1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 11, 1998
REGISTRATION NO. 333-56811
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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CAMELOT MUSIC HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 5735 13-3735306
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
No.)
incorporation or organization) Classification Code No.)
8000 FREEDOM AVENUE, N.W.
NORTH CANTON, OHIO 44720
(330) 494-2282
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------
JAMES E. BONK
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
8000 FREEDOM AVENUE, N.W.
NORTH CANTON, OHIO 44720
(330) 494-2282
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
COPIES TO:
THOMAS F. MCKEE, ESQ. VALERIE FORD JACOB, ESQ.
CALFEE, HALTER & GRISWOLD LLP FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
1400 MCDONALD INVESTMENT CENTER ONE NEW YORK PLAZA
800 SUPERIOR AVENUE NEW YORK, NY 10004
CLEVELAND, OHIO 44114 (212) 859-8000
(216) 622-8200
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM AMOUNT OF
TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE
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Common Stock, $.01 par value........ $150,000,000 $51,725
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(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to paragraph (o) of Rule 457 under the Securities
Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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EXPLANATORY NOTE
This registration statement contains two forms of prospectus: one to be
used in connection with a United States and Canadian offering of the
registrant's Common Stock (the "U.S. Prospectus") and one to be used in
connection with a concurrent international offering of the Common Stock (the
"International Prospectus"). The International Prospectus will be identical to
the U.S. Prospectus except that it will have a different front cover page,
underwriting section and back cover page. The U.S. Prospectus is included herein
and is followed by the alternate pages to be used in the International
Prospectus. The alternate pages to be used in the International Prospectus have
been labeled "Alternate Page for International Prospectus."
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED AUGUST 11, 1998
PROSPECTUS
SHARES
CAMELOT MUSIC HOLDINGS, INC.
COMMON STOCK
------------------------
All of the shares of Common Stock of Camelot Music Holdings,
Inc. (together with its subsidiaries, "Camelot" or the "Company") offered hereby
are being sold by certain stockholders (the "Selling Stockholders") of the
Company. See "Principal and Selling Stockholders." The Selling Stockholders
acquired their shares upon the Company's emergence from bankruptcy pursuant to
Section 1145(a) of the United States Bankruptcy Code or in open market
transactions thereafter. The Company is not selling shares of Common Stock in
the Offerings and will not receive any proceeds from the sale of any shares of
Common Stock offered hereby.
Of the shares of Common Stock offered hereby,
shares are being offered for sale initially in the United States
and Canada by the U.S. Underwriters and shares are being offered
for sale initially in a concurrent offering outside the United States and Canada
by the International Managers. The initial public offering price and the
underwriting discount per share will be identical for both Offerings. See
"Underwriting."
Prior to the Offerings, there has been a limited public market for the
Common Stock. It is currently estimated that the initial public offering price
will be between $ and $ per share. The initial public offering price
does not necessarily bear any direct relationship to the market prices of the
Common Stock as reported on the OTC Bulletin Board prior to the Offerings. The
closing bid price of the Common Stock on August 10, 1998 was $37 per share. For
a discussion relating to factors to be considered in determining the initial
public offering price, see "Underwriting." The Company has applied for quotation
of the Common Stock on the Nasdaq National Market System under the symbol
"CMLT."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) SELLING STOCKHOLDERS(2)
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Per Share...................... $ $ $
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Total(3)....................... $ $ $
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(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including certain
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) The Company has agreed to pay expenses of the Offerings estimated at
$ .
(3) The Selling Stockholders have granted to the U.S. Underwriters and the
International Managers options to purchase up to an additional
shares and shares of Common Stock,
respectively, in each case exercisable within 30 days after the date hereof,
solely to cover over-allotments, if any. If such options are exercised in
full, the total Price to Public, Underwriting Discount and Proceeds to
Selling Stockholders will be $ , $ and $ ,
respectively. See "Underwriting."
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The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about , 1998.
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MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
MCDONALD & COMPANY
SECURITIES, INC.
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The date of this Prospectus is , 1998.
4
[Photographs depicting Camelot Music and The Wall Stores, together with the
Camelot Music and The Wall logos and mottos.]
Certain persons participating in the Offerings may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock. Such
transactions may include stabilizing, the purchase of Common Stock to cover
syndicate short positions and the imposition of penalty bids. For a description
of these activities, see "Underwriting."
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless
otherwise indicated, information in this Prospectus assumes that the
Underwriters' over-allotment options have not been exercised and reflects a
-for-one stock split consummated prior to commencement of the Offerings. Pro
forma financial information included herein gives effect to the adoption of
fresh-start reporting and the acquisition by the Company of certain assets of
The Wall Music, Inc. ("The Wall") as if each took place at the beginning of the
period presented. The Company's fiscal year ends on the Saturday closest to
February 28th. Fiscal years are identified according to the calendar year in
which they begin (i.e., the fiscal year ended February 28, 1998 is referred to
herein as "Fiscal 1997").
THE COMPANY
Camelot Music Holdings, Inc. ("Camelot" or the "Company") is a leading
mall-based retailer of prerecorded music and accessories and is one of the
largest music retailers in the United States based on store count. As of July
31, 1998, the Company operated 493 stores in 37 states nationwide and in Puerto
Rico under three brand names: Camelot Music, founded in 1956, and operating 304
stores with a significant store base concentration in the Midwest and Southeast
regions of the United States; The Wall, operating 148 stores primarily in the
Mid-Atlantic and Northeast regions of the United States; and Spec's Music, Inc.
("Spec's"), operating 41 stores in south Florida and Puerto Rico. The Company
acquired certain assets of The Wall effective February 28, 1998 ("The Wall
Acquisition"), and it acquired Spec's, a music retailer, on July 29, 1998 (the
"Spec's Acquisition"). The Company believes that each chain benefits from name
recognition and a loyal customer base in its primary markets of operation. For
Fiscal 1997, the Company had pro forma net sales of $554.1 million ($396.2
million excluding The Wall) and earnings of $27.2 million ($15.9 million
excluding (i) The Wall, (ii) special items and (iii) the reinstatement of vendor
discounts). The Company believes that the Spec's Acquisition will enhance its
competitive position in the Southeastern United States and give the Company a
leading position in the south Florida market. See " -- Recent Developments."
Camelot offers a broad range of prerecorded music, including compact discs
("CDs"), cassettes, pre-recorded video cassettes, digital versatile discs
("DVDs") and accessories such as blank audio and video cassettes as well as
music and tape care products. The Company seeks to position itself as the
mall-based music specialist for prerecorded music, and advertises under the
motto "No One Knows Your Music Better." The Company's stores average 4,350
square feet in size and typically offer over 20,000 stock keeping units
("SKUs"), including both high-volume Billboard Top 100 titles ("hits") and a
broad offering of older releases and diverse music categories ("catalog"). The
Company believes its product offering enables it to attract a diverse customer
base and reduce its dependence on any one music genre. In Fiscal 1997, the
Company's average sales per square foot, including The Wall, was approximately
$293 which the Company believes is among the highest for mall-based retailers of
prerecorded music. The Company believes its broad product offering, supported by
a high level of customer service from its knowledgeable sales force, combined
with its competitive pricing strategy and attractive locations within regional
malls, position it to benefit from the favorable trends occurring in the
prerecorded music industry.
The Company believes that the total market for prerecorded music and music
videos in the United States amounted to $12.2 billion in 1997. The Company
believes that revenues in the music and music video market in the United States
have doubled over the last ten years and has grown at a compounded annual rate
of 8.2% during that time. Industry growth rates do not reflect the Company's
historical growth and are not necessarily indicative of its growth during future
periods. The Company's revenues have grown at a 7.8% compounded annual rate over
the last ten years, although its revenues grew over the past five years at a
compounded annual rate of 2.3%. During the 1980s the music retail industry
experienced rapid growth fueled by: (i) the introduction of new products such as
the CD; (ii) a relatively large number of popular new releases which increased
customer traffic and sales; and (iii) the rapid expansion of mall-based music
retailers. These factors led, in the early 1990s, to the competitive intrusion
of non-traditional music retailers such as consumer electronics stores and
discount stores and to increased price competition. By mid-1994, these
competitive factors, combined with the contraction of the replacement CD market
and a comparative lack of successful new releases, led to deteriorating
profitability in the music retail industry. Beginning in mid-1997, conditions in
the music retail industry began to improve as a result of: (i) the significant
reduction in competitive square footage resulting from the reduction in the
total number of traditional music retail stores from approximately 5,000 in 1995
to approximately 4,200 in 1997, including a net
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reduction of 600 retail stores by the top five traditional music retailers,
based on store count; (ii) an improvement in retail pricing as music vendors,
beginning in 1996, strengthened minimum advertised pricing ("MAP") guidelines,
which the Company believes decreased the intensity levels of price-based
competition for prerecorded music; and (iii) a resurgence in popular new
releases.
The Company has historically been privately held. In 1993, the Company was
acquired in a highly leveraged transaction by an investment group led by a
private investment firm and members of the Company's current management (the
"1993 Acquisition"). The 1993 Acquisition resulted in significant debt service
obligations. This significant debt service and the industry conditions described
above combined to impair Camelot's operating and financial condition and led the
Company to file a voluntary petition for protection under Chapter 11 of the
United States Bankruptcy Code (the "Bankruptcy Code") in August 1996 (the
"Petition Date"). See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Camelot's joint plan of reorganization
(the "Plan of Reorganization") was confirmed by the United States Bankruptcy
Court for the District of Delaware (the "Bankruptcy Court") on December 12, 1997
and became effective on January 27, 1998 (the "Plan Effective Date"). Under the
Plan of Reorganization, substantially all of the claims against the Company
existing as of the Petition Date were exchanged for shares of Common Stock.
Approximately $423.0 million of unsecured claims were exchanged for 10,167,824
shares of Common Stock valued at an amount equal to one share for each $47.95 of
claim, and approximately $41.5 million of secured claims were exchanged for
2,211,111 shares of Common Stock valued at an amount equal to one share for each
$18.75 of claim. All pre-petition ownership interests in the Company were
canceled.
Prior to and during its reorganization under the protection of the
Bankruptcy Court, Camelot was able to substantially improve the competitive
positioning of its business and significantly improve its financial position.
These improvements included: (i) closing 96 underperforming stores; (ii)
renegotiating unfavorable leases on certain of its remaining stores; (iii)
returning certain overstock inventory to its vendors; and (iv) eliminating
liabilities totaling approximately $485 million, including indebtedness of
approximately $412 million. In addition, during the same period, Camelot
invested $7.5 million to upgrade, develop and implement sophisticated
merchandising, distribution, replenishment, and financial software packages, all
of which were fully operational by the end of Fiscal 1997. The Company's new and
upgraded information systems enable management to (i) allocate specific
merchandise to a specific store, thereby improving sell-through rates and
reducing returns to vendors; (ii) improve the efficiency of its replenishment
system to reduce stock-outs and lower distribution center operating costs; (iii)
better track profitability by SKU, store and region; and (iv) automate invoice
matching to reduce corporate labor costs. The Company also developed and
implemented a new marketing and data warehousing system, which became fully
operational in April 1998, to better capture transaction specific data to
facilitate the further development of the Company's customer loyalty programs
and improve the effectiveness of its advertising programs by targeting specific
customers with promotional material tailored to their buying patterns. Over the
last two fiscal years, as the Company focused on improving the competitiveness
of its business, revenues increased 1.0% as the Company closed 83 stores and
opened no new stores.
The Company believes the improved industry conditions, the modifications to
its operations and financial condition, its infrastructure investments and its
strong market position, provide Camelot with distinct competitive advantages and
position it for accelerated growth and continued improvement in profitability.
Key elements of the Company's growth strategy include:
- Strengthen Competitive Position in Existing Markets. The Company intends
to strengthen its store base and increase sales by relocating certain
existing stores to larger stores and selectively opening new stores in
existing markets. New stores will be opened to fill out existing markets
and leverage the Company's distribution, advertising and field management
costs. As of July 31, 1998, approximately 280 of the Company's 493 stores
were less than 4,000 square feet in size compared to its current
prototype store of 5,000-6,000 square feet. The Company intends to
relocate many of these stores to larger facilities within the same
regional mall. The Company believes these relocations will better
facilitate its merchandising strategy, including the broader presentation
of higher-margin catalog titles. At July 31, 1998, the Company had
identified 100 such stores for relocation. In Fiscal 1998, the Company
plans to relocate 20 stores and open four new stores in existing markets.
Of these 24 projects, seven have been completed and
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7
lease commitments have been signed for three more. In Fiscal 1999, the
Company expects to relocate 17 stores and open 20 new stores.
- Improve Operating Margins. The Company has significantly improved its
operating margin to 3.6% of net sales (2.5% excluding special items) in
Fiscal 1997 from a loss of 3.5% of net sales (a loss of 1.9% excluding
special items) in Fiscal 1996. The Company believes that significant
opportunities exist to continue to improve its operating profit margin.
The Company seeks to increase its gross profit margin primarily through:
(i) improved pricing for the Company's products; (ii) enhanced trade
terms; (iii) reduced product returns, through a more systematic
allocation of products; and (iv) adjusting its merchandise mix to
emphasize higher-margin catalog items as it relocates its stores to
larger facilities. In addition, the Company expects to leverage its
general and administrative and warehousing and distribution costs as it
opens new stores or acquires stores in existing markets. The Company's
warehouse and distribution center is currently operating at between 30%
and 40% of capacity and the Company believes it could support
approximately 500 additional stores without a significant increase in
capital expenditures for its warehouse and distribution facilities.
- Pursue Acquisitions. The Company believes its industry leading position,
experienced management team and improved capitalization position Camelot
to pursue selective acquisition opportunities in the music retail
industry. Camelot targets mall-based retailers of prerecorded music in
existing or contiguous market areas which possess attractive real estate
locations. The Company's strategy is to improve such retailers' operating
results by remerchandising the stores to conform to Camelot's prototype,
implementing its information systems and integrating the acquired
operations in order to benefit from economies of scale in distribution,
advertising, and management costs. Effective February 28, 1998, the
Company purchased certain assets of The Wall for $72.4 million, which
significantly enhanced Camelot's market share in the Mid-Atlantic and
Northeast regions of the United States. At May 31, 1998, the Company had
improved product mix at all of The Wall's stores, targeted for closure 11
underperforming stores, implemented its information systems and reduced
costs by eliminating The Wall's corporate infrastructure and phasing out
its distribution facilities. See "Unaudited Pro Forma Condensed
Consolidated Financial Data." On July 29, 1998, the Company acquired
Spec's. See "-- Recent Developments."
RECENT DEVELOPMENTS
On July 29, 1998, the Company acquired Spec's under the terms of an
Agreement and Plan of Merger dated June 3, 1998 (the "Spec's Merger Agreement").
Spec's is a Miami, Florida-based retailer of prerecorded music operating 41
stores in south Florida and Puerto Rico. As of July 29, 1998, Spec's operated 16
mall stores and 25 stores in shopping centers and free-standing locations. The
Company believes the Spec's Acquisition will enhance its competitive position in
the Southeastern United States and give the Company a leading position in the
south Florida market. The cash purchase price for the Spec's Acquisition was $28
million (including related acquisition costs and the repayment of Spec's
indebtedness) and was funded primarily with amounts available under the
Company's Amended Credit Facility (as defined herein) as well as accumulated
cash. See "Risk Factors -- Risks of Restrictions by Lenders" and "Description of
Certain Indebtedness." See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources." Based
on public filings by Spec's, during the twelve months ended January 31, 1998,
Spec's had revenues of $66.2 million and an operating loss of $4.1 million
(excluding restructuring charges, store closing expenses and impairment of
long-lived assets). The Company expects to achieve cost savings through the
reduction or elimination of Spec's corporate and distribution infrastructure and
intends to close two underperforming stores.
---------------
The Company was incorporated in Delaware on September 30, 1993. Its
principal executive offices are located at 8000 Freedom Avenue, N.W., North
Canton, Ohio 44720 and its telephone number is (330) 494-2282.
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THE OFFERINGS
The offering of shares of the Company's Common Stock, par
value $.01 per share, in the United States and Canada (the "U.S. Offering") and
the offering of shares of the Common Stock outside the United
States and Canada (the "International Offering") are collectively referred to
herein as the "Offerings."
Common Stock offered by the Selling
Stockholders.............................. shares
Common Stock to be outstanding after the
Offerings(1).............................. 10,175,932 shares
Use of Proceeds............................. The Company will not receive any proceeds
from the sale of Common Stock offered by the
Selling Stockholders.
Proposed Nasdaq National Market System
Symbol.................................... "CMLT"
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(1) Does not include (i) 948,594 shares of Common Stock reserved for issuance
under the Company's stock option plans of which options to purchase an
aggregate of 734,000 shares of Common Stock will be outstanding upon
completion of the Offerings and (ii) up to 1,730 shares of Common Stock
reserved for issuance to certain former creditors of the Company pursuant to
the Plan of Reorganization. See "Shares Eligible for Future Sale,"
"Management -- Executive Compensation" and "Management -- Director
Compensation."
RISK FACTORS
Purchasers of Common Stock in the Offerings should carefully consider the
risk factors set forth under the caption "Risk Factors" and the other
information included in this Prospectus prior to making an investment decision.
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9
SUMMARY UNAUDITED PRO FORMA FINANCIAL INFORMATION AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA)
The following table presents summary unaudited pro forma financial data of
the Company for the twelve months ended and as of February 28, 1998. The column
entitled "Pro Forma Combined Fiscal 1997 (Fresh-Start)" gives effect to the
adoption by the Company of fresh-start reporting which was effective as of
January 27, 1998. The column entitled "Pro Forma Combined Fiscal 1997 (The
Wall)" gives effect both to fresh-start reporting as well as The Wall
Acquisition which was effective February 28, 1998. In both cases, the pro forma
data assume these events occurred on March 2, 1997. The pro forma financial
information does not give effect to the Spec's Acquisition. The summary
unaudited pro forma financial data are not necessarily indicative of operating
results that would have been achieved had these events been consummated on the
date indicated and should not be construed as representative of future operating
results. The unaudited pro forma financial data should be read in conjunction
with the financial statements and related notes thereto of the Company and The
Wall and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus.
PRO FORMA PRO FORMA
COMBINED COMBINED
FISCAL 1997 FISCAL 1997
(FRESH-START)(1) (THE WALL)(1)
---------------- -------------
INCOME STATEMENT DATA
Net sales................................................... $396,208 $554,120
Cost of sales............................................... 256,881 352,056
-------- --------
Gross profit................................................ 139,327 202,064
Selling, general and administrative expenses................ 108,214 151,226
Depreciation and amortization............................... 6,437 10,124
Special items(2)............................................ (4,443) (4,443)
-------- --------
Income before interest expense, other income (expenses),
net, reorganization income (expenses), income taxes and
extraordinary item........................................ 29,119 45,157
Interest expense............................................ (178) (588)
Other income (expenses), net................................ 2,639 --
-------- --------
Income before reorganization income (expenses), income taxes
and extraordinary item.................................... 31,580 44,569
Reorganization income (expenses)(3)......................... -- --
-------- --------
Income before income taxes and extraordinary item........... 31,580 44,569
(Provision) benefit for income taxes........................ (12,316) (17,383)
Extraordinary item, net of tax(4)........................... -- --
-------- --------
Net income.................................................. $ 19,264 $ 27,186
======== ========
Earnings per share(5)....................................... $ 2.67
Weighted average shares outstanding(5)...................... 10,176
SELECTED OPERATING DATA
Gross square footage (000's)................................ 1,309 1,862
Sales per square foot....................................... $ 306 $ 293
(footnotes on page 9)
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SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE, SELECTED STORE AND SELECTED OPERATING DATA)
The following table presents summary historical consolidated financial data
of the Company and its predecessor (the "Predecessor") as of the dates and for
the periods indicated. The summary historical consolidated financial data should
be read in conjunction with the financial statements and related notes thereto
of the Company and The Wall and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
PREDECESSOR(6) THE COMPANY PREDECESSOR(6) THE COMPANY
--------------------------------------------- ------------ --------------- -----------
PERIOD PERIOD PERIOD PERIOD
MARCH 2, FEBRUARY 1, MARCH 2, MARCH 1,
1997 TO 1998 TO COMBINED 1997 TO 1998 TO
FISCAL FISCAL FISCAL JANUARY 31, FEBRUARY 28, FISCAL MAY 31, MAY 30,
1994 1995 1996 1998(7) 1998(7) 1997(8) 1997 1998
-------- --------- -------- ----------- ------------ -------- --------------- -----------
INCOME STATEMENT DATA
Net sales.............. $459,077 $ 455,652 $396,502 $372,561 $ 27,842 $400,403 $ 82,815 $ 113,456
Cost of sales.......... 289,887 302,481 263,072 243,109 17,662 260,771 53,820 71,147
-------- --------- -------- -------- ----------- -------- -------- -----------
Gross profit........... 169,190 153,171 133,430 129,452 10,180 139,632 28,995 42,309
Selling, general and
administrative
expenses............. 128,158 135,441 117,558 99,553 9,240 108,793 26,407 36,213
Depreciation and
amortization......... 21,146 26,570 23,290 20,484 527 21,011 5,454 1,765
Special items(2)....... -- 211,520 6,523 (4,443) -- (4,443) -- 350
-------- --------- -------- -------- ----------- -------- -------- -----------
Income (loss) before
interest expense,
other income
(expenses), net,
reorganization income
(expenses), income
taxes and
extraordinary item... 19,886 (220,360) (13,941) 13,858 413 14,271 (2,866) 3,981
Interest expense....... (30,655) (38,319) (17,418) (221) (12) (233) (61) (86)
Other income
(expenses), net...... (5,026) (4,978) (1,160) (185) 295 110 (69) 263
-------- --------- -------- -------- ----------- -------- -------- -----------
Income (loss) before
reorganization income
(expenses), income
taxes and
extraordinary item... (15,795) (263,657) (32,519) 13,452 696 14,148 (2,996) 4,158
Reorganization income
(expenses)(3)........ -- -- (31,845) 26,501 -- 26,501 (1,113) --
-------- --------- -------- -------- ----------- -------- -------- -----------
Income (loss) before
income taxes and
extraordinary item... (15,795) (263,657) (64,364) 39,953 696 40,649 (4,109) 4,158
(Provision) benefit for
income taxes......... (3,070) (474) -- (289) (115) (404) -- (1,603)
Extraordinary item, net
of tax(4)............ -- -- -- 228,911 -- 228,911 -- --
-------- --------- -------- -------- ----------- -------- -------- -----------
Net income (loss)...... $(18,865) $(264,131) $(64,364) $268,575 $ 581 $269,156 $ (4,109) $ 2,555
======== ========= ======== ======== =========== ======== ======== ===========
Basic earnings per
share(5)............. $ 0.06 $ 0.25
Diluted earnings per
share(5)............. $ 0.06 $ 0.24
Weighted average number
of common shares
outstanding -- basic(5)... 10,176,162 10,176,162
Weighted average number
of common shares
outstanding -- diluted(5).. 10,176,162 10,469,914
SELECTED STORE DATA
Number of stores:
Open at beginning of
period............. 392 401 388 315 305 315 315 305
Opened during
period............. 21 14 -- -- -- -- -- 1
Closed during
period............. 12 27 73 10 -- 10 -- 1
Acquired during
period............. -- -- -- -- -- -- -- 150
-------- --------- -------- -------- ----------- -------- -------- -----------
Open at end of
period............. 401 388 315 305 305 305 315 455
======== ========= ======== ======== =========== ======== ======== ===========
SELECTED OPERATING DATA
Gross square footage
(000's)(9)........... 1,511 1,563 1,329 1,309 1,309 1,309 1,329 1,930
Sales per square
foot(6).............. $ 304 $ 292 $ 298 -- -- $ 306 $ 62 $ 59
Comparable store sales
increase
(decrease)(10)....... (2.6%) (5.6%) (3.5%) -- -- 6.8% 1.7% 1.0%
(footnotes on page 9)
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THE COMPANY
AT MAY 30, 1998
---------------
BALANCE SHEET DATA
Cash and cash equivalents................................... $ 15,680
Working capital............................................. 114,517
Total assets................................................ 303,894
Long-term debt.............................................. --
Stockholders' equity........................................ 197,692(11)
- ---------------
(1) For information regarding the pro forma adjustments made to the Company's
historical financial data, see "Unaudited Pro Forma Condensed Consolidated
Financial Data."
(2) Includes certain items, including the reversal of program reward redemption
reserves aggregating $4.4 million (income) in Fiscal 1997 when the Company
discontinued its manual "punch card" version of its customer loyalty
program and replaced it with a more limited automated customer loyalty
program, the write-down of the fair value of long-lived assets in Fiscal
1996 resulting in a charge of $6.5 million and the write-down of goodwill
in Fiscal 1995, principally related to the 1993 Acquisition. See Note 15 to
the Company's Consolidated Financial Statements. In the first quarter of
Fiscal 1998 the Company incurred a $0.4 million (expense) relating to the
Offerings.
(3) During Fiscal 1997, reorganization income related principally to
adjustments to prepetition claims that were discharged or received no
amount of recovery, offset by net adjustments to fair value, and
professional fees and other expenses related to the bankruptcy proceedings.
During Fiscal 1996, reorganization expense primarily reflected a provision
for store closings (including related lease rejection damage claims) and
the write-off of financing costs associated with prepetition indebtedness
as well as professional fees.
(4) As a result of the Company's reorganization, in Fiscal 1997 the Company
recorded a one-time gain of $228.9 million associated with the
extinguishment of its prepetition debt.
(5) The pro forma combined net income per share data is presented in accordance
with SFAS No. 128 and assumes: (i) the Company emerged from bankruptcy and
adopted fresh-start reporting on March 2, 1997; (ii) The Wall Acquisition
occurred on March 2, 1997; and (iii) the Company's 1998 Stock Option Plan
and Outside Directors Stock Option Plan were established on March 2, 1997.
Awards of options under these plans are not dilutive on a pro forma basis
and, therefore, basic and diluted data are the same. With respect to
historical combined net income per share, see Note 3 to the Company's year
end and interim Consolidated Financial Statements.
(6) The financial information for the Predecessor entity relates to the
operations of Camelot Music Holdings, Inc. prior to its emergence from the
protection of the Bankruptcy Court on the Plan Effective Date.
(7) As of January 31, 1998, the Company adopted fresh-start reporting in
accordance with AICPA Statement of Position 90-7, which resulted in a new
entity for financial reporting purposes. Financial information for the
period March 2, 1997 to January 31, 1998 reflects the operations of the
Company's Predecessor prior to emergence from bankruptcy. Financial
information for the period February 1, 1998 to February 28, 1998 reflects
the operations of the Company after the Plan Effective Date and the
adoption of fresh-start reporting.
(8) Combined Fiscal 1997 financial data represents a summation (on two
different bases of accounting due to the adoption of fresh-start reporting
on the Plan Effective Date) of the financial data for the Predecessor from
March 2, 1997 to January 31, 1998 and the financial data for the Company
from February 1, 1998 to February 28, 1998. See "Unaudited Pro Forma
Condensed Financial Data."
(9) Sales per square foot is based on the gross square footage for Camelot
stores only and excludes The Wall stores.
(10) The percentage change in comparable store sales is calculated as the net
change in sales for each comparable store for the equivalent period in the
prior year. The percentage change in comparable store sales is based on
comparable store sales for Camelot stores only and excludes The Wall
stores. Comparable stores are stores that have been operating for more than
12 months since first opening. During the 13th month of operations, new
stores are considered comparable stores. Stores which have been relocated
are treated as comparable stores. Closed stores are not categorized as
comparable stores.
(11) Does not reflect estimated expenses associated with the Offerings. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--General."
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RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully by prospective investors in evaluating an
investment in the Common Stock offered by this Prospectus. This Prospectus
contains forward-looking statements that involve risks and uncertainties. Actual
results could differ materially from those discussed herein. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed below and in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations," as well as those
discussed elsewhere in this Prospectus.
COMPETITION
The prerecorded music retail industry is highly competitive. Consumers have
numerous options through which to purchase prerecorded music and other home
entertainment products, including chain retailers (such as the Company)
specializing in prerecorded music, consumer electronics superstores, non-mall
multimedia superstores, discount stores, grocery, convenience and drug stores,
direct-mail programs via telephone, the Internet or television, local music
retailers and mail order music clubs. Certain of Camelot's competitors have
greater financial and other resources than the Company. In addition, during the
past several years, many retailers sought to increase their share of the retail
prerecorded music market by engaging in near- or below-cost pricing. This
resulted in unprecedented price competition which had a material adverse effect
on the Company's results of operations and financial condition. While this
intense price competition lessened somewhat during 1997, the Company expects
that the retail sales environment will continue to present challenges into the
foreseeable future, and there can be no assurance that price competition or
other competitive challenges will not have a material adverse effect on the
Company's results of operations and financial condition.
The Company also competes for consumer time and spending with all leisure
time activities, such as movie theaters, television, home computer and Internet
use, live theater, sporting facilities and spectator events, travel, amusement
parks, and other family entertainment centers. The impact of the increasing use
of these entertainment options in recent years has been a reduction in customer
traffic and revenues for mall-based prerecorded music retailers such as the
Company. The Company's ability to compete successfully depends on its ability to
secure and maintain attractive and convenient locations, market and manage
merchandise effectively and attractively, offer an extensive product selection
and knowledgeable customer service as well as provide effective management. See
"Business -- Competition."
UNCERTAINTIES REGARDING MAP GUIDELINES
During 1996, music vendors strengthened MAP guidelines, which are intended
to promote certain minimum retail prices for prerecorded music products by
providing incentives to retailers to comply with the terms of the programs. MAP
guidelines set forth minimum retail prices at which a vendor's merchandise is to
be sold if a retailer desires to receive cooperative advertising support from
such vendor. Efforts by music vendors to strengthen these MAP guidelines were an
important factor in the improvement in overall industry conditions during 1997
and the Company believes that these efforts also contributed to its improved
financial performance during recent periods. In response to consumer complaints,
the United States Federal Trade Commission (the "FTC") is currently
investigating the music vendors' MAP guideline programs in order to determine
whether the programs violate provisions of federal anti-trust laws. A decision
by the FTC to institute proceedings or take other action which results in the
relaxation or elimination of the MAP guidelines would have a material adverse
effect on the Company's results of operations and financial condition. There can
be no assurance that deep-discount pricing practices will not return, or that if
they do, that the Company will be able to remain competitive without a material
adverse effect on its financial condition and results of operation.
RISKS RELATED TO GROWTH STRATEGY
The Company's growth strategy involves store relocations (including
enlargements), the opening of new stores, as well as selective acquisitions of
music retailers. Each component of the Company's strategy involves significant
risks. Selection of locations for new stores and the relocation of existing
stores requires the Company to identify attractive locations for its stores,
obtain leases on favorable terms for those locations and, in the case of
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new stores, hire and retain qualified store personnel or, in the case of
relocated stores, accurately assess relocation costs and the likely return on
investment. Relocation of existing stores also will result in a loss of revenue
and income from those stores during transitional periods, which may have a
material adverse effect on the Company's results of operations and financial
condition. There can be no assurance as to the Company's ability to successfully
relocate or open new stores or as to the effect of remodelings and store
openings on the Company's financial condition and results of operations.
Selective acquisitions of other music retailers are also a component of the
Company's strategy. The Wall was the Company's first major acquisition, and the
Company recently completed the Spec's Acquisition. The Company expects to face
significant competition for acquisition candidates, which may limit the number
of acquisition opportunities and lead to higher acquisition prices. There can be
no assurance that the Company will be able to successfully integrate and
profitably manage The Wall or Spec's or that it will be able to identify,
acquire, successfully integrate or profitably manage additional acquisitions
without substantial costs, delays or other financial or operational
difficulties. Further, acquisitions involve a number of special risks, including
adverse short-term effects on the Company's results of operations, potentially
dilutive issuances of equity securities, the incurrence of debt and contingent
liabilities, diversion of management's attention, the failure to retain key
personnel of the acquired business, increased expenses for accounting and
computer systems (including reprogramming such computer systems to effectively
handle transactions in the year 2000 and beyond), the effects of amortization of
acquired intangible assets (such as goodwill) and risks associated with
unanticipated events or liabilities, some or all of which could have a material
adverse effect on the Company's results of operations and financial condition.
Although the Company has conducted what it believes to be a prudent level of
review regarding the operational condition of The Wall and Spec's, and expects
to conduct a similar level of review regarding any future acquisitions, the
Company cannot ascertain the actual value of acquisition targets until it
assumes operating control of such entities. In certain cases, the Company may be
required to file applications and obtain clearances under applicable federal
antitrust laws or receive approval of a target company's shareholders (as with
Spec's) before consummation of an acquisition. These regulatory requirements or
shareholder solicitations may restrict or delay the Company's acquisitions and
may increase the cost of completing such transactions. Although the Company from
time to time engages in discussions with prospective acquisition candidates, the
Company is not currently a party to any definite agreement or an agreement in
principle with respect to any acquisitions.
The timing, size and success of the Company's acquisition efforts and the
associated capital commitments cannot be readily predicted. The Company intends
to use cash, borrowings under the Amended Credit Facility and/or shares of
Common Stock to finance future acquisitions. If the Company does not have
sufficient cash resources, its growth could be limited unless it is able to
obtain additional capital through debt or equity financings. The availability of
debt or equity financing is subject to, among other things, market conditions.
If the Common Stock does not maintain a sufficient market value, or if potential
acquisition candidates are otherwise unwilling to accept Common Stock in
consideration for the sale of their businesses, the Company may be required to
use more of its cash resources, if available, to finance its acquisition
activities. The failure of the Common Stock to maintain a sufficient market
value also may adversely affect the Company's ability to engage in future equity
financings. There can be no assurance that the Company will be able to obtain
the additional financing it may need to implement its business strategy on terms
that it finds acceptable, if at all.
DEPENDENCE ON HIT RELEASES
The Company's business is dependent upon the production of hit releases by
recording artists. Hit releases are important for generating customer traffic
and sales in the Company's stores. During recent years, industry growth and
sales of music and video products slowed due to a lack of strong new releases.
The dependence on these products can create cyclical trends that do not
necessarily reflect general trends in the economy. The timing of these cycles
and the future availability of hit releases is beyond the control of the
Company. The absence of new hit releases or a decline in the number of hit
releases could have a material adverse effect on the Company's results of
operations and financial condition.
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RISK ASSOCIATED WITH NEW TECHNOLOGIES
Historically, prerecorded music was one of the few forms of inexpensive,
reusable home entertainment available to consumers. In recent years, the number
of new home entertainment products has grown significantly. Certain new
technologies, such as the compact disc, have benefited the music retail
industry. However, the proliferation of other entertainment technologies, such
as cable and broadcast satellite television, videos, computer games, the
Internet and other technologies, have intensified the competition among various
entertainment alternatives for consumer entertainment spending. There can be no
assurance as to the effect of the introduction of these and other new
entertainment alternatives on the music retail industry or the Company. In
addition, technological innovations in the music industry do not necessarily
result in increased levels of sales or profitability. The success of
technologies such as Digital Audio Technology, DVD and other format innovations
depends upon consumer acceptance of the new technology, industry agreement on a
standard, the availability of product for consumer purchase and the cost of that
product. The switch of consumers from one format to another, such as the switch
from records to audio cassettes, and the later shift from cassettes to CDs, may
also reduce sales of the existing format. Sales may be adversely affected and
product returns may be increased if the Company does not carry the right balance
of old and new formats. This could cause the Company to carry excess inventory.
There can be no assurance as to the Company's success in interpreting the
desires of customers or predicting which new technologies or formats will be
accepted by consumers.
HISTORY OF LOSSES
The Company has experienced significant losses during three of the past
four fiscal years. During Fiscal 1994, 1995, and 1996, the Company realized net
losses of $18.9 million, $264.1 million and $64.4 million, respectively. These
losses were the result of many factors, including the write-down of long-lived
assets (principally goodwill), restructuring charges, changes in the competitive
environment, interest expense resulting from indebtedness incurred in the 1993
Acquisition and the comparative lack of hit releases. In Fiscal 1997, the
Company had net income of $269.2 million ($19.3 million on a pro forma basis
after adjusting for fresh-start reporting and excluding The Wall). There can be
no assurance that the Company will be profitable in future periods or that it
will not realize significant losses.
ABSENCE OF LONG-TERM CONTRACTS WITH SUPPLIERS; POTENTIAL SUPPLIER CONSOLIDATION
The Company purchases its prerecorded music directly from a large number of
manufacturers. During Fiscal 1997, approximately 77% of purchases, net of
returns, were made from the following six suppliers: BMG Distribution, Sony
Music Entertainment, Inc., Universal Music and Video Distribution, Inc.,
Warner/Electra/ Atlantic Corporation, Polygram Group Distribution, Inc. and EMI
Music Distribution (collectively, the "Big Six Vendors"). Twenty other vendors
accounted for an additional 13% of purchases, net of returns, during such
period. As is standard in the industry, the Company does not maintain long-term
contracts with any of its suppliers, and the Company's purchases are made
through purchase orders. During the bankruptcy proceedings, the Company's access
to customary trade terms was severely limited. After the Effective Date, the
Company was able to negotiate customary trade terms with most of its suppliers,
including the Big Six Vendors. 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. However, there can be no
assurance that the Company will be able to maintain these customary trade terms
or enjoy positive vendor relations in the future. The loss of these positive
vendor relations and/or customary trade terms could have a material adverse
effect on the results of operations and financial condition of the Company. See
"Business -- Suppliers."
A number of the Big Six Vendors have recently stopped accepting returns of
open products from all of their retail customers. This trend has had an adverse
impact on the Company's financial condition and results of operations. There can
be no assurance that this trend will be reversed or that the Company's vendors
will not make other modifications to their policies which have an adverse effect
on the Company. Seagram Co., Ltd., owner of Universal Music and Video
Distribution, Inc., has recently announced its intention to acquire Polygram
Group Distribution, Inc. Seagram Co., Ltd. has indicated publicly that it may
intend to seek cost savings through the integration of its two music vendors.
There can be no assurance that this acquisition and any resulting integration of
two of the Big Six Vendors will not have a material adverse effect on the
Company.
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SEASONALITY OF SALES
The Company's business is seasonal in nature. In Fiscal 1997, approximately
35% of revenues, and all of its income before interest expense, other income
(expenses), net, reorganization income (expenses), income taxes and
extraordinary item and its net income before extraordinary item were generated
in the Company's fiscal fourth quarter. In anticipation of increased sales
activity during these months, the Company purchases substantial amounts of
inventory and hires a significant number of temporary employees to bolster its
permanent store staff. 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, including as a result of merchandise delivery
delays due to receiving or distribution problems, could have a material adverse
effect on the results of operations and financial condition of the Company.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent to a large extent on its ability to attract,
motivate and retain an adequate labor force, including management, sales,
merchandising and other personnel. The Company is also dependent to a
significant extent upon the continued efforts of its senior management team,
including in particular its President and Chief Executive Officer, James E.
Bonk. The Company has entered into an employment agreement with Mr. Bonk which
expires on December 31, 2000 and has entered into severance agreements with all
of its executive officers. If, for any reason, such key personnel do not
continue to be active in management, the Company's operations could be
materially adversely affected. The Company does not maintain key-man life
insurance policies on any of its executive officers. See "Management."
MINIMUM WAGE INCREASES
The Company employs a number of sales associates and other personnel,
including temporary employees hired during the periods in which the Company
experiences significantly increased sales, who are paid on an hourly basis. Many
of these hourly employees are paid at or near the minimum wage. Increases in the
minimum wage result in adjustments to the compensation of not only those hourly
employees who are paid minimum wage, but also to the compensation paid to more
highly compensated hourly employees. Increases in the minimum wage have had a
significant effect on the Company's compensation expense during prior periods,
and any future increases could have a material adverse effect on the Company's
results of operations and financial condition.
INTERNAL REVENUE SERVICE CLAIM
The Internal Revenue Service ("IRS") asserted in the bankruptcy proceedings
a priority tax claim against the Company of approximately $7.9 million (the "IRS
Claim"). Under the Plan of Reorganization, any allowed priority tax claim of the
IRS would be paid over six years, with quarterly amortization of interest and
principal, at an interest rate of 9.0%. The Company acknowledges a priority tax
obligation to the IRS of approximately $0.8 million and has established a
reserve in that amount. The Company 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
Company filed an objection (the "COLI Objection") to the IRS Claim with the
Bankruptcy Court to the extent that the IRS seeks to disallow the COLI
Deductions. In response to the COLI Objection, the IRS 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 Withdrawal Motion was
granted on May 29, 1998, and the proceeding is now before the District Court as
Civil Action No. 97-695 (MMS). The District Court approved a Joint Discovery
Plan on July 6, 1998. The Joint Discovery Plan mandates that all discovery be
served or issued so as to be completed on or before June 30, 1999. The Company
has established a reserve in an amount sufficient to cover the $0.8 million
priority tax obligation that it has acknowledged in the bankruptcy proceeding.
In the event that a judgment is rendered against the Company in an amount
exceeding the reserve established with respect to this matter, the Company's
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results of operations would be materially adversely affected. Such a judgment,
unless paid or bonded for appeal, would also be an Event of Default under the
Company's Amended Credit Facility (as defined).
RISKS OF RESTRICTIONS BY LENDERS AND COLLATERAL ARRANGEMENTS
The Company's Amended Credit Facility contains certain financial and
negative covenants which, among other things, limit the ability of the Company
and its subsidiaries to incur indebtedness, make investments, create or permit
liens, make capital expenditures, make guarantees or pay dividends.
Additionally, the Company is currently and will continue to be required to meet
certain financial covenants under the Amended Credit Facility, including minimum
consolidated earnings before interest, taxes, depreciation and amortization
("EBITDA"). There can be no assurance that the Company will not experience
difficulty meeting its financial covenants under the Amended Credit Facility. If
the Company is unable to comply with the covenants under the Amended Credit
Facility, such indebtedness could be declared immediately due and payable. The
obligations of the Company's wholly owned subsidiary Camelot Music Inc. ("CMI")
under the Amended Credit Facility are guaranteed by the Company and by all of
CMI's subsidiaries; these obligations are collateralized by substantially all of
CMI's and its subsidiaries assets. The Company has pledged to its lenders the
capital stock of CMI, and CMI has pledged to the lenders the capital stock of
its subsidiaries. If the Company defaulted on its indebtedness, the lenders
under the Amended Credit Facility would be able to foreclose on the collateral
and utilize other remedies available to secured lenders. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of Certain
Indebtedness."
YEAR 2000 COMPLIANCE
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
two-digit year is commonly referred to as the Year 2000 compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
data-based information. The Company has assessed its systems and equipment with
respect to Year 2000 and has developed a project plan. Many of the Year 2000
issues have been addressed. The Company is in the process of installing a new
back office point of sale system to address Year 2000 issues at the store level,
including the processing of credit card transactions. The remaining Year 2000
issues will be addressed either with scheduled systems upgrades or through the
Company's internal systems development staff. The incremental costs will be
charged to expense as incurred and are not expected to have a material impact on
the financial position or the results of operations of the Company. The Company
does not know the Year 2000 status of its vendors or of other third parties with
whom it does business. The Company could be adversely impacted if Year 2000
modifications are not properly completed by either the Company or its vendors,
banks or any other entity with whom the Company conducts business.
CONTROL BY PRINCIPAL STOCKHOLDERS
Upon completion of the Offerings, the Company's five principal stockholders
will collectively own approximately % of the outstanding Common Stock of
the Company. As a result, these stockholders will be able to significantly
influence the outcome of all matters requiring stockholder approval, including
the election of Directors and approval of significant corporate transactions.
Such concentration of ownership may have the effect of delaying or preventing a
change in control of the Company. See "Principal and Selling Stockholders" and
"Description of Capital Stock."
MATERIAL BENEFITS TO UNDERWRITERS
Merrill Lynch, Pierce, Fenner & Smith Incorporated is a Selling Stockholder
and will receive approximately $ million of gross proceeds from the sale
of shares in the Offerings. Merrill Lynch, Pierce, Fenner & Smith Incorporated
is one of the underwriters of the Offerings. Morgan Stanley & Co., Incorporated,
one of the underwriters of the Offerings, is under common ownership with Van
Kampen Merritt Prime Rate Income Trust ("Van Kampen"), a stockholder of the
Company. Van Kampen is not selling any shares of Common Stock in the Offerings.
See "Use of Proceeds," "Certain Transactions" and "Principal and Selling
Stockholders."
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PRIOR BANKRUPTCY
On August 9, 1996 (the "Petition Date"), the Company and its subsidiaries
filed petitions for relief under Chapter 11 of the Bankruptcy Code in the
Bankruptcy Court. The Plan of Reorganization became effective on January 27,
1998. The bankruptcy proceeding, among other things, permitted the Company to
terminate certain of its leases with its current mall owners. Many of the
elements of the Company's strategy depend upon its relationships with key
vendors, mall owners and customers. Though the Company is no longer a debtor-in-
possession in any bankruptcy proceeding, the effect of this proceeding on past
or potential mall owners, customers, vendors or employees cannot be determined.
ABSENCE OF DIVIDENDS AND RESTRICTION ON PAYMENT OF DIVIDENDS
The Company does not expect to pay dividends for the foreseeable future.
The Company's New Working Capital Facility restricts, and its Amended Credit
Facility will restrict the ability of the Company to pay dividends on the Common
Stock. See "Dividend Policy" and "Description of Certain Indebtedness."
CERTAIN ANTI-TAKEOVER PROVISIONS IN DELAWARE LAW AND THE COMPANY'S BY-LAWS
Certain provisions of Delaware law and the Company's By-Laws could have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of the Company.
The Company is subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law, which will prohibit the Company from engaging
in a "business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner. The application of Section 203 also could have the effect of
delaying or preventing a change in control of the Company. See "Description of
Capital Stock." In addition, the Company's By-Laws provide that for nominations
of Directors and other business to be brought before an annual meeting by a
stockholder, such stockholder must give written notice to the Company with
respect to such nomination or other matter a specified period in advance of the
meeting. This provision may tend to discourage a proxy contest or other takeover
bid for the Company.
DILUTION
Purchasers of the shares of Common Stock offered hereby will suffer
immediate and substantial dilution in the amount of $ per share. See
"Dilution."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS AGREEMENT
Upon completion of the Offerings, of the 30,000,000 authorized shares of
Common Stock, 10,177,662 shares of Common Stock are anticipated to be issued and
outstanding. Of these 10,177,662 shares of Common Stock, the
shares purchased in the Offerings will be freely tradable without restriction
under the Securities Act of 1933, as amended (the "Securities Act") by persons
who are not affiliates of the Company. In addition, the 9,835,559 shares of
Common Stock issued on the Effective Date and the 328,873 shares of Common Stock
issued pursuant to the Plan of Reorganization since the Effective Date were
issued pursuant to an exemption from the registration requirements of the
Securities Act (and of any state or local laws) provided by Section 1145(a)(1)
of the Bankruptcy Code. At August 1, 1998, up to an additional 1,730 shares of
Common Stock may be issued by the Company pursuant to the Plan of
Reorganization. All shares of Common Stock issued pursuant to the Plan of
Reorganization may be resold by the holders thereof without registration unless
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. Four
stockholders (including three Selling Stockholders) holding an aggregate of
shares of Common Stock after giving effect to the Offerings may be
deemed to be underwriters pursuant to Section 1145(b)(1) and were provided with
certain demand and piggyback registration rights under the terms of a
registration rights agreement (the "Registration Rights Agreement") with the
Company. See "Shares Eligible for Future Sale -- Registration Rights Agreement."
On May 5, 1998, an additional 10,000 shares of Common Stock were issued pursuant
to an order of the Bankruptcy Court to certain persons for their significant
contributions to the bankruptcy case. The Company believes that an aggregate of
shares of Common Stock,
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including the shares held by the stockholders who are parties to the
registration rights agreement, may currently be sold pursuant to Rule 144 under
the Securities Act in compliance with the notice, manner of sale, current public
reporting and volume limitations of Rule 144 (of which shares of
Common Stock held by the Selling Stockholders are subject to the lock-up
arrangements described herein) and shares may be sold without
restriction.
The 948,594 shares of Common Stock reserved for issuance upon exercise of
outstanding options will become eligible for resale under Rule 144 one year
subsequent to the date or dates that the holders of such options exercise the
same. Subsequent to the Offerings, the Company intends to file a registration
statement on Form S-8 with respect to the 734,000 shares of Common Stock
reserved for issuance upon exercise of all outstanding options (whether vested
or unvested) and the 214,594 shares of Common Stock reserved for issuance
pursuant to future option grants. Upon registration, such shares upon issuance
would be freely tradable by persons who are not "affiliates" of the Company. In
addition, "affiliates" of the Company could sell such shares pursuant to Rule
144 under the Securities Act in compliance with the resale volume limitations of
Rule 144.
The Company, its Directors, executive officers and management employees and
the Selling Stockholders and other shareholders holding an aggregate of
shares of Common Stock prior to the Offerings have agreed that they
will not, directly or indirectly, without the prior written consent of Merrill
Lynch on behalf of the Underwriters, offer, sell, grant any option to purchase
or otherwise dispose of any shares of Common Stock, or any securities
convertible into or exchangeable or exercisable for, Common Stock, for a period
of 180 days after the closing date of the Offerings. Stockholders holding
shares have entered into lock-up agreements, while stockholders holding
shares have not entered into such agreements.
No prediction can be made as to the effect, if any, that future sales of
shares of Common Stock, or the availability of shares of Common Stock for future
sale, will have on the market price of the shares of Common Stock prevailing
from time to time. Sales of substantial amounts of Common Stock (including
shares of Common Stock issued upon the exercise of outstanding stock options),
or the perception that such sales could occur, could adversely affect the
prevailing market prices for the Common Stock. See "Shares Eligible for Future
Sale."
ABSENCE OF ESTABLISHED PUBLIC MARKET AND POTENTIAL VOLATILITY OF STOCK PRICE
Prior to the Offerings, there has been a limited public market for the
Company's Common Stock, and there can be no assurance that an active trading
market will develop or be sustained in the Common Stock. See "Price Range of
Common Stock." The initial public offering price of the Common Stock will be
determined by negotiations among the Company, the Selling Stockholders and the
Underwriters. The initial public offering price does not necessarily bear any
direct relationship to the market prices of the Common Stock as reported on the
OTC Bulletin Board prior to the Offerings and may have no relationship to the
price at which the Common Stock will trade after completion of the Offerings.
See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. The stock market has from time to
time experienced extreme price and volume fluctuations that have been unrelated
to the operating performance of particular companies. The market price for the
Common Stock may be highly volatile depending on various factors, including but
not limited to the state of the national economy, stock market conditions,
industry research reports, actions by governmental agencies, litigation
involving the Company, the Company's most recent quarterly earnings,
announcements by the Company or its competitors and general conditions in the
music retailing industry.
16
19
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has traded on the OTC Bulletin Board under the
symbol "CMHDA" since February 27, 1998. The following table sets forth the range
of high and low closing bid prices for the Common Stock for the periods
indicated as reported by the National Association of Securities Dealers, Inc.
These prices represent inter-dealer prices, without adjustment for retail
mark-ups, mark-downs or commissions and do not necessarily represent actual
transactions. The Company has applied for quotation of the Common Stock on the
Nasdaq National Market System under the symbol "CMLT."
PRICE RANGE
------------------
HIGH LOW
------- -------
FISCAL 1997:
Fourth Quarter (February 27, 1998)........................ $ 40.00 $ 35.00
FISCAL 1998:
First Quarter............................................. $ 41.00 $ 33.00
Second Quarter (through August 10, 1998).................. 44.00 37.00
On August 10, 1998, the closing bid price of the Common Stock as reported
on the OTC Bulletin Board was $37.00 per share. Based upon information provided
by the Company's transfer agent, as of July 28, 1998 there were 742 holders of
the Common Stock. The initial public offering price of the Common Stock will not
necessarily bear any direct relationship to the trading prices on the OTC
Bulletin Board.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
The Company currently intends to retain any earnings for use in its business and
therefore does not anticipate paying any dividends in the foreseeable future. In
addition, the Company's Amended Credit Facility limits its ability to pay
dividends under certain circumstances. See "Description of Certain
Indebtedness." Any future determination as to the payment of cash dividends will
depend on a number of factors, including future earnings, capital requirements,
the financial condition and prospects of the Company and any restrictions under
credit agreements existing from time to time. There can be no assurance that the
Company will pay dividends in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
17
20
CAPITALIZATION
The following table sets forth the capitalization of the Company as of May
30, 1998. This table should be read in conjunction with the "Selected
Consolidated Financial Data" and the Consolidated Financial Statements and notes
thereto included elsewhere in this Prospectus.
AT MAY 30, 1998
---------------
(IN THOUSANDS,
EXCEPT
SHARE DATA)
Current maturities of long-term debt........................ $ --
========
Long-term debt, excluding current maturities (1)............ $ --
========
Stockholder's equity:
Common Stock, $.01 par value, 30,000,000 shares
authorized, 10,177,662 shares issued and outstanding
(2).................................................... $ 102
Additional paid-in capital................................ 194,454
Retained earnings (3)..................................... 3,136
--------
Total stockholders' equity........................ 197,692
--------
Total capitalization.............................. $197,692
========
- ---------------
(1) As of July 31, 1998, the Company had $25.0 million of indebtedness
outstanding pursuant to the term loan under the Amended Credit Facility. The
Company borrowed $25.0 million under the term loan in order to finance
substantially all of the cash purchase price of the Spec's Acquisition. See
"Risk Factors -- Risks of Restrictions by Lenders," "Prospectus
Summary -- Recent Developments," "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Description of Certain Indebtedness."
(2) See Note 13 to the Company's Consolidated Financial Statements.
(3) Does not reflect estimated expenses associated with the Offerings. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General."
18
21
DILUTION
The net tangible book value of the Company as of May 30, 1998 was $303.9
million or $26.00 per share of Common Stock. Net tangible book value per share
is determined by dividing the net tangible book value by the number of
outstanding shares of Common Stock, including the assumed exercise of all vested
options, after consummation of the Offerings. The net tangible book value
dilution per share shown below represents the difference between the amount per
share paid by purchasers of Common Stock in the Offerings and the net tangible
book value per share of Common Stock. The following table illustrates the per
share dilution:
Initial public offering price per share..................... $
Net tangible book value per share........................... $ 26.00
--------
Net tangible book value dilution per share.................. $
========
The following table summarizes, on a pro forma basis as of May 31, 1998,
the differences between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share of Common
Stock paid by the current stockholders and by the investors purchasing shares of
Common Stock in the Offerings, at the assumed initial public offering price of
$ per share of Common Stock.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- ---------
Current Stockholders (1)............ % $ % $
New investors.......................
---------- ----- ------------ -----
Total..................... 100.0% $ 100.0%
========== ===== ============ =====
- ---------------
(1) Ownership figures for current stockholders exclude an aggregate of 354,500
shares of Common Stock that may be acquired upon the exercise of currently
exercisable options at an exercise price of $20.75 per share under the
Company's stock option plans. See "Management -- Stock Option Plan" and
"Management -- Director Compensation."
19
22
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The accompanying unaudited pro forma condensed consolidated statement of
operations for Fiscal 1997 reflects the historical statement of operations of
the Company, adjusted to reflect the effects of (i) fresh-start reporting and
(ii) The Wall Acquisition (each as discussed herein), as if each had occurred as
of the beginning of the period presented.
The Company adopted the American Institute of Certified Public Accountants
Statement of Position ("SOP") 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code." Pursuant to the guidance provided by
SOP 90-7, the Company adopted fresh-start reporting for its Consolidated
Financial Statements effective as of January 31, 1998, the last day of the
Company's fiscal month end. Under fresh-start reporting, the reorganization
value of the Company has been allocated to the emerging Company's assets on the
basis of the purchase method of accounting. All of the reorganization value was
attributable to specific tangible assets of the emerging entity and no amount
has been recorded as intangible assets or as "Reorganization Value in Excess of
Amounts Allocable to Identifiable Assets."
Effective February 28, 1998, the Company acquired certain assets and
assumed certain liabilities and operating lease commitments of The Wall from WH
Smith Group Holdings USA, Inc. for a cash purchase price of $72.4 million. The
Wall was a wholly owned subsidiary of WH Smith Group Holdings USA, Inc. and an
indirect wholly owned subsidiary of the WH Smith Group, plc, a publicly held
United Kingdom corporation. The purchase price exceeded the fair value of the
net assets acquired by approximately $27.0 million, which amount will be
amortized on a straight line basis over 30 years. The acquisition was accounted
for under the purchase method of accounting.
The unaudited pro forma condensed consolidated financial data and
accompanying notes should be read in conjunction with the Consolidated Financial
Statements and related notes of the Company and the financial statements and
related notes of The Wall, all of which are included elsewhere in this
Prospectus. The Company believes that the assumptions used in the following
statements provide a reasonable basis on which to present the pro forma
financial data. The fresh-start reporting allocation is subject to the
resolution of the contingency with the IRS discussed in Note 18 to the
Consolidated Financial Statements of the Company. The purchase price allocation
related to The Wall Acquisition is subject to final adjustment based on the
resolution of certain contingencies related to merchandise inventory return
reserves and the finalization of acquisition costs. The unaudited pro forma
condensed consolidated financial data are provided for informational purposes
only and should not be construed to be indicative of the Company's results of
operations had The Wall Acquisition been consummated on the dates assumed and
are not intended to constitute projections with regards to the Company's results
of operations for any future period.
20
23
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FISCAL 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL
------------ HISTORICAL
HISTORICAL THE ------------
-------------- COMPANY THE WALL
PREDECESSOR (PERIOD (PERIOD
(PERIOD FEBRUARY 1, MARCH 2,
MARCH 2, 1997 PRO FORMA 1998 TO PRO FORMA 1997 TO PRO FORMA
TO JANUARY 31, ADJUSTMENTS FEBRUARY 28, FRESH-START FEBRUARY 28, ADJUSTMENTS
1998) (FRESH-START) 1998) COMBINED 1998) (THE WALL)
-------------- ------------- ------------ ----------- ------------ -----------
INCOME STATEMENT DATA
Net sales............. $372,561 $ (4,195)(1) $27,842 $396,208 $172,212 $(14,300)(10)
Cost of sales......... 243,109 (3,890)(1)(2) 17,662 256,881 104,175 (9,000)(10)
-------- --------- ------- -------- -------- --------
Gross profit........ 129,452 (305) 10,180 139,327 68,037 (5,300)
Selling, general and
administrative
expenses............ 99,553 (579)(1)(3) 9,240 108,214 54,505 (11,493)(10)(11)
(12)(13)
Depreciation and
amortization........ 20,484 (14,574)(1)(4) 527 6,437 6,725 (3,038)(14)
Special items......... (4,443) -- (4,443) 4,164 (4,164)(15)
-------- --------- ------- -------- -------- --------
Income before interest
expense, other
income (expenses),
net, reorganization
income (expenses),
and income taxes.... 13,858 14,848 413 29,119 2,643 13,395
Interest expense...... (221) 55(5) (12) (178) -- (410)(16)
Other income
(expenses), net..... (185) 2,529(6)(7) 295 2,639 -- (2,639)(16)
-------- --------- ------- -------- -------- --------
Income before
reorganization
income (expenses),
and income taxes.... 13,452 17,432 696 31,580 2,643 10,346
Reorganization income
(expenses).......... 26,501 (26,501)(7)(8) -- -- --
-------- --------- ------- -------- -------- --------
Income (loss) before
income taxes........ 39,953 (9,069) 696 31,580 2,643 10,346
(Provision) benefit
for income taxes.... (289) (11,912)(9) (115) (12,316) (2,206) (2,861)(17)
-------- --------- ------- -------- -------- --------
Net income (loss)..... $ 39,664 $ (20,981) $ 581 $ 19,264(20) $ 437 $ 7,485
======== ========= ======= ======== ======== ========
Earnings per
share(18)...........
Weighted average
shares
outstanding(18).....
PRO FORMA
COMBINED
-----------
INCOME STATEMENT DATA
Net sales............. $ 554,120
Cost of sales......... 352,056
-----------
Gross profit........ 202,064
Selling, general and
administrative
expenses............ 151,226
Depreciation and
amortization........ 10,124
Special items......... (4,443)
-----------
Income before interest
expense, other
income (expenses),
net, reorganization
income (expenses),
and income taxes.... 45,157
Interest expense...... (588)
Other income
(expenses), net..... --
-----------
Income before
reorganization
income (expenses),
and income taxes.... 44,569
Reorganization income
(expenses).......... --
-----------
Income (loss) before
income taxes........ 44,569
(Provision) benefit
for income taxes.... (17,383)
-----------
Net income (loss)..... $ 27,186(19)
===========
Earnings per
share(18)........... $ 2.67
Weighted average
shares
outstanding(18)..... 10,176,162
See accompanying notes to unaudited pro forma condensed consolidated statement
of operations.
21
24
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FRESH-START REPORTING PRO FORMA ADJUSTMENTS NOTES
(1) To eliminate operating results of ten stores closed in conjunction with the
Company's reorganization as follows: sales ($4,195); cost of sales
($2,740); selling, general and administrative expenses ($1,123); and
depreciation and amortization ($377).
(2) During the reorganization period certain trade vendors denied the Company
the right to take prompt payment discounts. The amounts and period of
denial varied by vendor. The adjustment of ($1,150) reinstates cash
discounts to normal and customary trade payment terms.
(3) To adjust selling, general and administrative expenses for the following:
(i) record the effects of fair value adjustments for favorable and
unfavorable lease value amortization of $578; (ii) record the effects of
fair value adjustments for average rent expense of $1,011; and (iii) record
the effects of capitalizing internal use software costs (SOP 98-1) of
($1,045).
(4) To reduce depreciation and amortization expense for the following: (i)
eliminate Predecessor Company goodwill amortization of ($1,840); (ii)
record the effects of amortizing capitalized internal software costs (SOP
98-1) of $105; (iii) eliminate Predecessor Company depreciation expense of
($18,644); and (iv) record depreciation expense of $6,182 for the adjusted
fixed asset values based on historical lives and half-year convention.
(5) To eliminate historical commitment fee expense of ($221) and record new
commitment fee expense of $166 based on the terms of the New Working
Capital Facility of .375%.
(6) To adjust amortization of deferred financing fees for the New Working
Capital Facility by ($218).
(7) To reclassify interest income of $2,311 from reorganization income. The
interest income consists of interest earned on cash accumulated during the
Chapter 11 proceedings due to the nonpayment of prepetition liabilities
subject to compromise and was recorded as a reorganization item in
accordance with SOP 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code."
(8) To eliminate reorganization income (including interest income of $2,311
included therein) which will not be incurred subsequent to the Plan
Effective Date.
(9) To reverse income tax effect of fresh-start reporting adjustments and
record the income tax effect of pro forma adjustments for items that are
deductible for income tax purposes, using an assumed rate of 39%.
THE WALL ACQUISITION PRO FORMA ADJUSTMENTS NOTES
(10) To reflect adjustment for operating results of 18 stores not acquired by
the Company for sales ($3,600); cost of sales ($2,300); and selling,
general and administrative expenses ($1,900); and to adjust operating
results for 11 stores acquired which will be closed and are reserved for as
part of the acquisition strategy as follows: sales ($10,700); cost of sales
($6,700); and selling, general and administrative expenses ($3,800).
(11) To eliminate duplicate payroll and related costs of ($4,313) associated
with the corporate employees not acquired, and to eliminate duplicate
corporate facility costs of ($400) for contracts not acquired.
(12) To eliminate duplicate payroll and related costs of ($710) associated with
distribution center employees not acquired.
(13) To adjust selling, general and administrative expenses for the following:
(i) record the effects of fair value adjustments for favorable and
unfavorable lease value amortization of ($1,120) and (ii) record the
effects of fair value adjustments for average rent expense of $750.
(14) To reduce depreciation and amortization for the following: (i) to reverse
historical depreciation and amortization of ($6,725); (ii) to record new
goodwill amortization of $898 (based on straight-line amortization over a
30-year period); (iii) to record trade name amortization of $380 (based on
straight-line amortization over a two-year period); and (iv) to record new
depreciation expense of $2,409 for revalued property, plant and equipment.
(15) To eliminate special charges of ($4,164) which represent the write-down on
long-lived assets which were either not acquired or recorded at fair value.
22
25
(16) To eliminate interest income of $2,639 and reflect additional interest
expense of $410 as a result of incremental borrowings needed to finance The
Wall Acquisition.
(17) To record the income tax effect of pro forma adjustments assuming an income
tax rate of 39%.
PRO FORMA COMBINED PER SHARE DATA
(18) The pro forma combined net income per share data is presented in accordance
with SFAS No. 128 and assumes: (i) the Company emerged from bankruptcy and
adopted fresh-start reporting on March 2, 1997; (ii) The Wall Acquisition
occurred on March 2, 1997; and (iii) the Company's 1998 Stock Option Plan
and Outside Directors Stock Option Plan were established on March 2, 1997.
Awards of options under these plans are not dilutive on a pro forma basis
and, therefore, basic and diluted data are the same. With respect to
historical combined net income per share, see Note 3 to the Company's
Consolidated Financial Statements.
OTHER INFORMATION
(19) Pro forma fresh-start combined net income of $19.3 million in Fiscal 1997
would have been $15.9 million when adjusted to reflect (i) the elimination
of a $4.4 million ($2.7 million, net of tax) special item and (ii) a $1.2
million ($0.7 million, net of tax) increase to cost of goods sold to
reflect the absence of customary trade payment terms during fiscal 1997.
Pro forma combined net income of $27.2 million for Fiscal 1997, adjusted
for (i) and (ii) above and a $2.1 million ($1.3 million, net of tax)
increase to selling, general and administrative expenses to reflect
accruals associated with The Wall Acquisition, would have been $22.5
million.
23
26
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE, SELECTED STORE AND SELECTED OPERATING DATA)
The selected consolidated financial data as of and for the fiscal year ended
August 31, 1993 and the 30 days ended September 30, 1993 have been derived from
the audited and internal financial statements of the Pre-Predecessor prior to
the 1993 Acquisition. The selected consolidated financial data as of and for the
period from October 1, 1993 to February 26, 1994 and the fiscal years ended
February 25, 1995, March 2, 1996 and March 1, 1997, and the period March 2, 1997
to January 31, 1998 have been derived from the audited financial statements of
the Predecessor. The selected consolidated financial data of the Company as of
and for the period February 1, 1998 to February 28, 1998 has been derived from
the audited financial statement of the Company. The selected consolidated
financial data of the Company for the period March 2, 1997 to May 31, 1997 and
March 1, 1998 to May 30, 1998 and as of May 31, 1997 and May 30, 1998 has been
derived from the unaudited financial statements of the Company. The selected
consolidated financial data set forth below should be read in conjunction with
the audited and unaudited historical 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
Prospectus. As a result of the implementation of fresh-start reporting, the
consolidated financial data for the Company is not comparable to that of the
Predecessor or the Pre-Predecessor. As a result of implementing purchase
accounting for the 1993 Acquisition, the consolidated financial data of the
Pre-Predecessor is not comparable to that of the Predecessor.
PRE-PREDECESSOR(1) PREDECESSOR(2)
--------------------------- -----------------------------------------------------------------
PERIOD
OCTOBER 1,
1993 PERIOD
FISCAL YEAR 30 DAYS TO MARCH 2,
ENDED ENDED FEBRUARY 1997 TO
AUGUST 31, SEPTEMBER 30, 26, FISCAL FISCAL FISCAL JANUARY 31,
1993 1993(3) 1994 1994 1995 1996 1998(4)
----------- ------------- ----------- ------------ ---------- -------- ------------
INCOME STATEMENT DATA
Net sales............. $421,467 $ 28,958 $206,246 $ 459,077 $ 455,652 $396,502 $372,561
Cost of sales......... 256,773 17,737 123,227 289,887 302,481 263,072 243,109
-------- -------- -------- --------- ---------- -------- --------
Gross profit.......... 164,694 11,221 83,019 169,190 153,171 133,430 129,452
Selling, general and
administrative
expenses............. 116,174 9,611 53,249 128,158 135,441 117,558 99,553
Depreciation and
amortization......... 13,110 1,135 7,465 21,146 26,570 23,290 20,484
Special items (6)..... -- -- 8,330 -- 211,520 6,523 (4,443)
-------- -------- -------- --------- ---------- -------- --------
Income (loss) before
interest expense,
other income
(expenses), net,
reorganization income
(expenses), income
taxes and
extraordinary item... 35,410 475 13,975 19,886 (220,360) (13,941) 13,858
Interest expense...... (2,022) (188) (10,693) (30,655) (38,319) (17,418) (221)
Other income
(expenses), net...... (1,210) (93) (1,548) (5,026) (4,978) (1,160) (185)
-------- -------- -------- --------- ---------- -------- --------
Income (loss) before
reorganization income
(expenses), income
taxes and
extraordinary item... 32,178 194 1,734 (15,795) (263,657) (32,519) 13,452
Reorganization income
(expenses)(7)........ -- -- -- -- -- (31,845) 26,501
-------- -------- -------- --------- ---------- -------- --------
Income (loss) before
income taxes and
extraordinary item... 32,178 194 1,734 (15,795) (263,657) (64,364) 39,953
(Provision) benefit
for income taxes..... (10,949) (34) (2,678) (3,070) (474) -- (289)
Extraordinary item,
net of tax(8)........ -- -- -- -- -- -- 228,911
-------- -------- -------- --------- ---------- -------- --------
Net income (loss)..... $ 21,229 $ 160 $ (944) $ (18,865) $ (264,131) $(64,364) $268,575
======== ======== ======== ========= ========== ======== ========
Basic earnings per
share(9).............
Diluted earnings per
share(9).............
Weighted average
number of common
shares
outstanding-basic(9)...
Weighted average
number of common
shares
outstanding-diluted(9)..
THE THE
COMPANY PREDECESSOR(2) COMPANY
------------ -------------- ----------
PERIOD PERIOD PERIOD
FEBRUARY 1, MARCH 2, MARCH 1,
1998 TO COMBINED 1997 TO 1998 TO
FEBRUARY 28, FISCAL MAY 31, MAY 30,
1998(4) 1997(5) 1997 1998
------------ -------- -------------- ----------
INCOME STATEMENT DATA
Net sales............. $ 27,842 $400,403 $ 82,815 $ 113,456
Cost of sales......... 17,662 260,771 53,820 71,147
-------- -------- -------- ----------
Gross profit.......... 10,180 139,632 28,995 42,309
Selling, general and
administrative
expenses............. 9,240 108,793 26,407 36,213
Depreciation and
amortization......... 527 21,011 5,454 1,765
Special items (6)..... -- (4,443) -- 350
-------- -------- -------- ----------
Income (loss) before
interest expense,
other income
(expenses), net,
reorganization income
(expenses), income
taxes and
extraordinary item... 413 14,271 (2,866) 3,981
Interest expense...... (12) (233) (61) (86)
Other income
(expenses), net...... 295 110 (69) 263
-------- -------- -------- ----------
Income (loss) before
reorganization income
(expenses), income
taxes and
extraordinary item... 696 14,148 (2,996) 4,158
Reorganization income
(expenses)(7)........ -- 26,501 (1,113) --
-------- -------- -------- ----------
Income (loss) before
income taxes and
extraordinary item... 696 40,649 (4,109) 4,158
(Provision) benefit
for income taxes..... (115) (404) -- (1,603)
Extraordinary item,
net of tax(8)........ -- 228,911 -- --
-------- -------- -------- ----------
Net income (loss)..... $ 581 $269,156 $ (4,109) $ 2,555
======== ======== ======== ==========
Basic earnings per
share(9)............. $ 0.06 -- -- $ 0.25
Diluted earnings per
share(9)............. $ 0.06 -- -- $ 0.24
Weighted average
number of common
shares
outstanding-basic(9). 10,176,162 10,176,162
Weighted average
number of common
shares
outstanding-diluted(9 10,176,162 10,469,914
(continued on following page)
24
27
PRE-PREDECESSOR(1) PREDECESSOR(2)
--------------------------- -----------------------------------------------------------------
PERIOD
OCTOBER 1,
1993 PERIOD
FISCAL YEAR 30 DAYS TO MARCH 2,
ENDED ENDED FEBRUARY 1997 TO
AUGUST 31, SEPTEMBER 30, 26, FISCAL FISCAL FISCAL JANUARY 31,
1993 1993(3) 1994 1994 1995 1996 1998(4)
----------- ------------- ----------- ------------ ---------- -------- ------------
SELECTED STORE DATA
Number of stores:
Open at beginning of
period............. 324 365 366 392 401 388 315
Open during period... 20 1 7 21 14 -- --
Closed during
period............. 5 -- -- 12 27 73 10
Acquired during
period............. 26 -- 19 -- -- -- --
-------- -------- -------- --------- ---------- -------- --------
Open at end of
period............. 365 366 392 401 388 315 305
======== ======== ======== ========= ========== ======== ========
SELECTED OPERATING
DATA
Gross square footage
(000's)(10).......... 1,273 1,281 1,393 1,511 1,563 1,329 1,309
Sales per square
foot(11)............. $ 331 -- -- $ 304 $ 292 $ 298 --
Comparable store sales
increase
(decrease)(12)....... -- -- -- (2.6%) (5.6%) (3.5%) --
BALANCE SHEET DATA (AT
END OF PERIOD)
Working capital....... $ 73,263 $ 73,329 $ 30,448 $ 58,127 $ (167,129) $125,329 $149,018
Total assets.......... 227,720 236,052 545,484 551,370 308,670 258,648 260,319
Current portion of
long-term debt....... 578 9,203 2,555 12,565 285,878 -- --
Long-term debt, net of
current portion...... 21,283 21,283 328,845 354,235 110,882 -- --
Liabilities subject to
compromise........... -- -- -- -- -- 484,811 --
Stockholders' equity
(deficit)............ 130,418 130,579 75,643 56,778 (203,940) (268,304) 194,368
THE THE
COMPANY PREDECESSOR(2) COMPANY
------------ -------------- ----------
PERIOD PERIOD PERIOD
FEBRUARY 1, MARCH 2, MARCH 1,
1998 TO COMBINED 1997 TO 1998 TO
FEBRUARY 28, FISCAL MAY 31, MAY 30,
1998(4) 1997(5) 1997 1998
------------ -------- -------------- ----------
SELECTED STORE DATA
Number of stores:
Open at beginning of
period............. 305 315 315 305
Open during period... -- -- -- 1
Closed during
period............. -- 10 -- 1
Acquired during
period............. -- -- -- 150
-------- -------- -------- ----------
Open at end of
period............. 305 305 315 455
======== ======== ======== ==========
SELECTED OPERATING
DATA
Gross square footage
(000's)(10).......... 1,309 1,309 1,329 1,930
Sales per square
foot(11)............. -- $ 306 $ 62 $ 59
Comparable store sales
increase
(decrease)(12)....... -- 6.8% 1.7% 1.0%
BALANCE SHEET DATA (AT
END OF PERIOD)
Working capital....... $110,143 $110,143 $124,608 $ 114,517
Total assets.......... 342,281 342,281 254,132 303,894
Current portion of
long-term debt....... -- -- -- --
Long-term debt, net of
current portion...... -- -- -- --
Liabilities subject to
compromise........... -- -- 484,497 --
Stockholders' equity
(deficit)............ 194,949 194,949 (272,421) 197,692
- ---------------
(1) The financial information for the Pre-Predecessor entity relates to the
operations of Camelot Music, Inc. prior to the 1993 Acquisition which was
effective September 30, 1993.
(2) The financial information for the Predecessor entity relates to the
operations of Camelot Music Holdings, Inc. prior to its emergence from
bankruptcy on the Plan Effective Date.
(3) 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.
(4) As of January 31, 1998, the Company adopted fresh-start reporting in
accordance with AICPA Statement of Position 90-7, which resulted in a new
entity for financial reporting purposes. Financial information for the
period from March 2, 1997 to January 31, 1998 reflects the operations of
the Company's Predecessor prior to its emergence from bankruptcy. Financial
information for the period from February 1, 1998 to February 28, 1998
reflects the operations of the Company after the Plan Effective Date and
the adoption of fresh-start reporting.
(5) Combined Fiscal 1997 consolidated financial data represents a summation (on
two different bases of accounting due to the adoption of fresh-start
reporting on the Plan Effective Date) of the financial data for the
Predecessor entity from March 2, 1997 to January 31, 1998 and the financial
data for the Company from February 1, 1998 to February 28, 1998. See
"Unaudited Pro Forma Condensed Consolidated Financial Data."
(6) Includes certain items, including the reversal of program reward redemption
reserves aggregating $4.4 million (income) in Fiscal 1997 when the Company
discontinued its manual "punch card" version of its customer loyalty
program and replaced it with a more limited automated program, the
write-down of the fair value of long-lived assets in Fiscal 1996 resulting
in a charge of $6.5 million, the write-down of goodwill in Fiscal 1995,
principally related to the 1993 Acquisition and restructuring charges of
$8.3 million. In the first quarter of Fiscal 1998, the Company incurred a
$0.4 million (expense) relating to the Offerings.
(7) During Fiscal 1997, reorganization income related principally to
adjustments to prepetition claims that were discharged or received no
amount of recovery, offset by net adjustments to fair value, and
professional fees and other expenses related to the bankruptcy proceedings.
During Fiscal 1996, reorganization expense primarily reflected a provision
for store closings (including related lease rejection damage claims) and
the write-off of financing costs associated with prepetition indebtedness
as well as professional fees.
(8) As a result of the Company's reorganization, in Fiscal 1997 the Company
recorded a one-time gain of $228.9 million associated with the
extinguishment of prepetition claims of approximately $428 million.
(9) See Note 3 to the Company's year end and interim Consolidated Financial
Statements.
(10) Gross square footage is based on Camelot stores only and excludes The Wall
stores.
(11) Sales per square foot is based on the gross square footage for Camelot
stores only and excludes The Wall stores.
(12) The percentage change in comparable store sales is calculated as the net
change in sales for each comparable store for the equivalent period in the
prior year. Comparable stores are stores that have been operating for more
than 12 months since first opening. During the 13th month of operations,
new stores are considered comparable stores. Stores which have been
relocated are treated as comparable stores. Closed stores are not
categorized as comparable stores.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Camelot was founded in 1956 as a third-party supplier of music to general
merchandise retailers such as regional drug, grocery, variety and discount
stores. In 1965, the Company opened its first retail outlet as a leased
department in a Canton, Ohio area discount store. Over the next several years,
the Company began to operate mall-based prerecorded music stores and leased
music departments in discount stores. The Company has been privately held since
its founding.
On November 12, 1993, Investcorp S.A., an international investment banking
firm, arranged for certain of its affiliates, other non-U.S. investors and
Camelot senior management to purchase the stock of Camelot Music, Inc. for
approximately $420.0 million (the "1993 Acquisition"). This purchase price was
funded with $80.0 million in cash, approximately $240.0 million of borrowings by
the Company's predecessor from institutional lenders provided under the terms of
a credit agreement, $50.0 million of subordinated debentures and $50.0 million
of Camelot Music, Inc.'s preferred stock.
During the 1980s the music retail industry experienced rapid growth fueled
by: (i) the introduction of new products such as the CD; (ii) a relatively large
number of popular new releases which increased customer traffic and sales; and
(iii) the rapid expansion of mall-based music retailers. These factors led, in
the early 1990s, to the competitive intrusion of non-traditional music retailers
such as consumer electronics stores and discount stores and to increasing price
competition. By mid-1994 these competitive factors, combined with the
contraction of the replacement CD market and a comparative lack of successful
new releases, led to deteriorating profitability in the music retail industry.
Beginning in mid-1997, conditions in the music retail industry began to improve
as a result of: (i) the significant reduction in competitive square footage
resulting from the reduction in the total number of traditional music retail
stores from approximately 5,000 in 1995 to approximately 4,200 in 1997,
including a net reduction of 600 retail stores by the top five traditional music
retailers, based on store count; (ii) an improvement in retail pricing as music
vendors, beginning in 1996, strengthened MAP guidelines, which the Company
believes decreased the intensity levels of price-based competition for
prerecorded music; and (iii) a resurgence in popular new releases.
The significant debt service burden resulting from the 1993 Acquisition and
the industry conditions described above combined to impair Camelot's operating
and financial condition and led the Company to file a voluntary bankruptcy
petition in August 1996. The Plan of Reorganization was confirmed by the
Bankruptcy Court and became effective on January 27, 1998 (the "Plan Effective
Date"). Over the last two fiscal years, as the Company focused on improving the
competitiveness of its business, revenues increased 1.0% as the Company closed
83 stores and opened no new stores. During this same period the Company
significantly improved its operating margin to 3.6% of net sales (2.5% excluding
special items) in Fiscal 1997 from a loss of 3.5% of net sales (a loss of 1.9%
excluding special items).
Because the Company is not offering any shares of Common Stock in the
Offerings, expenses incurred by the Company in connection with the Offerings are
being charged to earnings in the periods incurred. The Company currently
estimates incurring expenses associated with the Offerings of $1.0 million. In
addition, on June 4, 1998 each non-employee Director of the Company received an
option to purchase shares of Common Stock at an exercise price of $20.75 per
share See "Management -- Executive Compensation -- Stock Option Plan" and
"-- Director Compensation." Based upon the difference between the exercise price
of these options and the market price of a share of the Company's Common Stock
on the date of grant, the Company will recognize approximately $241,000 in
compensation expense in connection with these option awards during the second
quarter of Fiscal 1998.
RECENT DEVELOPMENTS
On July 29, 1998, the Company acquired Spec's under the terms of the Spec's
Merger Agreement. Spec's is a Miami, Florida-based retailer of prerecorded music
operating 41 stores in Florida and Puerto Rico. As of July 29, 1998, Spec's
operated 16 mall stores and 25 stores in shopping centers and free-standing
locations. The
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Company believes the Spec's Acquisition will enhance its competitive position in
the Southeastern United States and give the Company a leading position in the
south Florida market. The cash purchase price for the Spec's Acquisition was
approximately $28 million (including related acquisition costs and the repayment
of Spec's indebtedness) and was funded primarily with amounts available under
the Company's Amended Credit Facility as well as accumulated cash. See
"-- Liquidity and Capital Resources." Based on public filings by Spec's, during
the twelve months ended January 31, 1998, Spec's had revenues of $66.2 million
and an operating loss of $4.1 million (excluding restructuring charges, store
closing expenses and impairment of long-lived assets). The Company expects to
achieve cost savings through the reduction or elimination of Spec's corporate
and distribution infrastructure and intends to close two underperforming stores.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Selected Historical Financial and Operating Data and the Consolidated
Financial Statements of the Company and accompanying notes included elsewhere in
this Prospectus. The Company's fiscal year ends on the Saturday closest to
February 28. Any fiscal years or period designated herein is by the calendar
year in which the fiscal year commences. The Company completed a comprehensive
financial restructuring pursuant to the Plan of Reorganization under the United
States Bankruptcy Code, which became effective on January 27, 1998. The
Company's emergence from bankruptcy required the Company, in accordance with SOP
90-7, to adopt "fresh-start reporting" as of January 31, 1998. See Note 2 to the
Company's Consolidated Financial Statements included elsewhere herein. Due to a
revaluation of assets and liabilities and adoption of a new basis of accounting
resulting from fresh-start reporting, the results of operations for periods
subsequent to January 31, 1998 are not comparable to the results of operations
for prior periods. The following discussion and analysis of the results of
operations compare (i) the Company's results of operations for the thirteen
weeks ended May 30, 1998 with the results of operations for the thirteen weeks
ended May 31, 1997, (ii) a summation of the Company's results of operations for
the period February 1, 1998 to February 28, 1998 and the period March 2, 1997 to
January 31, 1998 ("Combined Fiscal 1997" or "Fiscal 1997") with the results of
operations for the 52 week period ended March 1, 1997 ("Fiscal 1996") and (iii)
the Company's results of operations for Fiscal 1996 with the results of
operations for the 53-week period ended March 2, 1996 ("Fiscal 1995"). Although
results for periods subsequent to January 31, 1998 are not comparable to results
for prior periods, information is presented on a combined basis in order to
provide investors with information covering a complete fiscal year of
operations. Management believes that presentation of information with respect to
Combined Fiscal 1997 facilitates investor comprehension of the Company's
performance for Fiscal 1997 in relation to the prior periods presented.
During Fiscal 1995, the Company experienced adverse business conditions
resulting principally from increased competition, which led to diminished
operating results and downward revisions to forecasted future results.
Accordingly, management determined that certain long-lived assets were impaired
and wrote those assets down by $202.9 million. Additional impaired asset
write-downs of $6.5 million were recorded in Fiscal 1996. These charges are
reflected in "special items." Income (loss) before interest expense, other
income (expenses), net, reorganization income (expenses), income taxes and
extraordinary item would have been a loss of $8.8 million in Fiscal 1995 (a loss
of 1.9% of net sales) and a loss of $7.4 million in Fiscal 1996 (a loss of 1.9%
of net sales), excluding such charges.
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The following table shows certain statement of operations line items as a
percentage of net sales during the three most recent fiscal years and for the
first quarters of Fiscal 1998 and Fiscal 1997.
PERCENTAGE OF NET SALES
---------------------------------------------------------------------------------
PRO FORMA PRO FORMA FIRST FIRST
COMBINED COMBINED COMBINED QUARTER QUARTER
FISCAL FISCAL FISCAL FISCAL 1997 FISCAL 1997 FISCAL FISCAL
1995 1996 1997(1) (FRESH-START)(2) (THE WALL)(2) 1997 1998
------ ------ -------- ---------------- ------------- ------- -------
Net sales.................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................................ 66.4 66.3 65.1 64.8 63.5 65.0 62.7%
----- ----- ----- ----- ----- ----- -----
Gross profit................................. 33.6 33.7 34.9 35.2 36.5 35.0 37.3
Selling, general and administrative
expenses................................... 29.7 29.7 27.2 27.3 27.3 31.9 31.9
Depreciation and amortization................ 5.8 5.9 5.2 1.6 1.8 6.6 1.6
Special items(3)............................. 46.4 1.6 (1.1) (1.1) (0.7) -- 0.3
----- ----- ----- ----- ----- ----- -----
Income (loss) before interest expense, other
income (expenses), net, reorganization
income (expenses), income taxes and
extraordinary item......................... (48.3) (3.5) 3.6 7.4 8.1 (3.5) 3.5
Interest expense............................. (8.4) (4.4) (0.1) -- (0.1) -- --
Other income (expenses), net................. (1.1) (0.3) -- 0.7 -- (0.1) 0.2
----- ----- ----- ----- ----- ----- -----
Income (loss) before reorganization income
(expenses), income taxes and extraordinary
item....................................... (57.8) (8.2) 3.5 8.1 8.0 (3.6) 3.7
Reorganization income (expenses)............. -- (8.0) 6.6 -- -- (1.3) --
----- ----- ----- ----- ----- ----- -----
Income (loss) before income taxes and
extraordinary item......................... (57.8) (16.2) 10.1 8.1 8.0 (4.9) 3.7
(Provision) benefit for income taxes......... (0.1) -- (0.1) (3.1) (3.1) -- (1.4)
Extraordinary item, net of tax............... -- -- 57.2 -- -- -- --
----- ----- ----- ----- ----- ----- -----
Net income (loss)............................ (57.9)% (16.2)% 67.2% 5.0% 4.9% (4.9)% 2.3%
===== ===== ===== ===== ===== ===== =====
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(1) Results of operations for Fiscal 1997 are presented on a combined basis
reflecting a summation of the Predecessor's operations for the period March
2, 1997 to January 31, 1998 and the Company's operations for the period
February 1, 1998 to February 28, 1998.
(2) See "Unaudited Pro Forma Condensed Consolidated Financial Data" and the
notes thereto.
(3) Includes certain items, including the reversal of program reward redemption
reserves aggregating $4.4 million (income) in Fiscal 1997 when the Company
discontinued its manual "punch card" version of its customer loyalty program
and replaced it with a more limited automated customer loyalty program, the
write-down of the fair value of long-lived assets in Fiscal 1996 resulting
in a charge of $6.5 million and 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 Acquisition.
THIRTEEN WEEKS ENDED MAY 30, 1998 COMPARED TO THE THIRTEEN WEEKS ENDED MAY 31,
1997.
Net sales. Net sales increased 37.0% to $113.5 million in the first quarter
of Fiscal 1998 compared to $82.8 million in the first quarter of Fiscal 1997.
The Company acquired 150 stores on February 28, 1998 as a result of The Wall
Acquisition. The increase in sales was primarily as result of The Wall
Acquisition which added $31.4 million to net sales for the quarter. Comparable
store sales (based on 305 Camelot stores) increased 1.0%, primarily due to
increases in retail pricing of catalog goods during the first quarter of Fiscal
1998 versus the prior year. Comparable store sales for The Wall for the first
quarter of Fiscal 1998 increased by approximately 10% compared to the first
quarter of Fiscal 1997 (when the Company did not own The Wall). During this
period, the Company opened one store and closed one store. As of May 30, 1998,
the Company operated 455 stores compared to 315 stores as of May 31, 1997.
Gross profit. Gross profit increased 45.9% to $42.3 million in the first
quarter of Fiscal 1998 compared to $29.0 million in the first quarter of Fiscal
1997. Gross profit as a percentage of net sales improved to 37.3% in the first
quarter of Fiscal 1998 from 35.0% in the first quarter of Fiscal 1997. The
increase in gross profit was a result
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of less promotional retail pricing, an increased mix of higher margin catalog
sales, the resumption of normal trade terms (including the availability of
prompt payment discounts) and the acquisition of The Wall stores. The Wall
Acquisition accounted for $12.2 million of the increase in gross profit.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 37.1% to $36.2 million in the first quarter of
Fiscal 1998 from $26.4 million in the first quarter of Fiscal 1997. During the
quarter The Wall stores contributed $9.2 million to the increase in selling,
general and administrative expenses (1.6% of net sales). Selling, general and
administrative expenses as a percentage of net sales was consistent with the
first quarter of Fiscal 1997 at 31.9%.
Depreciation and amortization. Depreciation and amortization decreased
67.3% to $1.8 million in the first quarter of Fiscal 1998 from $5.5 million in
the first quarter of Fiscal 1997. The reduction was the result of fresh-start
accounting and purchase accounting adjustments which significantly decreased the
depreciable basis of property, plant and equipment.
Special items. In the first quarter of Fiscal 1998 the Company incurred
$0.4 million (expense) relating to the Offerings.
Income (loss) before other income (expenses), net, reorganization expenses,
and income taxes. As a result of the foregoing, income (loss) before interest
expense, other income (expenses), net, reorganization expenses and income taxes
as a percentage of net sales increased to 3.5% or $4.0 million in the first
quarter of Fiscal 1998 as compared to a loss of $2.9 million or 3.5% as a
percentage of net sales in the first quarter of Fiscal 1997.
Other income (expenses), net. The Company's other income (expenses), net,
increased to $0.2 million (income) in the first quarter of Fiscal 1998 from $.1
million (expenses) in the first quarter of Fiscal 1997. Other income (expenses),
net includes the Company's interest income and financing charges. Other income
in the prior year quarter was netted against reorganization expenses as required
during the bankruptcy proceedings.
Reorganization expenses. The Company recorded no reorganization expenses in
the first quarter of Fiscal 1998 compared to reorganization expenses of $1.1
million in the first quarter of Fiscal 1997. During Fiscal 1997 the
reorganization expenses primarily reflected professional fees and other expenses
related to the bankruptcy proceedings. No expense has been incurred in Fiscal
1998 due to the Company's emergence from Chapter 11 on January 31, 1998.
Income taxes. The Company's provision for income taxes for the first
quarter of Fiscal 1998 was $1.6 million compared to no income tax recorded
during the first quarter of Fiscal 1997. The Company anticipates an effective
tax rate of approximately 39.7% with respect to Fiscal 1998 pretax income. The
Company believes that it is more likely than not that it will be able to use the
deferred tax assets at February 28, 1998. Under the provisions of the Internal
Revenue Code, no net operating losses remain to offset the Company's future
operating income. In addition, the write-off of unprofitable stores as a part of
the Plan, the forgiveness of debt and the related reduction in future interest
expense and the write-off of reorganization expense as a part of emergence from
bankruptcy will all contribute to future taxable income. Therefore, no valuation
allowance has been established to offset these deferred tax assets.
Net income. As a result of the foregoing, the Company recognized net income
of $2.6 million during the first quarter of Fiscal 1998, as compared to a net
loss of ($4.1) million in the first quarter of Fiscal 1997. Excluding special
items and reorganization expenses, the Company recognized net income in the
first quarter of Fiscal 1998 of $2.9 million, as compared to a net loss of
$(3.0) million in the first quarter of Fiscal 1997.
COMBINED FISCAL 1997 COMPARED TO FISCAL 1996
Net sales. Net sales increased 1.0% to $400.4 million in Fiscal 1997
compared to $396.5 million in Fiscal 1996. Comparable store sales increased
6.8%, primarily as a result of retail price increases on selected catalog titles
resulting from the institution of MAP pricing and decreased competition in the
marketplace and secondarily due to a comparably stronger new release schedule.
During Fiscal 1997, the Company did not open any stores and closed ten stores.
The Company acquired 150 stores on February 28, 1998 as a result of The Wall
Acquisition. The Company operated 455 stores at the end of Fiscal 1997 compared
to 315 stores at the end of Fiscal 1996.
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32
On a pro forma combined basis giving effect to the adoption of fresh-start
reporting at the beginning of Fiscal 1997 ("Pro Forma (Fresh-Start)"), Pro Forma
(Fresh-Start) net sales during Fiscal 1997 were $396.2 million. On a pro forma
combined basis giving further effect to The Wall Acquisition as if it had
occurred at the beginning of Fiscal 1997 ("Pro Forma (The Wall) "), Pro Forma
(The Wall) net sales during Fiscal 1997 were $55.4 million.
Gross profit. Gross profit increased 4.6% to $139.6 million in Fiscal 1997
compared to $133.4 million in Fiscal 1996. Gross profit as a percentage of net
sales improved to 34.9% in Fiscal 1997 from 33.7% in Fiscal 1996. For purposes
of determining the Company's gross profit, cost of sales is comprised of product
costs, freight, inventory shrink and prompt payment discounts. The increase in
gross profit was the result of decreased competition and an increasing mix of
higher margin catalog sales and the resumption of normal trade terms (including
the availability of prompt payment discounts), offset in part by lower margins
earned on non-music products such as laser video and software products that the
Company was in the process of discontinuing. The Company recorded a charge of
$2.0 million in Fiscal 1997 for the discontinuance of these product lines. Gross
margins were also impacted negatively as a result of a recent industry-wide
trend in which vendors have implemented policies prohibiting the return of open
products for credit. The Company expects the trend to continue in Fiscal 1998.
The Company has modified its inventory distribution systems in response to this
trend. Opened products returned by customers are segregated from other returns
and sent to liquidators for resale. The Company has also begun a program of
repackaging certain opened product and selling it as used product at selected
stores. In addition, the Company has modified its return policies to more
closely monitor customer returns in an effort to reduce returns of opened
product. The costs associated with this effort have not been material.
Pro Forma (Fresh-Start) gross profit as a percentage of net sales was
34.9%, primarily reflecting the effect of the elimination of the cost of sales
associated with the operations of ten stores closed during Fiscal 1997 and the
reinstatement of vendor discounts. Pro Forma (The Wall) gross profit as a
percentage of net sales was 36.5%, primarily reflecting the higher margins
associated with The Wall's operations.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased 7.5% to $108.8 million in Fiscal 1997 from
$117.6 million in Fiscal 1996. Selling, general and administrative expenses, as
a percentage of net sales, decreased to 27.2% in Fiscal 1997 compared to 29.7%
in Fiscal 1996. Selling, general and administrative expenses include payroll,
occupancy and net advertising costs, utilities, distribution costs and general
and administrative costs. The improvement in selling, general and administrative
expenses as a percentage of net sales was principally due to (i) temporary rent
concessions negotiated during the reorganization which have reduced store
occupancy costs as a percentage of net sales, (ii) increases in cooperative
advertising support from vendors and (iii) cost savings associated with
restructuring and automating the Company's customer loyalty program. The Company
expects these rent concessions to be phased out during 1999 and 2000.
Pro Forma (Fresh-Start) and Pro Forma (The Wall) selling, general and
administrative expenses were 27.2% of net sales. The pro forma selling, general
and administrative expenses resulted from the exclusion of net sales from the
ten Camelot stores closed during Fiscal 1997 and from The Wall stores that were
not acquired by The Company or which were targeted for closure subsequent to The
Wall Acquisition.
Depreciation and amortization. Depreciation and amortization decreased 9.9%
to $21.0 million in Fiscal 1997 from $23.3 million in Fiscal 1996. The reduction
was primarily attributable to store closings during Fiscal 1996 and Fiscal 1997.
Pro Forma (Fresh-Start) depreciation and amortization expense was 1.6% of
net sales, primarily reflecting the elimination of depreciation and amortization
expense resulting from fair value adjustments to property, plant and equipment
elimination of Predecessor Company goodwill amortization. Pro Forma (The Wall)
depreciation and amortization expense was 1.8% of net sales, and primarily
reflects the elimination of historic depreciation and amortization expense,
offset in part by new amortization expense for revalued property, plant and
equipment.
Special items. In Fiscal 1997 the Company discontinued the manual "punch
card" version of its customer loyalty program and replaced it with an automated
program targeted to its most frequent and highest spending customers. The
reduction in the program resulted in the reversal of program reward redemption
reserves
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33
aggregating $4.4 million (income). In Fiscal 1996 the Company wrote down the
fair value of long-lived assets resulting in a charge of $6.5 million.
Special items on a Pro Forma (Fresh-Start) basis as a percentage of net
sales were comparable with historic combined Fiscal 1997 levels. Reflecting the
higher pro forma sales resulting from The Wall Acquisition, special items as a
percentage of Pro Forma (The Wall) net sales were (0.7%).
Income (loss) before interest expense, other income (expenses), net,
reorganization income (expenses), income taxes and extraordinary item. As a
result of the foregoing, income (loss) before interest expense, other income
(expenses), net, reorganization income (expenses), income taxes and
extraordinary item as a percentage of net sales increased to 3.6% (2.5%
excluding special items) or $14.3 million in Fiscal 1997 as compared to a loss
of $13.9 million or a loss of 3.5% as a percentage of net sales (a loss of 1.9%
excluding special items) in Fiscal 1996.
Interest expense. The Company's interest expense declined to $0.2 million
in Fiscal 1997 from $17.4 million in Fiscal 1996. The decline in interest
expense was primarily attributable to the cessation of accruals on prepetition
indebtedness upon the filing of the Company's bankruptcy petition.
Other income (expenses), net. The Company's other income (expenses), net
decreased to $0.1 million in Fiscal 1997 from $18.6 million in Fiscal 1996.
Other income (expenses), net includes the Company's financing charges. Financing
costs decreased to $0.4 million in Fiscal 1997 from $1.9 million in Fiscal 1996.
Pro Forma (Fresh-Start) other income (expenses) net was 0.7% of net sales
and primarily reflects the reclassification of interest income from
reorganization income.
Reorganization income (expenses). The Company realized reorganization
income of $26.5 million in Fiscal 1997 compared to reorganization expense of
$31.8 million in Fiscal 1996. During Fiscal 1997, the reorganization income
related principally to adjustments to prepetition claims that were discharged or
received no amount of recovery, offset by net adjustments to fair values, and
professional fees and other expenses related to the bankruptcy proceedings.
During Fiscal 1996, the reorganization expense primarily reflected a provision
for store closings (including related lease rejection damage claims), and the
write-off of financing costs associated with prepetition indebtedness, as well
as professional fees. No reorganization income was recognized on a pro forma
basis.
Income taxes. The Company's provision for income taxes during Fiscal 1997
was $0.4 million compared to no income tax recorded during Fiscal 1996.
Differences between the effective tax rate and the statutory tax rate are due
primarily to the recording of valuation allowances against deferred tax assets.
The Company anticipates an effective tax rate of approximately 40% with respect
to Fiscal 1998 pre-tax income.
Extraordinary item. As a result of the Company's reorganization, in Fiscal
1997 the Company recorded a one-time gain of $228.9 million associated with the
extinguishment of its prepetition claims of approximately $428 million.
Net income. As a result of the foregoing, the Company recognized net income
of $269.2 million during Fiscal 1997, as compared to a net loss of $64.4 million
in Fiscal 1996. Excluding special items, reorganization income (expenses) and
extraordinary item, the Company recognized net income in Fiscal 1997 of $9.3
million, as compared to a net loss of $26.0 million in Fiscal 1996.
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales. Net sales decreased 13.0% to $396.5 million in Fiscal 1996 from
$455.7 million in Fiscal 1995. Comparable store sales declined 3.2% in Fiscal
1996 due to the comparative lack of strong product releases, a decline in CD
replacement sales and increased price-based competition led by price decreases
by non-traditional music retailers, such as consumer electronics retailers. The
decrease in total sales was primarily due to the closing of 73 stores in Fiscal
1996, a decrease in comparable store sales and the impact of one less week of
sales in Fiscal 1996. The Company opened no new stores in Fiscal 1996.
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34
Gross profit. Gross profit decreased 12.9% to $133.4 million in Fiscal 1996
compared to $153.2 million in Fiscal 1995. Gross profit as a percentage of net
sales remained relatively constant at 33.7% in Fiscal 1996 and 33.6% in Fiscal
1995. The decrease in gross profit was primarily due to the effects of increased
price-based competition and the comparative lack of strong new releases.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased 13.2% to $117.6 million in Fiscal 1996 from
$135.4 million in Fiscal 1995. Selling, general and administrative expenses, as
a percentage of net sales, remained constant at 29.7% in Fiscal 1996 and Fiscal
1995. The decrease in selling, general and administrative expenses was
principally due to the reduction in the number of stores operated by the Company
from 388 to 315 and a related reduction in corporate and store operating costs.
Depreciation and amortization. Depreciation and amortization decreased
12.3% to $23.3 million in Fiscal 1996 from $26.6 million in Fiscal 1995. The
decrease was a result of store closings.
Special items. 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 No. 121"),
issued in March 1995. In connection with the adoption of Statement No. 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 Acquisition. Additional impaired asset write-downs of $6.5
million were recorded in Fiscal 1996. These write-downs resulted from the
identification by management of significant adverse changes in the Company's
business climate late in the third quarter of Fiscal 1995 that continued into
Fiscal 1996. These changes were largely due to increasing competition which led
to operating results that were less than expected. As a result, management
reviewed the carrying values of long-lived assets, primarily goodwill and
property, plant and equipment, 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.
In addition, 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 in Fiscal 1995 of $5.2 million,
primarily related to store closings prior to the Petition Date.
Income (loss) before interest expense, other income (expenses), net,
reorganization income (expenses), income taxes and extraordinary item. As a
result of the foregoing, income (loss) before interest expense, other income
(expenses), net, reorganization income (expenses), income taxes and
extraordinary item decreased to $13.9 million in Fiscal 1996 from $220.4 million
in Fiscal 1995.
Interest expense. The Company's interest expense declined to $17.4 million
in Fiscal 1996 from $38.1 million in Fiscal 1995. In connection with the
bankruptcy proceedings, the Company did not record interest on its prepetition
debt subsequent to the Petition Date. During the bankruptcy proceedings, the
Company entered into an agreement with various lenders to obtain
debtor-in-possession financing (the "DIP Agreement"). 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
significantly lower than in Fiscal 1995.
Other income (expenses), net. Other income (expenses), net decreased to
$1.2 million in Fiscal 1996 from $5.2 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 $1.9 million upon the termination of a business
development agreement.
Reorganization income (expenses). Reorganization income (expenses) 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 1993 Acquisition of $16.0 million, a provision for store closing costs
of $4.9 million and related lease rejection claims of $7.6 million.
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Income Taxes. There was no provision for income taxes during Fiscal 1996.
In Fiscal 1995, the Company's provision for income taxes was $0.5 million.
Net income. As a result of the foregoing, the Company recognized a net loss
of $64.3 million in Fiscal 1996 and a net loss of $264.1 million in Fiscal 1995.
Excluding special items and reorganization expense, the Company recognized a net
loss of $26.0 million in Fiscal 1996, as compared to a net loss of $52.6 million
in Fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash needs fluctuate during the course of the fiscal year.
During the first three quarters, the Company's cash flow from operations
typically is consumed by payments to suppliers and store maintenance, renovation
expenditures and opening new stores, including relocations. During the fourth
quarter, the Company has historically relied on borrowings under its credit
facilities to provide it with liquidity to purchase inventory for sale during
the holiday season.
Pursuant to the Plan of Reorganization, a wholly owned subsidiary of the
Company, CMI, entered into a Revolving Credit Agreement dated January 27, 1998
(the "New Working Capital Facility") with a number of financial institutions.
The New Working Capital Facility provided the Company with advances of up to
$50.0 million during peak periods (October to December) and $35.0 million during
non-peak periods (January to September), bore interest at floating rates and
matured on January 27, 2002. The aggregate availability under the New Working
Capital Facility was limited to a borrowing base equal to 35.0% of inventory
during peak periods and 30.0% of inventory during non-peak periods. On June 12,
1998, the Company signed the first amendment and waiver to the New Working
Capital Facility (the "Amended Credit Facility"). The Amended Credit Facility
increases the borrowing base to 60.0% of inventory during all periods, modifies
existing limitations on capital expenditures, waived certain covenants in order
to permit the Spec's Acquisition and provided a $25.0 million term loan to
finance the Spec's Acquisition. The term loan under the Amended Credit Facility
will be amortized in semi-annual installments over a three year period beginning
January 31, 1999. The amortization payments will be $3.0 million, $2.0 million,
$6.0 million, $4.0 million, $6.0 million and $4.0 million. CMI's obligations
under the Amended Credit Facility are guaranteed by the Company and all of CMI's
subsidiaries; those obligations are collateralized by substantially all of the
Company's and its subsidiaries' assets. The Company has pledged to the lenders
under the Amended Credit Facility the capital stock of CMI, and CMI has in turn
pledged to such lenders the capital stock of its subsidiaries. The Company and
its subsidiaries are currently subject to certain customary negative covenants
under the Amended Credit Facility which, under certain circumstances, limit
their ability to incur additional indebtedness, pay dividends, make capital
expenditures and engage in certain extraordinary corporate transactions. The
Amended Credit Facility also requires the Company to maintain minimum
consolidated levels of earnings before interest, taxes, depreciation and
amortization ("EBITDA"). The Company is currently in compliance with all of
these covenants. See "Description of Certain Indebtedness." As of July 31, 1998,
the Company had $25.0 million outstanding under the term loan portion of the
Amended Credit Facility.
On July 29, 1998, the Company acquired Spec's for a cash purchase price of
$3.30 per share. Approximately $28 million was required to fund the payment of
the purchase price and the repayment of Spec's outstanding indebtedness and
acquisition costs. The Company funded the Spec's Acquisition with the $25.0
million term loan provided under the Amended Credit Facility and accumulated
cash balances. Management believes the principal effects of the Spec's
Acquisition on its financial position will be the debt service and amortization
requirements associated with the term loan. The Company also anticipates
recording approximately $18 million in goodwill as a result of the Spec's
Acquisition, which will be amortized over a 30-year period.
The Company's cash flow from operating activities increased to $54.9
million in Fiscal 1997 compared to cash flow from operating activities of $16.3
million in Fiscal 1996. The increase in cash generated from operating activities
primarily reflects the Company's net income of $269.2 million in Fiscal 1997
($19.3 million on a pro forma basis after adjusting for fresh-start reporting
and excluding The Wall) as compared to a net loss of $64.4 million in Fiscal
1996, together with increases in trade payables resulting from improved credit
terms, increases in accrued expenses and amounts payable in connection with The
Wall Acquisition. The Company's cash flow from operating activities increased to
$6.1 million for the period March 1, 1998 to May 30, 1998 compared to cash flow
from operating activities of $6.0 million for the period March 2, 1997 to May
31, 1997.
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Net cash used in investing activities increased to $12.9 million in Fiscal
1997, as compared to $4.0 million in Fiscal 1996, primarily as a result of the
Company's higher level of capital expenditures during Fiscal 1997. Net cash used
in investing activities increased to $73.0 million for the period March 1, 1998
to May 30, 1998 compared to net cash used in investing activities of $1.9
million for the period March 2, 1997 to May 31, 1997, as a result of $71.2
million invested in connection with The Wall Acquisition. The Company made
capital expenditures of $9.8 million during Fiscal 1997 as compared with capital
expenditures of $4.3 million in Fiscal 1996. Capital expenditures during Fiscal
1997 were comprised of $2.5 million in enhancements to information systems
(including enhancements associated with the anticipated integration of The
Wall's operations) and $7.3 million in store remodeling, maintenance and
expansions. Fiscal 1996 capital expenditures were primarily attributable to
store remodeling, maintenance and expansions. The Company made capital
expenditures of $1.8 million for the period March 1, 1998 to May 30, 1998
compared to capital expenditures of $1.9 million for the period March 2, 1997 to
May 31, 1997. Capital expenditures for both periods were primarily attributable
to store remodeling, maintenance and expansions.
Net cash used in financing activities increased to $0.8 million in Fiscal
1997, as compared to $0.6 million in Fiscal 1996. Net cash used in financing
activities in Fiscal 1997 primarily related to the payment of financing fees,
while net cash used in financing activities in Fiscal 1996 related to repayment
of borrowings under the Company's then-existing credit agreement and the payment
of financing fees, offset in part by the proceeds of such borrowings and other
long term debt. No cash was used in financing activities for the period March 1,
1998 to May 30, 1998 compared to net cash used in financing activities of $0.025
million for the period March 2, 1997 to May 31, 1997.
The Company currently anticipates that capital expenditures aggregating
approximately $22.4 million will be incurred in Fiscal 1998, of which $12.6
million is anticipated to relate to new, relocated and remodeled stores, $6.0
million is anticipated to relate to an upgraded store point of sale ("POS")
system, and the balance of which relates to general corporate purposes. The
Company anticipates making capital expenditures of $22.6 million during Fiscal
1999, substantially all of which is anticipated to relate to new, relocated and
remodeled stores. The Company expects that the total investment for each new
store will be approximately $0.6 million, including inventory (net of vendor
funding), leasehold improvements, signage, and furniture, fixtures and equipment
and excluding pre-opening expenses. Pre-opening expenses, which consist
primarily of non-recurring costs such as employee recruiting and training,
supplies and various miscellaneous expenditures, are expected to average
approximately $15,000 per store and will be expensed as incurred. The cost of
opening a new store can vary based on the size of the particular store,
construction costs in various markets and other factors. The Company generally
is able to determine whether a new store will be profitable after the store has
been open for a period of 12 months.
The IRS asserted in the bankruptcy proceedings a priority tax claim against
the Company of approximately $7.9 million. Under the Plan of Reorganization, any
allowed priority tax claim of the IRS would be paid over six years, with
quarterly amortization of interest and principal, at an interest rate of 9.0%.
The Company acknowledges a priority tax obligation to the IRS of approximately
$0.8 million and has established a reserve in that amount. The Company disputes
the validity of the balance of the IRS claim. In the event that a judgment is
rendered against the Company in an amount exceeding the reserves established
with respect to this matter, the Company's results of operations would be
materially adversely affected. Such a judgment, unless paid or bonded for
appeal, would be an Event of Default under the Company's Amended Credit
Facility. See "Business -- Legal Proceedings" and "Risk Factors -- Internal
Revenue Service Claim."
As of May 30, 1998, the Company had cash and working capital of
approximately $15.7 million and $114.5 million, respectively, compared to cash
of $82.5 million and working capital of $110.1 million at February 28, 1998.
Approximately $72.4 million in cash was used subsequent to year-end to pay the
purchase price for The Wall Acquisition. The Company's primary sources of funds
are expected to be cash from operations supplemented by borrowings under the
Amended Credit Facility. The Company's primary ongoing cash requirements will be
to finance working capital, primarily inventory purchases, and to make capital
expenditures for store relocations and new store openings and for upgraded POS
systems and continuing information systems maintenance. Management believes that
cash flows from its restructured operations and available working capital,
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supplemented by the borrowings under the Amended Credit Facility, will enable
the Company to meet its working capital and capital expenditure needs in Fiscal
1998 and Fiscal 1999.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly statement of
operations data for the period from March 3, 1996 to May 30, 1998, as well as
such data expressed as a percentage of yearly totals for the period indicated.
This data has been derived from unaudited Consolidated Financial Statements
that, in the opinion of the Company, include all adjustments necessary for fair
presentation of such information when read in conjunction with the Company's
audited Consolidated Financial Statements and notes thereto. The Company's
business is seasonal in nature. In Fiscal 1997, approximately 35% of its
revenues, and all of its income (loss) before interest expense, other income
(expenses) net, reorganization income (expenses) net, income taxes and
extraordinary item and its net income before extraordinary item was generated in
the Company's fiscal fourth quarter. Quarterly results are affected by, among
other things, new product offerings, store openings and closings, and sales
performance of existing stores.
FISCAL 1996
($ IN THOUSANDS)
---------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER TOTAL
------------- -------------- ------------- -------------- --------
Net sales............... $ 90,704 $ 90,132 $83,600 $132,066 $396,502
Gross profit............ 31,318 30,393 28,131 43,588 133,430
Operating income (loss)
(1)................... (6,398) (6,642) (7,352) 6,451 (13,941)
COMBINED FISCAL 1997
($ IN THOUSANDS)
---------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER (2) TOTAL
------------- -------------- ------------- -------------- --- --------
Net sales............... $ 82,815 $ 89,257 $88,178 $140,153 $400,403
Gross profit............ 28,995 31,451 28,621 50,565 139,632
Operating income (loss)
(1)................... (2,866) (346) 183 17,300 14,271
FISCAL 1998
($ IN THOUSANDS)
FIRST QUARTER
----------------
Net sales............. $113,456
Gross profit.......... 42,309
Operating income...... 3,981
- ---------------
(1) For purposes of this presentation, operating income (loss) means the
Company's income (loss) before interest expense, other income (expenses)
net, reorganization income (expenses) net, income taxes and extraordinary
item for each of the periods presented.
(2) Results for the fourth quarter of Fiscal 1997 are presented on a combined
basis reflecting a summation of the Predecessor's operations to January 31,
1998 and the Company's operations for the period February 1, 1998 to
February 28, 1998.
INFLATION
The Company believes that the inflationary 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 Amended Credit 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.
YEAR 2000 COMPLIANCE
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
two-digit year is commonly referred to as the Year 2000 compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
data-based information. The Company has assessed its systems and equipment with
respect to Year 2000 and has developed
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a project plan. Many of the Year 2000 issues have been addressed. The Company is
in the process of installing a new back office POS system to address Year 2000
issues at the store level, including the processing of credit card transactions.
The remaining Year 2000 issues will be addressed either with scheduled systems
upgrades or through the Company's internal systems development staff. The
incremental costs will be charged to expense as incurred and are not expected to
have a material impact on the financial position or the results of operations of
the Company. The Company does not know the Year 2000 status of its vendors or of
other third parties with whom it does business. The Company could be adversely
impacted if Year 2000 modifications are not properly completed by either the
Company or its vendors, banks or any other entity with whom the Company conducts
business.
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 has complied
with Statement No. 128.
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.
Financial Accounting Standards Board Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("FAS 131"), issued in June
1997 and effective for fiscal years beginning after December 15, 1997, will
change the way companies report selected segment information in annual financial
statements and also requires those companies to report selected segment
information in interim financial statements. The Company has evaluated the
impact of the application of the new rules on the Company's Consolidated
Financial Statements and the new rules will not change its financial
presentation.
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133"), issued in June, 1998
and effective for all fiscal quarters of fiscal years beginning after June 15,
1999, with earlier application permitted, requires companies to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company has evaluated
the impact of the application of the new rules on the Company's Consolidated
Financial Statements and the new rules will not change its financial
presentation.
The Accounting Standards Executive Committee Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"), issued in March 1998 and effective for fiscal years
beginning after December 15, 1998 with earlier application permitted, provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. The Company has adopted SOP 98-1 as of the date of emergence
from bankruptcy as required by fresh-start reporting. See Note 4 to the
Company's Consolidated Financial Statements.
The Accounting Standards Executive Committee Statement of Position 98-5,
"Accounting for the Costs of Start-up Activities" ("SOP 98-5"), issued in April
1998 and effective for fiscal years beginning after December 15, 1998 with
earlier application permitted, provides guidance on the financial reporting of
start-up costs and organization costs. The Company has adopted SOP 98-5 as of
the date of emergence from bankruptcy as required by fresh-start reporting. See
Note 4 to the Company's Consolidated Financial Statements.
FORWARD LOOKING STATEMENTS
This Prospectus includes forward-looking statements, including statements
regarding, among other items, (i) the Company's anticipated growth strategies,
including the Company's intention to expand current stores and open new stores,
(ii) the Company's intention to consider additional acquisitions, (iii)
anticipated trends in the Company's businesses, (iv) future expenditures for
capital projects, including the Company's intention to install a new back office
point of sale system, and (v) the Company's intention to seek to improve its
operational efficiencies. These forward-looking statements are based largely on
the Company's expectations and are subject
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to a number of risks and uncertainties, certain of which are beyond the
Company's control. Actual results could differ materially from these
forward-looking statements as a result of the factors described in "Risk
Factors" including, among others, (i) changes in the competitive marketplace,
including pricing changes and addition of new stores by the Company's
competitors, and (ii) changes in the trends in the retail music industry. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks and uncertainties, there can be no
assurance that the forward-looking information contained in this Prospectus will
in fact transpire.
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BUSINESS
Camelot is a leading mall-based retailer of prerecorded music and
accessories and is one of the largest music retailers in the United States based
on store count. As of July 31, 1998, the Company operated 493 stores in 37
states nationwide and in Puerto Rico under three brand names: Camelot Music,
founded in 1956, operating 304 stores with a significant store base
concentration in the Midwest and Southeast regions of the United States; The
Wall, operating 148 stores primarily in the Mid-Atlantic and Northeast regions
of the United States; and Spec's, operating 41 stores in South Florida and
Puerto Rico. The Company acquired certain assets of The Wall effective February
28, 1998 and it acquired Spec's on July 29, 1998. The Company believes that each
chain benefits from name recognition and a loyal customer base in their primary
markets of operation. For Fiscal 1997, the Company had pro forma net sales and
earnings of $554.1 million ($396.2 million excluding The Wall) and earnings of
$27.2 million ($15.9 million excluding (i) The Wall, (ii) special items and
(iii) the reinstatement of vendor discounts). On July 29, 1998, the Company
acquired Spec's, a music retailer operating 41 stores in south Florida and
Puerto Rico. The Company believes that the Spec's Acquisition will enhance its
competitive position in the Southeastern United States and give the Company a
leading position in the south Florida market. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Recent
Developments."
Camelot offers a broad range of prerecorded music, including CDs,
cassettes, prerecorded video cassettes, DVDs and accessories such as blank audio
and video cassettes and music and tape care products. The Company seeks to
position itself as the mall-based music specialist for prerecorded music, and
advertises under the motto "No One Knows Your Music Better." The Company's
stores average 4,350 square feet in size and typically offer over 20,000 SKUs,
including both high-volume hits and the Company's catalog. The Company believes
its product offering enables it to attract a diverse customer base thereby
reducing its dependence on any one genre of music. In Fiscal 1997, the Company's
average sales per square foot was approximately $293, including The Wall, which
the Company believes is among the highest for mall-based retailers of
prerecorded music. The Company believes its broad product offering, supported by
a high level of customer service from its knowledgeable sales force, combined
with its competitive pricing strategy and attractive locations within regional
malls, positions Camelot to benefit from the favorable trends occurring in the
prerecorded music industry.
The Company believes that the total market for prerecorded music and music
videos in the United States amounted to $12.2 billion in 1997. The Company
believes that revenues in the music and music video market in the United States
have doubled over the last ten years and has grown at a compounded annual rate
of 8.2% during such period. Industry growth rates do not reflect the Company's
historical growth and are not necessarily indicative of its growth during future
periods. The Company's revenues have grown at a 7.8% compounded annual rate over
the last ten years, although its revenues grew over the past five years at a
compounded annual rate of 2.3%. During the 1980s the music retail industry
experienced rapid growth fueled by: (i) the introduction of new products such as
the CD; (ii) a relatively large number of popular new releases which increased
customer traffic and sales; and (iii) the rapid expansion of mall-based music
retailers. These factors led, in the early 1990s, to the competitive intrusion
of non-traditional music retailers such as consumer electronics stores and
discount stores and to increasing price competition. By mid-1994, these
competitive factors, combined with the contraction of the replacement CD market
and a comparative lack of successful new releases led to deteriorating
profitability in the music retail industry. Beginning in mid-1997, conditions in
the music retail industry began to improve as a result of: (i) the significant
reduction in competitive square footage resulting from the reduction in the
total number of traditional music retail stores from approximately 5,000 in 1995
to approximately 4,200 in 1997, including a net reduction of 600 retail stores
by the top five traditional music retailers, based on store count; (ii) an
improvement in retail pricing as music vendors, beginning in 1996, strengthened
MAP guidelines, which the Company believes decreased the intensity levels of
price-based competition for prerecorded music; and (iii) a resurgence in popular
new releases.
The Company has historically been privately held. In 1993, the Company was
acquired in a highly leveraged transaction by an investor group led by a private
investment firm and members of the Company's current management. The 1993
Acquisition resulted in significant debt service obligations. This significant
debt service and the industry conditions described above combined to impair
Camelot's operating and financial condition and led the Company to file a
voluntary petition for protection under Chapter 11 of the Bankruptcy Code in
August
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1996. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Camelot's Plan of Reorganization was confirmed by the
Bankruptcy Court on December 12, 1997 and became effective on January 27, 1998.
Under the Plan of Reorganization, substantially all of the claims against the
Company existing as of the Petition Date were exchanged for shares of Common
Stock. Approximately $423.0 million of unsecured claims were exchanged for
10,167,824 shares of Common Stock valued at amount equal to one share for each
$47.95 of claim, and approximately $41.5 million of secured claims were
exchanged for 2,211,111 shares of Common Stock valued at an amount equal to one
share for each $18.75 of claim. All pre-petition ownership interests in the
Company were cancelled.
Prior to and during its reorganization under the protection of the
Bankruptcy Court, Camelot was able to substantially improve the competitive
positioning of its business and significantly improve its financial position.
These improvements included: (i) closing 96 underperforming stores; (ii)
renegotiating unfavorable leases on certain of its remaining stores; (iii)
returning certain overstock inventory to its vendors; and (iv) eliminating its
liabilities totaling approximately $485 million, including indebtedness of
approximately $412 million. In addition, during the same period, Camelot
invested $7.5 million to upgrade, develop and implement sophisticated
merchandising, distribution, replenishment, and financial software packages, all
of which were fully operational by the end of Fiscal 1997. The Company's new and
upgraded information systems enable management to (i) allocate specific
merchandise to a specific store, thereby improving sell-through rates and
reducing returns to vendors; (ii) improve the efficiency of its replenishment
system to reduce stock-outs and lower distribution center operating costs; (iii)
better track profitability by SKU, store and region; and (iv) automate invoice
matching to reduce corporate labor costs. The Company also developed and
implemented a new marketing and data warehousing system, which became fully
operational in April 1998, to better capture transaction specific data to
facilitate the further development of the Company's customer loyalty programs
and improve the effectiveness of its advertising programs by targeting specific
customers with promotional material tailored to their buying patterns. Over the
last two fiscal years, as the Company focused on improving the competitiveness
of its business, revenues increased 1.0% as the Company closed 83 stores and
opened no new stores.
The Company believes the improved industry conditions, the modifications to
its operations and financial condition, its infrastructure investments and its
strong market position, provide Camelot with distinct competitive advantages and
position it for accelerated growth and continued improvement in profitability.
Key elements of the Company's growth strategy include:
- Strengthen Competitive Position in Existing Markets. The Company intends
to strengthen its store base and increase sales by relocating certain
existing stores to larger stores and selectively opening new stores in
existing markets. New stores will be opened to fill out existing markets
and leverage the Company's distribution, advertising and field management
costs. As of July 31, 1998, approximately 280 of the Company's 493 stores
were less than 4,000 square feet in size compared to its current
prototype store of 5,000-6,000 square feet. The Company intends to
relocate many of these stores to larger facilities within the same
regional mall. The Company believes these relocations will better
facilitate its merchandising strategy, including the broader presentation
of higher-margin catalog titles. At July 31, 1998, the Company had
identified 100 such stores for relocation. In Fiscal 1998, the Company
plans to relocate 20 stores and open four new stores in existing markets.
Of these 24 projects, seven have been completed and lease commitments
have been signed for three more. In Fiscal 1999, the Company expects to
relocate 17 stores and open 20 new stores.
- Improve Operating Margins. The Company has significantly increased its
operating profit margin to 3.6% of net sales (2.5% excluding special
items) in Fiscal 1997 from a loss of 3.5% of net sales (a loss of 1.9%
excluding special items) in Fiscal 1996. The Company believes that
significant opportunities exist to continue to increase its operating
profit margin. The Company seeks to increase its gross profit margin
primarily through: (i) improved pricing for the Company's products; (ii)
enhanced trade terms; (iii) reduced product returns through a more
systematic allocation of products; and (iv) adjusting its merchandise mix
to emphasize higher-margin catalog items as it relocates its stores to
larger facilities. In addition, the Company expects to leverage its
general and administrative and warehousing and distribution costs as it
opens new stores or acquires stores in existing markets. The Company's
warehouse and
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distribution center is currently operating between 30% and 40% of
capacity and the Company believes it could support approximately 500
additional stores without a significant increase in capital expenditures
for its warehouse and distribution facilities.
- Pursue Acquisitions. The Company believes its industry leading position,
experienced management team and improved capitalization position Camelot
to pursue selective acquisition opportunities in the music retailing
industry. Camelot targets mall-based retailers of prerecorded music in
existing or contiguous market areas which possess attractive real estate
locations. The Company's strategy is to improve such retailers' operating
results by remerchandising the stores to conform to Camelot's prototype,
implementing its information systems and integrating the acquired
operations in order to benefit from economies of scale in distribution,
advertising, and management costs. Effective February 28, 1998, the
Company purchased certain assets of The Wall for $72.4 million, which
significantly enhanced Camelot's market share in the Mid-Atlantic and
Northeast regions of the United States. At May 31, 1998, the Company had
improved product mix at all of The Wall's stores, targeted for closure 11
underperforming stores, implemented its information systems and reduced
costs by eliminating The Wall's corporate infrastructure and phasing out
its distribution facilities. See "Unaudited Pro Forma Condensed
Consolidated Financial Data." On July 29, 1998, the Company acquired
Spec's. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Recent Developments."
RECENT ACQUISITIONS
The Company has completed two acquisitions since the January 27, 1998 Plan
Effective Date. Effective February 28, 1998, the Company acquired certain assets
and assumed certain liabilities and operating lease commitments of The Wall
pursuant to an Asset Purchase Agreement dated December 10, 1997. Prior to its
acquisition by the Company, The Wall was a mall-based music store chain owned by
W.H. Smith (USA), Inc. that operated 150 stores in the Mid-Atlantic region of
the United States. The total purchase price paid by the Company for the business
of The Wall was $89.4 million, including a cash purchase price of $72.4 million,
assumption of liabilities aggregating $14.7 million, and acquisition costs of
$2.3 million. The purchase price was subject to adjustment based on the
resolution of certain contingencies related to merchandise inventory return
reserves and finalization of acquisition costs. No adjustment to the purchase
price was made.
On July 29, 1998, the Company completed its acquisition of all of the
issued and outstanding shares of Common Stock of Spec's. Spec's operates 41
stores in south Florida and Puerto Rico, including 16 mall stores and 25 stores
in shopping centers and free standing locations. Prior to the acquisition,
Spec's was a public company and its Common Stock was traded on the Nasdaq
SmallCap Market. Under the terms of an Agreement and Plan of Merger dated June
3, 1998, SM Acquisition, Inc., a wholly-owned subsidiary of the Company, was
merged with and into Spec's (the "Merger"). Upon consummation of the Merger,
each share of Spec's Common Stock issued and outstanding prior to the Merger was
converted into the right to receive $3.30 per share in cash, and each
outstanding option to purchase shares of Spec's Common Stock was surrendered in
exchange for a cash payment equal to the excess, if any, of $3.30 per share over
the exercise price of such option. The total purchase price payable in
connection with the Spec's Acquisition was approximately $28 million, including
repayment of bank debt of approximately $9.2 million, the assumption of
liabilities of approximately $11 million, and acquisition costs of approximately
$2.0 million. In addition, Ann Spector Lieff, Spec's President and Chief
Executive Officer, entered into a consulting and non-competition agreement under
the terms of which she agreed to be available to consult with the Company's
Chief Executive Officer for a period beginning 60 days after the date of the
Merger and ending on the first anniversary of the Merger. Under the terms of
this agreement, Ms. Lieff will be entitled to continue to receive salary
payments for 60 days after the Merger and will receive a severance payment of
$58,000 at the end of such period. Thereafter, Ms. Lieff will receive consulting
fees aggregating approximately $100,000 during the term of the agreement. The
agreement also provides that Ms. Lieff may not directly or indirectly engage in
the specialty music business in any area in which the Company conducts business
during the term of the agreement.
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INDUSTRY
The Company believes that the total market for prerecorded music and music
videos in the United States in 1997 amounted to $12.2 billion. The Company
believes that revenues in the music and music video market in the United States
have doubled over the last ten years and has grown at a compound annual rate of
8.2% during such period. Industry growth rates do not reflect the Company's
historical growth and are not necessarily indicative of its growth during future
periods. The Company's revenues have grown at a 7.8% compounded annual rate over
the last ten years, although its revenues grew over the past five years at a
compounded annual rate of 2.3%. The music retail industry is comprised of a
number of participants operating in a variety of store formats. Participants in
the industry include dedicated music retailers, such as the Company, operating
in mall-based stores, shopping centers and free standing locations, as well as
mass merchants (such as Wal-Mart, K-Mart and Target), electronics superstores
(such as Best Buy and Circuit City), department stores (such as Sears and
Montgomery Ward) and other retailers that offer music as part of a wide variety
of product offerings. Other retailers of music products include mail-order music
clubs and, in recent years, companies that offer CDs and tapes via the Internet.
During the 1980s, the music retail industry experienced significant growth in
sales and earnings fueled by the introduction of new products and the release of
extremely popular recordings. The most important new product was the CD. The
popularity of the CD format caused many consumers to replace their old vinyl
album and cassette collections with CDs. Expansion of the retail music business
attracted new entrants into the industry. During the mid 1990s, this increased
competition arising out of the entry of non-traditional competitors, such as
electronics superstores, as well as the contraction of the CD replacement
market, the relative lack of hit releases and the lack of new technology
formats, combined to depress profit margins for music retailers. The total
number of traditional music retail stores decreased from approximately 5,000 in
1995 to approximately 4,200 in 1997, including a net reduction of 600 retail
stores by the top five traditional music retailers, based on store count.
Conditions in the music retail industry improved during 1997. Store
closings prompted by the financial condition of many industry participants have
led to a better leasing environment, with many mall owners increasingly willing
to allow retailers to improve locations and reduce occupancy costs. Music
distribution companies have taken steps to reduce retail price competition
through the implementation and enforcement of new MAP guidelines. MAP guidelines
generally state that a music distribution company will not authorize any
advertising funds for any media or in-store programs that advertise a price
lower than a specified price. In addition, a music retailer who violates the MAP
guidelines will not receive advertising funds from the music distribution
company for a period ranging from 60 to 90 days. The Company believes the music
retail industry will experience additional consolidation in the next few years,
as the increasing level of sophistication required to operate profitably will
continue to make it difficult for smaller retailers to compete effectively.
STORE FORMAT
The Company operates its stores under the "Camelot Music," "The Wall" and
"Spec's" names. The Company's stores provide a broad selection of CDs, tapes and
video and related products in a customer friendly environment. Substantially all
of the Company's stores are located in shopping malls and range in size from
1,500 to 23,500 square feet, averaging 4,350 square feet. As of July 31, 1998,
approximately 280 of the Company's 493 stores were less than 4,000 square feet
in size compared to its current prototype store of 5,000-6,000 square feet in
size. The larger stores are in more prominent mall locations and carry a broader
inventory of catalog products in order to appeal to the high-volume purchaser.
The Company emphasizes in-store presentation, broad product selection and
competitive pricing to attract the casual buyer. At July 31, 1998, the Company
operated 304 Camelot Music stores in 34 states, 148 The Wall stores in the
Mid-Atlantic and Northeastern regions of the United States and 41 Spec's stores
in south Florida and Puerto Rico. As a result of The Wall's name recognition and
loyal customer base in its primary markets, the Company has determined to
maintain separate identities for its stores.
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The following table sets forth information regarding the size ranges of the
Company's stores and the number of stores within each range as of July 31, 1998.
STORE SIZE
(SQUARE FOOTAGE) NUMBER OF STORES
---------------- ----------------
Over 5,000.............................................. 126
4,000 to 4,999.......................................... 85
Under 3,999............................................. 282
----
Total......................................... 493
====
The Company's strategy for its mall stores is to operate profitable stores
in high-traffic locations while controlling occupancy costs. The Company's site
selection strategy focuses on using the more favorable leasing environment to
establish dominant positions in key regional malls. Camelot has identified a
target group of approximately 100 stores where opportunities exist to strengthen
the Company's competitive position by improving and expanding store locations
within these malls and, often, obtaining exclusive arrangements with mall
owners.
PRODUCTS
The Company's stores focus on providing a broad selection of prerecorded
music, but also carry a limited selection of prerecorded videocassettes, blank
audio and videocassettes, music and tape care products, carrying cases, storage
units, sheet music and personal electronics. During the past several years,
sales of prerecorded music have accounted for approximately 88% of the Company's
revenues.
Camelot Music, The Wall and Spec's stores offer a wide array of CDs and
prerecorded audio cassettes. Sales of CDs are expected to continue to become a
larger portion of total prerecorded music sales, while sales of prerecorded
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 18,000 and 25,000 titles of prerecorded music, depending on store
size and location. These titles include "hits," which represent the best-selling
newer releases, and catalog items, representing older but still popular releases
that customers purchase to build their collections.
The Company's stores offer a full assortment of CDs, prerecorded audio
cassettes, prerecorded video cassettes and related accessories. Sales by
category as a percentage of net sales over the past three fiscal years were as
follows:
PERCENTAGE OF NET SALES
-----------------------------------------
COMBINED
PRODUCT FISCAL 1995 FISCAL 1996 FISCAL 1997
- ---------------------------------------------------------- ----------- ----------- -----------
Compact discs............................................. 57.4% 63.3% 67.0%
Prerecorded audio cassettes............................... 20.7 17.3 14.8
Singles................................................... 5.3 5.7 5.8
Accessories............................................... 5.3 5.6 5.9
Prerecorded video cassettes............................... 5.5 4.3 4.5
Cut outs and budget....................................... 1.6 0.9 0.3
Laser..................................................... 3.2 2.0 1.0
Software/games............................................ 0.5 0.3 0.2
Other..................................................... 0.5 0.6 0.5
----- ----- -----
Total........................................... 100.0% 100.0% 100.0%
===== ===== =====
The Company seeks to have the most popular hits available at all times
while maximizing the selection of popular catalog titles. Store management works
with corporate merchandise allocators to tailor product offerings to local
customer tastes and to maximize the availability of the most popular items at
each store relative to store size and location.
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Typically, the Company's stores carry approximately 1,500 titles of
prerecorded videocassettes. The Company has discontinued sales of lower margin
laserdiscs and computer software products in an effort to focus on higher margin
prerecorded music products.
DISTRIBUTION
Central to the Company's strategy of providing broad merchandise selection
to its customers is its ability to distribute products 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 the Company's 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 distribution
center currently operates at between 30% and 40% of total capacity, providing
sufficient excess capacity to support significant future store growth and
distribution requirements of potential acquisitions. The Company currently has
the right to use The Wall's distribution center under a contractual arrangement
with WH Smith Group Holdings (USA), Inc. This arrangement will expire in August
1998. Subsequent to that time, the Company will service all of its stores from
its existing facility.
Inventory is shipped to each 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 (i.e.,
carriers with whom the Company contracts for less than all available storage
space) enabling the Company to maximize transportation efficiencies while
minimizing costs. The Company's sophisticated inventory management system links
together store POS merchandising and distribution systems, enabling the
distribution center to replenish inventory in stores within two to four days of
sale, depending upon geographic proximity to the distribution facility.
Enhancements to this system implemented at the Company's Camelot Music stores in
the early part of Fiscal 1998 permit the Company to manage the replacement of
individual SKUs on an automated basis, based on model stocks calculated by
reference to sales information. These enhancements enable the Company to react
more quickly to increasing sales velocities for specific titles resulting from
promotions, concert tours or other media events, and also permit it to ramp down
replenishment as sales of specific titles decline. The Company anticipates that
The Wall stores will be incorporated into this enhanced inventory management
system during the current fiscal year.
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 has been
funded by suppliers through these programs. See Note 3 to the Company's
Consolidated Financial Statements.
Customer-specific relationship marketing programs are a key component of
the Company's marketing effort. Camelot discontinued the manual "punch card"
version of its "Repeat Performer" frequent buyer program in mid-1997. The
Company's new marketing information system has permitted it to replace the
manual version of the Repeat Performer program with a more limited electronic,
automated frequent buyer program targeting the Company's most frequent and
highest spending customers. Camelot initiated a limited chainwide roll-out of
this program to its most frequent and highest spending customers during 1997,
and intends to significantly expand the program in 1998. 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
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preference data upon customer sign-up as well as item-specific transaction data
each time Repeat Performer customers make a purchase. The Company also collects
e-mail addresses of its customers to which it can send promotional materials.
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
that are designed to generate increased sales levels and purchase frequency. The
customer-specific information obtained through the Repeat Performer program
allows the Company to better understand its customers and to tailor direct mail
marketing programs to individual customer preferences. 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.
The Company also intends to assimilate The Wall stores into its overall
marketing strategy. While the Company plans to maintain and support the separate
identity of The Wall stores, its objective is to integrate The Wall into global
marketing campaigns supporting both Camelot Music and The Wall stores. As part
of this effort, the Company intends to implement modifications to The Wall's
"Buzz Club" frequent buyer program during the current fiscal year to conform it
to the new Repeat Performer program. The Company also expects to continue The
Wall's lifetime warranty program for damaged goods.
The capabilities of the Company's new marketing system also permit it to
measure the effectiveness of individual promotional efforts, including radio,
television and direct mail programs, internal merchandising changes, new signage
and visual marketing presentations, new store configurations, changed inventory
mix and other in-store initiatives. The ability to measure the effectiveness of
these programs will permit Camelot to modify marketing efforts based on the
effectiveness of these campaigns.
SUPPLIERS
The Company purchases its prerecorded music directly from a large number of
manufacturers. During Fiscal 1997, approximately 77% of purchases, net of
returns, were made from the Big Six Vendors. Twenty other vendors accounted for
an additional 13% of purchases during such period. 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. After the Effective Date, the
Company was once again able to negotiate customary trade terms with most of its
suppliers, including the Big Six Vendors. Recently, a number of vendors have
implemented policies prohibiting the return of opened product for credit.
INFORMATION SYSTEMS
The Company has made significant investments in its information systems
during the past three years, including the installation of new merchandising and
marketing systems, which will be implemented throughout its stores during Fiscal
1998. Camelot's merchandising systems provide it with the ability to monitor
inventory levels, analyze changes in inventory and replenish inventory on an
automated basis, based on model stocks calculated by reference to sales
information. These capabilities permit the Company to react quickly to changes
in sales velocities for specific titles or products and to better measure the
effectiveness of advertising, promotional and merchandising programs. The
Company's marketing system provides it with the ability to collect a variety of
customer and transaction specific data from participants in its relationship
marketing programs, which allows it to tailor relationship marketing efforts to
each customer's purchase patterns and music preferences. This system is part of
the Company's larger Data Warehouse/COREMA system, which enables it to record
and preserve two years of transaction-specific information for every store. The
Company is also in the process of replatforming its back-office POS system. The
new system will enable the Company to standardize the Camelot Music and The
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Wall POS systems and bring those systems into Year 2000 compliance while
retaining existing in-store POS devices at its Camelot Music stores.
EMPLOYEES
As of July 31, 1998, the Company employed approximately 2,215 full-time
employees and 3,995 part-time employees. As of such date, the Company employed
approximately 167 individuals at its corporate headquarters, 305 at its
distribution center, and 5,738 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 prerecorded music market is highly competitive. Competition is based on
breadth of product offering, price, location of stores, convenience and customer
service. Consumers have numerous options in purchasing prerecorded music and
other home entertainment products, including chain retailers specializing in
prerecorded 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 use of personal computers in 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 prerecorded music have begun to enforce
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 prerecorded music in 1997. However, the FTC is currently
investigating the MAP programs, and there can be no assurance that such programs
will continue in the future. There can be no assurance that deep-discount
pricing practices will not return, or that if they do, that the Company will be
able to remain competitive without a material adverse effect on its results of
operations and financial condition.
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 securing and maintaining the most desirable locations
within quality regional malls, efficient inventory management, and offering
broad, market-specific merchandise selections at competitive prices.
The Company also competes for consumer entertainment dollars with leisure
time activities such as movie theaters, television, home computer and Internet
use, live theater, sporting events, travel, amusement parks and other
entertainment centers.
SEASONALITY
The Company's business is seasonal in nature. In Fiscal 1997, approximately
35% of revenues and all of its income (loss) before interest expense, other
income (expenses) net, reorganization income (expenses) net, income taxes and
extraordinary item, and net income before extraordinary item was 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Selected Quarterly Results of
Operations."
TRADEMARKS AND SERVICE MARKS
The Company operates its stores under the "Camelot Music," "The Wall" and
"Spec's" names, which have become important to the Company's business as a
result of its advertising and promotional activities. These
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names and other names used in the Company's business have been registered with
the United States Patent and Trademark Office. The Company has not experienced
any significant patent infringement in recent years.
PROPERTIES
The Company owns its headquarters facility and distribution center in North
Canton, Ohio. All stores operated by Camelot and The Wall are under operating
leases with various remaining terms through the year 2009. The leases have terms
ranging from one to 20 years. In most instances, the Company pays, in addition
to minimum rent, real estate taxes, utilities, common area maintenance costs and
percentage rents which are based upon sales volume. Certain store leases provide
the Company with an early cancellation option if sales for a designated period
do not reach a specified level as defined in the lease. The following table
lists the number of leases due to expire or terminate in each fiscal year based
on fixed lease term, giving effect to early cancellation options and excluding
renewal options.
CAMELOT
EXPIRATION DATES MUSIC THE WALL SPEC'S COMPANY TOTAL
---------------- ------- -------- ------ -------------
1998............................................. 42 16 10 68
1999............................................. 29 14 6 49
2000............................................. 35 12 7 54
2001............................................. 50 24 2 76
2002............................................. 27 23 1 51
2003............................................. 34 14 3 51
2004............................................. 42 24 9 75
2005 and thereafter.............................. 45 21 3 69
--- --- -- ---
304 148 41 493
=== === == ===
The Company's leases generally do not contain renewal options. Although the
Company has historically been successful in renewing most of its store leases
when they have expired, there can be no assurance that Camelot will continue to
be able to do so on acceptable terms or at all. Many of the Company's current
landlords were landlords under leases with respect to which the Company's
obligations were terminated during the bankruptcy proceedings. If the Company is
unable to renew leases for its stores as they expire, or find favorable
locations on acceptable terms, there can be no assurance that such failures will
not have a material adverse effect on the Company's financial condition and
results of operations.
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The following table shows the distribution of the Company's stores by state
as of July 31, 1998.
NUMBER OF STORES
-----------------------------
CAMELOT
STATE MUSIC THE WALL SPEC'S
----- ------- -------- ------
Alabama................................................. 8 -- --
Arkansas................................................ 5 -- --
California.............................................. 9 -- --
Florida................................................. 33 -- 37
Georgia................................................. 14 -- --
Illinois................................................ 10 -- --
Indiana................................................. 8 -- --
Kansas.................................................. 5 -- --
Kentucky................................................ 7 -- --
Louisiana............................................... 5 -- --
Maryland................................................ 5 9 --
Massachusetts........................................... -- 6 --
Michigan................................................ 8 -- --
Missouri................................................ 10 -- --
New Jersey.............................................. 4 20 --
New York................................................ 5 32 --
North Carolina.......................................... 18 1 --
Ohio.................................................... 25 1 --
Oklahoma................................................ 6 -- --
Oregon.................................................. 5 -- --
Pennsylvania............................................ 14 57 --
South Carolina.......................................... 9 -- --
Tennessee............................................... 13 -- --
Texas................................................... 34 -- --
Virginia................................................ 7 14 --
Washington.............................................. 11 -- --
West Virginia........................................... 4 2 --
Wisconsin............................................... 6 -- --
Puerto Rico............................................. -- -- 4
All other states........................................ 16 6 --
---- --- ---
Totals........................................ 304 148 41
==== === ===
The Company is subject to extensive regulation under environmental and
occupational health and safety laws and regulations. In addition, the
Comprehensive Environmental Response, Compensation and Liability Act generally
imposes joint and several liability for clean-up and enforcement costs, without
regard to fault, on parties allegedly responsible for contamination at a site.
While the Company is not aware of any current environmental liability, no
assurance can be given that the Company will not be liable in the future.
LEGAL PROCEEDINGS
The Company is involved from time to time in various routine legal and
administrative proceedings and threatened legal and administrative proceedings
incidental to the ordinary course of its business. Except as described below,
the Company is not now involved in any litigation, individually or in the
aggregate, which could have a material adverse effect on the Company's business,
financial condition, results of operations or cash flows.
The IRS asserted in the bankruptcy proceedings a priority tax claim against
the Company of approximately $7.9 million on January 10, 1997. Under the Plan of
Reorganization, any allowed priority tax claim of the IRS would be paid over six
years, with quarterly amortization of interest and principal, at an interest
rate of 9.0%. The Company acknowledges a priority tax obligation to the IRS of
approximately $0.8 million, and disputes the
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validity of the balance of the IRS Claim, the large majority of which relates to
a proposed disallowance by the IRS of the COLI Deductions. On October 15, 1997,
the Debtors filed 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, on
November 21, 1997 the IRS filed the Withdrawal Motion with the District Court
seeking to have the COLI Objection resolved by the District Court rather than
the Bankruptcy Court. On May 29, 1998, the District Court granted the Withdrawal
Motion, and the proceeding is now before the District Court as Civil Action No.
97-695 (MMS). The District Court approved a Joint Discovery Plan on July 6,
1998. The Joint Discovery Plan mandates that all discovery be served or issued
so as to be completed on or before June 30, 1999. In the event that a judgment
is rendered against the Company in an amount exceeding the reserve established
with respect to this matter, the Company's results of operations would be
materially adversely affected. Such a judgment, unless paid or bonded for
appeal, would also be an Event of Default under the Company's Amended Credit
Facility.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the executive
officers and directors of the Company as of July 31, 1998:
NAME AGE POSITION
---- --- --------
James E. Bonk................ 50 President, Chief Executive Officer and Chairman of the Board of
Directors
Jack K. Rogers............... 48 Executive Vice President, Chief Operating Officer, Secretary
and Director
Lee Ann Thorn................ 37 Chief Financial Officer and Treasurer
George R. Zoffinger.......... 50 Director
Stephen H. Baum.............. 56 Director
Herbert J. Marks............. 53 Director
Michael B. Solow............. 39 Director
Marc L. Luzzatto............. 42 Director
Larry K. Mundorf............. 50 Vice President of Marketing
Lewis S. Garrett............. 48 Vice President of Buying and Merchandising
Charles R. Rinehimer III..... 50 Vice President of Stores
James E. Bonk has served as President, Chief Executive Officer and Chairman
of the Board of the Company since January 1998, and as President, Chief
Executive Officer and Director of the Company since November 1993. Prior to that
time he served as Executive Vice President, Chief Operating Officer and Director
of the Company 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 has served as Executive Vice President, Chief Operating
Officer, Secretary and a Director of the Company 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, Chief
Financial Officer, Secretary and Director of Camelot from June 1988 to November
1993.
Lee Ann Thorn has served as Chief Financial Officer and Treasurer of the
Company 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.
George R. Zoffinger has served as a Director of the Company since January
1998. He has been President and Chief Executive Officer of Constellation Capital
Corp. since March 1998. Mr. Zoffinger served as President, Chief Executive
Officer and Director of Value Property Trust from 1995 until that company was
purchased by Wellsford Real Properties, Inc. in March 1998. 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. Mr. Zoffinger is also a
member of the Board of Directors of NJ Resources, Inc.
Stephen H. Baum has served as a Director of the Company since January 1998.
He has been a principal of The Mead Point Group, an advisor to senior management
of service enterprises since 1991. 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 ten
years with Booz, Allen & Hamilton, where he led the consumer services practice.
Herbert J. Marks has served as a Director of the Company since January
1998. He has served at RBC Dominion Securities as Vice President and Manager of
the Merger Arbitrage Group since 1997. He has also
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served as Senior Vice President and Managing Director of Tribeca Investments,
L.L.C. (a subsidiary of the Travelers Group), Senior Vice President and Director
of Research for Kellner Dileo & Co., Senior Vice President and Manager of the
Risk Arbitrage Department of Kidder Peabody & Co. and Senior Vice President of
the Risk Arbitrage Group of Lehman Brothers Inc.
Michael B. Solow has served as a Director of the Company since March 1998.
Mr. Solow is currently a partner and Practice Manager for Financial Services
Practice at Hopkins & Sutter, a Chicago, Illinois law firm where he has
practiced since 1985. Mr. Solow is also a member of the Board of Directors for
Chrisken Residential Trust, Inc. and Edwards Arts Products, and has previously
served on other corporate boards.
Marc L. Luzzatto has served as a Director of the Company since March 1998.
Mr. Luzzatto has served as the President and Chief Operating Officer of The Welk
Group, Inc., a Santa Monica, California-based company with interests in various
entertainment, hospitality and real estate businesses, since 1995. He has been
an executive of The Welk Group, Inc. since 1990. Mr. Luzzatto is also a member
of the Board of Directors for Welk Direct Marketing, Inc. Mr. Luzzatto has
served in various capacities in the investment banking, real estate and legal
professions.
Larry K. Mundorf has served as Vice President of Marketing for the Company
since February 1998. Mr. Mundorf served as President and Chief Operating Officer
of National Record Mart, Inc., a music retailer headquartered in Pittsburgh,
Pennsylvania, from January 1997 to February 1998 and as that company's Executive
Vice President and Chief Operating Officer from January 1996 to January 1997. He
served as Vice President of Marketing for Alpha Enterprises, a Canton,
Ohio-based supplier to the music and video industry, from 1991 to 1995. Prior to
that time, Mr. Mundorf spent 23 years with Camelot, last serving as the
Company's Senior Vice President of Operations.
Lewis S. Garrett has served as Vice President of Buying and Merchandising
of the Company since January 1986, supervising all of the Company's buying and
allocation functions. He joined Camelot in 1972. In addition, Mr. Garrett is the
Chairman of The National Association of Recording Merchandisers Retailers'
Advisory Committee.
Charles R. Rinehimer III has served as Vice President of Stores of the
Company since May 1994. Previously, Mr. Rinehimer served as Vice President of
Store Operations for American Greetings (Summit Corporation) from 1989 to May
1994.
TERMS OF DIRECTORS
The Board of Directors consists of seven Directors. The Directors of the
Company are elected annually for one-year terms. In accordance with Section 8.02
of the Plan of Reorganization, five members of the Board of Directors of the
Company (Messrs. Zoffinger, Baum, Marks, Luzzatto and Solow) were appointed by
the holders of a majority of the Common Stock upon the Company's emergence from
bankruptcy. In addition, James Bonk's employment agreement provides that he will
be elected Chairman of the Board of Directors of the Company during the term of
the agreement.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has three standing committees: a Compensation
Committee, an Audit Committee and an Executive Committee. The Compensation
Committee has the authority to (i) administer the Company's stock option plans,
including the selection of optionees and the timing of option grants, and (ii)
review and monitor key employee compensation and benefits policies and
administer the Company's management compensation plans. The members of the
Compensation Committee are Messrs. Solow, Baum and Zoffinger. See
"Management -- Executive Compensation."
The Audit Committee recommends the annual appointment of the Company's
auditors, with whom the Audit Committee reviews the scope of audit and non-audit
assignments and related fees, the accounting principles used by the Company in
financial reporting, internal financial auditing procedures and the adequacy of
the Company's internal control procedures. Messrs. Marks and Luzzatto serve as
members of the Audit Committee.
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The Executive Committee exercises the powers and authority of the full
Board during the period between meetings of the entire Board of Directors.
Messrs. Bonk, Rogers, Solow and Zoffinger serve as members of the Executive
Committee.
EXECUTIVE COMPENSATION
The following compensation information has been prepared based upon the
actual compensation and benefits earned during Fiscal 1997, as well as various
employee retention and compensation arrangements which were entered into in
connection with the bankruptcy proceedings. The table below sets forth
information concerning the annual and long-term compensation for services in all
capacities for the Company for Fiscal 1997, with respect to those persons who
were (i) the Chief Executive Officer and (ii) the four other most highly
compensated executive officers of the Company (collectively, the "Named
Executive Officers") at February 28, 1998.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
---------------------------- UNDERLYING ALL OTHER
NAME AND POSITION YEAR SALARY BONUS(1) OPTIONS/SARS COMPENSATION(2)
----------------- ---- -------- -------- ------------ ---------------
James E. Bonk.................... 1997 $358,380 $754,000 110,000 $322,813
President and Chief Executive
Officer
Jack K. Rogers................... 1997 239,630 375,000 80,000 322,631
Executive Vice President, Chief
Operating Officer and Secretary
Lee Ann Thorn.................... 1997 147,090 230,000 40,000 2,234
Chief Financial Officer and
Treasurer
Lewis S. Garrett................. 1997 170,880 182,500 40,000 233,265
Vice President of Buying and
Merchandising
Charles R. Rinehimer III......... 1997 170,880 187,500 40,000 2,693
Vice President, Stores
- ---------------
(1) Represents (a) annual incentive bonuses earned by Messrs. Bonk and Rogers,
Ms. Thorn and Messrs. Garrett and Rinehimer of $300,000, $125,000, $80,000,
$87,500 and $87,500, respectively, and (b) one-time bankruptcy retention and
success bonuses earned by Messrs. Bonk and Rogers, Ms. Thorn and Messrs.
Garrett and Rinehimer of $454,000, $250,000, $150,000, $95,000 and $100,000,
respectively.
(2) Represents (a) payments made by the Company in connection with the buyout of
its obligations under its Supplemental Executive Retirement Plan to Messrs.
Bonk, Rogers and Garrett of $319,580, $319,580 and $231,054, respectively,
and (b) employer matching contributions to the Company's 401(k) Plan on
behalf of the Named Executive Officers.
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 Plan 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 the Company and its subsidiaries, are eligible
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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 Plan 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
Option Plan, 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
the Company's 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 Plan Effective Date, options to
purchase 687,000 shares of Common Stock (representing approximately 83% of the
total shares of Common Stock reserved for issuance under the Option Plan as of
the Plan Effective Date) were granted to 79 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 Plan 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 Plan Effective Date are intended to
qualify as ISOs and will become exercisable no later than four years from the
Plan Effective Date; however, up to 50% of these options may become exercisable
prior to the second anniversary of the Plan 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 Plan 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 approximately 45% of the total number of shares for which options
were granted as of the Plan 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 Plan
Effective Date, and such options will have exercise prices and shall be
exercisable at such times (not extending beyond ten 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 ten years
following the Plan 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 ten years from the date granted and
are subject to earlier termination upon termination of the optionee's employment
with the Company 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 Plan
Effective Date provide that the option exercise price may be paid by personal
check, bank draft or money order;
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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 a broker-assisted exercise program.
OPTION GRANTS IN FISCAL 1997
The following table sets forth certain information relating to grants of
stock options made during Fiscal 1997 to the Named Executive Officers under the
Company's Stock Option Plan. Such grants are reflected in the Summary
Compensation Table above.
INDIVIDUAL GRANTS
------------------------------------------------------
% OF TOTAL POTENTIAL REALIZABLE VALUE
NUMBER OF OPTIONS/SARS AT ASSUMED ANNUAL RATES
SECURITIES GRANTED TO EXERCISE OF STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES OR FOR OPTION TERM
OPTIONS/SARS IN BASE EXPIRATION ---------------------------
NAME GRANTED FISCAL YEAR PRICE DATE 5% 10%
---- ------------ ------------ ----------- ---------- ------------ ------------
James E. Bonk................. 110,000 16.0% $20.75 1/27/2008 $1,437,975 $3,640,588
Jack K. Rogers................ 80,000 11.6 20.75 1/27/2008 1,045,800 2,647,700
Lee Ann Thorn................. 40,000 5.8 20.75 1/27/2008 522,900 1,323,850
Lewis S. Garrett.............. 40,000 5.8 20.75 1/27/2008 522,900 1,323,850
Charles R. Rinehimer III...... 40,000 5.8 20.75 1/27/2008 522,900 1,323,850
FISCAL YEAR END OPTION VALUE TABLE
The following table provides certain information concerning the number of
securities underlying unexercised stock options held by each of the Named
Executive Officers as of February 28, 1998. None of the Named Executive Officers
exercised any stock options during Fiscal 1997.
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT MONEY OPTIONS AT
FEBRUARY 28, 1998 FEBRUARY 28, 1998(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
James E. Bonk.............................. 0 110,000 $0.00 $2,062,500
Jack K. Rogers............................. 0 80,000 0.00 1,500,000
Lee Ann Thorn.............................. 0 40,000 0.00 750,000
Lewis S. Garrett........................... 0 40,000 0.00 750,000
Charles R. Rinehimer III................... 0 40,000 0.00 750,000
- ---------------
(1) Represents the total gain which would be realized if all in-the-money
options beneficially owned at February 28, 1998 were exercised, determined
by multiplying the number of shares underlying the options by the difference
between the per share exercise price and $39.50, the estimated fair market
value per share of Common Stock as of such date based upon the mean between
the bid and asked prices of a share of Common Stock as reported on the OTC
Bulletin Board on February 27, 1998.
EMPLOYMENT CONTRACTS
The Company maintains written severance agreements with Mr. Bonk and all
other executive officers. The severance arrangements with Mr. Bonk are a part of
his employment contract, as described below. The contracts with the executive
officers, including Ms. Thorn and Messrs. Rogers, Garrett, Rinehimer and
Mundorf, and other officers, including Messrs. Marsh (Vice President of
Information Systems and Chief Information Officer) and Scott (Vice President of
Logistics), provide severance benefits in the event the executive is terminated
without cause at any time prior to the executive's normal retirement date. An
executive would be terminated without cause if the executive's employment is
terminated by reason of layoff or reduction in force or for any other reason
except (i) the resignation by the executive unless such resignation is preceded
by, or reasonably contemporaneous with, (a) a change of the holders of 50% or
more of the equity of the Company, (b) a change in the majority of the Company's
Board of Directors, (c) merger with less than 50% of the merged entity owned by
pre-merger stockholders or (d) sale or abandonment of more than 50% of the
Company's revenue-generating assets; or (ii) a
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termination of the executive's employment arising from gross incompetence,
insubordination, dishonesty in performance of the Company's duties, or
conviction of fraud, theft, embezzlement or any felony.
The benefits under the contracts with the executive officers other than Mr.
Bonk are for 12 months of salary continuation subject to mitigation, except that
the contract with Mr. Rogers provides for severance benefits of 18 months with
only the final six months subject to mitigation. These benefits include payment
of monthly salary and the continuance of group medical, dental and long-term
disability insurance.
As of the Plan 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 the Company. 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.
DIRECTOR COMPENSATION
Each non-employee Director of the Company receives a quarterly retainer of
$3,000, and a fee of $1,000 for each Board meeting attended and a fee of $500
for each Committee meeting attended. Directors may elect to defer some or all of
these fees and use deferred amounts to purchase shares of Common Stock once each
year at the fair market value of a share on the date of purchase. The Company
has also established an Outside Directors' Stock Option Plan (the "Director
Plan"). Under the terms of the Director Plan, each Director who is not an
employee of the Company or its subsidiaries (an "Outside Director") received a
one-time award of options to purchase 2,500 shares of Common Stock at $20.75,
which options were vested upon their award. In addition, upon the consummation
of the Offerings, each Outside Director will receive a one-time award of options
to purchase 7,500 shares of Common Stock at the initial public offering price,
which options will vest over a three year period. Further, under the Director
Plan, each Outside Director will receive an annual grant to purchase 1,500
shares of Common Stock at the fair market value at the time of the grant, which
options will vest over a one year period. Upon election, each new Outside
Director will receive a one-time award of options to purchase 10,000 shares of
Common Stock at the fair market value at the time of the grant, which options
will vest over a three year period.
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 Camelot's Directors, resigned. Messrs. Hedley and Philippin
had been the only members of the Company's Compensation Committee. Accordingly,
upon their resignations, such Committee was effectively dissolved. Mr. Philippin
had also been President of the Company's Predecessor until his resignation, and
Mr. Hedley had been the Vice President, Secretary and Treasurer of the Company's
Predecessor 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, the Company.
CERTAIN TRANSACTIONS
Mr. Solow, a Director of the Company, is a member of the law firm of
Hopkins & Sutter. The Company reimbursed Hopkins & Sutter for services which
Hopkins & Sutter provided to Van Kampen American Prime Rate Income Trust ("Van
Kampen") as a prepetition lender. For Fiscal 1994, Fiscal 1995 and Fiscal 1996,
the Company's indebtedness to Van Kampen totaled $30,710,959, $32,601,087 and
$33,712,679, respectively. All indebtedness was converted to equity on the Plan
Effective Date.
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Mr. Luzzatto, a Director of the Company, is the President and Chief
Executive Officer and a Director of the Welk Group, Inc. (the "Welk Group").
During each of the past three fiscal years, the Company has purchased
prerecorded music from the Welk Group. The Company's purchases from the Welk
Group aggregated $147,256 in Fiscal 1997, $72,245 in Fiscal 1996 and $60,810 in
Fiscal 1995.
On the January 27, 1998 Plan Effective Date, the Company issued the
following amounts of shares of Common Stock to each current owner of more than
5% of the outstanding Common Stock in exchange for the amount of claims noted:
Van Kampen Merritt, 1,994,717 shares in exchange for claims aggregating
$88,287,616; Fernwood Associates, L.P., 1,549,595 shares in exchange for claims
aggregating $62,860,596; Merrill Lynch, 1,466,362 shares in exchange for claims
aggregating $59,484,183; Oaktree Capital Management, LLC, 961,740 shares in
exchange for claims aggregating $39,013,798; Daystar Partners LLC, 358,115
shares in exchange for claims aggregating $14,527,212; First Union National
Bank, 652,952 shares in exchange for claims aggregating $26,487,528; and Yale
University, 594,944 shares in exchange for claims aggregating $26,165,121.
First Union National Bank ("First Union") and Van Kampen, the beneficial
owners of shares representing 5.9% and 19.6% of the Company's Common Stock,
respectively, are lenders under the Amended Credit Facility. The maximum amount
of First Union's commitment under that facility is $15.0 million, including
$10.0 million under the revolving portion of that facility and $5.0 million
under the term loan portion of that facility. The maximum amount of Van Kampen's
commitment under that facility is $7.5 million, including $5.0 million under the
revolving portion of that facility and $2.5 million under the term loan portion
of that facility.
Van Kampen, Fernwood Associates, L.P., Oaktree Capital Management, LLC and
Merrill Lynch are parties to the Registration Rights Agreement with the Company.
See "Shares Eligible for Future Sale -- Registration Rights Agreement."
The Company believes that these transactions were on terms no less
favorable to the Company than could have been obtained from unaffiliated third
parties.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of July 28, 1998, and as adjusted to
reflect the sale of the Common Stock offered hereby, by (i) the Selling
Stockholders, (ii) each Director, (iii) each Named Executive Officer, (iv) all
Directors and executive officers as a group, and (v) each person known by the
Company to be the beneficial owner of more than 5% of the Common Stock on a
fully diluted basis.
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
THE OFFERINGS NUMBER THE OFFERINGS(2)
NAME AND ADDRESS ---------------------- OF SHARES --------------------
OF BENEFICIAL OWNER(1) NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE
---------------------- --------- ---------- --------- ------- ----------
5% SHAREHOLDERS:
Van Kampen-Merritt Prime Rate Income Trust....... 1,994,717 19.6%
1 Parkview Plaza
Oakbrook Terrace, Illinois 60180
Fernwood Associates, L.P......................... 1,549,596 15.2%
667 Madison Avenue, 20th Floor
New York, New York 10021
Merrill Lynch, Pierce, Fenner & Smith 1,435,782 14.1%
Incorporated.....................................
Debt & Equity Market Group
World Financial Center, North Tower
New York, New York 10281
Oaktree Capital Management, LLC(6)............... 968,416 9.5%
(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
Daystar Partners LLC............................. 750,892 7.4%
411 Theodore Fremd Avenue
Rye, New York 10580
First Union National Bank........................ 602,952 5.9%
301 South Cole Street BC-5
Charlotte, North Carolina 28258
Yale University.................................. 549,944 5.4%
c/o Daystar Partners LLC
411 Theodore Fremd Avenue
Rye, New York 10580
DIRECTORS AND NAMED EXECUTIVE OFFICERS:
James E. Bonk.................................... 55,000(3) * 55,000(3) *
Jack K. Rogers................................... 40,000(3) * 40,000(3) *
Lee Ann Thorn.................................... 20,000(3) * 20,000(3) *
Lewis S. Garrett................................. 20,000(3) * 20,000(3) *
Charles R. Rinehimer III......................... 20,000(3) * 20,000(3) *
George R. Zoffinger.............................. 5,500(3)(4) * 5,500(3) *
Stephen H. Baum.................................. 2,500(3) * 2,500(3) *
Herbert J. Marks................................. 2,500(3) * 2,500(3) *
Marc L. Luzzatto................................. 2,500(3) * 2,500(3) *
Michael B. Solow................................. 2,500(3) * 2,500(3) *
All Directors and Executive Officers as a 170,500(5) 1.6% 170,500(5) 1.6%
Group..........................................
- ---------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission (the "Commission") and includes voting
and investment power with respect to the shares. As to each stockholder, the
percentage ownership is calculated by dividing (i) the sum of the number of
shares of Common Stock owned by such stockholder plus the number of shares
of Common Stock that such stockholder would receive upon the exercise of
currently exercisable options held by such stockholder by (ii) the sum of
the total number of outstanding shares of Common Stock plus the total number
of shares issuable upon exercise of exercisable options.
(2) Based on 10,175,932 shares outstanding as of July 28, 1998. Assumes no
exercise by the underwriters of their over-allotment options.
(3) Includes shares that may be acquired upon exercise of stock options that are
exercisable within 60 days of the date of this Prospectus.
(4) Includes 3,000 shares owned by Mr. Zoffinger's wife. Mr. Zoffinger disclaims
beneficial ownership of these 3,000 shares.
(5) Includes 167,500 shares that may be acquired upon exercise of stock options
that are exercisable within 60 days of the date of this Prospectus.
(6) Matthew S. Barrett, Managing Director of Oaktree Capital Management, LLC
since April, 1995, was formerly a director of the Company from January, 1998
to March, 1998.
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DESCRIPTION OF CAPITAL STOCK
The Company's Second Amended and Restated Certificate of Incorporation (the
"Certificate") authorizes 30,000,000 shares of Common Stock, $.01 par value, and
no shares of preferred stock. As of July 28, 1998, 10,175,932 shares of Common
Stock were issued and outstanding and, based on information provided by the
Company's transfer agent, held by 742 holders of record. To the extent
prohibited by the Bankruptcy Code, the Company may not issue non-voting equity
securities.
Holders of Common Stock are entitled to receive dividends as declared from
time to time by the Board of Directors out of funds legally available therefor.
In the event of a liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities subject to prior distribution rights of any
preferred stock then outstanding. The Common Stock has no preemptive or
conversion rights and is not subject to further calls or assessments by the
Company. There are no redemption or sinking fund provisions applicable to the
Common Stock. All currently outstanding Common Stock of the Company is duly
authorized, validly issued, fully paid and nonassessable.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders, and do not have the right to vote
cumulatively in the election of Directors. The Board of Directors presently
consists of seven members. All Directors hold office for a term of one year and
until their successor is duly elected and qualified. Any Director may be
removed, with or without cause, by the affirmative vote of a majority of the
voting power of all shares of the Company entitled to vote generally in the
election of Directors. In general, the Certificate can be amended by the
affirmative vote of a majority of the Company's then outstanding shares having
voting power thereon. Special meetings of stockholders may be called only by the
Chief Executive Officer, by a majority of the Board of Directors or by the
holders of 33 1/3% of the voting power of all shares of the Company entitled to
vote generally in the election of Directors.
The Amended and Restated By-Laws of the Company (the "By-Laws") provide
that in order for a stockholder to properly bring nominations or other business
before an annual meeting, the stockholder must give timely, written notice
thereof in the manner specified in the By-Laws to the Company and such other
business must be a proper matter for stockholder action. To be timely, a
stockholder's notice generally must be delivered to the Secretary of the Company
at its principal executive offices not less than 70 nor more than 90 days prior
to the first anniversary of the preceding year's annual meeting. If the Company
has not publicly announced the date of the annual meeting at least 80 days prior
to the first anniversary of the preceding year's meeting, a stockholder's notice
will be timely if delivered no later than the close of business on the tenth day
following the date of such public announcement.
The Common Stock is currently traded on the OTC Bulletin Board. The Company
has applied for quotation of the Common Stock on the Nasdaq National Market
System under the symbol "CMLT."
THE DELAWARE BUSINESS COMBINATION ACT
Section 203 of the General Corporation Law of the State of Delaware (the
"Delaware Business Combination Act") imposes a three-year moratorium on business
combinations between a Delaware corporation and an "interested stockholder" (in
general, a stockholder owning 15% or more of a corporation's outstanding voting
stock) or an affiliate or associate thereof unless (a) prior to the interested
stockholder becoming such, the board of directors of the corporation approved
either the business combination or the transaction resulting in the interested
stockholder becoming such; (b) upon consummation of the transaction resulting in
the interested stockholder becoming such, the interested stockholder owns 85% of
the voting stock outstanding at the time the transaction commenced (excluding
from the calculation of outstanding shares beneficially owned by directors who
are also officers and certain employee benefit plans); or (c) on or after the
interested stockholder becomes such, the business combination is approved by (i)
the board of directors and (ii) the holders of at least 66 2/3% of the
outstanding shares (other than those beneficially owned by the interested
stockholder) at a meeting of stockholders.
The Delaware Business Combination Act defines the term "Business
Combination" to encompass a wide variety of transactions with, or caused by, an
interested stockholder in which the interested stockholder receives or could
receive a benefit on other than a pro rata basis with other stockholders. These
transactions include
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mergers, certain asset sales, certain issuances of additional shares to the
interested stockholder, transactions with the Company which increase the
proportionate interest of the interested stockholder or transactions in which
the interested stockholder receives certain other benefits.
By a provision in its original certificate of incorporation or an amendment
thereto or to its by-laws adopted by a majority of the shares entitled to vote
thereon, a corporation may elect not to be governed by the Delaware Business
Combination Act (provided that any amendment to the certificate of incorporation
will not become effective until 12 months after its adoption). The Company has
not made such an election and, as a result of the quotation of its shares of
Common Stock on the Nasdaq National Market System, the Company will become
subject to the Delaware Business Combination Act subsequent to the Offerings.
CANCELLATION OF CAPITAL STOCK OUTSTANDING PRIOR TO THE PLAN EFFECTIVE DATE
Under the terms of the Plan of Reorganization, all authorized capital stock
of the Company existing immediately prior to the Plan Effective Date, whether
issued or unissued, and including any right to acquire such capital stock
pursuant to any agreement, arrangement, or understanding, or upon exercise of
conversion rights, exchange rights, warrants, options or other rights, was
deemed canceled and of no further force or effect without any action on the part
of the Board of Directors. The holders of such cancelled capital stock and any
cancelled right to acquire such stock have no rights arising from or relating to
such capital stock (or the stock certificates representing such cancelled stock)
or any right to acquire such capital stock.
DIRECTOR LIABILITY
As permitted by the Delaware General Corporation law, the Certificate
contains a provision which under certain circumstances eliminates the personal
liability of the directors of the Company to the Company or its stockholders, in
their capacity as directors of the Company, for monetary damages for the breach
of fiduciary duty as a director. The provision in the Certificate does not
change a Director's duty of care, but it does eliminate the possibility of
monetary liability for certain violations of that duty, including violations
based on grossly negligent business decisions. The provision does not affect the
availability of equitable remedies for a breach of the duty of care, such as an
action to enjoin or rescind a transaction involving a breach of fiduciary duty;
however, in certain circumstances equitable remedies may not be available as a
practical matter. The provision in the Certificate does not in any way affect a
Director's liability under the federal securities laws. In addition, the By-
Laws indemnify its past and present directors for and provide advancements in
respect of any expense, liability or loss incurred in connection with any
threatened, pending or completed action, suit or proceeding by an individual by
reason of the fact that he is or was a director or officer of the Company or
serving at the request of the Company in another capacity. The Company has also
entered into indemnity agreements pursuant to which it has agreed, among other
things, to indemnify its Directors for settlements in derivative actions.
ANTI-TAKEOVER EFFECT OF CERTAIN BY-LAW PROVISIONS
It is possible that the provisions of the Company's By-Laws that require
stockholders to provide advance notice of nominations of Directors and other
business to be brought before an annual meeting may tend to discourage a proxy
contest or other takeover bid for the Company. The provisions of the Delaware
Business Combination Statute also may discourage other companies from making a
tender offer for, or acquisitions of substantial amounts of, the Company's
Common Stock. This could have an incidental effect of inhibiting changes in
management and may also prevent temporary fluctuations in the market price of
the Company's Common Stock which often result from actual or rumored takeover
attempts. In addition, the provisions of the Certificate eliminating certain
liabilities of Directors, the indemnification provisions of the By-Laws and the
indemnity agreements may have the effect of reducing the likelihood of
derivative litigation against Directors and to deter stockholders from bringing
a lawsuit against Directors for breach of their duty of care, even though such
an action, if successful, might otherwise have benefited the Company and the
stockholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is The Bank of New
York.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offerings, of the 30,000,000 authorized shares of
Common Stock, 10,177,662 shares are anticipated to be outstanding. Of these
10,177,662 shares of Common Stock, the shares purchased in the
Offerings by persons who are not "affiliates" of the Company will be freely
tradable, without restriction under the Securities Act.
In addition, the 9,835,559 shares of Common Stock issued on the Plan
Effective Date and the 328,873 shares of Common Stock issued pursuant to the
Plan of Reorganization since the Plan Effective Date were issued pursuant to the
exemption from the registration requirements of the Securities Act (and of any
state or local laws) provided by Section 1145(a)(1) of the Bankruptcy Code. At
August 1, 1998, up to an additional 1,730 shares of Common Stock may be issued
by the Company pursuant to the Plan of Reorganization. All shares of Common
Stock issued pursuant to the Plan of Reorganization 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 of Common Stock who, due to the magnitude of their holdings as
of the Plan Effective Date, may be deemed to be "underwriters" pursuant to
Section 1145(b) of the Bankruptcy Code, are parties with the Company to 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 Capital Management LLC (in its capacity as general partner and
investment manager of OCM Opportunities Fund, L.P. and Columbia/HCA Master
Retirement Trust) (collectively the "Securities Holders" and individually a
"Security Holder"). These four stockholders have agreed not to sell their shares
for 180 days after the date hereof. On May 5, 1998, an additional 10,000 shares
of Common Stock were issued pursuant to an order of the Bankruptcy Court to
certain persons for their significant contributions to the bankruptcy case.
The Company believes that shares of Common Stock currently
may be sold pursuant to Rule 144 under the Securities Act in compliance with the
resale volume limitations of Rule 144. These volume limitations will apply only
if and as long as the holders of these shares are "affiliates" of the Company
for purposes of Rule 144. 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
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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.
Up to 947,094 shares of Common Stock reserved for issuance upon exercise of
outstanding options will become eligible for resale under Rule 144 one year
subsequent to the date or dates that the holders of such options exercise the
same. Subsequent to the Offerings, however, the Company intends to file a
registration statement on Form S-8 with respect to the 734,000 shares of Common
Stock reserved for issuance upon exercise of outstanding options and the 213,094
shares of Common Stock reserved for issuance pursuant to future option grants.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Registration Rights Agreement, any Securities Holder or
Securities Holders may, subject to certain limitations, require the Company 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 after January 27, 1998); 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. During the First Phase, the minimum threshold requirement is 10% of
the outstanding Common Stock for demand registration and 15% for shelf
registration. In the event of a demand registration, the non-requesting
Securities Holders and the Company 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 the Company and then shares offered by
piggy-backing stockholders would be reduced. In addition, if the Company 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 the Company (other than private sales in connection
with an acquisition or compensation plan); 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, the Company 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, the Company will indemnify the
Securities Holders for certain liabilities, including liabilities under the
Securities Act, in connection with any such registration.
In addition, pursuant to the Registration Rights Agreement, if the Company
offers stock pursuant to a registration statement, none of the Securities
Holders can exercise their demand registration rights during the period
beginning on the date the Company issued notice of its intent to file a
registration statement and ending 90 days after the closing date of the related
offering. In addition, none of the Securities Holders can offer to sell their
shares pursuant to a demand registration during the 90-day period following
receipt by each Securities Holder of a certificate of an officer of the Company
to the effect that the Board of Directors of the Company has in good faith and
for valid business reasons requested that the Securities Holders refrain from
selling their shares; provided, however, that the identity of a potential
purchaser from a Securities Holder shall not constitute a valid business reason.
LOCK-UP AGREEMENTS
The Company, its Directors and executive officers, members of management,
the Selling Stockholders and certain other holders of shares of
Common Stock have agreed, subject to certain exceptions, not to directly or
indirectly (i) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of or otherwise dispose of or transfer any shares
of Common Stock or securities convertible into or exchangeable or exercisable
for Common Stock, whether now owned or thereafter acquired by the person
executing the agreement or with respect to which the person executing the
agreement thereafter acquires the power of disposition, or file a registration
statement under
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the Securities Act with respect to the foregoing or (ii) enter into any swap or
other agreement that transfers, in whole or in part, the economic consequence of
ownership of the Common Stock whether any such swap or transaction is to be
settled by delivery of Common Stock or other securities, in cash or otherwise,
without the prior consent of Merrill Lynch on behalf of the Underwriters for a
period of 180 days after the date of this Prospectus.
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of the Common Stock prevailing from time to time. Sales of substantial
amounts of Common Stock (including shares issued upon the exercise of the
outstanding stock options), or the perception that such sales could occur, could
adversely affect the prevailing market prices for the Common Stock.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The summary of the Amended Credit Facility contained herein does not
purport to be complete and is qualified in its entirety by reference to the
provisions of the Amended Credit Facility, a copy of which will be filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
CMI, a wholly owned subsidiary of the Company, entered into the New Working
Capital Facility, dated as of January 27, 1998, among Camelot Music, Inc., as
Borrower, Bank of America National Trust and Savings Association, First Union
National Bank, Societe Generale, Van Kampen American Capital Prime Rate Income
Trust and The Chase Manhattan Bank, as lenders, and The Chase Manhattan Bank, as
Agent. The Company has guaranteed CMI's obligations under the facility. On June
12, 1998, the Company signed the Amended Credit Facility.
The Amended Credit Facility provides for loans of up to $50.0 million
during the peak period (October through December) and up to $35.0 million during
the non-peak period (including in each case up to $5.0 million of letters of
credit issued by the Agent). In no case can the amount of loans exceed the
borrowing base. The Amended Credit Facility provides a borrowing base set at the
lesser of the commitments from the lenders or 60% of eligible inventory during
all periods. In Fiscal 1997, eligible inventory during the peak period ranged
between approximately $103 million and $139 million, while eligible inventory
during the non-peak period ranged between $96 million and $121 million. The
Amended Credit Facility also provides the Company with a $25.0 million term loan
in addition to the working capital facility. The $25.0 million term loan
provided most of the cash financing necessary to complete the Spec's
Acquisition. The term loan provided under the Amended Credit Facility will be
amortized in semi-annual installments over a three-year period beginning January
31, 1999. The amortization payments will be $3.0 million, $2.0 million, $6.0
million, $4.0 million, $6.0 million and $4.0 million. The Amended Credit
Facility will terminate on January 27, 2002. CMI's obligations under the Amended
Credit Facility are guaranteed by the Company and by all of CMI's subsidiaries
and are collateralized by substantially all of CMI's and its subsidiaries'
assets. The Company has pledged to the lenders its capital stock of CMI, and CMI
has pledged to the lenders the capital stock of its subsidiaries.
Interest Rate
Under the Amended Credit Facility loans bear interest, at the option of
CMI, at either (a) the Eurodollar Rate (as defined) plus 1.75% or (b) the
greater of (i) the Prime Rate charged by the Agent, (ii) the Base CD Rate (as
defined) plus 1% and (iii) the Federal Funds Effective Rate (as defined) plus
1/2 of 1%. CMI also pays an annual commitment fee of 3/8 of 1% on the available
commitment. CMI is required to use any excess proceeds from asset sales of more
than $750,000 first to prepay the term loan and second to reduce the commitments
under the revolving credit facility. In addition, CMI is required for 45
consecutive days during each year to reduce the principal amount of all
outstanding working capital loans to zero.
Covenants
The Amended Credit Facility limits the ability of the Company and its
subsidiaries to incur additional indebtedness, except (a) existing indebtedness,
(b) indebtedness incurred under the Amended Credit Facility, (c) certain
indebtedness pursuant to financing leases incurred to acquire, install and
implement POS systems and pursuant to other financing leases, (d) intercompany
indebtedness, (e) certain indebtedness incurred to finance the acquisition of
fixed or capital assets (up to $5.0 million at any time outstanding), (f)
certain additional indebtedness, and (g) certain indebtedness of other persons
who become parties to the facility or assumed in connection with certain
permitted acquisitions or mergers, provided that the indebtedness incurred under
(e) and (f) (together with certain permitted contingent obligations) is limited
in the aggregate outstanding amount at any given time.
In addition, the Company and its subsidiaries are subject to additional
negative covenants, including, subject to exceptions, covenants limiting (i) the
incurrence or creation of liens, (ii) the incurrence or creation of contingent
obligations and similar guarantees, (iii) any merger, consolidation, sale of all
or substantially all of its property or other fundamental changes, (iv) sales of
its property or assets, including capital stock of its subsidiaries, (v)
investments, loans, advances and purchases of securities, (vi) the amounts of
capital expenditures
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(e.g., limits of $20.0 million in 1998 (with an additional $8.0 million
allowable for POS system expenditures) and $25.0 million in 1999), (vii) the
payment of dividends or making payments for the purchase, redemption, retirement
or other acquisition of any shares of capital stock, (viii) transactions with
affiliates, (ix) changes in the Company's fiscal year and (x) changes in the
Company's line of business. In connection with the payment of dividends, the
facility provides that the Company can pay cash dividends during any fiscal year
to the holders of its capital stock in an amount not to exceed 30% of
consolidated net income for the preceding fiscal year, provided that after
payment of such dividends there remains borrowing capacity under the revolving
credit facility of more than $40.0 million during peak periods and $25.0 million
during non-peak periods. The Amended Credit Facility also requires consolidated
EBITDA to be at least $32.0 million annually and require the Company to maintain
trade credit in amounts and on terms at least as favorable as those included in
the Company's budget. The Company must also maintain a system of cash management
consistent with its currently existing cash management system which concentrates
in one concentration account at least three times each week all funds received
and used in the Company's business. The Company expects that it will be able to
comply with these covenants for the foreseeable future.
Events of Default
The Amended Credit Facility includes standard events of default, including,
subject to exceptions, those related to (i) defaults in the payment of principal
and interest, (ii) materially incorrect representations and warranties, (iii)
defaults in the observance or performance of any of the affirmative or negative
covenants included in the facility or in the related security and pledge
documents, (iv) cross defaults on other indebtedness of more than $1.0 million,
(v) certain events of bankruptcy, (vi) certain ERISA events, (vii) certain
judgments or decrees involving more than $1.0 million, (viii) the failure of the
facility and related documents to be in full force and effect, (ix) CMI ceasing
to own all of its subsidiaries or the Company ceasing to own all of CMI, and (x)
any person (other than certain permitted holders), singly or in concert with one
or more other persons, acquiring or having the power to vote or direct the
voting of, 35% or more of the outstanding Common Stock of the Company on a fully
diluted basis.
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CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
FOR NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal tax
consequences of the acquisition, ownership and disposition of Common Stock by a
Non-United States Holder. This discussion is based upon the United States
federal tax law now in effect, which is subject to change, possibly
retroactively. For purposes of this discussion, a "Non-United States Holder'
means a holder other than a citizen or resident of the United States; a
corporation, a partnership or other entity created or organized in the United
States or under the laws of the United States or of any political subdivision
thereof; or an estate or trust whose income is includible in gross income for
United States federal income tax purposes regardless of its source. This
discussion does not address aspects of United States federal taxation other than
income and estate taxation and does not address all aspects of income and estate
taxation or any aspects of state, local, or non-United States taxes. This
discussion does not consider any specific facts or circumstances that may apply
to a particular Non-United States Holder (including certain United States
expatriates). Prospective investors are urged to consult their tax advisors
regarding the United States federal tax consequences of acquiring, holding and
disposing of Common Stock, as well as any tax consequences that may arise under
the laws of any foreign, state, local or other taxing jurisdiction.
DIVIDENDS
Dividends paid to a Non-United States Holder will generally be subject to
withholding of United States Federal income tax at the rate of 30% (or at a
reduced tax treaty rate), unless the dividend is effectively connected with the
conduct of a trade or business within the United States by the Non-United States
Holder, in which case the dividend will be subject to the United States federal
income tax on net income on the same basis that applies to United States persons
generally. In the case of a Non-United States Holder which is a corporation,
such effectively connected income also may be subject to the branch profits tax.
Non-United States Holders should consult their tax advisors concerning any
applicable income tax treaties that may provide for a lower rate of withholding
or other rules different from those described above.
Under currently effective United States Treasury regulations (the "Current
Regulations"), dividends paid to an address in a foreign country are presumed to
be paid to a resident of that country (unless the payor has knowledge to the
contrary) for purposes of the withholding discussed above and, under the current
interpretation of United States Treasury regulations, for purposes of
determining the applicability of a tax treaty rate. Under United States Treasury
regulations issued on October 6, 1997 (the "Final Regulations") generally
effective for payments made after December 31, 1999, a Non-United States Holder
(including, in certain cases of Non-United States Holders that are fiscally
transparent entities, the owner or owners of such entities) will be required to
provide to the payor certain documentation that such Non-United States Holder
(or the owner or owners of such fiscally transparent entities) is a resident of
the relevant country in order to claim a reduced rate of withholding pursuant to
an applicable income tax treaty.
GAIN ON DISPOSITION
A Non-United States Holder will generally not be subject to United States
federal income tax on gain recognized on a sale or other disposition of Common
Stock unless (i) the gain is effectively connected with the conduct of a trade
or business within the United States by the Non-United States Holder, (ii) in
the case of a Non-United States Holder who is a nonresident alien individual and
holds the Common Stock as a capital asset, such holder is present in the United
States for 183 or more days in the taxable year of disposition and either such
individual has a "tax home" in the United States or the gain is attributable to
an office or other fixed place of business maintained by such individual in the
United States or (iii) the Company is or has been a "U.S. real property holding
corporation" for United States federal income tax purposes (which the Company
does not believe that it is or is likely to become). Gain that is effectively
connected with the conduct of a trade or business within the United States by
the Non-United States Holder will be subject to the United States Federal income
tax on net income on the same basis that applies to United States persons
generally (and, with respect to corporate holders, under certain circumstances,
the branch profits tax) but will not be subject to withholding. Non-United
States Holders should consult their own tax advisors concerning any applicable
treaties that may provide for different rules. If the Company were or were to
become a U.S. real property holding corporation at any time
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during this period, gains realized upon a disposition of Common Stock by a
Non-United States Holder which did not directly or indirectly own more than 5%
of the Common Stock during this period generally would not be subject to United
States federal income tax, provided that the Common Stock is regularly traded on
an established securities market.
FEDERAL ESTATE TAXES
Common Stock owned or treated as owned by an individual who is not a
citizen or resident (for United States estate tax purposes) of the United States
at the date of death will be included in such individual's estate for United
States federal estate tax purposes, unless an applicable estate tax treaty
provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company generally must report annually to the IRS and to each
Non-United States Holder the amount of dividends paid to, and the tax withheld
with respect to, such holder, regardless of whether any tax was actually
withheld. This information may also be made available to the tax authorities of
a country in which the Non-United States Holder resides.
Under the Current Regulations, United States information reporting
requirements and backup withholding tax will generally not apply to dividends
paid on the Common Stock to a Non-United States Holder at an address outside the
United States. Payments by a United States office of a broker of the proceeds of
a sale of the Common Stock is subject to both backup withholding at a rate of
31% and information reporting unless the beneficial owner certifies its
Non-United States Holder status under penalties of perjury or otherwise
establishes an exemption. Information reporting requirements (but not backup
withholding) will also apply to payments of the proceeds of sales of the Common
Stock by foreign offices of United States brokers, or foreign brokers with
certain types of relationships to the United States, unless the broker has
documentary evidence in its records that the beneficial owner is a Non-United
States Holder (and the broker does not have knowledge to the contrary) and
certain other conditions are met, or the beneficial owner otherwise establishes
an exemption.
Under the Final Regulations, the payment of dividends or the payment of
proceeds from the disposition of Common Stock to a Non-United States Holder may
be subject to information reporting and backup withholding unless such recipient
provides to the payor certain documentation as to its status as a Non-United
States Holder or otherwise establishes an exemption.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will, in certain circumstances, be refunded or credited
against the Non-United States Holder's United States federal income tax
liability, provided that the required information is furnished to the IRS.
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UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
Morgan Stanley & Co. Incorporated and McDonald & Company Securities, Inc. are
acting as representatives (the "U.S. Representatives") of each of the
Underwriters named below (the "U.S. Underwriters"). Subject to the terms and
conditions set forth in a U.S. purchase agreement (the "U.S. Purchase
Agreement") among the Company, CMI, the Selling Stockholders and the U.S.
Underwriters, and concurrently with the sale of shares of Common
Stock to the International Managers (as defined below), the Selling Stockholders
have agreed to sell to the U.S. Underwriters, and each of the U.S. Underwriters
severally and not jointly has agreed to purchase from the Selling Stockholders,
the number of shares of Common Stock set forth opposite its name below.
NUMBER OF
U.S. UNDERWRITER SHARES
---------------- -----------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..............................
Morgan Stanley & Co. Incorporated......................
McDonald & Company Securities, Inc.....................
-----------
Total.....................................
===========
The Company, CMI and the Selling Stockholders have also entered into an
international purchase agreement (the "International Purchase Agreement") with
certain underwriters outside the United States and Canada (the "International
Managers" and, together with the U.S. Underwriters, the "Underwriters") for whom
Merrill Lynch International, Morgan Stanley & Co. International Limited and
McDonald & Company Securities, Inc are acting as lead managers (the "Lead
Managers"). Subject to the terms and conditions set forth in the International
Purchase Agreement, and concurrently with the sale of shares of
Common Stock to the U.S. Underwriters pursuant to the U.S. Purchase Agreement,
the Selling Stockholders have agreed to sell to the International Managers, and
the International Managers severally have agreed to purchase from the Selling
Stockholders, an aggregate of shares of Common Stock. The initial
public offering price per share and the total underwriting discount per share of
Common Stock are identical under the U.S. Purchase Agreement and the
International Purchase Agreement.
In the U.S. Purchase Agreement and the International Purchase Agreement,
the several U.S. Underwriters and the several International Managers,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Common Stock being sold pursuant to
each such agreement if any of the shares of Common Stock being sold pursuant to
such agreement are purchased. Under certain circumstances, under the U.S.
Purchase Agreement and the International Purchase Agreement, the commitments of
non-defaulting Underwriters may be increased. The closings with respect to the
sale of shares of Common Stock to be purchased by the U.S. Underwriters and the
International Managers are conditioned upon one another.
The U.S. Representatives have advised the Company and the Selling
Stockholders that the U.S. Underwriters propose initially to offer the shares of
Common Stock to the public at the initial public offering price set forth on the
cover page of this Prospectus, and to certain dealers at such price less a
concession not in excess of $ per share of Common Stock. The U.S.
Underwriters may allow, and such dealers may reallow, a discount not in excess
of $ per share of Common Stock on sales to certain other dealers. After the
initial public offering, the public offering price, concession and discount may
be changed.
The Selling Stockholders have granted options to the U.S. Underwriters,
exercisable for 30 days after the date of this Prospectus, to purchase up to an
aggregate of additional shares of Common
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Stock at the initial public offering price set forth on the cover page of this
Prospectus, less the underwriting discount. The U.S. Underwriters may exercise
these options solely to cover over-allotments, if any, made on the sale of the
Common Stock offered hereby. To the extent that the U.S. Underwriters exercise
these options, each U.S. Underwriter will be obligated, subject to certain
conditions, to purchase a number of additional shares of Common Stock
proportionate to such U.S. Underwriter's initial amount reflected in the
foregoing table. The Selling Stockholders also have granted options to the
International Managers, exercisable for 30 days after the date of this
Prospectus, to purchase up to an aggregate of additional shares
of Common Stock to cover over-allotments, if any, on terms similar to those
granted to the U.S. Underwriters.
At the request of the Company, the Underwriters have reserved for sale, at
the initial public offering price, up to of the shares offered to be
sold to certain employees of the Company and vendors and service providers
having business relationships with the Company. The number of shares of Common
Stock available for sale to the general public will be reduced to the extent
such persons purchase such reserved shares. Any reserved shares which are not
orally confirmed for purchase within one day of the pricing of the Offerings
will be offered by the Underwriters to the general public on the same terms as
the other shares offered hereby.
The Company, its directors and executive officers, members of management,
the Selling Stockholders and certain holders of the Common Stock have agreed,
subject to certain exceptions, not to directly or indirectly (i) offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant for the sale of
or otherwise dispose of or transfer any shares of Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock, whether now
owned or thereafter acquired by the person executing the agreement or with
respect to which the person executing the agreement thereafter acquires the
power of disposition, or file a registration statement under the Securities Act
with respect to the foregoing or (ii) enter into any swap or other agreement
that transfers, in whole or in part, the economic consequence of ownership of
the Common Stock whether any such swap or transaction is to be settled by
delivery of Common Stock or other securities, in cash or otherwise, without the
prior consent of Merrill Lynch on behalf of the Underwriters for a period of 180
days after the date of this Prospectus. See "Shares Eligible for Future Sale."
The U.S. Underwriters and the International Managers have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement, the
U.S. Underwriters and the International Managers are permitted to sell shares of
Common Stock to each other for purposes of resale at the initial public offering
price, less an amount not greater than the selling concession. Under the terms
of the Intersyndicate Agreement, the U.S. Underwriters and any dealer to whom
they sell shares of Common Stock will not offer to sell or sell shares of Common
Stock to persons who are non-U.S. or non-Canadian persons or to persons they
believe intend to resell to persons who are non-U.S. or non-Canadian persons,
and the International Managers and any dealer to whom they sell shares of Common
Stock will not offer to sell or sell shares of Common Stock to U.S. persons or
to Canadian persons or to persons they believe intend to resell to U.S. or
Canadian persons, except in the case of transactions pursuant to the
Intersyndicate Agreement.
Prior to the Offerings, there has been a limited public market for the
Common Stock of the Company. The initial public offering price will be
determined through negotiations among the Selling Stockholders and the U.S.
Representatives and the Lead Managers. The factors considered in determining the
initial public offering price, in addition to prevailing market conditions, are
price-earnings ratios of publicly traded companies that the U.S. Representatives
believe to be comparable to the Company, certain financial information of the
Company, the history of, and the prospects for, the Company and the industry in
which it competes, and an assessment of the Company's management, its past and
present operations, the prospects for, and timing of, future revenues of the
Company, the present state of the Company's development, and the above factors
in relation to market values and various valuation measures of other companies
engaged in activities similar to the Company. There can be no assurance that an
active market will develop for the Common Stock or that the Common Stock will
trade in the public market subsequent to the Offerings at or above the public
offering price.
The Common Stock is currently traded on the OTC Bulletin Board. The Company
has applied for quotation of the Common Stock on the Nasdaq National Market
System under the symbol "CMLT."
67
70
Because Merrill Lynch may be deemed to be an affiliate of the Company, the
Offerings will be conducted in accordance with Conduct Rule 2720 of the National
Association of Securities Dealers, Inc., which requires that the public offering
price of an equity security be no higher than the price recommended by a
Qualified Independent Underwriter which has participated in the preparation of
the Registration Statement and performed its usual standard of due diligence
with respect thereto. McDonald & Company Securities, Inc. has agreed to act as
Qualified Independent Underwriter with respect to the Offerings, and the public
offering price of the Common Stock will be no higher than that recommended by
McDonald & Company Securities, Inc.
The Underwriters do not intend to confirm sales of the Common Stock offered
hereby to any accounts over which they exercise discretionary authority.
The Company and the Selling Stockholders have agreed to indemnify the U.S.
Underwriters and the International Managers against certain liabilities,
including certain liabilities under the Securities Act, or to contribute to
payments the U.S. Underwriters and the International Managers may be required to
make in respect thereof.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase the Common Stock. As an
exception to these rules, the U.S. Representatives are permitted to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offerings, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the U.S.
Representatives may reduce the short position by purchasing Common Stock in the
open market. The U.S. Representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.
The U.S. Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the U.S.
Representatives purchase shares of Common Stock in the open market to reduce the
Underwriters' short position or to stabilize the price of the Common Stock, they
may reclaim the amount of the selling concession from the Underwriters and
selling group members who sold those shares as part of the Offerings.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of the Common Stock to the extent that it
discourages resales of Common Stock.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the U.S.
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
Merrill Lynch, a co-manager of the Offerings, is also a Selling Stockholder
and will receive a portion of the proceeds of the Offerings. Morgan Stanley &
Co. Incorporated, a co-manager of the Offerings, is under common ownership with
Van Kampen-Merritt Prime Rate Income Trust, which is the largest stockholder of
the Company.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Calfee, Halter & Griswold
LLP, Cleveland, Ohio. Calfee, Halter & Griswold LLP provides legal services to
McDonald & Company Securities, Inc. on a regular basis. Certain legal matters
relating to the Offerings will be passed upon for the Underwriters by Fried,
Frank, Harris, Shriver & Jacobson (a partnership including professional
corporations), New York, New York.
68
71
EXPERTS
The Consolidated Financial Statements of Camelot Music Holdings, Inc.
("Successor Company") as of February 28, 1998 and for the period February 1,
1998 to February 28, 1998 ("Successor period") and of CM Holdings, Inc.
("Predecessor Company") as of March 1, 1997 and for the period March 2, 1997 to
January 31, 1998, the 52 week period ended March 1, 1997 and the 53 week period
ended March 2, 1996 ("Predecessor periods"), appearing in this Prospectus, have
been audited by PricewaterhouseCoopers LLP, independent accountants, as set
forth in their report thereon appearing elsewhere in this Prospectus, and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
The financial statements of The Wall Music, Inc. for the year ended June 1,
1997 included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein (which report
expresses an unqualified opinion and includes an explanatory paragraph referring
to the sale of substantially all of the tangible assets and the transfer of
certain liabilities of The Wall Music, Inc. effective February 28, 1998), and
have been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (together with all amendments, schedules and exhibits thereto, the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. This Prospectus does not contain all the information set
forth in the Registration Statement, certain portions of which are omitted as
permitted by the rules and regulations of the Commission. For further
information pertaining to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement, including the exhibits thereto
and the financial statements, notes and schedules filed as a part thereof.
Statements made in this Prospectus regarding the contents of any contract or
other document referred to herein or therein are not necessarily complete, and
in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement or such other
document, each such statement being qualified in all respects by such reference.
Upon completion of the Offerings, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and, in accordance therewith, will file reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information, as well as the Registration Statement and the exhibits and
schedules thereto, may be inspected, without charge, at the public reference
facility maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C., 20549 and at the Commission's regional offices
located at Seven World Trade Center, Suite 1300, New York, NY 10048 and
Northwestern Atrium Center, 500 West Madison Street, Room 1400, Chicago, IL
60661-2511. Copies of such material may also be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. Such materials can also be inspected at the offices
of the Nasdaq National Market System at 1735 K Street, N.W., Washington, D.C.
20006 or on the Commission's site on the Internet at http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements for each fiscal year and interim reports
for each of the first three quarters of its fiscal year containing unaudited
interim financial information.
69
72
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
CAMELOT MUSIC HOLDINGS, INC. AND ITS PREDECESSOR
Condensed Consolidated Balance Sheet (Unaudited) as of May
30, 1998.................................................. F-2
Condensed Consolidated Statements of Operations (Unaudited)
for the period March 1, 1998 to May 30, 1998 and the
period March 2, 1997 to May 31, 1997...................... F-3
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the period March 1, 1998 to May 30, 1998 and the
period March 2, 1997 to May 31, 1997...................... F-4
Notes to Condensed Consolidated Financial Statements........ F-5
Report of Independent Accountants........................... F-8
Consolidated Balance Sheets as of February 28, 1998 and
March 1, 1997............................................. F-9
Consolidated Statements of Operations for the period
February 1, 1998 to February 28, 1998, the period March 2,
1997 to January 31, 1998, the 52 week period ended March
1, 1997 and the 53 week period ended March 2, 1996........ F-10
Consolidated Statements of Stockholders' Equity (Deficit)
for the period February 1, 1998 to February 28, 1998, the
period March 2, 1997 to January 31, 1998, the 52 week
period ended March 1, 1997 and the 53 week period ended
March 2, 1996............................................. F-11
Consolidated Statements of Cash Flows for the period
February 1, 1998 to February 28, 1998, the period March 2,
1997 to January 31, 1998, the 52 week period ended March
1, 1997 and the 53 week period ended March 2, 1996........ F-12
Notes to Consolidated Financial Statements.................. F-13
THE WALL MUSIC, INC.
Independent Auditor's Report................................ F-38
Statements of Operations for the nine months ended February
28, 1998 (unaudited) and March 1, 1997 (unaudited) and for
the year ended June 1, 1997............................... F-39
Statements of Stockholder's Equity for the nine months ended
February 28, 1998 (unaudited) and for the year ended June
1, 1997................................................... F-40
Statements of Cash Flows for the nine months ended February
28, 1998 (unaudited) and March 1, 1997 (unaudited) and for
the year ended June 1, 1997............................... F-41
Notes to Financial Statements............................... F-42
F-1
73
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
MAY 30,
1998
--------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 15,680
Accounts payable.......................................... 2,922
Inventories............................................... 176,659
Deferred income taxes..................................... 6,556
Other current assets...................................... 3,098
--------
Total current assets.............................. 204,915
--------
Property, plant and equipment, net.......................... 40,519
--------
Other non-current assets:
Goodwill, net of accumulated amortization of $224 in
1998................................................... 26,726
Intangible assets, net of accumulated amortization of $858
in 1998................................................ 1,336
Deferred income taxes..................................... 18,547
Favorable lease values, net of accumulated amortization of
$895 in 1998........................................... 11,253
Other assets.............................................. 598
--------
Total other non-current assets.................... 58,460
--------
Total assets...................................... $303,894
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade................................... $ 62,805
Accrued expenses and other liabilities.................... 27,593
--------
Total current liabilities......................... 90,398
--------
Long-term liabilities:
Revolving credit agreement................................ --
Unfavorable lease values, net of accumulated amortization
of $987 in 1998........................................ 12,411
Other long-term liabilities............................... 3,393
--------
Total long-term liabilities....................... 15,804
--------
Commitments and contingencies............................... --
--------
Total liabilities................................. 106,202
--------
Stockholders' equity:
Common stock.............................................. 102
Additional paid-in capital................................ 194,454
Retained earnings......................................... 3,136
--------
Total stockholders' equity........................ 197,692
--------
Total liabilities and stockholders' equity........ $303,894
========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-2
74
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
SUCCESSOR PREDECESSOR
COMPANY COMPANY
------------ -----------
PERIOD PERIOD
MARCH 1, MARCH 2,
1998 TO 1997 TO
MAY 30, MAY 31,
1998 1997
------------ -----------
Net sales................................................... $ 113,456 $ 82,815
Cost of sales............................................... 71,147 53,820
----------- --------
Gross profit.............................................. 42,309 28,995
Selling, general and administrative expenses................ 36,213 26,407
Depreciation and amortization............................... 1,765 5,454
Special items 350 --
----------- --------
Income (loss) before other income (expenses), net,
reorganization expenses and income taxes........ 3,981 (2,866)
----------- --------
Other income (expenses), net:
Interest income........................................... 387 --
Interest expense.......................................... (86) (61)
Amortization of financing fees............................ (56) (115)
Other, net................................................ (68) 46
----------- --------
Total other income (expenses), net................ 177 (130)
----------- --------
Income (loss) before reorganization expenses and
income taxes.................................... 4,158 (2,996)
Reorganization expenses..................................... -- (1,113)
----------- --------
Income (loss) before income taxes................. 4,158 (4,109)
(Provision) for income taxes:
Current................................................... (1,601) --
Deferred.................................................. (2) --
----------- --------
Total (provision) for income taxes................ (1,603) --
----------- --------
Net income (loss)................................. $ 2,555 ($ 4,109)
=========== ========
Computation of earnings per share:
Basic:
Average shares outstanding................................ 10,176,162 *
=========== ========
Per share.............................................. $ 0.25 *
=========== ========
Diluted:
=========== ========
Average shares outstanding................................ 10,176,162 *
Net effect of dilutive stock options...................... 293,752 *
----------- --------
Total equivalent shares................................ 10,469,914 *
=========== ========
Per share............................................ $ 0.24 *
=========== ========
- ---------------
* Historical per share data for the Predecessor Company is not meaningful since
the Company has been recapitalized and has adopted fresh-start reporting as of
January 31, 1998.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-3
75
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
SUCCESSOR PREDECESSOR
COMPANY COMPANY
------------ ------------
PERIOD PERIOD
MARCH 1, MARCH 2,
1998 TO 1997 TO
MAY 30, 1998 MAY 31, 1997
------------ ------------
Cash flows from operating activities:
Net income (loss)......................................... $ 2,555 $(4,109)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization excluding financing
fees.................................................. 1,765 5,454
Amortization of favorable/unfavorable leases........... (92) --
Amortization of financing fees......................... 56 115
Deferred income taxes.................................. 2 --
Changes in assets and liabilities:
Accounts receivable.................................... (1,073) (34)
Inventories............................................ (29,987) 1,942
Other current assets................................... 1,779 3,040
Other assets........................................... (155) 43
Accounts payable, trade................................ 32,102 153
Accrued expenses and other liabilities................. (2,449) (799)
Accrued income taxes................................... 1,641 (83)
Liabilities subject to compromise...................... -- (314)
Changes due to reorganization activities:
Accrued professional fees.............................. -- 557
-------- -------
Net cash provided by operating activities............ 6,144 5,965
-------- -------
Cash flows from investing activities:
Additions to property, plant and equipment................ (1,803) (1,862)
Acquisition of The Wall, net of cash acquired............. (71,191) --
-------- -------
Net cash used in investing activities................ (72,994) (1,862)
-------- -------
Cash flows from financing activities:
Payment of financing fees................................. -- (25)
-------- -------
Net cash used in financing activities................ -- (25)
-------- -------
(Decrease) increase in cash and cash equivalents............ (66,850) 4,078
Cash and cash equivalents at beginning of period............ 82,530 41,260
-------- -------
Cash and cash equivalents at end of period.................. $ 15,680 $45,338
======== =======
Supplemental Data:
Non-cash investing activities:
Common stock issued in settlement of payable for
professional services.................................. $ 188 $ --
======== =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-4
76
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT WHERE OTHERWISE INDICATED)
1. BASIS OF PRESENTATION:
CM Holdings, Inc. ("Predecessor Company") was incorporated on September 30,
1993, and acquired all of the outstanding common stock of Camelot Music, Inc. on
November 12, 1993. The Predecessor Company subsequently changed its name to
Camelot Music Holdings, Inc. and together with Camelot Music, Inc. ("Camelot")
emerged from bankruptcy on January 27, 1998. Camelot Music Holdings, Inc. and
its subsidiaries are referred to herein as the "Successor Company". The
Predecessor Company and the Successor Company are collectively referred to
herein as the "Company".
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries, all of which are wholly owned. All significant
intercompany accounts and transactions have been eliminated.
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 is
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 consolidated financial statements of the Company
and the Predecessor Company for the fiscal year ended February 28, 1998, which
are included within this Registration Statement.
2. FRESH-START REPORTING
On January 31, 1998, the Company implemented the recommended accounting
principles for entities emerging from Chapter 11 set forth in the American
Institute of Certified Public Accountants Statement of Position 90-7 on
Financial Reporting by Entities in Reorganization under the Bankruptcy Code (SOP
90-7). Under this concept, all assets and liabilities were restated to reflect
the reorganization value of the reorganized entity, which approximated its fair
value at the date of reorganization. In addition, the accumulated deficit of the
Company was eliminated and its capital structure was recast in conformity with
the plan of reorganization (the "Plan"). As such, the accompanying Company
condensed consolidated financial statements as of May 30, 1998 and for the
period March 1, 1998 to May 30, 1998, represents that of the Successor Company.
The condensed consolidated statement of operations and cash flows for the period
March 2, 1997 to May 31, 1997 represent activity of the Predecessor Company and
may not be comparable to those of the Successor Company.
3. EARNINGS PER SHARE
In February 1997, The Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which
was effective for the Successor Company for Fiscal 1997. This standard requires
the Successor Company to disclose basic earnings per share and diluted earnings
per share. Basic earnings per share is calculated by dividing net income (loss)
by the weighted average shares outstanding. Diluted earnings per share is
calculated by dividing net income (loss) by the sum of the weighted average
shares and additional common shares that would have been outstanding if the
dilutive potential common shares had been issued for common stock options from
the Successor Company's Stock Option Plan. As required by SFAS No. 128, all
outstanding common stock options are considered included even though their
exercise may be contingent upon vesting.
F-5
77
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
4. SPECIAL ITEMS:
In the first quarter of Fiscal 1998, the Successor Company incurred $.4
million of expenses related to a filing of a registration statement with the
Securities and Exchange Commission.
5. STOCK OPTION PLAN AND PURCHASE AGREEMENTS:
The Predecessor Company had established a Management Stock Incentive Plan
for certain key employees and a Stock Purchase Agreement with certain key
employee shareholders. No compensation expense was recognized based on the terms
of these agreements and the agreements were terminated as of the effective date
of the Plan with none of the key employees receiving any shares in the Successor
Company as a result of these agreements.
Effective January 27, 1998, the Successor Company established the Camelot
Music Holdings, Inc. 1998 Stock Option Plan (the "Stock Option Plan"). The Stock
Option Plan provides for the granting of either incentive stock options or
nonqualified stock options to purchase shares of the Company's common stock to
officers, directors and key employees responsible for the direction and
management of the Company. Vesting of the options was over a four year period
with a maximum term of ten years. Based on the terms of the Stock Option Plan
vesting has been accelerated based on the market performance of the Company's
common stock whereby 50% of the options vested on March 13, 1998 and the
remaining vest on January 28, 2000. At May 30, 1998, 343,500 options were
exercisable and 825,094 shares of common stock were reserved for future issuance
under the Stock Option Plan based on a requirement that 7.5% of total
outstanding shares on a diluted basis be reserved for the Stock Option Plan.
Information relating to stock options is as follows:
OPTION PRICE TOTAL
NUMBER OF PER SHARE EXERCISE
SHARES AVERAGE* PRICE
--------- ------------ -----------
Shares under option at February 28, 1998.................... 687,000 $20.75 $14,255
Granted..................................................... -- -- --
Exercised................................................... -- -- --
Forfeited................................................... -- -- --
------- ------ -------
Shares under option May 30, 1998............................ 687,000 $20.75 $14,255
======= ====== =======
- ---------------
* Per share data not in thousands of dollars
All outstanding options are qualified options. No compensation expense
related to stock option grants was recorded for the period January 28, 1998 to
February 28, 1998 as the option exercise prices were above the fair value on the
date of grant.
Pro forma information regarding net income and net income per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
F-6
78
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
that Statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted
average assumptions:
Risk-free interest rate..................................... 5.49%
Dividend yield.............................................. 0.00%
Volatility factor........................................... 36.89%
Weighted average expected life.............................. 2 years
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. The Company's
pro forma net income and net income per share for the quarter ended May 30, 1998
were as follows:
Net earnings -- as reported................................. $2,555
Net earnings -- pro forma................................... $1,683
Basic earnings per share.................................... $ 0.17
Diluted earnings per share.................................. $ 0.16
6. COMMITMENTS AND CONTINGENCIES:
The Successor Company is a party to various claims, legal actions and
complaints arising in the ordinary course of business, including proposed
pre-petition assessments by the Internal Revenue Service aggregating
approximately $7,900 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
financial position, results of operations or cash flows of the Successor
Company.
7. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS:
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" issued in June, 1998 and effective for all fiscal quarters of fiscal
years beginning after June 15, 1999, with earlier application permitted,
requires companies to recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. The Company has evaluated the impact of the application of the new rules
on the Company's Consolidated Financial Statements and the new rules will not
change its financial presentation.
8. SUBSEQUENT EVENT:
On June 3, 1998, the Successor Company entered into an agreement and plan
of merger (the "Merger Agreement") with respect to the proposed acquisition of
Spec's Music, Inc. ("Spec's"). Pursuant to the Merger Agreement, the Successor
Company will acquire all of Spec's outstanding common stock in exchange for
$3.30 per share. The board of directors of both the Successor Company and Spec's
have approved the merger. Spec's shareholders approved the merger and the
transaction closed on July 29, 1998.
F-7
79
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders of
Camelot Music Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Camelot
Music Holdings, Inc. ("Successor Company") as of February 28, 1998 and of CM
Holdings, Inc. ("Predecessor Company") as of March 1, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows of
the Successor Company for the period February 1, 1998 to February 28, 1998
("Successor period"), and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the period March 2, 1997 to
January 31, 1998, the 52 week period ended March 1, 1997 and the 53 week period
ended March 2, 1996 ("Predecessor periods"), respectively. These consolidated
financial statements are the responsibility of the management of Camelot Music
Holdings, Inc. Our responsibility is to express an opinion on these consolidated
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 January 27, 1998, the Company emerged from bankruptcy. As described in
Notes 2, 3 and 4 to the consolidated financial statements, the Company accounted
for the reorganization as of January 31, 1998 and adopted "fresh-start
reporting". As a result, the Successor Company's consolidated financial
statements are not comparable to the Predecessor Company's consolidated
financial statements since they are presented on a new basis of accounting.
In our opinion, the aforementioned Successor Company consolidated financial
statements present fairly, in all material respects, the consolidated financial
position of the Successor Company as of February 28, 1998, and the consolidated
results of its operations and its cash flows for the Successor period, in
conformity with generally accepted accounting principles. Further, in our
opinion, the Predecessor Company consolidated financial statements present
fairly, in all material respects, the consolidated financial position of the
Predecessor Company as of March 1, 1997, and the consolidated results of its
operations and its cash flows for the Predecessor periods, in conformity with
generally accepted accounting principles.
As discussed in Notes 3 and 15 to the consolidated financial statements for
the 53 week period ended March 2, 1996, the Predecessor 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". In
addition, as discussed in Notes 3 and 4 to the consolidated financial
statements, on January 31, 1998, in conjunction with the Company's adoption of
"fresh-start reporting", the Predecessor Company adopted Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" and Statement of Position 98-5, "Accounting for the Costs of
Start-Up Activities".
Cleveland, Ohio
June 10, 1998
COOPERS & LYBRAND L.L.P.
F-8
80
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
SUCCESSOR PREDECESSOR
COMPANY COMPANY
------------ -----------
FEBRUARY 28, MARCH 1,
1998 1997
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 82,530 $ 41,260
Accounts receivable....................................... 1,849 979
Inventories............................................... 146,672 112,537
Deferred income taxes..................................... 6,557 --
Other current assets...................................... 4,877 5,287
-------- --------
Total current assets.............................. 242,485 160,063
-------- --------
Property, plant and equipment, net.......................... 40,220 56,738
-------- --------
Other non-current assets:
Goodwill, net of accumulated amortization of $0 in 1997
and $4,025 in 1996..................................... 26,950 41,188
Intangible assets, net of accumulated amortization of $707
in 1997 and $265 in 1996............................... 1,487 350
Deferred income taxes..................................... 18,548 --
Favorable lease values, net of accumulated amortization of
$276 in 1997........................................... 12,148 --
Other assets.............................................. 443 309
-------- --------
Total other non-current assets.................... 59,576 41,847
-------- --------
Total assets...................................... $342,281 $258,648
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable, trade................................... $ 30,703 $ 11,398
Accrued expenses and other liabilities.................... 101,639 23,336
-------- --------
Total current liabilities......................... 132,342 34,734
-------- --------
Long-term liabilities:
Revolving credit agreement................................ -- --
Unfavorable lease values, net of accumulated amortization
of $158 in 1997........................................ 13,398 --
Other long-term liabilities............................... 1,592 7,407
-------- --------
Total long-term liabilities....................... 14,990 7,407
-------- --------
Liabilities subject to compromise........................... -- 484,811
Commitments and contingencies (Notes 2, 4, 7, 12, 16 and
18)....................................................... -- --
-------- --------
Total liabilities................................. 147,332 526,952
-------- --------
Stockholders' equity (deficit):
Common stock.............................................. 102 10
Additional paid-in capital................................ 194,266 79,990
Retained earnings (accumulated deficit)................... 581 (348,304)
-------- --------
Total stockholders' equity (deficit).............. 194,949 (268,304)
-------- --------
Total liabilities and stockholders' equity
(deficit)....................................... $342,281 $258,648
======== ========
The accompanying notes are an integral part of these financial statements.
F-9
81
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
SUCCESSOR
COMPANY
--------- PREDECESSOR COMPANY
PERIOD ----------------------------------------------
FEBRUARY 1, PERIOD 52 WEEK 53 WEEK
1998 TO MARCH 2, 1997 PERIOD ENDED PERIOD ENDED
FEBRUARY 28, TO JANUARY 31, MARCH 1, MARCH 2,
1998 1998 1997 1996
------------ -------------- ------------ ------------
Net sales.............................. $ 27,842 $372,561 $396,502 $ 455,652
Cost of sales.......................... 17,662 243,109 263,072 302,481
----------- -------- -------- ---------
Gross profit......................... 10,180 129,452 133,430 153,171
Selling, general and administrative
expenses............................. 9,240 99,553 117,558 135,441
Depreciation and amortization.......... 527 20,484 23,290 26,570
Special items.......................... -- (4,443) 6,523 211,520
----------- -------- -------- ---------
Income (loss) before other
income (expenses), net,
reorganization income
(expenses), income taxes
and extraordinary item..... 413 13,858 (13,941) (220,360)
----------- -------- -------- ---------
Other income (expenses), net:
Interest income...................... 328 -- -- 263
Interest expense (contractual
interest expense was (1) $58,157
and (2) $41,329).................. (12) (221)(1) (17,418)(2) (38,319)
Amortization of financing fees....... (7) (434) (1,856) (3,738)
Other, net........................... (26) 249 696 (1,503)
----------- -------- -------- ---------
Total other income
(expenses), net............ 283 (406) (18,578) (43,297)
----------- -------- -------- ---------
Income (loss) before
reorganization income
(expenses), income taxes
and extraordinary item..... 696 13,452 (32,519) (263,657)
Reorganization income (expenses)....... -- 26,501 (31,845) --
----------- -------- -------- ---------
Income (loss) before income
taxes and extraordinary
item....................... 696 39,953 (64,364) (263,657)
(Provision) benefit for income taxes:
Current.............................. -- (289) -- (376)
Deferred............................. (115) -- -- (98)
----------- -------- -------- ---------
Total (provision) benefit for
income taxes............... (115) (289) -- (474)
----------- -------- -------- ---------
Income (loss) before
extraordinary item......... 581 39,664 (64,364) (264,131)
Extraordinary item, net of
tax........................ -- 228,911 -- --
----------- -------- -------- ---------
Net income (loss)............ $ 581 $268,575 $(64,364) $(264,131)
=========== ======== ======== =========
Basic and diluted earnings per share... $ .06 * * *
=========== ======== ======== =========
Weighted average number of common
shares outstanding -- basic and
diluted.............................. 10,176,162
===========
- ---------------
* Historical per share data for the Predecessor Company is not meaningful since
the Company has been recapitalized and has adopted fresh-start reporting as of
January 31, 1998.
The accompanying notes are an integral part of these financial statements.
F-10
82
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS OF DOLLARS)
RETAINED
COMMON STOCKS ADDITIONAL EARNINGS
-------------------- PAID-IN PUT (ACCUMULATED
SHARES DOLLARS CAPITAL AGREEMENTS DEFICIT) TOTAL
---------- ------- ---------- ---------- ------------ ---------
PREDECESSOR COMPANY:
Balances at February 25,
1995.................... 1,000,000 $ 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.................... 1,000,000 10 79,990 -- (283,940) (203,940)
Net loss................ -- -- -- -- (64,364) (64,364)
---------- ---- -------- ------- --------- ---------
Balances at March 1,
1997.................... 1,000,000 10 79,990 -- (348,304) (268,304)
Net income.............. -- -- -- -- 268,575 268,575
Adoption of "fresh-start
reporting"*........... 9,176,162 92 114,276 -- 79,729 194,097
---------- ---- -------- ------- --------- ---------
Balances at January 31,
1998.................... 10,176,162 $102 $194,266 $ -- $ -- $ 194,368
========== ==== ======== ======= ========= =========
SUCCESSOR COMPANY:
Balances at February 1,
1998.................... 10,176,162 $102 $194,266 $ -- $ -- $ 194,368
Net income.............. -- -- -- -- 581 581
---------- ---- -------- ------- --------- ---------
Balances at February 28,
1998.................... 10,176,162 $102 $194,266 $ -- $ 581 $ 194,949
========== ==== ======== ======= ========= =========
- ---------------
* Cancellation of 1,000,000 shares of the Predecessor Company and issuance of
10,176,162 shares of the Successor Company.
The accompanying notes are an integral part of these financial statements.
F-11
83
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
SUCCESSOR
COMPANY
------------ PREDECESSOR COMPANY
PERIOD --------------------------------------------
FEBRUARY 1, PERIOD 52 WEEK 53 WEEK
1998 TO MARCH 2, 1997 PERIOD ENDED PERIOD ENDED
FEBRUARY 28, TO JANUARY 31, MARCH 1, MARCH 2,
1998 1998 1997 1996
------------ -------------- ------------ ------------
Cash flows from operating activities:
Net income (loss).................................... $ 581 $268,575 $(64,364) $(264,131)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization excluding financing
fees............................................. 527 20,484 23,290 26,570
Amortization of favorable/unfavorable lease
values........................................... 118 -- -- --
Amortization of financing fees..................... 7 434 1,856 3,738
Noncash portion of restructuring charges........... -- -- -- 5,238
Write-down of long-lived assets.................... -- -- 6,523 202,869
Expiration of put agreements....................... -- -- -- 3,413
Deferred income taxes.............................. 115 -- -- 98
Other, net......................................... -- -- 451 607
Changes in assets and liabilities:
Accounts receivable and refundable income taxes.... (234) (1,438) 2,578 3,437
Inventories........................................ 1,739 4,763 15,216 28,418
Other current assets............................... (87) 2,623 (2,197) (283)
Other assets....................................... 706 -- 131 427
Accounts payable, trade............................ (1,449) 22,124 (12,540) 20,149
Accrued expenses and other liabilities............. (874) (5,972) 17,509 (8,414)
Accrued income taxes............................... -- 308 647 5,401
Liabilities subject to compromise.................. -- (58,507) -- --
Changes due to reorganization activities:
Gain on discharge of prepetition liabilities....... -- (228,911) -- --
Net adjustment in accounts for fair values......... -- 25,527 -- --
Accrued professional fees.......................... -- 2,187 1,717 --
Write-off of financing fees........................ -- -- 15,953 --
Provision for store closing costs.................. -- -- 3,988 --
Provision for lease rejection damages.............. -- -- 7,658 --
Employment termination costs....................... -- 454 803 --
Write-off of capital lease obligation.............. -- -- (1,677) --
Other expenses directly related to bankruptcy...... -- 1,137 (1,261) --
------- -------- -------- ---------
Net cash provided by operating activities........ 1,149 53,788 16,281 27,537
------- -------- -------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment........... (1,807) (8,029) (4,330) (20,873)
Proceeds from sale of equipment...................... 2 10 239 137
Acquisition of The Wall, net of cash acquired........ (2,884) -- -- --
Other assets and liabilities, net.................... (234) 94 93 409
------- -------- -------- ---------
Net cash used in investing activities............ (4,923) (7,925) (3,998) (20,327)
------- -------- -------- ---------
Cash flows from financing activities:
Payment of financing fees............................ -- (819) (615) --
Proceeds from lines of credit and other short-term
borrowings......................................... -- -- 25,000 195,500
Payments on lines of credit and other short-term
borrowings......................................... -- -- (25,000) (174,000)
Payments on long-term debt........................... -- -- (27) (2,560)
------- -------- -------- ---------
Net cash (used in) provided by financing
activities.................................... -- (819) (642) 18,940
------- -------- -------- ---------
Net (decrease) increase in cash and cash
equivalents................................... (3,774) 45,044 11,641 26,150
Cash and cash equivalents at beginning of period....... 86,304 41,260 29,619 3,469
------- -------- -------- ---------
Cash and cash equivalents at end of period............. $82,530 $ 86,304 $ 41,260 $ 29,619
======= ======== ======== =========
The accompanying notes are an integral part of these financial statements.
F-12
84
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS)
1. ORGANIZATION AND BUSINESS:
CM Holdings, Inc. ("Predecessor Company") 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. The Predecessor Company
subsequently changed its name to Camelot Music Holdings, Inc. and together with
Camelot Music, Inc. ("Camelot") emerged from bankruptcy on January 27, 1998 (see
Notes 2 and 4). Camelot Music Holdings, Inc. and its subsidiaries are referred
to herein as the "Successor Company". The Predecessor Company and the Successor
Company are collectively referred to herein as the "Company".
The Company is a mall-based specialty retailer of pre-recorded music,
pre-recorded video cassettes and other entertainment products and related
accessories and operates in thirty-seven states across the United States. The
Company operates in a single industry segment, the operation of a chain of
retail entertainment stores. At February 28, 1998, the Company operated four
hundred fifty-five stores nationwide under the "Camelot Music" and "The Wall"
names.
2. STATUS OF REORGANIZATION UNDER CHAPTER 11:
On August 9, 1996 (the "petition date"), CM Holdings, Inc. 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 were jointly administered, with the Predecessor
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
Predecessor Company believes that appropriate provisions were made in the
accompanying financial statements for the prepetition claims that could be
estimated at the date of those financial statements. Such claims are reflected
in the March 1, 1997 consolidated balance sheet as "liabilities subject to
compromise" (See Note 12). Claims collateralized by the Predecessor Company's
assets (secured claims) were stayed, although holders of such claims had the
right to move the Bankruptcy Court for relief from the stay. Secured claims were
collateralized by a pledge of stock of Camelot as well as certain non-store
properties.
Under the Bankruptcy Code, a creditor's claim was treated as secured only
to the extent of the value of such creditor's collateral, and the balance of
such creditor's claim was treated as unsecured.
The Predecessor 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 Predecessor Company
prior to a plan of reorganization. Generally, unsecured debt did not accrue
interest after the petition date. In addition, the Predecessor Company had
determined that there was insufficient collateral to cover the interest portion
of scheduled payments on most prepetition debt obligations. Therefore, the
Predecessor Company discontinued accruing interest on those obligations.
Contractual interest on those obligations amounted to $58,157 for the period
March 2, 1997 to January 31, 1998 and $41,329 for the 52 week period ended March
1, 1997, which was $57,936 and $23,911, respectively, in excess of reported
interest expense. Refer to Note 11 for a discussion of the financing
arrangements entered into subsequent to the Chapter 11 filings.
As debtor-in-possession, the Predecessor Company had 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" meant that the Predecessor Company agreed to perform its
obligations and cure certain existing defaults under the contract or lease, and
"rejection" meant that the Predecessor Company was relieved
F-13
85
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
2. STATUS OF REORGANIZATION UNDER CHAPTER 11 -- CONTINUED:
from its obligations to perform further on the contract or lease and was 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 was
treated as a general unsecured claim in the Chapter 11 proceedings. The
Predecessor Company reviewed its executory contracts and rejected 95 leases. An
estimate of the allowed claims related to the rejected leases of $14,349 was
provided for and included in liabilities subject to compromise.
An official committee of unsecured creditors (the "Committee") was formed
to act in the Chapter 11 proceedings. The Committee had 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 Predecessor Company.
On December 12, 1997, the Bankruptcy Court entered an order confirming the
Predecessor Company's Joint Plan of Reorganization (the "Plan") which was
submitted by the Predecessor Company on October 1, 1997, amended on November 7,
1997, and became effective January 27, 1998. Pursuant to the Plan,
administrative and priority claims of $5,632 will be fully paid in cash. The
remaining prepetition claims were settled principally with the issuance of
equity in the reorganized company (Successor Company) to the claimholders. The
stockholders in the Predecessor Company received no recovery nor were they
issued any shares in the Successor Company under the Plan. Under the Plan,
approximately 10,166,162 common shares in the Successor Company are to be issued
to the claim holders. None of the claimholders receiving shares of the Successor
Company were pre-confirmation shareholders of the Predecessor Company. The
Successor Company expects to register the common shares with the filing of a
Form S-1 with the Securities and Exchange Commission (see Note 21).
As of January 31, 1998, in accordance with the American Institute of
Certified Public Accountants ("AICPA") Statement of Position ("SOP") 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code",
the Predecessor Company adopted "fresh-start reporting" and reflected the
effects of such adoption in its consolidated financial statements for the eleven
months then ended (see Note 4).
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The significant accounting policies used in the preparation of the
consolidated financial statements are as follows:
A. FINANCIAL REPORTING FOR BANKRUPTCY PROCEEDINGS: During the period
August 9, 1996 to January 31, 1998, 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 and
after filing of a reorganization plan; as appropriate. Accordingly,
liabilities subject to compromise under the Chapter 11 proceedings have
been segregated on the consolidated balance sheet and were 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.
On January 31, 1998, the Company accounted for all transactions
related to entities emerging from Chapter 11 reorganization set forth in
SOP 90-7 ("fresh-start reporting" -- see Note 4).
B. PRINCIPLES OF CONSOLIDATION: The accompanying consolidated
Predecessor Company financial statements include the accounts of CM
Holdings, Inc. and its wholly owned subsidiary Camelot and its inactive
subsidiaries -- G.M.G. Advertising, Inc. and Grapevine Records and Tapes,
Inc. The accompanying
F-14
86
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED:
consolidated financial statements of the Successor Company include the
accounts of Camelot Music Holdings, Inc., and its wholly owned subsidiary
Camelot and its recently formed subsidiaries -- Camelot Midwest Region,
Inc.; Camelot Northeast Region, Inc.; Camelot Southeast Region, Inc.;
Camelot Western Region, Inc.; Camelot Distribution Co., Inc.; and its
inactive subsidiaries G.M.G. Advertising, Inc. and Grapevine Records and
Tapes, Inc. All significant intercompany accounts and transactions have
been eliminated in consolidation.
C. FISCAL PERIODS: The Company's fiscal year ends on the Saturday
closest to February 28. Any fiscal years or period ends designated in the
consolidated financial statements and the related notes are 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. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS: During the period
February 26, 1995 to January 31, l998, the Predecessor Company adopted the
following accounting standards based on the effective date of those
standards or as required by "fresh-start reporting": (1) Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of"; (2) SFAS No. 123, "Accounting for Stock-Based Compensation"; (3) SFAS
No. 128, "Earnings Per Share"; (4) SFAS No. 129, "Disclosure of Information
about Capital Structure"; (5) SFAS No. 130, "Reporting Comprehensive
Income"; (6) SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information"; (7) SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" and (8) SOP 98-5,
"Accounting for the Costs of Start-Up Activities".
The adoption of SFAS No. 123, SFAS No. 128, SFAS No. 129, SFAS No. 130
and SFAS No. 131 had no significant effects on the Company's consolidated
financial statements. The effect of adopting SFAS No. 121 is discussed in
Note 15 and the effects of adopting SOP 98-1 and SOP 98-5 are discussed in
Note 4.
F. 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.
G. CONCENTRATION OF CREDIT RISKS: The Company maintains centralized
cash management programs whereby 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
February 28, 1998 and March 1, 1997 uninsured bank cash balances were
$80,648 and $40,835, respectively.
H. CONCENTRATION OF BUSINESS RISKS: The Company purchases its
pre-recorded music directly from a large number of suppliers, with
approximately 77% of purchases, net of returns, being made from six
suppliers. Prior to the bankruptcy proceedings, the Company had not
experienced difficulty in obtaining satisfactory sources of supply. In
connection with its emergence from bankruptcy, the Company obtained
commitments to reinstate customary trade terms and management believes that
it will retain access to
F-15
87
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED:
adequate sources of supply. However, a loss of a major supplier could cause
a possible loss of sales, which would have an adverse affect on
consolidated operating results and result in a decrease in vendor support
for the Company's advertising programs.
I. INVENTORIES AND RETURN COSTS: Inventories are valued at the lower
of cost or market. Cost is determined principally by the average cost
method. Inventories consist primarily of resaleable prerecorded music,
video cassettes, video games and other related products. Vendors typically
offer incentives of approximately 1% upon the purchase of product. The
Company is entitled to return product purchases from these vendors. The
vendors often reduce the return credit with a product return charge ranging
from 0% to 20% of the original product purchase price depending on the type
of product being returned. The Company records the product return charges
in cost of sales.
J. 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. In accordance with "fresh-start reporting", the pre-effective
date accumulated depreciation and amortization has been eliminated, and a
new depreciation and amortization base has been established equal to the
fair value of the existing property, plant and equipment. 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 7 years
Furniture, fixtures and equipment........... 5-7 years
Effective January 31, 1998, the direct costs of computer software
developed or obtained for internal use are capitalized and amortized over
the estimated useful life on a straight-line basis. All other related costs
are expensed as incurred.
K. GOODWILL: Goodwill in the Predecessor Company's consolidated
financial statements represented primarily the adjusted amount of the cost
of acquisition in excess of fair value of the Camelot Acquisition and was
amortized using the straight-line method over a 40 year period until March
2, l996. The remaining amount was being amortized using the straight-line
method over a 22 year period. In connection with the emergence from Chapter
11 and in accordance with SOP 90-7, the remaining Predecessor Company
goodwill was written off at January 31, 1998. The Successor Company
goodwill represents the adjusted amount of the cost of acquisition in
excess of fair value of The Wall acquisition (see Note 7) and is being
amortized using the straight-line method over a 30 year period.
L. INTANGIBLE ASSETS AND FAVORABLE (UNFAVORABLE) LEASE
VALUES: Financing fees are amortized on a straight-line basis over the
terms of the related financings, which vary with the terms of the related
agreements ranging from one to four years. As a result of the Chapter 11
proceedings, the net book value of the financing fees related to
prepetition financing was written off during the 52 week period ended March
1, l997.
Favorable lease values and non-compete agreements acquired by the
Predecessor Company in connection with store acquisitions were being
amortized using the straight-line method over the lives of the
F-16
88
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED:
related agreements. Primarily as a result of store closings, the net book
value of these assets was written off during the 52 week period ended March
1, 1997. Favorable (unfavorable) lease values of the Successor Company
established in "fresh-start reporting" and acquired in connection with The
Wall store acquisitions are being amortized to rent expense using the
effective interest method over the lives of the related lease agreements.
The trade name of the Successor Company acquired in The Wall
acquisition is being amortized on a straight-line basis over two years.
M. FAIR VALUE OF LONG-LIVED ASSETS: 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 in accordance with SFAS
No. 121.
N. FAIR VALUE OF FINANCIAL INSTRUMENTS: It was not practicable to
estimate the fair value of the Predecessor Company's prepetition debt
obligations as the Predecessor Company was in Chapter 11 proceedings. The
ultimate plan of reorganization could have significantly impacted the
estimated fair value of those obligations. Financial instruments of the
Successor Company consist of a revolving credit facility (including letters
of credit) which is carried at an amount which approximates fair value (see
Note 11).
O. ADVERTISING COSTS: Advertising costs are expensed during the
period incurred. The amount charged to advertising expense during the
period February 1, 1998 to February 28, 1998, the period March 2, 1997 to
January 31, 1998, the 52 week period ended March 1, 1997 and the 53 week
period ended March 2, 1996 was $167, $5,810, $6,128 and $6,458,
respectively.
P. STORE OPENING AND OTHER START-UP COSTS: The expenses associated
with the opening of new stores and other start-up costs are charged to
expense as incurred.
Q. EARNINGS (LOSS) PER SHARE: In February l997, the Financial
Accounting Standards Board issued SFAS No. 128, "Earnings Per Share," which
is effective for the Successor Company for Fiscal 1997. This standard
requires the Successor Company to disclose basic earnings per share and
diluted earnings per share. Basic earnings per share is calculated by
dividing net income (loss) by the weighted average shares outstanding.
Diluted earnings per share is calculated by dividing net income (loss), by
the sum of the weighted average shares and additional common shares that
would have been outstanding if the dilutive potential common shares had
been issued for the Successor Company's common stock options from the
Successor Company's Stock Option Plan. As required by SFAS No. 128 all
outstanding common stock options which have a dilutive effect are
considered outstanding even though their exercise may be contingent upon
vesting. For the period February 1, 1998 to February 28, 1998 all common
shares issuable under the Successor Company's Stock Option Plan were
antidilutive.
R. 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.
S. STOCK-BASED COMPENSATION: The Company follows Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for
F-17
89
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED:
its employee stock options. Under APB No. 25, because the exercise price of
employee stock options equals or exceeds the market price of the underlying
stock on the date of grant, no compensation expense is recorded. The
Company adopted the disclosure-only provisions of SFAS No. 123 for options
issued to employees and directors.
T. DIVIDEND POLICY: The Company has never declared or paid cash
dividends on its common stock. The Successor Company currently intends to
retain any earnings for use in its business and therefore does not
anticipate paying any dividends in the foreseeable future. In addition, the
Successor Company's revolving credit facility limits its ability to pay
dividends under certain circumstances. Any future determination as to the
payment of cash dividends will depend on a number of factors, including
future earnings, capital requirements, the financial condition and
prospects of the Successor Company and any restrictions under credit
agreements existing from time to time.
U. RECLASSIFICATIONS: Certain amounts in the Predecessor Company's
Consolidated Financial Statements have been reclassified to conform to the
Successor Company's Consolidated Financial Statements.
4. FRESH-START REPORTING:
The AICPA has issued Statement of Position ("SOP") 90-7, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code". Pursuant to
the guidance provided by SOP 90-7, the Predecessor Company adopted "fresh-start
reporting" for its consolidated financial statements effective as of January 31,
1998, the last day of the Predecessor Company's fiscal month end. Under
fresh-start reporting, the reorganization value of the Company has been
allocated to the emerging Company's assets on the basis of the purchase method
of accounting. Deferred income taxes were reported in conformity with the
liability method of accounting for income taxes and no pre-confirmation net
operating loss carryforwards were available at February 1, 1998. All of the
reorganization value was attributable to specific tangible assets of the
emerging entity and no amount has been recorded as intangible assets or as
"Reorganization Value in Excess of Amounts Allocable to Identifiable Assets" in
the accompanying consolidated balance sheet as of January 31, 1998.
The fresh-start reporting entity value was determined to be $194,368 (net
of $5,632 of administrative and priority claims payments). This value which
results in a per share common stock value of eighteen dollars and seventy five
cents was determined by the Company with the assistance of its special financial
advisor during the Chapter 11 reorganization. The significant factors used in
the determination of this value were a four year analysis of the Company's
forecasted cash flows discounted at 14.0% to a present value and certain
additional financial analyses and forecasts prepared by management.
Under fresh-start reporting, the final consolidated balance sheet of the
Predecessor Company as of January 31, 1998, becomes the opening consolidated
balance sheet of the Successor Company. Since fresh-start reporting has been
reflected in the accompanying consolidated balance sheet as of January 31, 1998,
the consolidated balance sheet as of that date is not comparable to any such
statement as of any prior date or for any prior period.
The adjustments to reflect the consummation of the Plan, including the
subsequent gain on debt discharge of prepetition liabilities and the adjustment
to record assets and liabilities at their fair values have been reflected in the
accompanying consolidated financial statements as of January 31, 1998.
Accordingly, a black line is shown to separate the February 28, 1998
consolidated balance sheet and the consolidated statement of operations and cash
flows for the period February 1, 1998 to February 28, 1998 from the prior years
since they are not prepared on a comparable basis.
F-18
90
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
4. FRESH-START REPORTING -- CONTINUED:
The effect of the Plan on the Company's Consolidated Balance Sheet as of
January 31, 1998 is as follows:
ADJUSTMENTS TO RECORD THE PLAN
----------------------------------------
PRE-FRESH FRESH-START
START ------------------------- FRESH-START
BALANCE SHEET FAIR VALUE BALANCE SHEET
JANUARY 31, DEBT ACCOUNTING ADJUSTMENTS JANUARY 31,
1998 DISCHARGE(a) Changes(b) (c)(d) 1998
------------- ------------ ----------- ----------- -------------
ASSETS
Current assets:
Cash and cash equivalents............... $ 87,842 $ (1,538) $ -- $ -- $ 86,304
Accounts receivable..................... 2,401 297 -- -- 2,698
Inventories............................. 107,774 -- -- 1,007 108,781
Deferred income taxes................... -- -- -- 6,334 6,334
Other current assets.................... 2,207 -- -- -- 2,207
-------- --------- -------- -------- --------
Total current assets.............. 200,224 (1,241) -- 7,341 206,324
-------- --------- -------- -------- --------
Property, plant and equipment. net........ 46,062 -- -- (21,662) 24,400
-------- --------- -------- -------- --------
Other non-current assets:
Goodwill, net........................... 39,348 -- -- (39,348) --
Intangible assets, net.................. 813 -- (78) -- 735
Favorable lease values, net............. -- -- -- 9,256 9,256
Deferred income taxes................... -- -- -- 18,886 18,886
Other assets............................ 718 -- -- -- 718
-------- --------- -------- -------- --------
Total other non-current assets.... 40,879 -- (78) (11,206) 29,595
-------- --------- -------- -------- --------
Total assets...................... $287,165 $ (1,241) $ (78) $(25,527) $260,319
======== ========= ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable, trade................. $ 33,522 $ -- $ -- $ -- $ 33,522
Accrued expenses and other
liabilities........................... 21,836 3,322 -- (1,374) 23,784
-------- --------- -------- -------- --------
Total current liabilities......... 55,358 3,322 -- (1,374) 57,306
-------- --------- -------- -------- --------
Long-term liabilities:
Revolving credit agreement.............. -- -- -- -- --
Unfavorable lease values, net........... -- -- -- 7,100 7,100
Other long-term liabilities............. 6,229 772 -- (5,456) 1,545
-------- --------- -------- -------- --------
Total long-term liabilities....... 6,229 772 -- 1,644 8,645
-------- --------- -------- -------- --------
Liabilities subject to compromise......... 428,614 (428,614) -- -- --
Commitments and contingencies............. -- -- -- -- --
-------- --------- -------- -------- --------
Total liabilities................. 490,201 (424,520) -- 270 65,951
-------- --------- -------- -------- --------
Stockholders' equity (deficit):
Common stock............................ 10 102 -- (10) 102
Additional paid-in capital.............. 79,990 194,266 -- (79,990) 194,266
Retained earnings (accumulated
deficit).............................. (283,036) 228,911 (78) 54,203 --
-------- --------- -------- -------- --------
Total stockholders equity
(deficit)....................... (203,036) 423,279 (78) (25,797) 194,368
-------- --------- -------- -------- --------
Total liabilities and
stockholders' equity
(deficit)....................... $287,165 $ (1,241) $ (78) $(25,527) $260,319
======== ========= ======== ======== ========
- ---------------
(a) To record the settlement of liabilities subject to settlement under
reorganization proceeding and the payment of administrative expenses in
connection with the Plan.
(b) To record the effects of adopting SOP 98-1 ($0) and SOP 98-5 ($78) as of the
Plan's effective date.
(c) To record the adjustments to state assets and liabilities at fair value and
to eliminate the deficit in accumulated deficit against additional paid-in
capital.
(d) The fair value adjustments are subject to the resolution of the contingency
with the Internal Revenue Service discussed in Note 18.
F-19
91
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
4. FRESH-START REPORTING -- CONTINUED:
The following unaudited Consolidated Pro Forma Statement of Operations
reflects the financial results of the Company as if the Plan and change in
accounting principles had been effective March 1, 1997:
COMBINED 52 WEEK PERIOD ENDED FEBRUARY 28, 1998
---------------------------------------------------------------------------
Adjustments(2)
-------------------------------
AS REPORTED(1) STORE CLOSINGS(a) OTHER Pro Forma(2)
--------------- ------------------ --------- -------------
Net sales......................... $400,403 $(4,195) $ -- $396,208
Costs of sales.................... 260,771 (2,740) (1,150)(b) 256,881
-------- ------- --------- --------
Gross profit.................... 139,632 (1,455) 1,150 139,327
Selling, general and
administrative expenses......... 108,793 (1,123) 544(c) 108,214
Depreciation and amortization..... 21,011 (377) (14,197)(d) 6,437
Special items..................... (4,443) -- -- (4,443)
-------- ------- --------- --------
Income (loss) before other income
(expenses), net, reorganization
income, income taxes and
extraordinary item.............. 14,271 45 14,803 29,119
-------- ------- --------- --------
Other income (expenses), net:
Interest income................. 328 -- 2,311(g) 2,639
Interest expense................ (233) -- 55(e) (178)
Amortization of financing
fees......................... (441) -- 218(f) (223)
Other........................... 223 -- -- 223
-------- ------- --------- --------
Total other income
(expenses), net....... (123) -- 2,584 2,461
-------- ------- --------- --------
Income (loss) before
reorganization income, income
taxes and extraordinary item.... 14,148 45 17,387 31,580
Reorganization income............. 26,501 -- (26,501)(g)(h) --
-------- ------- --------- --------
Income (loss) before income taxes
and extraordinary item.......... 40,649 45 (9,114) 31,580
(Provision) benefit for income
taxes........................... (404) -- (11,912)(i) (12,316)
-------- ------- --------- --------
Income (loss) before extraordinary
item............................ 40,245 45 (21,026) 19,264
Extraordinary item, net of tax.... 228,911 -- (228,911)(j) --
-------- ------- --------- --------
Net income (loss)................. $269,156 $ 45 $(249,937) $ 19,264
======== ======= ========= ========
- ---------------
See accompanying unaudited consolidated pro forma notes on the next page.
F-20
92
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
4. FRESH-START REPORTING -- CONTINUED:
(1) As reported amounts are the summation of the Predecessor Company for the
period March 2, 1997 to January 31, 1998 and the Successor Company for the
period February 1, 1998 to February 28, 1998.
(2) The pro forma amounts are based on certain assumptions and estimates. The
pro forma results do not necessarily represent results which would have
taken place on the basis assumed above, nor are they indicative of the
results of future "fresh-start" operations. The pro forma adjustments are
also subject to the resolution of the contingency with the Internal Revenue
Service discussed in Note 18.
(a) To eliminate operating results of ten stores closed in conjunction with the
Plan.
(b) During the reorganization period certain trade vendors denied the Company
the right to take prompt payment discounts. The amounts and period of denial
varied by vendor. The adjustment of $(1,150) reinstates cash discounts to
normal and customary trade payment terms.
(c) To adjust selling, general and administrative expenses for the following:
(1) record the effects of fair value adjustments for favorable and
unfavorable lease value amortization of $578; (2) record the effects of fair
value adjustments for average rent expense of $1,011; and (3) record the
effects of capitalizing internal use software costs (SOP 98-1) of $(1,045).
(d) To reduce depreciation and amortization for the following: (1) eliminate
Predecessor Company goodwill amortization of $(1,840); (2) record the
effects of amortizing capitalized internal software costs (SOP 98-1) of
$105; (3) eliminate Predecessor Company depreciation expense of ($18,644);
and (4) record depreciation expense of $6,182 for the adjusted fixed asset
values based on historical lives and half-year convention.
(e) To eliminate historical commitment fee expense of $(221) and record new
commitment fee expense of $166 based on the terms of the Amended Credit
Facility of .375%.
(f) To adjust amortization of deferred financing fees for the Amended Credit
Facility by $(218).
(g) To reclass interest income from reorganization income.
(h) To eliminate reorganization income (including interest income of $2,311
included therein) which will not be incurred subsequent to the effective
date of the Plan.
(i) To reverse income tax effect of fresh-start reporting adjustments and record
the income tax effect of pro forma adjustments for items that are deductible
for income tax purposes, using an assumed income tax rate of 39%.
(j) To eliminate gain on discharge of debt pursuant to the Plan.
F-21
93
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
5. REORGANIZATION INCOME (EXPENSES):
The net reorganization income (expenses) incurred as a result of the
Chapter 11 filings and subsequent reorganization efforts have been segregated
from ordinary operations in the Consolidated Statements of Operations:
PREDECESSOR COMPANY
-----------------------
PERIOD 52 WEEK
MARCH 2, PERIOD
1997 TO ENDED
JANUARY 31, MARCH 1,
1998 1997
----------- --------
Net adjustment to fair values............................... $(25,527) $ --
Adjustments to claims (including $1,017 of post March 1,
1997 net activity)........................................ 57,511 --
Restructuring costs......................................... (1,548) (11,869)
Bankruptcy related expenses................................. (6,246) (4,866)
Financing fees.............................................. -- (15,953)
Interest income............................................. 2,311 843
-------- --------
$ 26,501 $(31,845)
======== ========
Net adjustments to fair values reflect the net change to state assets and
liabilities at fair value. Adjustments to claims represent prepetition claims
that were either discharged or received no amount of recovery. Restructuring
costs include costs and expenses from closing of facilities, consolidation of
operations, and certain expenses related to the rejection of executory contracts
as well as gains and losses from the disposition of related assets. Bankruptcy
related expenses relate to professional fees and other expenses related to the
bankruptcy proceedings. Financing fees consist of the write-off of the
unamortized portion of deferred financing fees relating to collateralized debt
as of the petition date. Interest income is attributable to the accumulation of
cash and short-term investments subsequent to the petition date.
6. EXTRAORDINARY ITEM:
The Plan resulted in the discharge of $428,614 of prepetition claims and
the recognition of $297 in prepetition vendor receivables against/due to the
Predecessor Company during Chapter 11 through the distribution of $5,632 in cash
and the issuance of 10,166,162 shares of new common stock to creditors. The
value of cash and securities distributed less the vendor receivables was
$228,911 less than the allowed claims, and the resultant gain was recorded as an
extraordinary item, net of related tax effects of $0.
7. ACQUISITION:
Effective February 28, 1998, the Company acquired certain assets and
assumed certain liabilities and operating lease commitments of The Wall Music,
Inc. ("The Wall") pursuant to an Asset Purchase Agreement ("Purchase Agreement")
dated December 10, 1997 which closed on March 2, 1998. The Wall is a mall-based
music store chain that operated one hundred fifty stores in the Mid-Atlantic
region of the United States. The Company acquired all of these stores of which
eleven stores will be closed as part of the Company's acquisition
F-22
94
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
7. ACQUISITION -- CONTINUED:
strategy. The Company has accrued $410 in exit costs related to these closings.
The purchase of The Wall was funded by the Company's cash and cash equivalents.
The acquisition has been accounted for as a purchase, and included a cash
payment of $72,351, the assumption of liabilities aggregating $14,723, and
acquisition costs of $2,300. Accordingly, the assets and liabilities of the
acquired business are included in the consolidated balance sheet at February 28,
1998 and no results of operations are included in the consolidated statement of
operations. The purchase price is subject to final adjustment based on the
resolution of certain contingencies related to merchandise inventory return
reserves and finalization of acquisition costs. The Company does not believe the
final purchase price will differ significantly from the preliminary purchase
price recorded at February 28, 1998. The excess of the purchase price over the
fair values of the net assets acquired (goodwill) of $26,950 will be amortized
on a straight-line basis over 30 years.
The following summarized unaudited pro forma financial information assumes
the acquisition of The Wall had occurred as of March 2, 1997 and March 3, 1996:
PRO FORMA
COMBINED 52 PRO FORMA
WEEK PERIOD 52 WEEK
ENDED PERIOD ENDED
FEBRUARY 28, MARCH 1, 1997
1998 (PREDECESSOR)
------------ -------------
Net sales.................................................. $558,315 $541,040
======== ========
Net income (loss).......................................... $282,050 $(57,564)
======== ========
Pro forma adjustments for the combined 52 week period ended February 28,
1998 were applied to the summation of the as reported amounts of the Predecessor
Company for the period March 2, 1997 to January 31, 1998 and the Successor
Company for the period February 1, 1998 to February 28, 1998.
The pro forma amounts are based upon certain assumptions and estimates, and
do not reflect any benefits from economies which might be achieved from combined
operations. The pro forma results do not necessarily represent results which
would have taken place on the basis assumed above, nor are they indicative of
the results of future combined operations.
F-23
95
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
8. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consisted of the following:
SUCCESSOR PREDECESSOR
COMPANY COMPANY
------------ -----------
FEBRUARY 28, MARCH 1,
1998 1997
------------ -----------
Land and buildings.......................................... $ 5,470 $ 12,365
Leasehold improvements...................................... 12,245 31,643
Office furniture and fixtures............................... 535 1,899
Store furniture and fixtures................................ 13,123 41,175
Machinery and equipment..................................... 5,003 13,139
Remodeling-in-progress...................................... 4,371 1,499
------- --------
40,747 101,720
Less accumulated depreciation and amortization.............. (527) (44,982)
------- --------
Total............................................. $40,220 $ 56,738
======= ========
9. INTANGIBLE ASSETS:
Intangible assets consisted of the following:
SUCCESSOR PREDECESSOR
COMPANY COMPANY
------------ -----------
FEBRUARY 28, MARCH 1,
1998 1997
------------ -----------
Financing fees.............................................. $1,434 $ 615
Trade name.................................................. 760 --
------ ------
2,194 615
Less accumulated amortization............................... (707) (265)
------ ------
Total............................................. $1,487 $ 350
====== ======
F-24
96
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
10. ACCRUED EXPENSES AND OTHER LIABILITIES:
Accrued expenses and other liabilities consisted of the following:
SUCCESSOR PREDECESSOR
COMPANY COMPANY
------------ -----------
FEBRUARY 28, MARCH 1,
1998 1997
------------ -----------
Payroll and related costs................................... $ 8,256 $ 6,775
Taxes other than income..................................... 3,266 3,892
Gift certificate liability.................................. 5,391 2,456
Payable for acquisition, including expenses (see Notes 7 and
20)....................................................... 71,614 --
Customer product guarantee program.......................... 3,275 --
Customer loyalty program liability.......................... 744 6,101
Reorganization liabilities.................................. 4,532 1,273
Other....................................................... 4,561 2,839
-------- -------
Total............................................. $101,639 $23,336
======== =======
11. FINANCING ARRANGEMENTS:
Predecessor Company:
As a result of Chapter 11 proceedings, all remaining indebtedness of the
Predecessor 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 were pending, the Predecessor Company was
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 were suspended subject to settlement. Furthermore, the Predecessor
Company was not able to borrow additional funds under any of its prepetition
credit arrangements. 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 was under secured.
The Predecessor Company obtained debtor-in-possession financing with a
syndicate of financial institutions whereby a maximum of $35,000 revolving
credit facility ("DIP Facility"), which included a letter of credit sub-
facility of $10,000, was available to fund working capital, issue letters of
credit and make other payments during the Chapter 11 proceedings. The DIP
Facility was available through the earlier of February 9, 1998 or the effective
date of the Plan. The maximum amount available under the DIP Facility was
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 Predecessor
Company's cash management bank less the Predecessor Company's cash collateral.
Borrowings under the DIP Facility bore interest, at the Predecessor 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).
Interest on Base Rate loans was payable monthly in arrears. The Predecessor
Company paid a commitment fee of 1/2% on the average daily unused portion of
the DIP Facility. The Predecessor Company had no outstanding borrowings against
the DIP Facility at March 1, 1997. At March 1, 1997, the Predecessor Company had
$3,270 of letters of credit outstanding.
F-25
97
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
11. FINANCING ARRANGEMENTS -- CONTINUED:
The weighted average interest rate on these borrowings was 9.84% for the 53
week period ended March 2, 1996.
The Predecessor 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 Predecessor
Company's lenders could not enforce any rights, exercise any remedies or realize
on any claims in the event that the Predecessor Company failed to comply with
any of the covenants contained in the various prepetition loan agreements.
The Predecessor Company was 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 was
in compliance with the DIP Facility covenants at March 1, 1997 or obtained
appropriate waivers.
Successor Company:
The Successor Company entered into a Revolving Credit Agreement dated as of
January 27, 1998. The facility provides for loans of up to $50,000 during the
peak period (October through December) and up to $35,000 during the non-peak
period (including in each case up to $5,000 of letters of credit). In no case
can the amount of loans exceed the borrowing base, as defined. The borrowing
base means, during the peak period, 35% of eligible inventory and during the
non-peak period, 30% of eligible inventory. The Successor Company had no
borrowings under the facility during the period January 27, 1998 to February 28,
1998 and had $35,000 of availability at February 28, 1998. The facility
terminates on January 27, 2001. The Successor Company's obligations are
guaranteed by Camelot Music Holdings, Inc. ("CMHI") and by all of Camelot's
subsidiaries and are collateralized by substantially all of Camelot's assets.
CMHI has pledged to the lenders its capital stock of Camelot and Camelot has
pledged to the lenders the capital stock of its subsidiaries.
Loans bear interest, at the option of the Successor Company, at either (a)
the Eurodollar Rate (as defined) plus 1.75% or (b) the greater of (i) the bank's
Prime Rate, (ii) the Base CD Rate (as defined) plus 1%, or (iii) the Federal
Funds Effective Rate (as defined) plus 1/2 of 1%. The Successor Company also
pays an annual commitment fee of 3/8 of 1% on the available commitment. The
Successor Company is required to use any excess proceeds from asset sales of
more than $750 to reduce the commitments under the facility. In addition, the
Successor Company is required for 45 consecutive days during each year to reduce
the principal amount of all outstanding loans to zero.
The Revolving Credit Agreement contains certain customary negative
covenants which under certain circumstances, limit the Successor Company's
ability to incur additional indebtedness, pay dividends, make capital
expenditures and engage in certain extraordinary corporate transactions. The
Revolving Credit Agreement also requires the Successor Company to maintain
minimum consolidated EBITDA (as defined) levels. The Successor Company was in
compliance with these covenants at February 28, 1998.
As of June 3, 1998, the Successor Company received commitment letters from
its lenders to modify the Revolving Credit Agreement to include; among other
things, a term loan provision (see Note 21).
F-26
98
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
11. FINANCING ARRANGEMENTS -- CONTINUED:
Long-term debt, in accordance with its contracted terms, consisted of the
following:
SUCCESSOR PREDECESSOR
COMPANY COMPANY
--------- -----------
FEBRUARY
28, MARCH 1,
1998 1997
-------- --------
Revolving Credit Agreement.................................. $ -- $ --
Senior Credit Facility:
Tranche A Term Loan....................................... -- 57,000
Tranche B Term Loan....................................... -- 78,000
Tranche C Term Loan....................................... -- 60,000
Revolving Credit Commitment............................... -- 90,800
Subordinated Debentures..................................... -- 55,748
Senior Debentures........................................... -- 55,212
--------- ---------
Total............................................. -- 396,760
--------- ---------
Less long-term debt classified as current -- --
Less amounts included as liabilities subject to
compromise........................................... -- (396,760)
--------- ---------
$ -- $ --
========= =========
The Predecessor Company accrued interest on its unsecured and under secured
obligations through the petition date; however, due to the uncertainties
relating to a final plan of reorganization, the Predecessor Company ceased
accruing interest on such obligations effective on the petition date (see Note
2).
12. LIABILITIES SUBJECT TO COMPROMISE:
Liabilities subject to compromise consisted of the following:
PREDECESSOR
COMPANY
-------------
MARCH 1,
1997
-------------
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
========
F-27
99
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
12. LIABILITIES SUBJECT TO COMPROMISE -- CONTINUED:
Liabilities subject to compromise under the Chapter 11 proceedings included
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, was stayed while the Predecessor
Company operated as a debtor-in-possession.
As part of the Chapter 11 proceedings, the Predecessor Company 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
failed to submit on or before the Bar Date a proof of claim in respect of a
claim against the Predecessor Company is forever barred from asserting such
claim against the Predecessor Company.
On December 12, 1997, as described in Notes 2, 4 and 5, the Predecessor
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.
13. STOCKHOLDERS' EQUITY (DEFICIT):
The following is a summary of the capitalization of the Predecessor Company
at March 1, 1997:
Class A Stock:............................ 910,000 shares authorized; 850,000 shares
issued and outstanding
Class C Stock:............................ 557,000 shares authorized; 143,750 shares
issued and outstanding
Class D Voting Stock:..................... 6,250 shares authorized; 6,250 shares
issued and outstanding
Class E Stock:............................ 375,010 shares authorized; no shares
issued or outstanding
Common Stock:............................. 1,848,260 shares authorized; no shares
issued or outstanding
The Class A Stock, Class C Stock, Class D Voting Stock and Common Stock had
one cent par values per share. The Class E Stock had a one dollar par value per
share. The transfer of any shares of stock were restricted and voting rights,
liquidation rights and dividend rights were as specified in the Predecessor
Company's Certificate of Designation.
On December 12, 1997, the Company's Plan was confirmed in Bankruptcy Court
whereby the reorganized company emerged and issued approximately 10,166,162
common shares of stock to the various claim holders pursuant to the terms of the
Plan. The stockholders in the Predecessor Company received no recovery nor were
they issued any shares in the Successor Company under the Plan. None of the
claim holders receiving shares of the Successor Company were pre-confirmation
shareholders of the Predecessor Company.
The capitalization of the Successor Company at February 28, 1998 consists
of 30,000,000 shares of authorized one cent par value voting common stock of
which 9,835,559 shares were issued and outstanding at
F-28
100
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
13. STOCKHOLDERS' EQUITY (DEFICIT) -- CONTINUED:
February 28, 1998 and 340,603 shares will be issued pursuant to the Plan and in
lieu of payment of $188 in administrative expenses.
14. STOCK OPTION PLAN AND PURCHASE AGREEMENTS:
The Predecessor Company had established a Management Stock Incentive Plan
for certain key employees and a Stock Purchase Agreement with certain key
employee shareholders. No compensation expense was recognized based on the terms
of these agreements and the agreements were terminated as of the effective date
of the Plan with none of the key employees receiving any shares in the Successor
Company as a result of these agreements.
Effective January 27, 1998, the Successor Company established the Camelot
Music Holdings, Inc. 1998 Stock Option Plan (the "Stock Option Plan"). The Stock
Option Plan provides for the granting of either incentive stock options or
nonqualified stock options to purchase shares of the Company's common stock to
officers, directors and key employees responsible for the direction and
management of the Company. Vesting of the options was over a four year period
with a maximum term of ten years. Based on the terms of the Stock Option Plan
vesting has been accelerated based on the market performance of the Company's
common stock whereby 50% of the options vested on March 13, 1998 and the
remaining vest on January 28, 2000. None of the options were exercisable at
February 28, 1998. At February 28, 1998, 825,094 shares of common stock were
reserved for future issuance under the Stock Option Plan based on a requirement
that 7.5% of total outstanding shares on a diluted basis be reserved for the
Stock Option Plan.
Information relating to stock options is as follows:
OPTION PRICE TOTAL
NUMBER OF PER SHARE EXERCISE
SHARES AVERAGE* PRICE
--------- ------------ --------
Shares under option at January 27, 1998.......... -- $ -- $ --
Granted.......................................... 687,000 20.75 14,255
Exercised........................................ -- -- --
Forfeited........................................ -- -- --
------- ------ ---------
Shares under option February 28, 1998............ 687,000 $20.75 $ 14,255
======= ====== =========
- ---------------
* Per share data not in thousands of dollars
All outstanding options are qualified options. No compensation expense
related to stock option grants was recorded for the period January 28, 1998 to
February 28, 1998 as the option exercise prices were above the fair value on the
date of grant.
Pro forma information regarding net income and net income per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
F-29
101
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
14. STOCK OPTION PLAN AND PURCHASE AGREEMENTS -- CONTINUED:
that Statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted
average assumptions:
Risk-free interest rate..................................... 5.61%
Dividend yield.............................................. 0%
Volatility factor........................................... 55.33%
Weighted average expected life.............................. 5 years
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. The Company's
pro forma net income and net income per share for the one month period ended
February 28, 1998 were as follows:
Net earnings -- as reported................................. $581
Net earnings -- pro forma................................... $445
Basic and diluted earnings per share*....................... $0.04
- ---------------
* Per share amounts not in thousands of dollars
On June 4, 1998, the Successor Company's Board of Directors approved a
Director Stock Option Plan (see Note 21).
15. SPECIAL ITEMS:
Special items consisted of the following:
SUCCESSOR
COMPANY PREDECESSOR COMPANY
------------ -----------------------------------
PERIOD PERIOD 52 WEEK 53 WEEK
FEBRUARY 1, MARCH 2, PERIOD PERIOD
1998 TO 1997 TO ENDED ENDED
FEBRUARY 28, JANUARY 31, MARCH 1, MARCH 2,
1998 1998 1997 1996
------------ ----------- -------- --------
Put agreements................................. $ -- $ -- $ -- $ 3,413
Write-down of long-lived assets................ -- 6,523 202,869
Restructuring charges.......................... -- -- -- 5,238
Reduction of customer loyalty program
liability.................................... -- (4,443) -- --
------- ------- ------ --------
Total................................ $ -- $(4,443) $6,523 $211,520
======= ======= ====== ========
F-30
102
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
15. SPECIAL ITEMS -- CONTINUED:
Put Agreements: Effective November 12, 1993 the Predecessor Company entered
into Put Agreements ("Put") with four existing shareholders. The Put provided
the Predecessor Company an option to sell 375,010 shares of its Class E
preferred stock at an aggregate purchase price of $50,000. In consideration for
the Put, the Predecessor Company paid fees of $3,413 to the four shareholders.
The Put was exercisable upon the execution by the Predecessor 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.
Write-down of Long-Lived Assets: Management identified significant adverse
changes in the Predecessor Company's business climate late in the third quarter
of the 53 week period ended March 2, 1996 that persisted subsequent to year end.
These changes were largely due to increasing competition in the Predecessor
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 earnings before interest,
taxes and depreciation expense. In management's judgment, there was an
impairment of certain of the Predecessor Company's property, plant and equipment
and the carrying value of the Predecessor Company's goodwill was reduced
resulting in an impairment loss of $202,869 which is included in the
consolidated statement of operations for that period.
As a result of the Predecessor Company's financial performance and the
Chapter 11 proceedings, the Predecessor Company closed seventy-three locations
during the 52 week period ended March 1, 1997. In addition, the Predecessor
Company re-evaluated the carrying amount of its property, plant and equipment.
Based on this evaluation, the Predecessor 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
consolidated statement of operations for that period.
Restructuring Charges: In response to an increasingly competitive retail
environment, the Predecessor Company began a "reengineering" project during the
53 week period ended March 2, 1996 in order to lower costs through corporate
overhead reductions and the identification of under performing stores. As part
of this project, the Predecessor 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,
restructuring charges of $5,238 were recorded in the consolidated statement of
operations for that period.
Customer Loyalty Program Liability: During the period March 2, 1997 to
January 31, 1998, the Company discontinued its manual "Punch Card" version of
its customer loyalty program and replaced it with a limited automated program
targeted to its most frequent and highest spending customers. The reduction in
the program resulted in the reversal of program reward redemption reserves
aggregating $4,443 which was recorded in the consolidated statement of
operations for that period.
16. 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 and generally all the leases require the Company to
pay real estate taxes and common area maintenance charges.
F-31
103
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
16. LEASES -- CONTINUED:
Minimum rental commitments are summarized as follows:
FISCAL YEARS
------------
1998........................................................ $ 39,001
1999........................................................ 35,888
2000........................................................ 33,550
2001........................................................ 29,906
2002........................................................ 24,668
Thereafter.................................................. 43,509
--------
Total minimum payments............................ $206,522
========
Rental expense totaled $2,236, $25,593, $29,361 and $33,404 for the period
February 1, 1998 to February 28, 1998, the period March 2, 1997 to January 31,
1998, the 52 week period ended March 1, 1997 and the 53 week period ended March
2, 1996, respectively. Rental expense included contingent rentals of $157,
$2,259, $2,187 and $2,813 for the respective periods. The contingent rentals are
based on sales volume.
17. INCOME TAXES:
The (provision) benefit for income taxes includes current and deferred
income taxes as follows:
SUCCESSOR
COMPANY
-------------- PREDECESSOR COMPANY
PERIOD ------------------------------------------------------
FEBRUARY 1, PERIOD 52 WEEK 53 WEEK
1998 TO MARCH 2, 1997 PERIOD ENDED PERIOD ENDED
FEBRUARY 28, TO JANUARY 31, MARCH 1, MARCH 2,
1998 1998 1997 1996
-------------- --------------------- ------------ -------------
Current taxes:
Federal........................ $ -- $ -- $ -- $(538)
State and local................ -- (289) -- 162
----- ----- ----- -----
Total.................. -- (289) -- (376)
----- ----- ----- -----
Deferred taxes:
Federal........................ (97) -- -- --
State and local................ (18) -- -- (98)
----- ----- ----- -----
Total.................. (115) -- -- (98)
----- ----- ----- -----
Total (provision)
benefit.............. $(115) $(289) $ -- $(474)
===== ===== ===== =====
Income tax (provision) benefit
from continuing operations
before extraordinary item...... $(115) -- -- $(474)
Tax benefit of extraordinary
item........................... -- -- -- --
----- ----- ----- -----
Total............................ $(115) $(289) $ -- $(474)
===== ===== ===== =====
F-32
104
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
17. INCOME TAXES -- CONTINUED:
The significant differences between the Federal U.S. statutory rate and the
Company's effective tax rate are as follows:
SUCCESSOR
COMPANY
------------ PREDECESSOR COMPANY
PERIOD ----------------------------------------------
FEBRUARY 1, PERIOD 52 WEEK 53 WEEK
1998 TO MARCH 2, 1997 PERIOD ENDED PERIOD ENDED
FEBRUARY 28, TO JANUARY 31, MARCH 1, MARCH 2,
1998 1998 1997 1996
------------ -------------- ------------ ------------
Statutory tax rate...................... 35.0% 35.0% (35.0)% (35.0)%
Goodwill amortization and Fiscal 1995
write-off............................. -- 2.0 1.1 26.7
Corporate owned life insurance.......... (0.4) (1.3) 4.9 --
State taxes, net of federal benefit..... 4.0 .9 -- --
Utilization of loss carryforwards....... -- (35.7) -- --
IRC section 108 ordering rules.......... (22.1) -- -- --
Valuation allowance -- due to
uncertainty of utilization of net
operating loss carryforwards.......... -- 29.0 8.4
Other adjustments, net.................. -- -- -- .1
----- ----- ----- -----
Effective tax rate...................... 16.5% .9% 0.0% 0.2%
===== ===== ===== =====
At February 28, 1998 and March 1, 1997, the Company had total deferred tax
assets of $26,344 and $55,989 and total deferred tax liabilities of $1,239 and
$192, respectively. As part of the emergence from Chapter 11 proceedings, the
Company believes that it is more likely than not that it will be able to use the
deferred tax assets at February 28, 1998 in the future. Therefore, no valuation
allowance has been established to offset these deferred tax assets. At March 1,
1997, the Company had net operating loss carryforwards of $76,000 for federal
and state income tax purposes expiring in years 2010 through 2012. For financial
reporting purposes, a full valuation allowance at March 1, 1997 was recognized
to offset the net deferred tax assets as management determined that the assets
may not be realized.
At January 31, 1998, as part of the fresh-start reporting, a reduction in
the deferred tax valuation allowance of $55,797 was recorded. A portion of this
reduction related to the utilization of net operating loss carryforwards against
the cancellation of indebtedness resulting from the emergence from Chapter 11
(see Note 2). Under the provision of the Internal Revenue Code ("IRC"), no
provision for income taxes was recorded on the remaining gain on the
cancellation of indebtedness. The remaining March 1, 1997 valuation allowance
was reversed as a part of the Company's adoption of fresh-start reporting and is
included in reorganization income (see Note 5). Deferred tax assets after
fresh-start reporting at the emergence date were $25,220.
F-33
105
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
17. INCOME TAXES -- CONTINUED:
Significant components of the Company's deferred tax assets and liabilities
are as follows:
SUCCESSOR PREDECESSOR
COMPANY COMPANY
------------ -----------
FEBRUARY 28, MARCH 1,
1998 1997
------------ -----------
Net current deferred income tax assets:
Inventory reserves..................................... $ 1,817 $ 2,775
Reorganization expenses................................ 1,830 4,967
Other, net............................................. 2,910 3,986
------- --------
6,557 11,728
------- --------
Net long-term deferred income tax assets:
Depreciation differences............................... 16,138 4,361
Amortization of financing fees......................... -- 5,749
Net federal and state operating loss................... -- 28,306
Leases................................................. -- 2,265
Other, net............................................. 2,410 3,388
------- --------
18,548 44,069
------- --------
Valuation allowance.................................... -- (55,797)
------- --------
Net deferred tax assets on the consolidated balance
sheets............................................... $25,105 $ --
======= ========
18. COMMITMENTS AND CONTINGENCIES:
Claims and Legal Actions: The Company is a party to various claims, legal
actions and complaints arising in the ordinary course of its business, including
proposed pre-petition assessments by the Internal Revenue Service aggregating
approximately $7,900 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
financial position, results of operations or cash flows 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 was party to a five year
management consulting agreement with Investcorp S.A. ("Investcorp"). Fees under
this agreement were $500 per year payable annually, in advance, with the first
three years paid on November 12, 1993. The final two year payment was not paid
to Investcorp as a result of the rejection of the contract under Chapter 11
proceedings.
19. ELECTIVE SAVINGS AND PLAN:
The Company sponsors an Elective Savings 401(k) and Profit Sharing Plan
(the "401(k) Plan"). The 401(k) Plan covers substantially all employees and
provides for a 22.5% to 50% matching contribution of employee
F-34
106
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
19. ELECTIVE SAVINGS AND PLAN -- CONTINUED:
elective contributions up to a maximum of 10% of wages, not to exceed the
statutory limit. Such matching contributions were approximately $56, $239, $309,
and $266 for the period February 1, 1998 to February 28, 1998, the period March
2, 1997 to January 31, 1998, the 52 week period ended March 1, 1997 and the 53
week period ended March 2, 1996, 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 the respective
periods.
20. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
SUCCESSOR
COMPANY
------------ PREDECESSOR COMPANY
PERIOD ----------------------------------------------
FEBRUARY 1, PERIOD 52 WEEK 53 WEEK
1998 TO MARCH 2, 1997 PERIOD ENDED PERIOD ENDED
FEBRUARY 28, TO JANUARY 31, MARCH 1, MARCH 2,
1998 1998 1997 1996
------------ -------------- ------------ ------------
Supplemental disclosures of cash flow
information:
Cash paid (received) during the fiscal
year for:
Interest............................ $ 11 $ 152 $ 2,585 $32,136
Income taxes paid (refunded), net... 3 58 129 (3,221)
Reorganization items................ -- 5,759 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) --
F-35
107
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
20. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -- CONTINUED:
SUCCESSOR COMPANY
-----------------------------
PERIOD FEBRUARY 1, 1998 TO
FEBRUARY 28, 1998
-----------------------------
FRESH-START ACQUISITION OF
REPORTING THE WALL
----------- --------------
Supplemental disclosures of investing activities:
Assets at fair value:
Cash...................................................... $ 86,304 $ 153
Accounts receivable....................................... 2,698 1,550
Inventories............................................... 108,781 39,630
Prepaid expenses and other................................ 8,541 2,583
Property, plant and equipment............................. 24,400 14,541
Goodwill.................................................. -- 26,950
Other long-term assets.................................... 29,595 3,967
--------- -------
Total assets...................................... 260,319 89,374
--------- -------
Liabilities at fair value:
Accounts payable.......................................... 33,522 --
Accrued expenses and other liabilities.................... 23,784 1,418
Other current liabilities................................. -- 6,633
Long-term liabilities..................................... 8,645 6,672
--------- -------
Total liabilities................................. 65,951 14,723
--------- -------
Common stock issued in exchange for debt discharged....... (194,368) --
Cash acquired............................................. -- (153)
Payable for acquisition, including expenses............... -- 71,614
--------- -------
Cash paid, net of cash acquired........................... $ -- $ 2,884
========= =======
21. SUBSEQUENT EVENTS:
Plan of Merger: On June 3, 1998, the Successor Company entered into an
agreement and plan of merger (the "Merger Agreement") with respect to the
proposed acquisition of Spec's Music, Inc. ("Spec's"). Spec's is a Miami,
Florida based music retailer, and operates forty-two stores in Florida and
Puerto Rico. As of June 3, 1998, Spec's operated sixteen mall stores and
twenty-six stores in shopping centers and free-standing locations. Spec's also
owns three specialty Latin businesses, including a music distribution company
and the Latin music record label "Hits Only" and its recording studio, and
maintains an inventory of music produced by a majority of the independent Latin
labels. The acquisition will be accounted for as a purchase, and will include a
cash payment of approximately $26,000 (including repayment of assumed bank debt
of approximately $7,000), the assumption of additional liabilities of
approximately $13,000, and acquisition costs of approximately $2,000. The
acquisition will be funded primarily by the proceeds of a new term loan and the
balance funded by operating cash. Consummation of the acquisition is subject to
certain conditions, including approval of the acquisition by Spec's public
stockholders. The acquisition is anticipated to close in July 1998.
Revolving Credit Agreement Amendment and Waiver: In early June 1998, the
Successor Company received commitment letters from its lenders to modify its
Revolving Credit Agreement (the "Amended Credit Facility"). The commitment
includes the addition of a $25,000 term loan that will bear interest at the same
rate as the
F-36
108
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS OF DOLLARS)
21. SUBSEQUENT EVENTS -- CONTINUED:
existing Revolving Credit Agreement. The proceeds of the term loan will be used
to finance the acquisition of Spec's. Mandatory repayments of the term loan are
$3,000 in Fiscal 1998, $8,000 in Fiscal 1999, $10,000 in Fiscal 2000, and $4,000
in Fiscal 2001. In addition, the modification also increased the eligible
borrowing base to 60% of eligible inventory as well as modified the current
capital expenditures limitation and waived certain covenants in order to permit
the Spec's acquisition. The Successor Company will pay a fee of $125 for the
commitment to modify the Revolving Credit Agreement.
Outside Directors Stock Option Plan: On June 4, 1998, the Successor
Company's Board of Directors approved the Outside Directors Stock Option Plan
(the "Directors Plan"). Eligible participants include all non-employee
directors. A total of 125,000 shares were reserved for future issuance under the
Directors Plan. On June 4, 1998, each of the five outside directors received a
grant of 2,500 stock options at an option price of twenty dollars and
seventy-five cents per share. Vesting on the options is immediate upon grant. In
addition, upon the effective date of the registration statement for the
Company's initial public offerings each outside director will also receive a
grant of 7,500 options at an option price equal to the fair market value of a
share of common stock on the date of the contemplated public offering of the
shares. These options have a three-year vesting schedule. The Company will
recognize approximately $241 in compensation expense in connection with these
option awards during the second quarter of Fiscal 1998.
Initial Public Offerings: The Company announced its intention to register
with the Securities and Exchange Commission for initial public offerings of
common stock. The offerings will be made by institutional stockholders who
received shares of common stock as part of the Company's emergence from Chapter
11.
F-37
109
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholder
The Wall Music. Inc.:
We have audited the accompanying statements of operations, stockholder's
equity and cash flows of The Wall Music, Inc. (the "Company"), for the year
ended June 1, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of the Company's operations and cash flows for the year
ended June 1, 1997 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company sold
substantially all of its tangible assets and transferred certain liabilities
effective February 28, 1998.
Deloitte & Touche LLP
Atlanta, Georgia
August 21, 1997
(February 28, 1998 as to Note 1)
F-38
110
THE WALL MUSIC, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
NINE MONTHS ENDED
------------------------ YEAR ENDED
FEBRUARY 28, MARCH 1, JUNE 1,
1998 1997 1997
------------ -------- ----------
(UNAUDITED)
NET SALES................................................ $141,314 $130,338 $161,236
COST AND EXPENSES:
Cost of sales.......................................... 85,701 80,955 99,429
Selling, general, and administrative expenses.......... 41,565 40,758 53,698
Depreciation and amortization.......................... 4,666 6,138 8,197
Writedown of long-lived assets......................... 23,159 27,323
-------- -------- --------
INCOME (LOSS) BEFORE TAXES............................... 9,382 (20,672) (27,411)
INCOME TAX BENEFIT (EXPENSE)............................. (3,177) 2,767 3,738
-------- -------- --------
NET INCOME (LOSS)........................................ $ 6,205 $(17,905) $(23,673)
======== ======== ========
See notes to financial statements.
F-39
111
THE WALL MUSIC, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEAR ENDED JUNE 1, 1997
AND THE NINE MONTHS ENDED FEBRUARY 28, 1998 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARES OUTSTANDING)
PREFERRED STOCK COMMON STOCK
-------------------- -------------------- ADDITIONAL
SHARES SHARES PAID-IN ACCUMULATED
OUTSTANDING AMOUNT OUTSTANDING AMOUNT CAPITAL DEFICIT
----------- ------ ----------- ------ ---------- -----------
BALANCE -- June 2, 1996....... 749 $749 100 $ -- $110,656 $(23,303)
Conversion of stock........... (749) (749) 400 -- 749 --
Net loss...................... -- -- -- -- -- (23,673)
----- ---- --- ----- -------- --------
BALANCE -- June 1, 1997....... -- $ -- 500 $ -- $111,405 $(46,976)
----- ---- --- ----- -------- --------
Net income (unaudited)........ -- -- -- -- -- 6,205
----- ---- --- ----- -------- --------
BALANCE -- February 28, 1997.. -- $ -- 500 $ -- $111,405 $(40,771)
===== ==== === ===== ======== ========
See notes to financial statements.
F-40
112
THE WALL MUSIC, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
------------------------ YEAR ENDED
FEBRUARY 28, MARCH 1, JUNE 1,
1998 1997 1997
------------ -------- ----------
(UNAUDITED)
OPERATING ACTIVITIES:
Net income (loss)........................................ $ 6,205 $(17,905) $(23,673)
Adjustments to reconcile net income (loss) from operating
activities to net cash provided by (used in) operating
activities:
Depreciation, amortization and writedown of long-lived
assets.............................................. 4,666 29,297 35,520
Deferred income taxes.................................. 209 (2,819) (3,758)
Gain (loss) on disposition of property and equipment... 81 (163) (132)
Increase (decrease) in cash flow resulting from changes
in assets and liabilities:
Accounts receivable................................. 45 (135) (60)
Inventories......................................... (3,091) (6,724) 696
Due from parent company............................. (10,285) 6,019 1,874
Other current assets................................ (2,179) 1,513 2,049
Accounts payable, trade............................. 2,613 (3,359) (5,833)
Accrued expenses.................................... 5,979 (1,504) (1,275)
------- -------- --------
Net cash provided by (used in) operating
activities........................................ 4,243 4,220 5,408
INVESTING ACTIVITIES:
Additions to property and equipment...................... (2,061) (4,642) (5,825)
Deferred transaction costs............................... (3,350) -- --
Proceeds from sale of property and equipment............. 417 38 38
------- -------- --------
Net cash used in investing activities............... (4,994) (4,604) (5,787)
NET DECREASE IN CASH AND CASH EQUIVALENTS................ (751) (384) (379)
CASH AND CASH EQUIVALENTS
Beginning of period.................................... 1,782 2,161 2,161
------- -------- --------
End of period.......................................... $ 1,031 $ 1,777 $ 1,782
======= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION --
Cash paid for income taxes............................. $ 29 $ 86 $ 115
======= ======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES--
Conversion of preferred shares to common shares........ $ -- $ 749 $ 749
======= ======== ========
See notes to financial statements.
F-41
113
THE WALL MUSIC, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 1, 1997 AND FOR THE NINE MONTHS ENDED
FEBRUARY 28, 1998 (UNAUDITED) AND MARCH 1, 1997 (UNAUDITED)
1. DESCRIPTION OF BUSINESS AND SUBSEQUENT EVENT
The Wall Music, Inc. (the "Company") is a wholly owned subsidiary of W H
Smith Group Holdings (USA), Inc. (the "Parent"). The Parent is a wholly owned
subsidiary of W H Smith Group plc, a publicly-held United Kingdom corporation.
Prior to the sale of certain assets and transfer of certain liabilities on
February 28, 1998, the Company was a specialty music retailer operating in ten
states in the Northeastern and Mid-Atlantic regions of the United States. The
Company sold compact discs, cassettes, pre-recorded video cassettes, and other
entertainment products and related accessories.
Pursuant to an Asset Purchase Agreement dated December 10, 1997 (the
"Purchase Agreement"), the Parent sold certain assets and transferred certain
liabilities of the Company to Camelot Music, Inc. ("Camelot") effective February
28, 1998. In connection with the acquisition, Camelot assumed all of the
Company's store leases in effect on February 28, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- These financial statements have been prepared from
the separate books and records of the Company and represent the results of
operations, changes in stockholders', and cash flows of the Company immediately
prior to the acquisition by Camelot of substantially all tangible assets and
certain liabilities of the Company.
The financial statements of the Company for the nine months ended February
28, 1998 and March 1, 1997 are unaudited and, in the opinion of management,
include all adjustments consisting solely of normal recurring adjustments
necessary to fairly state the Company's results of operations, changes in
stockholder's equity, and cash flows for the periods presented. The results of
operations for the nine months ended February 28, 1998 and March 1, 1997 are not
necessarily indicative of the results to be expected for the full year.
The Company had certain transactions with its Parent (see Note 7).
Fiscal Year -- The Company's fiscal year is comprised of the 52- or 53-week
period ending on the Sunday closest to May 31. The year ended June 1, 1997
("fiscal 1997") contained 52 weeks.
Cash and Cash Equivalents -- For the purpose of reporting cash flows, cash
and cash equivalents include cash on hand and cash invested in highly liquid
investments with a purchased maturity of three months or less.
Inventories -- Inventories are valued at the lower of average cost or
market.
Preopening Costs -- Costs associated with opening new stores are expensed
when incurred.
Property and Equipment -- Property and equipment is stated at cost.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are amortized over the
shorter of the terms of the leases, including likely renewal options, or ten
years.
Goodwill -- Excess of cost over net assets acquired is amortized over
various periods ranging from 25 to 40 years.
Favorable Lease Values -- Intangible assets related to leases are amortized
over the terms of the associated leases.
Income Taxes -- The Company was a member of a consolidated group for
federal income tax filing purposes. The Company's Parent allocated income tax
expense or benefit to each of its subsidiaries based on each
F-42
114
THE WALL MUSIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
subsidiary's pretax income or loss. If the Company had computed income taxes on
a separate return basis, income tax expense for the year ended June 1, 1997 and
for the nine months ended February 28, 1998 and March 1, 1997 would have been
approximately zero. (See also Note 5.)
Impairment of Long-Lived Assets -- During the year ended June 1, 1997, the
Company adopted the provisions of Statement of Financial Accounting Standards
("SFAS") 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of." SFAS 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
3. IMPAIRMENT OF LONG-LIVED ASSETS
During fiscal 1997, the Company evaluated the recoverability of long-lived
assets on a store-by-store basis. For each operating unit determined to be
impaired, the Company recognized an impairment loss equal to the difference
between the carrying value and the fair value of the operating unit's assets.
Fair value, on an individual operating-unit basis, was estimated to be the
present value of expected future cash flows, as determined by management. As a
result of this evaluation, the Company wrote-down intangible assets by
$17,475,000 and property and equipment by $9,849,000 in Fiscal 1997.
4. LEASE OBLIGATIONS
The Company has operating leases that relate primarily to its retail
stores. Lease terms generally range from 3 to 20 years with renewal options.
Certain store leases provide for additional contingent rentals based on a
percentage of sales in excess of a base amount. Certain other leases provide for
scheduled rent increases over the term of the lease; rent expense for such
leases is recognized in equal annual amounts over the term of each such lease.
Total rent expense for the year ended June 1, 1997 (including contingent rentals
of $104,000) was $17,592,000.
Future minimum lease payments as of June 1, 1997 are as follows (in
thousands):
OPERATING
FISCAL YEAR LEASES
----------- ---------
1998........................................................ $16,904
1999........................................................ 15,826
2000........................................................ 14,097
2001........................................................ 13,139
2002........................................................ 11,740
Thereafter.................................................. 25,489
-------
$97,195
=======
F-43
115
THE WALL MUSIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
The components of income tax benefit (expense) for the year ended June 1,
1997 follow (in thousands):
Current:
Federal................................................... $ 122
State..................................................... (142)
------
(20)
------
Deferred:
Federal................................................... 6,539
State..................................................... 1,403
------
7,942
------
Change in valuation allowance............................. (4,184)
------
Total income tax benefit.......................... $3,738
======
The income tax benefit computed using the federal statutory rate is
reconciled to the reported income tax benefit as follows for the year ended June
1, 1997:
Computed tax benefit at federal statutory rate.............. 34.0%
State taxes, net............................................ 8.2
Nondeductible amortization.................................. (13.3)
Change in valuation allowance............................... (15.3)
-----
13.6%
=====
In fiscal 1997, the Company determined that it was unlikely to realize the
benefit of deferred state income tax assets. Accordingly, the Company
established a reserve for the full amount of such deferred taxes.
6. PENSION AND RETIREMENT PLANS
Employees were eligible to participate in the W H Smith, Inc. Savings and
Retirement Plan that qualified as a deferred salary arrangement under Section
401(k) of the Internal Revenue Code. The plan covered substantially all
employees. After one year of continuous service, the Company matched 100% of
employee contributions up to 3% of each employee's salary. The Company recorded
expense in fiscal 1997 related to this plan of $220,000.
In addition, the Company participated in an unfunded Supplemental Executive
Retirement Plan ("SERP") which provided supplemental pension benefits to key
executives. Expense for this plan was $75,000 for the year ended June 1, 1997.
7. RELATED PARTY TRANSACTIONS
The Company regularly received and remitted working capital to the Parent
based on cash flow required for or generated from operations.
The Company supplied inventory and administrative services for airport
music stores operated by its sister company W H Smith, Inc. ("Smith"). During
fiscal 1997, the Company provided Smith $1,650,000 in inventory (at average
cost) and charged Smith $76,000 for related administrative costs.
The Company participated in group insurance programs managed by the Parent.
The Parent charged the Company for its insurance premiums and for its
self-insured medical and workers compensation expense. Such charges aggregated
$1,206,000 for the year ended June 1, 1997.
The Company also recorded a management fee representing the allocated costs
of certain corporate services provided by the Parent. Such expenses totaled
$250,000 during fiscal 1997.
F-44
116
A map of the United States depicting locations of Camelot Music and The
Wall stores as of June 1, 1998, text stating "Customer Satisfaction Through
Broad Product Selection and Service," and the Camelot Music and The Wall logos.
117
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY THE
COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.................... 3
Risk Factors.......................... 10
Price Range of Common Stock........... 17
Dividend Policy....................... 17
Capitalization........................ 18
Dilution.............................. 19
Unaudited Pro Forma Condensed
Consolidated Financial Data......... 20
Selected Consolidated Financial
Data................................ 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 26
Business.............................. 38
Management............................ 49
Certain Transactions.................. 54
Principal and Selling Stockholders.... 56
Description of Capital Stock.......... 57
Shares Eligible For Future Sale....... 59
Description of Certain Indebtedness... 62
Certain United States Federal Tax
Consequences for Non-United States
Holders............................. 64
Underwriting.......................... 66
Legal Matters......................... 68
Experts............................... 69
Available Information................. 69
Index to Consolidated Financial
Statements and Notes Thereto........ F-1
UNTIL , ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION
OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
SHARES
[LOGO]
CAMELOT MUSIC HOLDINGS, INC.
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
MCDONALD & COMPANY
SECURITIES, INC.
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
118
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
JURISDICTION.
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED AUGUST 11, 1998
PROSPECTUS
SHARES
CAMELOT MUSIC HOLDINGS, INC.
COMMON STOCK
------------------------
All of the shares of Common Stock of Camelot Music Holdings, Inc.
(together with its subsidiaries, "Camelot" or the "Company") offered hereby are
being sold by certain stockholders (the "Selling Stockholders") of the Company.
See "Principal and Selling Stockholders." The Selling Stockholders acquired
their shares upon the Company's emergence from bankruptcy pursuant to Section
1145(a) of the United States Bankruptcy Code or in open market transactions
thereafter. The Company is not selling shares of Common Stock in the Offerings
and will not receive any proceeds from the sale of any shares of Common Stock
offered hereby.
Of the shares of Common Stock offered hereby, shares
are being offered for sale initially outside the United States and Canada by the
International Managers and shares are being offered for sale initially
in a concurrent offering in the United States and Canada by the U.S.
Underwriters. The initial public offering price and the underwriting discount
per share will be identical for both Offerings. See "Underwriting."
Prior to the Offerings, there has been a limited public market for the
Common Stock. It is currently estimated that the initial public offering price
will be between $ and $ per share. The initial public offering
price does not necessarily bear any direct relationship to the market prices of
the Common Stock as reported on the OTC Bulletin Board prior to the Offerings.
The closing bid price of the Common Stock on August 10, 1998 was $37 per share.
For a discussion relating to factors to be considered in determining the initial
public offering price, see "Underwriting." The Company has applied for quotation
of the Common Stock on the Nasdaq National Market System under the symbol
"CMLT."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) SELLING STOCKHOLDERS(2)
- --------------------------------------------------------------------------------------------------------------------
Per Share........................... $ $ $
- --------------------------------------------------------------------------------------------------------------------
Total(3)............................ $ $ $
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including certain
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) The Company has agreed to pay expenses of the Offerings estimated at
$ .
(3) The Selling Stockholders have granted the International Managers and the
U.S. Underwriters options to purchase up to an additional
shares and shares of Common Stock, respectively, in each case
exercisable within 30 days after the date hereof, solely to cover
over-allotments, if any. If such options are exercised in full, the total
Price to Public, Underwriting Discount and Proceeds to Selling Stockholders
will be $ , $ and $ , respectively. See
"Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about , 1998.
------------------------
MERRILL LYNCH INTERNATIONAL
MORGAN STANLEY DEAN WITTER
MCDONALD & COMPANY
SECURITIES, INC.
------------------------
The date of this Prospectus is , 1998.
119
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
UNDERWRITING
Merrill Lynch International, Morgan Stanley & Co. International Limited and
McDonald & Company Securities, Inc. are acting as lead managers (the "Lead
Managers") for each of the International Managers named below (the
"International Managers"). Subject to the terms and conditions set forth in an
international purchase agreement (the "International Purchase Agreement") among
the Company, CMI, the Selling Stockholders and the International Managers, and
concurrently with the sale of shares of Common Stock to the U.S.
Underwriters (as defined below), the Selling Stockholders have agreed to sell to
the International Managers, and each of the International Managers severally and
not jointly has agreed to purchase from the Selling Stockholders, the number of
shares of Common Stock set forth opposite its name below.
NUMBER OF
INTERNATIONAL MANAGER SHARES
--------------------- -----------
Merrill Lynch International.................................
Morgan Stanley & Co. International Limited..................
McDonald & Company Securities, Inc..........................
Total.............................................
===========
The Company, CMI and the Selling Stockholders have also entered into a U.S.
purchase agreement (the "U.S. Purchase Agreement") with certain underwriters in
the United States and Canada (the "U.S. Underwriters" and together with the
International Managers, the "Underwriters") for whom Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch"), Morgan Stanley & Co. Incorporated
and McDonald & Company Securities, Inc. are acting as representatives (the "U.S.
Representatives"). Subject to the terms and conditions set forth in the U.S.
Purchase Agreement, and concurrently with the sale of shares of Common
Stock to the International Managers pursuant to the International Purchase
Agreement, the Selling Stockholders have agreed to sell to the U.S.
Underwriters, and the U.S. Underwriters severally have agreed to purchase from
the Selling Stockholders, an aggregate of shares of Common Stock. The
initial public offering price per share and the total underwriting discount per
share of Common Stock are identical under the International Purchase Agreement
and the U.S. Purchase Agreement.
In the International Purchase Agreement and the U.S. Purchase Agreement,
the several International Managers and the several U.S. Underwriters,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Common Stock being sold pursuant to
each such agreement if any of the shares of Common Stock being sold pursuant to
such agreement are purchased. Under certain circumstances, under the
International Purchase Agreement and the U.S. Purchase Agreement, the
commitments of non-defaulting Underwriters may be increased. The closings with
respect to the sale of shares of Common Stock to be purchased by the
International Managers and the U.S. Underwriters are conditioned upon one
another.
The Lead Managers have advised the Company and the Selling Stockholders
that the International Managers propose initially to offer the shares of Common
Stock to the public at the initial public offering price set forth on the cover
page of this Prospectus, and to certain dealers at such price less a concession
not in excess of $ per share of Common Stock. The International Managers may
allow, and such dealers may reallow, a discount not in excess of $ per share
of Common Stock on sales to certain other dealers. After the initial public
offering, the public offering price, concession and discount may be changed.
The Selling Stockholders have granted options to the International
Managers, exercisable for 30 days after the date of this Prospectus, to purchase
up to an aggregate of additional shares of Common Stock at the
initial public offering price set forth on the cover page of this Prospectus,
less the underwriting discount. The International Managers may exercise these
options solely to cover over-allotments, if any, made on the sale of the Common
Stock offered hereby. To the extent that the International Managers exercise
these options, each International Manager will be obligated, subject to certain
conditions, to purchase a number of additional shares of Common Stock
proportionate to such International Manager's initial amount reflected in the
foregoing table. The Selling Stockholders also have granted options to the U.S.
Underwriters, exercisable for 30 days after the
66
120
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
date of this Prospectus, to purchase up to an aggregate of additional
shares of Common Stock to cover over-allotments, if any, on terms similar to
those granted to the International Managers.
At the request of the Company, the Underwriters have reserved for sale, at
the initial public offering price, up to of the shares offered to be
sold to certain employees of the Company and vendors and service providers
having business relationships with the Company. The number of shares of Common
Stock available for sale to the general public will be reduced to the extent
such persons purchase such reserved shares. Any reserved shares which are not
orally confirmed for purchase within one day of the pricing of the Offerings
will be offered by the Underwriters to the general public on the same terms as
the other shares offered hereby.
The Company, its directors and executive officers, member of management,
the Selling Stockholders and certain holders of Common Stock have agreed,
subject to certain exceptions, not to directly or indirectly (i) offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant for the sale of
or otherwise dispose of or transfer any shares of Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock, whether now
owned or thereafter acquired by the person executing the agreement or with
respect to which the person executing the agreement thereafter acquires the
power of disposition, or file a registration statement under the Securities Act
with respect to the foregoing or (ii) enter into any swap or other agreement
that transfers, in whole or in part, the economic consequence of ownership of
the Common Stock whether any such swap or transaction is to be settled by
delivery of Common Stock or other securities, in cash or otherwise, without the
prior written consent of Merrill Lynch on behalf of the Underwriters for a
period of 180 days after the date of this Prospectus. See "Shares Eligible for
Future Sale."
The International Managers and the U.S. Underwriters have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement, the
International Managers and the U.S. Underwriters are permitted to sell shares of
Common Stock to each other for purposes of resale at the initial public offering
price, less an amount not greater than the selling concession. Under the terms
of the Intersyndicate Agreement, the U.S. Underwriters and any dealer to whom
they sell shares of Common Stock will not offer to sell or sell shares of Common
Stock to persons who are non-U.S. or non-Canadian persons or to persons they
believe intend to resell to persons who are non-U.S. or non-Canadian persons,
and the International Managers and any dealer to whom they sell shares of Common
Stock will not offer to sell or sell shares of Common Stock to U.S. persons or
to Canadian persons or to persons they believe intend to resell to U.S. or
Canadian persons, except in the case of transactions pursuant to the
Intersyndicate Agreement.
Prior to the Offerings, there has been a limited public market for the
Common Stock of the Company. The initial public offering price will be
determined through negotiations among the Selling Stockholders and the U.S.
Representatives and the Lead Managers. The factors considered in determining the
initial public offering price, in addition to prevailing market conditions, are
price earnings ratios of publicly traded companies that the U.S. Representatives
believe to be comparable to the Company, certain financial information of the
Company, the history of, and the prospects for, the Company and the industry in
which it competes, and an assessment of the Company's management, its past and
present operations, the prospects for, and timing of, future revenues of the
Company, the present state of the Company's development, and the above factors
in relation to market values and various valuation measures of other companies
engaged in activities similar to the Company. There can be no assurance that an
active trading market will develop for the Common Stock or that the Common Stock
will trade in the public market subsequent to the Offerings at or above the
initial public offering price.
The Common Stock is also currently traded on the OTC Bulletin Board. The
Company has applied for quotation of the Common Stock on the Nasdaq National
Market System under the symbol "CMLT."
Because Merrill Lynch may be deemed to be an affiliate of the Company, the
Offerings will be conducted in accordance with Conduct Rule 2720 of the National
Association of Securities Dealers, Inc., which requires that the public offering
price of an equity security be no higher than the price recommended by a
Qualified Independent Underwriter which has participated in the preparation of
the Registration Statement and performed its usual standard of due diligence
with respect thereto. McDonald & Company Securities, Inc. has agreed to act as
Qualified Independent Underwriter with respect to the Offerings, and the public
offering price of the Common Stock will be no higher than that recommended by
McDonald & Company Securities, Inc.
67
121
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
The Underwriters do not intend to confirm sales of the Common Stock offered
hereby to any accounts over which they exercise discretionary authority.
The Company and the Selling Stockholders have agreed to indemnify the
International Managers and the U.S. Underwriters against certain liabilities,
including certain liabilities under the Securities Act, or to contribute to
payments the U.S. Underwriters and the International Managers may be required to
make in respect thereof.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase the Common Stock. As an
exception to these rules, the U.S. Representatives are permitted to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offerings, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the U.S.
Representatives may reduce that short position by purchasing Common Stock in the
open market. The U.S. Representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.
The U.S. Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the U.S.
Representatives purchase shares of Common Stock in the open market to reduce the
Underwriters' short position or to stabilize the price of the Common Stock, they
may reclaim the amount of the selling concession from the Underwriters and
selling group members who sold those shares as part of the Offerings.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of the Common Stock to the extent that it
discourages resales of the Common Stock.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the U.S.
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
Each International Manager has agreed that (i) it has not offered or sold
and, prior to the expiration of the period of six months from the Closing Date,
will not offer or sell any shares of Common Stock to persons in the United
Kingdom, except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances which do not
constitute an offer to the public in the United Kingdom within the meaning of
the Public Offers of Securities Regulations 1995; (ii) it has complied and will
comply with all applicable provisions of the Financial Services Act 1986 with
respect to anything done by it in relation to the Common Stock in, from or
otherwise involving the United Kingdom; and (iii) it has only issued or passed
on and will only issue or pass on in the United Kingdom any document received by
it in connection with the issuance of Common Stock to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or is a person to whom such document may
otherwise lawfully be issued or passed on.
No action has been or will be taken in any jurisdiction (except in the
United States) that would permit a public offering of the shares of Common
Stock, or the possession, circulation or distribution of this Prospectus or any
other material relating to the Company, the Selling Stockholders or shares of
Common Stock in any jurisdiction where action for that purpose is required.
Accordingly, the shares of Common Stock may not be offered or sold, directly or
indirectly, and neither this Prospectus nor any other offering material or
advertisements in connection with the shares of Common Stock may be distributed
or published, in or from any country or jurisdiction except in compliance with
any applicable rules and regulations of any such country or jurisdiction.
68
122
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
Purchasers of the shares offered hereby may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase in addition to the offering price set forth on the cover page hereof.
Merrill Lynch, a co-manager of the Offerings, is also a Selling Stockholder
and will receive a portion of the proceeds of the Offerings. Morgan Stanley &
Co. Incorporated, a co-manager of the Offerings, is under common ownership with
Van Kampen-Merritt Prime Rate Income Trust, which is the largest shareholder of
the Company.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Calfee, Halter & Griswold
LLP, Cleveland, Ohio. Calfee, Halter & Griswold LLP provides services to
McDonald & Company Securities, Inc. on a regular basis. Certain legal matters
relating to the Offerings will be passed upon for the Underwriters by Fried,
Frank, Harris, Shriver & Jacobson (a partnership including professional
corporations), New York, New York.
EXPERTS
The Consolidated Financial Statements of Camelot Music Holdings, Inc.
("Successor Company") as of February 28, 1998 and for the period February 1,
1998 to February 28, 1998 ("Successor period") and of CM Holdings, Inc.
("Predecessor Company") as of March 1, 1997 and for the period March 2, 1997 to
January 31, 1998, the 52 week period ended March 1, 1997 and the 53 week period
ended March 2, 1996 ("Predecessor periods"), appearing in this Prospectus, have
been audited by PricewaterhouseCoopers LLP, independent accountants, as set
forth in their report thereon appearing elsewhere in this Prospectus, and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
The financial statements of The Wall Music, Inc. for the year ended June 1,
1997 included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein (which report
expresses an unqualified opinion and includes an explanatory paragraph referring
to the sale of substantially all of the tangible assets and the transfer of
certain liabilities of The Wall Music, Inc. effective February 28, 1998), and
have been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (together with all amendments, schedules and exhibits thereto, the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. This Prospectus does not contain all the information set
forth in the Registration Statement, certain portions of which are omitted as
permitted by the rules and regulations of the Commission. For further
information pertaining to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement, including the exhibits thereto
and the financial statements, notes and schedules filed as a part thereof.
Statements made in this Prospectus regarding the contents of any contract or
other document referred to herein or therein are not necessarily complete, and
in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement or such other
document, each such statement being qualified in all respects by such reference.
Upon completion of the Offerings, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and, in accordance therewith, will file reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information, as well as the Registration Statement and the exhibits and
schedules thereto, may be inspected, without charge, at the public reference
facility maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C., 20549 and at the Commission's regional offices
located at Seven World Trade Center, Suite 1300, New York, NY 10048 and
Northwestern Atrium Center, 500 West Madison Street, Room 1400, Chicago, IL
60661-2511. Copies of such material may also be obtained from the Public
Reference Section of the
69
123
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. Such materials can also be inspected at the offices of the Nasdaq
National Market System at 1735 K Street, N.W., Washington, D.C. 20006 or on the
Commission's site on the Internet at http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements for each fiscal year and interim reports
for each of the first three quarters of its fiscal year containing unaudited
interim financial information.
70
124
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY THE
COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
IN THIS PROSPECTUS, REFERENCES TO "DOLLARS" AND "$" ARE TO UNITED STATES
DOLLARS.
------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.................... 3
Risk Factors.......................... 10
Price Range of Common Stock........... 17
Dividend Policy....................... 17
Capitalization........................ 18
Dilution.............................. 19
Unaudited Pro Forma Condensed
Consolidated Financial Data......... 20
Selected Consolidated Financial
Data................................ 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 26
Business.............................. 38
Management............................ 49
Certain Transactions.................. 54
Principal and Selling Stockholders.... 56
Description of Capital Stock.......... 57
Shares Eligible For Future Sale....... 59
Description of Certain Indebtedness... 62
Certain United States Federal Tax
Consequences for Non-United States
Holders............................. 64
Underwriting.......................... 66
Legal Matters......................... 69
Experts............................... 69
Available Information................. 69
Index to Consolidated Financial
Statements and Notes Thereto........ F-1
UNTIL , ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION
OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
SHARES
[LOGO]
CAMELOT MUSIC HOLDINGS, INC.
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
MERRILL LYNCH INTERNATIONAL
MORGAN STANLEY DEAN WITTER
MCDONALD & COMPANY
SECURITIES, INC.
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
125
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a list of the estimated expenses to be incurred by the
Company in connection with the distribution of the shares of Common Stock being
registered hereby. Except for the Securities and Exchange Commission
Registration Fee, the National Association of Securities Dealers, Inc. Filing
Fee and the Nasdaq National Market Listing Fee, all amounts are estimates.
Securities and Exchange Commission Registration Fee......... $51,725
National Association of Securities Dealers, Inc. Filing
Fee....................................................... 15,500
Nasdaq National Market Listing Fee.......................... *
Printing and Engraving Costs................................ *
Accounting Fees and Expenses................................ *
Legal Fees and Expenses (excluding Blue Sky)................ *
Blue Sky Fees and Expenses.................................. *
Transfer Agent and Registrar Fees........................... *
Miscellaneous............................................... *
-------
Total............................................. $ *
=======
- ---------------
* To be provided by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the DGCL permits the Company 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 the Company, 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 the Company 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 the Company may modify the extent of
such indemnification by individual contracts with its directors and executive
officers.
The Company's Second Amended and Restated Certificate of Incorporation (the
"Certificate") provides that, to the fullest extent permitted by the DGCL, the
Company will indemnify all present or former directors or officers (and their
respective heirs, executors or administrators) of the Company from any pending,
threatened or completed action, suit or proceeding (brought in the right of the
Company or otherwise), by reason of the fact that such person is or was serving
as an officer or director of the Company, or at the request of the Company 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 the Company will not be personally liable to the Company 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.
II-1
126
The Certificate permits the Company 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 the Company would have
the power to indemnify such person against such liability under the DGCL. The
Company's directors and officers are covered under a liability insurance policy.
Such policy affords the Company's directors and officers with insurance coverage
for losses arising from claims based on breaches of duty, negligence, error and
other wrongful acts. The Company has also entered into indemnity agreements
pursuant to which it has agreed, among other things, to indemnify its Directors
for settlements in derivative actions.
The Registrant has entered into indemnity agreements (the "Indemnity
Agreements") with the current Directors and executive officers of the Registrant
and expects to enter into similar agreements with any Director or executive
officer elected or appointed in the future at the time of their election or
appointment. Pursuant to the Indemnity Agreements, the Registrant will indemnify
a Director or executive officer of the Registrant (the "Indemnitee") if the
Indemnitee is a party to or otherwise involved in any legal proceeding by reason
of the fact that the Indemnitee is or was a Director or executive officer of the
Registrant, or is or was serving at the request of the Registrant in certain
capacities with another entity, against all expenses, judgments, settlements,
fines and penalties, actually and reasonably incurred by the Indemnitee in
connection with the defense or settlement of such proceeding. Indemnity is only
available if the Indemnitee acted in good faith and in a manner which he
reasonably believed to be in, or not opposed to, the best interests of the
Registrant. The same coverage is provided whether or not the suit or proceeding
is a derivative action. Derivative actions may be defined as actions brought by
one or more shareholders of a corporation to enforce a corporate right or to
prevent or remedy a wrong to the corporation in cases where the corporation,
because it is controlled by the wrongdoers or for other reasons, fails or
refuses to take appropriate action for its own protection. The Indemnity
Agreements mandate advancement of expenses to the Indemnitee if the Indemnitee
provides the Registrant with a written promise to repay the advanced amounts in
the event that it is determined that the conduct of the Indemnitee has not met
the applicable standard of conduct. In addition, the Indemnity Agreements
provide various procedures and presumptions in favor of the Indemnitee's right
to receive indemnification under the Indemnity Agreement. A copy of the form of
Indemnity Agreement is included herein as Exhibit 10.11.
Under the Plan of Reorganization, all obligations of the Company to
indemnify or to pay contribution or reimbursement to individuals who served as
directors or officers of the Company at any time during the bankruptcy
proceedings were expressly assumed and affirmed by the Company. All other
indemnity, contribution or reimbursement obligations of the Company were
rejected and terminated under the Plan of Reorganization.
Reference is made to Section 6 of the Purchase Agreement filed as Exhibit
1.1 to this Registration Statement for information concerning the indemnity
arrangements between the Company and the Underwriters.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
No securities of the Company which were not registered under the Act have
been issued or sold by the Company within the past three years except as
follows:
As of January 27, 1998, pursuant to the Plan of Reorganization, the Company
issued 9,835,559 shares of Common Stock to various claimholders in the
bankruptcy case in satisfaction of substantially all of its pre-petition debt
and other liabilities. As of May 5, 1998, an additional 328,873 shares of Common
Stock were issued pursuant to the Plan of Reorganization. A total of 10,164,432
shares of Common Stock have been issued by the Company pursuant to the exemption
from the registration requirements of the Act provided by Section 1145(a)(1) of
the Bankruptcy Code. On May 5, 1998 the Company issued an additional 10,000
shares of Common Stock pursuant to an order of the Bankruptcy Court to certain
persons who made a significant contribution to the bankruptcy case. On June 29,
1998, a former employee exercised options to purchase 1,500 shares of Common
Stock and these 1,500 shares of Common Stock were issued by the Company pursuant
to an exemption from the registration requirements of the Act provided by Rule
701 of the Act.
II-2
127
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
See Exhibit Index at page E-1 of this Registration Statement.
(b) Financial Statement Schedules:
DESCRIPTION PAGE NO.
----------- --------
Schedule II -- Valuation and Qualifying Accounts II-12
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Purchase Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Act may be
permitted to Directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a Director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
Director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes that:
(1) For the purpose of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide public offering thereof.
II-3
128
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Cleveland, State of Ohio, on August 11, 1998.
CAMELOT MUSIC HOLDINGS, INC.
By: /s/ JAMES E. BONK
------------------------------------
James E. Bonk,
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities indicated on August 11, 1998.
SIGNATURE TITLE
--------- -----
/s/ JAMES E. BONK Chairman, President and Chief Executive Officer
- ---------------------------------------- and Director (Principal Executive Officer)
James E. Bonk
LEE ANN THORN* Treasurer and Chief Financial Officer
- ---------------------------------------- (Principal Financial and Accounting Officer)
Lee Ann Thorn
JACK K. ROGERS* Executive Vice President, Chief Operating Officer, Secretary
- ---------------------------------------- and Director
Jack K. Rogers
GEORGE R. ZOFFINGER* Director
- ----------------------------------------
George R. Zoffinger
STEPHEN H. BAUM* Director
- ----------------------------------------
Stephen H. Baum
HERBERT J. MARKS* Director
- ----------------------------------------
Herbert J. Marks
MICHAEL B. SOLOW* Director
- ----------------------------------------
Michael B. Solow
MARC L. LUZZATTO* Director
- ----------------------------------------
Marc L. Luzzatto
- ---------------
* The undersigned, by signing his name hereto, does sign this Amendment No. 1 to
this Registration Statement on behalf of the above Directors and Officers of
Camelot Music Holdings, Inc. pursuant to a Power of Attorney executed on
behalf of each such Director and Officer and which has been filed with the
Securities and Exchange Commission.
By: /s/ JAMES E. BONK
------------------------------------
James E. Bonk,
As Attorney-In-Fact
II-4
129
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
1.1 Form of U.S. Purchase Agreement
1.2 Intersyndicate Agreement
2.1 Second Amended Joint Plan of Reorganization dated November
7, 1997, which is incorporated by reference to Exhibit 2.1
to the Company's Form 10 as filed on February 13, 1998 (File
No. 0-23807)
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, which is incorporated by
reference to Exhibit 2.2 to the Company's Form 10 as filed
on February 13, 1998 (File No. 0-23807)
2.3 Assignment of The Wall Purchase Agreement, which is
incorporated by reference to Exhibit 2.3 to the Company's
Form 10 as filed on February 13, 1998 (File No. 0-23807)
2.4 Agreement and Plan of Merger among Camelot Music Holdings,
Inc., SM Acquisition, Inc. and Spec's Music, Inc., dated as
of June 3, 1998
3.1 Second Amended and Restated Certificate of Incorporation of
the Registrant, which is incorporated by reference to
Exhibit 3.1 to the Company's Form 10 as filed on February
13, 1998 (File No. 0-23807)
3.3 Amended and Restated By-Laws of the Registrant, which is
incorporated by reference to Exhibit 3.2 to the Company's
Form 10 as filed on February 13, 1998 (File No. 0-23807)
4.1 Specimen certificate for the Registrant's Common Stock which
is incorporated by reference to Exhibit 4.1 to the Company's
Form 10 as filed on February 13, 1998 (File No. 0-23807)
5.1 Opinion of Calfee, Halter & Griswold LLP as to the validity
of the shares 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,
which is incorporated by reference to Exhibit 10.1 to the
Company's Form 10 as filed on February 13, 1998 (File No.
0-23807)
10.2 Registration Rights Agreement, dated as of January 27, 1998,
by and among the Registrant and the security holders named
therein, which is incorporated by reference to Exhibit 10.2
to the Company's Form 10 as filed on February 13, 1998 (File
No. 0-23807)
10.3 Second Amended and Restated Employment Agreement, dated as
of January 1, 1998, between Camelot Music, Inc. and James E.
Bonk, which is incorporated by reference to Exhibit 10.3 to
the Company's Form 10 as filed on February 13, 1998 (File
No. 0-23807)*
10.4 Camelot Music Holdings, Inc. 1998 Stock Option Plan, which
is incorporated by reference to Exhibit 10.4 to the
Company's Form 10 as filed on February 13, 1998 (File No.
0-23807)
10.5 Form of Stock Option Agreement*+
10.6 Amended and Restated Severance and Bonus Management
Incentive Agreement, dated as of October 11, 1996, between
Camelot Music, Inc. and Jack K. Rogers*+
10.7 Amended and Restated Severance and Bonus Management
Incentive Agreement, dated as of October 11, 1996, between
Camelot Music, Inc. and Lewis S. Garrett*+
10.8 Amended and Restated Severance and Bonus Management
Incentive Agreement, dated as of October 21, 1996, between
Camelot Music, Inc. and Charles Marsh*+
10.9 Amended and Restated Severance and Bonus Management
Incentive Agreement, dated as of October 11, 1996, between
Camelot Music, Inc. and Charles R. Rinehimer III*+
10.10 Amended and Restated Severance and Bonus Management
Incentive Agreement, dated as of October 11, 1996, between
Camelot Music, Inc. and Lee Ann Thorn*+
10.11 Form of Indemnity Agreement+
10.12 Camelot Music Holdings, Inc. 1998 Stock Option Plan, which
is incorporated by reference to Exhibit 10.4 to the
Company's Form 10 as filed on February 13, 1998 (File No.
0-23807)
II-9
130
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.13 Camelot Music Holdings, Inc. 1998 Outside Directors Stock
Option Plan
10.14 Amendment No. 1 to the Revolving Credit Agreement
10.15 Form of Customary Trade Terms Commitment and Option Exercise
Notice+
10.16 Amended and Restated Severance and Bonus Management
Incentive Agreement, dated as of October 11, 1996, between
Camelot Music, Inc. and Roger D. Marks*+
10.17 Amended and Restated Severance and Bonus Management
Incentive Agreement, dated as of October 17, 1996, between
Camelot Music, Inc. and William H. Scott*+
10.18 Employment and Severance Agreement between Camelot Music,
Inc. and Larry K. Mundorf*
10.19 Indemnity Agreement between Camelot Music Holdings, Inc. and
Stephen H. Baum, dated June 4, 1998*
10.20 Indemnity Agreement between Camelot Music Holdings, Inc. and
George R. Zoffinger, dated June 4, 1998*
10.21 Indemnity Agreement between Camelot Music Holdings, Inc. and
Michael B. Solow, dated June 4, 1998*
10.22 Indemnity Agreement between Camelot Music Holdings, Inc. and
Marc L. Luzzatto, dated June 4, 1998*
10.23 Indemnity Agreement between Camelot Music Holdings, Inc. and
Herbert J. Marks, dated June 4, 1998*
10.24 Indemnity Agreement between Camelot Music Holdings, Inc. and
James E. Bonk, dated June 4, 1998*
10.25 Indemnity Agreement between Camelot Music Holdings, Inc. and
Jack K. Rogers, dated June 4, 1998*
10.26 Indemnity Agreement between Camelot Music Holdings, Inc. and
Lee Ann Thorn, dated June 4, 1998*
10.27 Indemnity Agreement between Camelot Music Holdings, Inc. and
Charles R. Rinehimer III, dated June 4, 1998*
10.28 Indemnity Agreement between Camelot Music Holdings, Inc. and
Lewis S. Garrett, dated June 4, 1998*
10.29 Indemnity Agreement between Camelot Music Holdings, Inc. and
Larry K. Mundorf, dated June 4, 1998*
10.30 Camelot Music Holdings, Inc. 1998 Deferred Compensation
Plan*
10.31 Form of Stock Option Agreement for 1998 Outside Directors
Stock Option Plan*
21.1 Subsidiaries of the Registrant which is incorporated by
reference to Exhibit 21.1 to the Company's Form 10 as filed
on February 13, 1998 (File No. 0-23807)
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Calfee, Halter & Griswold LLP (included in
Exhibit 5.1 of this Registration Statement)**
24.1 Power of Attorney and related certified resolution
27.1 Financial Data Schedule of the Predecessor+
27.2 Financial Data Schedule of the Company
- ---------------
* Management compensatory plan or arrangement.
+ Filed as an exhibit to the Company's Form S-1 on June 15, 1998.
** To be filed by amendment.
II-10
131
REPORT OF INDEPENDENT ACCOUNTANTS
In connection with our audits of the consolidated financial statements of
Camelot Music Holdings, Inc. ("Successor Company") as of February 28, 1998 and
for the period February 1, 1998 to February 28, 1998 and of CM Holdings, Inc.
("Predecessor Company") as of March 1, 1997 and for the period March 2, 1997 to
January 31, 1998, the 52 week period ended March 1, 1997 and the 53 week period
ended March 2, 1996, which financial statements are included in the Prospectus,
we have also audited the financial statement schedule listed in Item 16 herein.
In our opinion, this financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Cleveland, Ohio
June 10, 1998
II-11
132
CAMELOT MUSIC HOLDINGS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
- -----------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -----------------------------------------------------------------------------------------------------
ADDITIONS
----------------------- BALANCE
BALANCE CHARGED TO CHARGED TO DEDUCTIONS AT END
AT BEGINNING COSTS AND OTHER FROM OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RESERVES PERIOD
- -----------------------------------------------------------------------------------------------------
PREDECESSOR COMPANY:
Inventory Reserves:
Year Ended March 2, 1996........... $ 3,883 $ 1,790 $ -- $ -- $ 5,673
Year Ended March 1, 1997........... 5,673 3,992 -- 2,533(1) 7,132
Eleven Months Ended January 31,
1998............................ 7,132 3,361 -- 10,493(2) --
Valuation Allowance on deferred tax
assets:
Year Ended March 2, 1996........... 25,309 12,030 -- -- 37,339
Year Ended March 1, 1997........... 37,339 18,458 -- -- 55,797
Eleven Months Ended January 31,
1998............................ 55,797 -- -- 55,797(3) --
SUCCESSOR COMPANY:
Inventory Reserves:
One Month Ended February 28,
1998............................ $ -- $ 235 $ -- $ -- $ 235
Valuation Allowance on deferred tax
assets:
One Month Ended February 28,
1998............................ -- -- -- -- --
- ---------------
(1) The deduction in reserves of $2,533 relates to the disposal of related
inventory.
(2) $5,351 of the deduction relates to "fresh-start reporting" adjustments in
the eleven months ended January 31, 1998 and the remaining balance of $5,142
relates to the disposal of related inventory.
(3) The deduction in the eleven months ended January 31, 1998 occurred in
conjunction with the "fresh-start reporting" adjustments.
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