-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QpBUkqJoVQVtYRYCGkG6OoM/I9/mXH/rGHiq9pzitBWvFI6sqpT/WTcVLq+Adb19 7N/wKltS3OP1VY1DvYIjNA== 0000885066-97-000003.txt : 19970401 0000885066-97-000003.hdr.sgml : 19970401 ACCESSION NUMBER: 0000885066-97-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIANCE ENTERTAINMENT CORP CENTRAL INDEX KEY: 0000885066 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-DURABLE GOODS, NEC [5099] IRS NUMBER: 133645913 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13054 FILM NUMBER: 97571303 BUSINESS ADDRESS: STREET 1: 110 E 59TH ST STREET 2: 18TH FLR CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2129356662 FORMER COMPANY: FORMER CONFORMED NAME: TRINITY CAPITAL OPPORTUNITY CORP DATE OF NAME CHANGE: 19930328 10-K 1 ALLIANCE ENTERTAINMENT CORP. FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________________ TO ______________________. Commission File Number 1-13054 ALLIANCE ENTERTAINMENT CORP. (Exact name of registrant as specified in its charter) Delaware 13-3645913 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 110 East 59th Street, New York, New York 10022 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (212) 935-6662 ( Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding year (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing required for the past 90 days. Yes X No ______ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. [ ] As of February 20, 1997, the number of shares outstanding of the issuer's common stock was 44,764,853. The aggregate market value of the voting stock held by the non-affiliates of the Registrant as of February 20, 1997 was $45,079,797. DOCUMENTS INCORPORATED BY REFERENCE The Registrant's definitive Proxy Statement for the Annual Meeting of the Stockholders scheduled to be held on June 27, 1997 is incorporated herein by reference into Part III.
ALLIANCE ENTERTAINMENT CORP. PART I Page No. Item 1. Business 5 Item 2. Properties 16 Item 3. Legal Proceedings 16 Item 4. Submission of Matters to a Vote of Security Holders 17 PART II Item 5. Market for Registrant's Common Equity and Related Stockholders Matters 18 Item 6. Selected Financial Data 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 21 Item 8. Financial Statements and Supplementary Data 31 Item 9. Changes In and Disagreements with Accountants 56 PART III Item 10. Directors and Executive Officers of the Registrant 56 Item 11. Executive Compensation 56 Item 12. Security Ownership Of Certain Beneficial Owners And Management 56 Item 13. Certain Relationships and Related Transactions 56 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 57 Signatures 71
Item 1. BUSINESS Alliance Entertainment Corp. ("Alliance" or the "Company") is a fully integrated independent music company which creates, markets and distributes its proprietary content rights consisting of both new artist and catalog product in several genres. It is also the largest domestic full service distributor of pre-recorded music and music related products through traditional as well as emerging retail channels. In August 1996, Alvin N. Teller (the former Chairman and Chief Executive Officer of MCA Music Entertainment Group) became Co-Chairman, Chief Executive Officer and President of Alliance in order to expand the Company's proprietary content business and to consolidate and focus the operations of the Company. The Company's Proprietary Products Group consists of three primary labels: Red Ant, Concord Jazz and Castle Communications. Each of these labels specializes in particular genres of music and releases records under a number of label imprints. Red Ant (which commenced operations in 1996 and will release its first full lenght projects in 1997) specializes in new product primarily in the alternative rock and urban genres, with particular focus on the identification and development of new talent. It has succeeded in acquiring rights to certain groups also sought by labels of greater size and financial resources. Concord Jazz is a label specializing in traditional and contemporary jazz by well-known jazz artists such as Mel Torme, Rosemary Clooney, Chick Corea and Maynard Ferguson. Castle Communications is primarily a catalog and re-issue label which specializes in exploiting proprietary content rights to 1960's and 1970's British rock groups such as the Kinks, Iron Maiden, Black Sabbath, Iron Maiden, and the Small Faces. Castle Communications together with The St. Claire Entertainment Group (the Company's wholly-owned Canadian subsidiary) are also engaged in the creation of budget product utilizing both the Company's proprietary products and rights licensed from others. The Company's distribution operation is conducted through two groups: the One Stop Group specializing in the wholesale distribution of substantially all available pre-recorded music product (i.e., pre-recorded music manufactured by the six major music companies: Sony Music, Time Warner, Polygram, MCA, EMI and BMG (the "Major Labels")), as well as music manufactured by independent labels ("Independent Labels")); and the Independent Distribution Group (specializing in the marketing, promotion and distribution of pre-recorded music manufactured by; Independent Labels, including the Proprietary Products Group, on an exclusive and regional basis). While the Company's distribution operation services primarily store-based retail customers currently, the Company is actively seeking distribution and fulfillment opportunities with music retailers operating on-line or through the internet. The Company is the exclusive music supplier to several on-line music retail sites and also provides music database services to many cyber-retailers, including Music Boulevard and CD Now. The Company believes that its position as the largest full service distributor of music product in the United States provides certain competitive advantages to its Proprietary Products Group over other labels with respect to identifying and attracting new talent for the Proprietary Products Group and that this advantage will enhance its growth and commercial success. Industry Conditions After sustaining significant growth from 1990 to 1995, the domestic music industry has gone through a period of little or no growth since 1995. Estimated United States retail sales volume for pre-recorded music and music videos, as published by the Recording Industry Association of America ("RIAA") total approximately $12.5 billion in 1996, representing a 1.5% increase from approximately $12.3 billion in 1995. This current slow down in the growth of domestic music sales has combined with (i) an over-expansion of retail outlets selling music products, (ii) substantial discount pricing on pre-recorded music by certain traditional and alternative music retailers; and (iii) changes in music consumption demographics to adversely impact the music industry in general and the Company's customers in particular. The adverse conditons have resulted in, among other things, product returns to the Company well in excess of historical levels as well as the bankruptcy of several significant customers. While the Company believes that these adverse factors are temporary in nature, no assurances can be given as to when such conditions will be alleviated. Consolidation Plan In November 1996, the Company announced a comprehensive consolidation plan (the "Consolidation Plan") pursuant to which Alliance's operations are in the process of being streamlined and non-core businesses have been or are in the process of being sold or discontinued. Pursuant to the Consolidation Plan, the Company will close five of the Company's eight domestic distribution facilities by the first quarter of 1998 (a ninth facility was closed in February 1997) and centralize all administrative functions for the Company's One Stop Group and Independent Distribution Group. Additionally, the Consolidation Plan calls for the administrative functions of the Company's three domestic proprietary labels (Red Ant, Castle US and Concord Jazz) to be consolidated under Red Ant. The Consolidation Plan is expected to be completed by March 1998 and includes the elimination of approximately 851 employee positions comprised principally of warehouse, sales, management and administrative employees. When fully implemented the Company believes that the Consolidation Plan will result in annual savings to Alliance of approximately $25 million. For the year ended December 31, 1996, the Company recorded certain charges (the "Consolidation and Other Charges") totaling $118.9 million which in large part contributed to the Company's net loss of approximately $148.7 million for the year ended December 31, 1996. These Consolidation and Other Charges consisted of: (i) $33.6 million in non-recurring charges relating to the Consolidation Plan; (ii) $53.9 million in non-recurring charges relating to the disposition of certain Non-Core Businesses; (iii) $29.4 million of charges relating to current industry conditions; and (iv) $2.0 million in non-recurring charges related to the termination of a merger agreement with Metromedia International Group, Inc. The $118.9 million is inclusive of $20.0 million which will be required to be expended in future periods. Music Industry Overview The Major Labels produce and supply retailers and distributors with the majority of the industry's pre-recorded music. In addition to the Major Labels, the Independent Labels produce recordings for artists and enter into distribution arrangements with the Major Labels or with non-captive (i.e., not affiliated with a Major Label) distribution companies. Generally, Independent Labels focus on new or emerging artists or on genres of music which have smaller audiences than those genres distributed by the Major Labels. Included within the category of Independent Labels are companies whose primary business is the exploitation of existing catalogs of pre-recorded music. According to Billboard Magazine, Major Labels held a market share of 78.8% of total albums sold domestically during 1996 (down from 79.4% in 1995) while Independent Labels held approximately a 21.2% market share of albums sold domestically in 1996 (which exceeded the market share in 1996 of any single Major Label and increased from approximately 20.6% in 1995). In the United States, the pre-recorded music product of Major Labels and Independent Labels are supplied to full service distributors (such as the Company) as well as to retail customers on a "returnable" basis which allows such full service distributors and retail customers to return unsold merchandise for credit (subject in the case of Major Labels to certain re-stocking penalties) on future purchases. Each of the Major Labels (in addition to owning several music labels) owns a distribution company that exclusively distributes its labels as well as recordings for certain Independent Labels. These captive distribution companies principally distribute a limited number of high volume, hit-driven stock keeping units ("SKUs") manufactured by production companies also owned by the Major Label to full service distributors (such as the Company) as well as to a relatively limited number of large retail customers. Although the Major Labels distribute their products directly to these retailers, a significant portion of such distribution is on fairly inflexible terms (i.e., significant minimum order quantities and restrictive credit policies) and as a result only the largest retail customers can do business directly with the distribution arms of the Major Labels on an economical basis. Unlike these captive distribution companies, a full service distributor like the Company will ship both large and small quantities of product manufactured by all Major Labels and most Independent Labels on a 24-hour turn-around basis to thousands of individual store locations, as well as to central warehouses of large retail chains. As a full service distributor, the Company is also able to perform a warehousing function for retailers that wish to avoid the fixed costs associated with storing product in quantity, provide more flexible terms for order quantity and can deliver product to retailers more quickly. The retail customers of full service music distributors such as the Company include international and national retail chains, multi-store and single-store retailers, as well as non-traditional retail music outlets, such as home entertainment superstores, bookstore merchandisers, consumer electronics retailers and discount retailers. Most recently, on-line services and internet "world wide web" sites have also become active music outlets. While most large store-based music retailers have their own internal distribution operations to supply high-volume "hit" titles to their numerous branch locations, they increasingly rely on full service distributors who can supply smaller quantities of comparatively low-volume "catalog" titles, frequently on a "just-in-time" basis, thereby avoiding the cost of warehousing lower-volume titles. In addition, alternative retail music outlets such as bookstore chains and electronic equipment retailers (and especially the new on-line and internet retailers) frequently rely on full service distributors to supply much or all of their music inventory. General Segments. The Company currently operates in two business segments: (i) the creation, acquisition and exploitation of proprietary rights with respect to recorded music; and (ii) the sale and distribution of pre-recorded music and music and entertainment related products. With the acquisition of Red Ant, the Company anticipates that it will increase the application of available resources to the enhancement of its proprietary content rights revenues beyond those historically achieved by the Company. The following table reflects the Company's segment revenues for 1994, 1995 and 1996, giving effect on a pro forma basis to all significant acquisitions completed since 1994 as if such acquisitions had been made on January 1, 1994:
Pro Forma Revenues by Business Segment (Dollars in Thousands) Year Ended December 31, 1994 1995 1996 ------------------------- --------------------- -------------- % of % of % of Amount Total Amount Total Amount Total Distribution Revenue $645,922 92% $721,416 92% $617,885 89% Proprietary Rights and Service Revenue 59,960 8% 63,014 8% 72,933 11% ------ ---- ------ ---- ------- --- $705,882 100% $784,430 100% $690,818 100% ======== ==== ======== ==== ======== ====
(1) Does not include $281,000 of revenues related to corporate services. Proprietary Products The Company's Proprietary Products Group creates, licenses, markets and promotes both newly recorded and catalog proprietary content rights. The Proprietary Products Group consists of three primary labels: Red Ant, Concord Jazz and Castle Communications. Each of these labels specializes in particular genres of music and releases records under a number of label imprints. Red Ant. Red Ant (which commenced operations in 1996 and will release its first full length projects in 1997) specializes in the release of new product primarily in the alternative rock and urban genres, with particular focus on the identification and development of new talent. It has succeeded in acquiring rights to certain groups also sought by labels of greater size and financial resources. Among the new artists signed to Red Ant are Symposium, Naked and Salmon. In addition to new artist signings, Red Ant also enhanced its artist roster by entering into a joint venture agreement in March 1997 with Delicious Vinyl (the "Delicious Vinyl Joint Venture"), a successful Independent Label with established artists such as the Brand New Heavies, Pharcyde and Born Jamericans. Under the Delicious Vinyl Joint Venture, Red Ant and Delicious Vinyl will jointly release, market and promote Delicious Vinyl proprietary product. Including releases under the Delicious Vinyl Joint Venture, Red Ant expects to release approximately 35 full-length recordings in 1997. Concord Jazz. Concord Jazz, acquired by the Company in 1994, is a label which specializes in the production and marketing of traditional and contemporary jazz by well-known jazz artists such as Mel Torme, Rosemary Clooney, Chick Corea and Maynard Ferguson. Concord Jazz estimates that it will augment its catalog of over 700 recordings with approximately 80 new releases in 1997. While Concord Jazz has recently signed a number of young artists to exclusive recording agreements, it also records new works by "catalog" artists (i.e., established artists with an established base of fans but that are unlikely to produce a "platinum" or "gold" hit), such as Rosemary Clooney, Mel Torme and Chick Corea. A recent example of such a recording was Clooney's "White Christmas" which was released in 1996 and reached number one on the Billboard Magazine Jazz Album chart. Castle Communications. Castle Communications, which was acquired by the Company in 1994, owns or controls through licenses thousands of copyrighted master recordings and is primarily a catalog and re-issue label which specializes in exploiting proprietary content rights to 1960's and 1970's British rock groups such as The Kinks, Black Sabbath, Iron Maiden and the Small Faces. Castle Communications together with The St. Claire Entertainment Group (the Company's wholly-owned Canadian subsidiary) are also engaged in the creation of budget product utilizing both the Company's proprietary products and rights licensed from others. Sales, Marketing and Promotion. The staff of Red Ant is responsible for the development, production, sales, marketing and promotion of all Proprietary Product Group as well as Delicious Vinyl releases. Its staff consists of 116 persons consisting of artist repertoire personnel, manufacturing and production personnel, sales personnel, marketing and radio promotion personnel. Although Red Ant was recently formed, its personnel generally have significant experience in the music industry, including several with extensive experience working for Major Labels. Database Services - The Company (through its Matrix Software subsidiary) provides databased services to cyber-retailers selling pre-recorded music over the internet. Matrix maintains an extensive music product database as well as two proprietary web sites ("www.allmusic.com" and "www.allmovie.com") on the world wide web promoting the All-Music Guide and the All-Movie Guide. See, "Business - New Distribution Channels." Distribution. The Proprietary Products Group is distributed by the Company's Independent Distribution Group in the United States. The Company contracts with a number of sources on a non-exclusive basis with respect to the international distribution of its proprietary products. For example, the Company has an agreement with BMG Records (UK) (Ltd.) ("BMG (UK)") pursuant to which BMG (UK) distributes Castle's products throughout the United Kingdom, other than sales to major retail chains, which are made directly by Castle from its warehouse located near London, England. Castle's budget product is handled by specialist distributors who service non-traditional retail outlets. Castle's proprietary product is distributed by the Company, as well as by Edel Gmbh in Germany. Castle's proprietary product is distributed under license in Japan by Victor Entertainment, Inc. and in the rest of Asia by a subsidiary of BMG. Foreign Operations. During 1996, approximately 74% of the Company's revenues from proprietary products were derived from Europe, approximately 20% were derived from the United States and the balance was derived from the Pacific Rim, South America and the Caribbean. During 1996, the United Kingdom and Germany accounted for approximately 42% and 16%, respectively, of such revenues. No other foreign country provided more than 5% of the Company's proprietary product revenues during the periods indicated. The Company attempts to conduct its operations so that foreign currency generated by sales are sufficient to pay expenses denominated in such foreign currency. Therefore, the Company does not believe that there is a significant foreign currency risk with respect to such operations. Copyright. Certain of the catalogs and titles which the Company exploits were acquired from third parties who in some cases are part of a chain of ownership. The various assignments and licenses of copyright, exploitation and other rights with respect to these catalogs and titles are governed by the laws of numerous jurisdictions. As with any rights related business, uncertainties may exist as to the terms and scope of some of these assignments. From time to time there are claims by artists, producers, managers or others seeking to assert an interest in the Company's proprietary products. In addition, laws regarding copyright are subject to change. Recently, the European Economic Community adopted new legislation designed to harmonize the copyright laws of its member states. The Company does not believe that these changes will have a significant effect the Company. Distribution Operations The Company is a full-service music distribution company which maintains a broad based inventory of pre-recorded music and entertainment related products, which includes product manufactured by the Major Labels and many Independent Labels, including the Company's Proprietary Products Group. The Company ships both large and small quantities of product on a 24-hour turn-around basis to thousands of individual store locations, as well as to central warehouses of large retail chains. As a full service distributor, the Company is also able to perform a warehousing function for retailers that wish to avoid the fixed costs associated with storing product in quantity, provide more flexible terms for order quantity and can deliver product to retailers more quickly. The Company also distributes a broad range of music accessories and related products, including professional and consumer blank tapes, blank cassettes, music storage products, batteries, headphones and various other ancillary products. The Company's video products include a large selection of laser discs and a smaller selection of video tapes, video CDs, CD-ROM and publications. The Company also distributes selected items from substantially all of the major suppliers of music related merchandise, such as music related apparel, including T-shirts and caps, bearing entertainment related designs and logos. The Company's range of products enables the Company's customers to order a wide variety of products from a single source while maintaining one small minimum purchase order with the Company. The following table reflects the Company's revenues by: (i) major product category; and (ii) geographic regions for 1994, 1995 and 1996, giving effect on a pro forma basis to all significant acquisitions completed since 1994 as if they had been made on January 1, 1994. PRO FORMA DISTRIBUTION REVENUES BY GEOGRAPHIC REGIONS (Dollars in Thousands)
Year Ended December 31, ========================================================================================== 1994 1995 1996 ------------------------- ---------------------------- --------------------------- Amount % of Total Amount % of Total Amount % of Total ------ ---------- ------ ---------- ------ ---------- United States $485,726 75% $513,336 71% $438,618 71% South America and the Caribbean 71,261 11 79,136 11 59,777 10 Pacific Rim 57,643 9 104,332 15 79,511 13 Europe and Others 31,292 5 24,612 3 39,979 6 =========== ============= ============ ============ ========== ============= $645,922 100% $721,416 100% $617,885 100% =========== ============= ============ ============= =========== =============
PRO FORMA DISTRIBUTION REVENUES BY MAJOR PRODUCT CATEGORY (Dollars in Thousands)
Year Ended December 31, ========================================================================================== 1994 1995 1996 ------------------------- --------------------------- --------------------------- Amount % of Total Amount % of Total Amount % of Total ------ ---------- ------ ---------- ------ ---------- Pre-Recorded Music: Major Label $321,982 50% $346,556 48% $361,365 58% Independent Label 260,993 40 303,232 42 218,680 35 Accessories 29,502 5 30,709 4 15,554 3 Video Products and Publications 32,054 5 31,249 5 10,141 2 Licensed Merchandise 1,391 - 9,670 1 12,145 2 =========== ============= =========== ============== =========== ============= $645,922 100% $721,416 100% 617,885 100% =========== ============= =========== ============== ============= =============
Sales, Marketing and Customer Service One Stop Group. The Company believes that it is the largest full service distributor of music product in the United States. As a full service distributor, the Company's One Stop Group maintains a telemarketing staff that solicits sales on a regular basis from over 18,000 retail accounts. The One Stop Group has the ability to ship both large and small quantities of product on a 24-hour turn-around basis to thousands of individual store locations as well as to central warehouses. The depth and breadth of the inventory stocked by the Company's One Stop Group provides the ability to maintain high order fill rates with its customer base allowing such customers to manage their inventory on a "just-in-time" basis and avoid the fixed costs associated with storing product in quantity. In addition to high fill rates and rapid delivery, the Company also provides other warehousing services to its customers that do not maintain their own centralized physical inventories. These services range from applying the customers' pricing and inventory information to stickers on each individual piece of product to arranging product in the shipping container as it will appear on the retailers shelves. These services can be individually tailored to the customers' requirements. The Company also provides a number of marketing related programs to its customer base including a monthly new release guide and semi-annual product catalog. Independent Distribution Group. The Company believes that it is the largest non-captive distributor of Independent Label product in the United States. The Company's Independent Distribution Group focuses on obtaining exclusive rights from Independent Labels with respect to distribution of urban, rock/alternative, dance, jazz and other music genres which are usually hit-driven, have high sales volume and require constant feedback from and responsiveness to retail customers on a national basis. The Independent Distribution Group has distribution relationships with many of the largest Independent Labels in the United States including ILS (the Independent Label affiliate of PolyGram). In addition, the Company has entered into a distribution agreement with EMI-Capitol Music Group North America ("EMI-Capitol")(the "EMI-Capitol Distribution Agreement"), pursuant to which the Company's Independent Distribution Group will market, and sell over 450 selected EMI-Capitol catalog titles, on an exclusive basis in the United States. The Company provides the Independent Labels it distributes with many services that such labels would be unable to perform on their own behalf including sales and marketing assistance and radio promotion. Such services are critical to maximizing the sales success of the labels' products and provide them with a strong incentive for maintaining their relationships with the Company going forward. The national scope of the Company's Independent Label distribution operations creates certain economies of scale that are not available for distributors possessing only regional exclusive rights. The Company believes that the efficiencies that it brings to the distribution of Independent Label product can give it a competitive advantage in signing new exclusive distribution contracts with Independent Labels. New Distribution Channels On October 11, 1996, the Company acquired Matrix Software, Inc. ("Matrix"), a leading provider of music product databases to cyber-retailers selling prerecorded music over the internet. Matrix is the creator of the All-Music and All-Movie Guides, print and software encyclopedic databases widely used by music retailers and the key element of search engines for most on-line/web sites that sell prerecorded music and video. Matrix also maintains two proprietary web sites ("www.allmusic.com" and "www.allmovie.com") on the world wide web promoting the All-Music Guide and the All-Movie Guide. The acquisition of Matrix is part of the Company's strategy to create a full service music distribution company serving existing as well as future internet-based retailers by combining its music distribution expertise with an extensive music software database. While the Company's distribution operation services primarily store-based retail customers currently, the Company is actively seeking distribution and fulfillment opportunities with music retailers operating on-line or through the internet. The Company is the exclusive music supplier to several on-line music retail sites, and also provides music database services to many cyber-retailers, including Music Boulevard and CD Now. Distribution Revenues The Company generated approximately 71% of its distribution revenue during 1996 from the United States, with the balance coming from South America/the Caribbean and the Pacific Rim. All of the Company's foreign sales, other than those made in the United Kingdom and Germany, are denominated in United States dollars. The Company attempts to conduct its operations so that foreign currency generated by sales are sufficient to pay expenses denominated in such foreign currency. Therefore, the Company does not believe that there is a significant foreign currency risk with respect to its operations. Purchasing The Company purchases the products that it sells from each of the Major Labels, many Independent Labels and other domestic and foreign wholesalers and manufacturers. The volume of purchases from individual vendors fluctuates from year to year based on the demand for the selections being offered by such vendors. No Major or Independent Label accounted for more than 10% of the Company's distribution revenues for the years ended December 31, 1995 and 1996, except for The Warner Music Group, which accounted for approximately 14% of 1995 distribution revenues and 11% of 1996 distribution revenues. Sales by any single label fluctuate based on the current popularity of its titles; consequently, such percentages can vary significantly. The Company is not subject to any minimum purchase commitment with respect to any vendor, except that pursuant to the EMI-Capitol Distribution Agreement, the Company has agreed to purchase an annual minimum of $16 million worth of titles. Except for ILS and EMI-Capitol, the Company does not have distribution contracts with the Major Labels or with many Independent Labels from which it purchases product. Purchases are generally made by individual purchase orders and are subject to the Company's right to return unsold merchandise for credit (subject in the case of Major Labels to certain re-stocking penalties) on future purchases. The Major Labels typically provide distributors with 60-day terms and a 2% discount for timely payment (within 60 days). The Major Labels and many Independent Labels also offer various incentives, including advertising allowances. Extended payment terms and additional discounts are also commonly available under seasonal and promotional programs. The Company endeavors to make purchases during these seasonal and promotional programs. Payment terms vary considerably among Independent Labels and other independent distributors, ranging from advances to labels to be recouped against future sales in the case of exclusive distribution products to payment on consignment. The Company is often able to negotiate favorable pricing and discount programs with Independent Labels for which it acts as a distributor or supplier based upon a number of factors, including amount of funds advanced, volume of purchases, prompt payment and other value-added customer services. Each of the Major Labels has adopted policies regarding the distribution of its merchandise, including restrictions on the export of its merchandise by domestic distributors and on the premature release of recordings. Over the past several years, the Major Labels have sent various notifications to a number of domestic distributors (including the Company) with respect to alleged violations of one or more of such policies. Such notifications have contained express warnings that the Major Labels would refuse to supply product to distributors who continue to violate such policies. Refusal by any Major Label to ship product on a timely basis to the Company could have a material adverse effect on the Company's operations. While the Major Labels have, at times, temporarily suspended shipments to certain distributors for violations of such policies, the Company has never been subjected to any such suspension of shipments. The Company believes that its relationships with the Major Labels are good, and that none of its current sales activities will result in the loss of any major supplier of product to the Company. Substantially all of the pre-recorded music and video products sold by the Company are subject to copyrights, which, among other things, limit the manner and geographic area in which such products can be sold. Sales made in violation of copyright restrictions by any person in the chain of distribution of a copyrighted product may subject others in the chain of distribution, such as the Company, to infringement penalties. Such penalties may include monetary damages, injunctive relief on such terms as may be deemed reasonable to prevent or restrain further copyright infringement, or the impoundment or destruction of all copies or phono records claimed to have been made or used in violation of the copyright owner's exclusive rights. The Company distributes a multiplicity of labels and products and relies on its suppliers to comply with applicable copyright laws, as is customary in the industry. The Company also buys and sells product over a wide geographical area and is subject to the copyright laws of numerous jurisdictions, some of which may be conflicting and as a result, the Company's exposure to copyright infringement penalties may be heightened. The Company purchases its other product lines, including music accessories and related products, from a variety of manufacturers and distributors. With respect to the Company's various other product lines, inventory is not returnable in all instances; therefore, the Company attempts to maintain a more conservative stocking and payable position for these items. Shipping Policies The Company offers 24-hour delivery throughout the continental United States via overnight delivery services. Taking advantage of favorable volume arrangements, the Company is able to provide such service at competitive prices. The majority of the Company's international orders emanating from the United States are shipped using air carriers that will guarantee timely delivery of music products to the Company's foreign customers. These air carriers provide volume discounts that allow the Company to supply foreign customers at competitive prices. Customers and Credit Policies The Company services thousands of retail locations worldwide, including retail chains and wholesale distributors, multi-store retailers, and single-store retailers. No one customer accounted for more than 10% of the Company's sales in 1995 or 1996. The Company requires substantially all new domestic customers to pay C.O.D. and all new international customers to prepay orders for an initial screening period until a credit history can be established. New customers are then gradually provided credit over time as a satisfactory payment record is demonstrated. Competition The Company believes it is the largest full service distributor of pre-recorded music and music related products in the United States. In addition, the Company believes it is the leading non-captive distributor of Independent Label product in the United States. Its principal competitors among non-captive distributors of Major Labels include Valley Distributors, Universal Distributors and Pacific Coast One-Stop and its principal competitors among distributors of Independent Labels include RED, MS Distributors and Navarre Corp. The Company believes that the primary competitive factors in the music distribution business include: technological capabilities, breadth of owned and exclusively distributed products and depth of inventory, "fill rate," timeliness of delivery, geographic coverage, marketing capability and financial resources. The Company's competitors in the acquisition and exploitation of proprietary products include the Major Labels, each of whom has significantly greater financial resources than does the Company. Employees As of December 31, 1996, the Company had approximately 1,850 employees, none of whom was represented by an employee union. Of such employees, 498 were engaged in management and administrative functions, 402 were engaged in sales and marketing, and 950 were engaged in inventory control/warehouse and distribution. Management believes that its employee relations are good. Item 2. PROPERTIES As of December 31, 1996, the Company conducted its distribution operations from the following locations:
Approximate Location Square Footage Leased or Owned Coral Springs, Florida 240,000 Owned Santa Fe Springs, California 130,000 Leased Los Angeles, California 13,000 Leased Chessington, England 33,000 Leased Albany, New York 120,000 Leased Montreal, Canada 18,000 Leased Miami, Florida* 100,000 Leased Miami, Florida* 47,000 Leased Miami, Florida* 24,000 Leased Miami, Florida* 16,000 Leased Denver, Colorado** 36,000 Leased Bethel, Connecticut** 86,000 Leased San Fernando, California** 30,000 Leased Secaucus, New Jersey** 26,000 Leased Dallas, Texas** 36,000 Leased Sao Paulo, Brazil** 40,000 Leased Sao Paulo, Brazil** 4,000 Leased - ---------------
* Closed on or before March 31, 1997. ** To be closed pursuant to the Consolidation Plan. See "Management's Discussion and Analysis of Financial Condition-Consolidation and Other Charges." Item 3. LEGAL PROCEEDINGS Not Applicable Item 4. SUBMISSION OF MATTERS TO A VOTE BY THE SECURITY HOLDERS A Special Meeting of Stockholders of the Company was held on October 29, 1996 (the "Special Meeting"). Of the 44,724,845 shares of Common Stock of the Company entitled to be voted at the Special Meeting, 30,110,467 shares of Common Stock were voted in person or by proxy, constituting a quorum. The following matters were considered and voted at the Special Meeting: 1. The Stockholders approved the issuance of shares of Common Stock upon conversion of the Company's Series A Convertible Preferred Stock. Votes cast for 29,733,778 Votes cast against 320,256 Abstentions 62,774 Broker non-votes 14,614,378 2. The Stockholders ratified the acquisition of Red Ant L.L.C. pursuant to the Stock Acquisition and Merger Agreement dated as of August 15,1996, (the "Merger Agreement") so as to approve the issuance of the Contingent Stock contemplated thereby. Before adjustments required by rules promulgated by the New York Stock Exchange: Votes cast for 29,688,984 Votes cast against 358,709 Abstentions 62,774 Broker non-votes 14,614,378 After adjustments to vote the shares of Common Stock acquired by Mr. Alvin N. Teller and by Wasserstein & Co., Inc. and affiliates pursuant to the Merger Agreement (6,718,751 shares) in the same proportion as shares of Common Stock voted for approval of this Proposal 2 by unaffiliated Stockholders. Votes cast for 26,454,577 Votes cast against 412,459 Abstentions 62,774 Broker non-votes 17,795,035 PART II Item 5. MARKET FOR THE REGISTRANT'S SECURITIES AND RELATED MATTERS The Common Stock is listed and traded on the NYSE under the symbol "CDS". The following table sets forth for the periods indicated, the high and low sales prices per share for Alliance Common Stock as reported on the New York Stock Exchange Composite Tape. PRICE RANGE OF COMMON STOCK The Common Stock is traded on the NYSE under the symbol "CDS." The following table sets forth, for the periods indicated, the high and low sales prices per share for the Common Stock as reported on the New York Stock Exchange Composite Tape:
High Low 1995 First quarter .................................... 7 4 3/8 Second quarter ................................... 10 1/8 5 3/4 Third quarter .................................... 9 5/8 6 7/8 Fourth quarter ................................... 11 1/4 6 1/8 1996 First quarter .................................... 10 1/2 7 5/8 Second quarter ................................... 9 1/2 4 7/8 Third quarter ................................... 7 4 3/4 Fourth quarter ................................... 5 3/4 1 7/8 1997 First quarter (through March 21, 1997) .......... 2 1/4 1 3/8
On March 21, 1997, the closing price per share for the Common Stock was $1 1/2. As of March 21, 1997, there were approximately 314 record holders of Common Stock. DIVIDEND POLICY The Company has not declared or paid any dividends on its Common Stock and does not anticipate paying any cash dividends in the foreseeable future. The Company intends to retain all working capital and earnings, if any, for use in the Company's operations and in the expansion of its business. Any future determination with respect to the payment of dividends will be at the discretion of the Board of Directors and will depend upon, among other things, the Company's results of operations, financial condition and capital requirements, the terms of any then existing indebtedness, general business conditions and such other factors as the Board of Directors deems relevant. The indenture governing the Company's 11 1/4% Senior Subordinated Notes, the Company's Credit Agreement and the Certificates of Designation of the Company's outstanding Convertible Preferred Stock restrict the Company's ability to pay dividends. Item 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION The following selected historical financial data have been derived from the consolidated financial statements of Alliance. The following data should be read in conjunction with Alliance's consolidated financial statements and related notes, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the other financial information included elsewhere herein.
Year Ended December 31, 1992 1993 1994 1995 1996 ---------- ---------- ---------- ---------- ------- (Dollars in thousands, except share and per share data) Statements of Operation Data: Net sales............................ $ 131,397 $ 200,537 $ 535,195 $720,325 $691,099 Cost of sale......................... 109,386 168,276 442,004 575,552 603,7219(1) ---------- ----------- --------- -------- ------- Gross profit......................... 22,011 32,261 93,191 144,773 87,378 Selling; general and administrative expenses........... 12,359 20,461 56,714 97,496 144,402(1) Restructuring and asset impairment charges................ -- -- -- -- 62,498(1) Amortization of intangible assets.... 1,545 3,294 6,315 10,500 12,568 ---------- ----------- --------- -------- ------------- 8,107 8,506 30,162 36,777 (132,090) Other, primarily interest expense.... (3,246) (4,058) (7,892) (24,685) (32,465) ---------- ----------- --------- -------- ------------- Income (loss) before income taxes and extraordinary loss...... 4,861 4,448 22,270 12,092 (164,555)(1) Provision (benefit) for income taxes............................. 1,829 1,804 9,427 6,820 (15,900) Income (loss) before extraordinary loss................ 3,032 2,644 12,843 5,272 $(148,655)(1) ----- ----------- --------- -------- ------------- Extraordinary loss................... 630 3,539 -- -- -- --- ----------- --------- -------- ------------ Net income (loss).................... $ 2,402 $ (895) $ 12,843 $ 5,272 $(148,655)(1) ========= ========= ======== ======= ============= Earnings (loss) per common share and common share equivalents: Income (loss) before extraordinary (loss).............. $ .10 $.06 $ .38 $ .16 $(3.82) Extraordinary loss, net.............. (.05) (.22) -- -- -- ---- ---------- --------- --------- ------------ Net income (loss).................... $ .05 $ (.16) $ .38 $ .16 $(3.82) ========= ========= ========= ======== ============= Net income (loss) applicable to common stock used in computing earnings (loss) per common share...................... $ 752 $ (2,556) $ 12,843 $ 5,272 $(150,877) ========= ========= ======== ======= ========== Weighted average number of shares of common stock and equivalents outstanding........... 13,848,911 15,838,278 34,214,304 39,099,500 39,540,216 ========== ========== ========== ========== ========== Other Data: EBITDA(1)(2)......................... $ 10,117 $ 12,592 $ 38,833 $ 51,097 $(113,999) Interest Expense..................... 3,207 3,624 7,533 22,142 33,760 Depreciation and amortization(3)..... 2,010 4,086 8,671 14,320 18,091 Capital Expenditures(4).............. 783 1,284 3,594 17,965 16,215 Ratio of EBITDA to interest expense(5)........................ 3.2x 3.5x 5.2x 2.3x * Ratio of earning to fixed charges(6) ....................... 2.5x 2.0x 3.6x 1.5x * Balance Sheet Data (as of end of period): Working capital...................... $ 866 $ 32,490 $ 48,630 $ 121,057 $ 36,894 Total assets......................... 81,683 150,218 402,619 645,408 613,082 Long-term debt, net of current....... portion.............................. 14,733 34,986 115,581 234,989 237,348 Stockholders' equity................. 4,332 41,618 68,431 88,827 17,054
(1) Contributing to the loss of $148.7 miliion for the year December 31, 1996, were Consolidation and Other Charges of $118.9 million. Of the $118.9 million in charges, $40.9 million was charged to cost of sales and $15.4 million was charged to selling, general and administrative expenses. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Consolidation and Other Charges." (2) EBITDA (earnings before extraordinary items, interest, taxes, depreciation and amortization) is presented here not as a substitute for operating income, net income or cash flow from operating activities determined in accordance with generally accepted accounting principles, but rather as a measure of the Company's operating performance and ability to service debt. Certain restrictive covenants in the Indenture and the Credit Agreement are based on or related to the Company's EBITDA. (3) Excludes amortization of deferred financing costs. (4)Excludes capital expenditures incurred by acquired companies prior to acquisition. (5) For purposes of computing the ratio of EBITDA to interest expense, interest expense does not include amortization of deferred financing costs. (6) For purposes of computing the ratio of earnings to fixed charges, earnings consist of income (loss) before income taxes and extraordinary items plus fixed charges. Fixed Charges consist of interest on all indebtedness, amortization of deferred financing costs, preferred stock dividends on a pre-tax basis and that portion of rental expense (approximately one-third) that management believes to be representative of interest. * Due to ratios being less than zero, no amounts are presented herein.
Quarterly Financial Data (Unaudited) (Amounts in Thousands, Except Share Data) First Quarter Second Quarter Third Quarter Fourth Quarter 1995 1996(1) 1995 1996(2) 1995 1996 1995 1996(3) ---- ---- ---- ---- ---- ---- ---- ---- Net sales 150,249 176,188 158,768 163,168 182,516 160,636 228,792 191,107 Gross profit 28,675 32,794 30,922 21,096 36,820 28,233 48,356 5,255 Net Income (Loss) 1,696 (4,628) 2,588 (21,897) 984 (9,445) 4 (112,685) Income (loss) per common share .05 (.13) .07 (.59) .03 (.23) .01 (2.87)
(1) Included in the First Quarter loss were Consolidation and Other Charges totalling $2.9 million. See "Management's Discussion and Analysis of Financial Condition and Result of Operations - Consolidation and Other Charges" and "Results of Operations Year Ended December 31, 1996 vs. Year Ended December 31, 1995." (2) Included in the Second Quarter loss were Consolidation and Other Charges totalling $17.5 million. See "Management's Discussion and Analysis of Financial Condition and Result of Operations - Consolidation and Other Charges" and "Results of Operations Year Ended December 31, 1996 vs. Year Ended December 31, 1995." (3) Included in the Fourth Quarter loss were Consolidation and Other Charges totalling $98.5 million. See "Management's Discussion and Analysis of Financial Condition and Result of Operations - Consolidation and Other Charges" and "Results of Operations Year Ended December 31, 1996 vs. Year Ended December 31, 1995." ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Alliance is a fully integrated independent music company which creates, markets and distributes its proprietary content rights consisting of both new artist and catalog product in several genres. It is also the largest domestic full service distributor of pre-recorded music and music related products through traditional as well as emerging retail channels. In August 1996, Alvin N. Teller (the former Chairman and Chief Executive Officer of MCA Music Entertainment Group) became Co-Chairman, Chief Executive Officer and President of Alliance in order to expand the Company's proprietary content business and to consolidate and focus the operations of the Company. The Company's Proprietary Products Group consists of three primary labels: Red Ant, Concord Jazz and Castle Communications. Each of these labels specializes in particular genres of music and releases records under a number of label imprints. Red Ant (which commenced operations in 1996 and will release its first full lenght projects in 1997)specializes in the release of new product primarily in the alternative rock and urban genres, with particular focus on the identification and development of new talent. It has succeeded in acquiring rights to certain groups also sought by labels of greater size and financial resources. Concord Jazz is a label specializing in traditional and contemporary jazz by well-known jazz artists such as Mel Torme, Rosemary Clooney, Chick Corea and Maynard Ferguson. Castle Communications is primarily a catalog and re-issue label which specializes in exploiting proprietary content rights to 1960's and 1970's British rock groups such as the Kinks, Iron Maiden, Black Sabbath and the Small Faces. Castle Communications together with The St. Claire Entertainment Group (the Company's wholly-owned Canadian subsidiary) are also engaged in the creation of budget product utilizing both the Company's proprietary products and rights licensed from others. The Company's distribution operation is conducted through two groups: The One Stop Group specializing in the wholesale distribution of all available pre-recorded music product (i.e., pre-recorded music manufactured by the six major music companies: Sony Music, Time Warner, Polygram, MCA, EMI and BMG (the "Major Labels"); as well as music manufactured by independent labels ("Independent Labels")), and the Independent Distribution Group (specializing in the marketing, promotion and distribution of pre-recorded music manufactured by Independent Labels, including the Proprietary Products Group, on an exclusive and regional basis). While the Company's distribution operation services primarily store-based retail customers currently, the Company is actively seeking distribution and fulfillment opportunities with music retailers operating on-line or through the internet. The Company is the exclusive music supplier to several on-line music retail sites, and also provides music database services to many cyber-retailers, including Music Boulevard and CD Now. The Company believes that its position as the largest full service distributor of music product in the United States provides certain competitive advantages to its Proprietary Products Group over other labels with respect to identifying and attracting new talent for the Proprietary Products Group and that this advantage will enhance its growth and commercial success. Industry Conditions After sustaining significant growth from 1990 to 1995, the domestic music industry has gone through a period of little or no growth since 1995. Estimated United States retail sales volume for pre-recorded music and music videos, as published by the Recording Industry Association of America ("RIAA") totaled approximately $12.5 billion in 1996, representing a 1.5% increase from approximately $12.3 billion in 1995. This current slow down in the growth of domestic music sales has combined with (i) an over-expansion of retail outlets selling music products, (ii) substantial discount pricing on pre-recorded music by certain traditional and alternative music retailers; and (iii) changes in music consumption demographics to adversely impact the music industry in general and the Company's customers in particular. The adverse conditons have resulted in, among other things, product returns to the Company well in excess of historical levels as well as the bankruptcy of several significant customers. While the Company believes that these adverse factors are temporary in nature, no assurances can be given as to when such conditions will be alleviated. Consolidation and Other Charges In November 1996, the Company announced a comprehensive consolidation plan (the "Consolidation Plan") pursuant to which Alliance's operations are in the process of being streamlined and non-core businesses have been or are in the process of being sold or discontinued. Pursuant to the Consolidation Plan, the Company will close five of the Company's eight domestic distribution facilities by the first quarter of 1998 (a ninth facility was closed in February 1997) and centralize all administrative functions for the Company's One Stop Group and Independent Distribution Group. Additionally, the Consolidation Plan calls for the administrative functions of the Company's three domestic proprietary labels (Red Ant, Castle US and Concord Jazz) to be consolidated under Red Ant. The Consolidation Plan is expected to be completed by March 1998 and includes the elimination of approximately 851 employee positions comprised principally of warehouse, sales, management and administrative employees. When fully implemented, the Company believes that the Consolidation Plan will result in annual savings to Alliance of approximately $25 million. For the year ended December 31, 1996, the Company recorded certain charges (the "Consolidation and Other Charges") totaling $118.9 million which in large part contributed to the Company's net loss of approximately $148.7 million for the year ended December 31, 1996. These Consolidation and Other Charges consisted of: (i) $33.6 million in non-recurring charges relating to the Consolidation Plan; (ii) $53.9 million in non-recurring charges relating to the disposition of certain Non-Core Businesses; (iii) $29.4 million of charges relating to current industry conditions; and (iv) $2.0 million in non-recurring charges related to the termination of a merger agreement with Metromedia International Group, Inc. The $118.9 million is inclusive of $20.0 million which will be required to be expended in future periods. In connection with costs to be incurred pursuant to completion of the Consolidation Plan, the Company recorded charges in fiscal year 1996 of $33.6 million, $30.6 million of which was recorded by the Company in the fourth quarter. These Consolidation Plan charges included: (i) $8.9 million of severance and benefits for employees to be terminated; (ii) $4.0 million of lease termination costs; and (iii) $20.7 million relating to adjustments to carrying value of certain assets such as inventory of labels which the Company's Independent Distribution Group no longer anticipates distributing and leasehold improvements. In connection with costs to be incurred pursuant to the divestiture or discontinuation of the Company's Brazilian operations, Premier Artist Services, Inc. subsidiary, German sales office, and video rights exploitation business (these businesses are hereinafter referred to as the "Non-Core Business"), the Company recorded charges in the fourth quarter in the amount of $53.9 million, which represented: (i) a reduction in the carrying value of the Company's investment in the Non-Core Businesses to their respective net realizable values; (ii) the elimination of the unamortized costs in excess of net assets acquired with respect to the Non-Core Businesses; and (iii) results of operations of the Non-Core Businesses during the fourth quarter of 1996. In addition to the charges related to the Consolidation Plan and the Non-Core Businesses, the Company recorded additional charges for the year ended December 31, 1996 of $ 29.4 million relating to certain adverse factors affecting the United States recorded music industry including (a) over expansion of retail outlets selling music products, (b) substantial discount pricing of product by both major and alternative retailers, (c) higher than expected product returns from customers, (d) the bankruptcy of several significant customers and (e) changes in demographics and other factors slowing the growth of demand for pre-recorded music product. These industry-related charges significantly impacted the Company's distribution segment and include increased reserves for doubtful or uncollectable accounts and customer returns. While the industry conditions described above were a fundamental consideration in the Company's decision to implement the Consolidation Plan, these provisions would have been recognized even if management had not adopted a formal restructuring plan. Results of Operations The following discussion and analysis should be read in conjunction with the audited financial statements of the Company and the notes thereto included elsewhere in this Annual Report. The following table sets forth certain operating data as a percentage of net sales for the years ended December 31, 1994, 1995 and 1996.
Percentage of Sales -------------------------------------------------------------- Year Ended December 31, 1996 Pre-Consolidation ------------------------------------- 1994 1995 1996 and Other Charges(1) ---- ---- ---- -------------------- Net Sales 100% 100% 100% 100% Gross Profit 17.4 20.1 12.6 18.6 Selling, General and Administrative Expenses 10.6 13.5 20.9 18.7 Restructuring and Asset Impairment Charges -- -- 9.0 -- Amortization of Intangible Assets 1.2 1.5 1.8 1.8 Other Income (Expense) primarily Interest Expense (1.5) (3.4) (4.7) (4.7) Provision (Benefit) for Income Tax 1.7 1.0 (2.3) (1.5) Net Income (Loss) 2.4 0.7 (21.5) (5.1) - ---------------------------
(1) Cost of sales, selling general and administrative expenses, and restructuring and asset impairment charges for the year ended December 31, 1996 include Consolidation and Other Charges of $41.0 million, $15.4 million, and $62.5 million, respectively. The following table sets forth certain operating data by business segment, excluding corporate related expenses and assets, for the years ended December 31, 1994, 1995 and 1996 (in thousands).
Year Ended December 31, 1994 1995 1996 ------------------------------------------------------------------------------ Proprietary Proprietary Proprietary Distribution Products Distribution Products Distribution Products ------------ ----------- ------------ ----------- ------------ ----------- Net Sales................... $511,236 $23,869 $653,981 $66,157 $617,885 $72,933 Depreciation and Amortization................ 2,454 378 3,112 7,225 3,913 8,357 Operating Income (Loss) - - Pre-Consolidation and Other Charges (1)..... 39,305 2,832 45,419 3,639 6,120 (2,728) Operating Income (Loss) - - Post-Consolidation and Other Charges (1)..... 39,305 2,832 45,419 3,639 (48,527) (25,737) Capital Expenditures........ 1,844 2,633 5,312 1,795 5,277 2,231 Identifiable Assets......... 222,046 99,364 393,304 119,594 326,085 133,191 - ---------------------------
(1) See "Management's Discussion and Analysis of Financial Condition and Results of Operations Consolidation and Other Charges" and "Results of Operations - Year Ended December 31, 1996 vs. Year Ended December 31, 1995." Year Ended December 31, 1996 vs. Year Ended December 31, 1995 Net sales decreased from $720.3 million for the year ended December 31, 1995 to $691.1 million for the year ended December 31, 1996 or 4.1%. Net sales attributable to the Company's distribution segment for the year ended December 31, 1996 were approximately $617.9 million compared to $654.0 million for the year ended December 31, 1995. During the year ended December 31, 1996, the Company's distribution segment continued to experience lower than anticipated net sales to its customers in part due to: (i) decreased export sales; (ii) higher than expected product returns from customers as a result of weak retail sales and store closings, especially with respect to traditional music retailers; (iii) limited budgets allocated to the purchase of new product by certain of the Company's customers; and (iv) the reduction in successful new product released by the industry during 1996. Additionally, net sales in the distribution segment were negatively impacted by the downsizing of the Company's Brazilian operations in anticipation of their disposition. Net sales attributable to the Company's proprietary product segment for the year ended December 31, 1996, were approximately $72.9 million, compared to $66.2 million for the year ended December 31, 1995. Net sales for the period in the proprietary products segment were positively impacted by the exploitation of newly-acquired catalogs and the expansion of domestic label groups, but this positive impact was partially offset by a reduced demand by the Company's customers for deep catalog (as opposed to front-line or new release) product. The Company's business is seasonal with the smallest percentage of sales typically occurring in the first quarter and the largest percentage of annual sales typically occurring in the fourth quarter. The Company's gross margin decreased to 12.6% for the year ended December 31, 1996 from 20.1% for the year ended December 31, 1995. The impact of the Consolidation and Other Charges on gross margin resulted in a gross margin reduction of approximately 6% for the year ended December 31, 1996. For the year ended December 31, 1996, the gross margin of the distribution segment was 9.1%, compared to 17.6% for the year ended December 31, 1995. The impact of the Consolidation and Other Charges on gross margin for this segment resulted in a gross margin reduction of approximately 6.5% for the year ended December 31, 1996. The reduction in gross margin prior to the impact of the Consolidation and Other Charges for the distribution segment was primarily related to: (i) return disincentive penalties associated with higher than expected product return during the period; (ii) increased proportion of sales of the One Stop Group attributable to new release product as opposed to higher margin, deep catalog product; (iii) a reduction in discount buying and advertising programs offered by the six Major Labels; and (iv) the impact of the downsizing of the Brazilian operations in anticipation of their disposition. For the year ended December 31, 1996, the gross margin of the proprietary products segment was 42.7% compared to 44.8% for the year ended December 31, 1995. The impact of the Consolidation and Other Charges on gross margins for the proprietary products segment resulted in a gross margin reduction of approximately 1.0% for the year ended December 31, 1996. Selling, general and administrative expenses increased from $97.5 million, or 13.5% of net sales, for the year ended December 31, 1995 to $144.4 million, or 20.9% of net sales, for the year ended December 31, 1996. The Company's selling, general and administrative expenses as a percentage of net sales increased on an overall basis in the period for several reasons including: (i) non-recurring charges of approximately $15.4 million associated with the Consolidation and Other Charges; (ii) the incremental costs of processing higher than anticipated customer returns during the period; (iii) costs associated with the duplication of certain overhead related to the Consolidation Plan; and (iv) the inclusion of a full year of results for Independent National Distributors, Inc. ("INDI") and One Way Records, Inc. ("One Way") in 1996 as compared to five months of results for INDI and four month of results for One Way for the year ended December 31, 1995. Net income for the year ended December 31, 1995 was $5.3 million compared to a net loss for the year ended December 31, 1996 of $148.7 million primarily due to the impact of the Consolidation and Other Charges discussed above. The impact of the Consolidation and Other Charges on the net loss for the year ended December 31, 1996, was $113.4 million. The remaining reduction from the year ended December 31, 1995 was primarily related to losses from operations discussed above as well as increased interest expense of $11.6 million resulting from: (i) higher interest rates associated with the Company's borrowings under the 11 1/4% Senior Subordinated Notes, the proceeds of which were utilized to finance strategic acquisitions; (ii) increased working capital requirements related to the companies acquired in 1995; (iii) higher interest rates associated with working capital borrowings by the Company's Brazilian operations; and (iv) an on-going timing difference between investing in copyright acquisitions by the Proprietary Products Group and the generation of sales associated with products produced pursuant to such acquired rights. For the year ended December, 1996, the Company recognized tax benefits of approximately $15.9 million representing the effect of net operating loss carry forwards and other frontline deductible amounts which management believes will be recognized in future periods although no assurance can be given with respect to the realization of such benefits. Year Ended December 31, 1995 vs. Year Ended December 31, 1994 Net sales increased from $535.2 million for the year ended December 31, 1994 to $720.3 million for the year ended December 31, 1995, or 34.6%, as a result of (i) inclusion of five months of net sales of INDI ($38.8 million); (ii) inclusion of four months of net sales of One Way ($16.3 million); (iii) increased domestic net sales to existing as well as new customers; and (iv) a $26.2 million increase in net sales by the Company's Brazilian operations, despite relatively flat sales in the industry during this period (See "Business-Music Industry Overview"). Net sales attributable to the Company's distribution segment for the year ended December 31, 1995 were approximately $654.0 million compared to $511.3 million for the year ended December 31, 1994. Sales attributable to the Company's proprietary product segment for the year ended December 31, 1995 were approximately $66.2 million, compared to $23.9 million for the year ended December 31, 1994. Sales for the year ended December 31, 1994 included only four months of sales of Castle and only one month of sales for Concord. The Company's business is seasonal with the smallest percentage of sales typically occurring in the first quarter and the largest percentage of annual sales typically occurring in the fourth quarter. The Company's gross margin increased to 20.1% for the year ended December 31, 1995 from 17.4% for the year ended December 31, 1994. For the year ended December 31, 1995, the gross margin of the distribution segment was 17.6%, compared to 16.3% for the year ended December 31, 1994. The increase was due in part to the relatively higher gross margin associated with sales of independent label product and budget product by the Company's Independent Distribution Group pursuant to exclusive and regional distribution agreements. For the year ended December 31, 1995, the gross margin of the proprietary products segment was 44.8% compared to 45.2% for the year ended December 31, 1994. The Company believes that gross margins as a percent of sales of the proprietary products segment may decline in the future as the Company implements its plan to distribute directly rather than license more of its proprietary products. The Company believes that the increase in expected sales as a result of the strategy to distribute directly rather than license its proprietary product will be sufficient to offset the adverse effect resulting from the possible decrease in gross margins. Selling, general and administrative expenses increased from $56.7 million or 10.6% of net sales for the year ended December 31, 1994 to $97.5 million or 13.5% of net sales for the year ended December 31, 1995. While selling, general and administrative expenses as a percentage of net sales of the One Stop Group was relatively unchanged, the Company's selling, general and administrative expenses as a percentage of net sales increased on an overall basis in the period for several reasons including (i) less than anticipated sales (especially in the fourth quarter); (ii) the inclusion in 1995 of acquired companies with higher marginal marketing and promotional expenses in both the Proprietary Products Group and Independent Distribution Group, (iii) increases in corporate overhead and expenses related to legal, accounting, information systems and other services provided to the Company's operating units to assist them in integrating acquired companies and implementing the Company's modernization program and (iv) higher than expected selling, general and administrative expenses incurred in connection with the relocation of a distribution facility to Santa Fe Springs, California. Net income for the year ended December 31, 1995 decreased $7.6 million or 59.0% from that of the year ended December 31, 1994 primarily as a result of (i) the increase in selling, general and administrative expenses discussed above, (ii) increased amortization of intangible assets associated with acquisitions ($5.0 million for the year ended December 31, 1994 to $6.4 million for the year ended December 31, 1995); (iii) the Company's higher effective income tax rate (42% for the year ended December 31, 1994 to 56.4% for the year ended December 31, 1995); and (iv) increased interest expense of $14.6 million resulting from: (a) higher interest rates associated with the Company's borrowings under the 11 1/4% Senior Subordinated Notes; (b) increased effective interest rates on the Company's borrowings under its Credit Agreement from 7.3% for the year ended December 31, 1994 to 8.8% for the year ended December 31, 1995; (c) increased borrowings to finance higher than expected inventory levels related to, among other things, purchases of extra inventory in connection with the relocation into a new warehouse facility in Santa Fe Springs, California; (d) additional borrowings to finance acquisitions; (e) increased working capital requirements related to the increase in sales; and (f) an on-going timing difference between the financing of copyright acquisitions by the Proprietary Products Group and the generation of sales associated with products produced pursuant to such acquired rights. Liquidity and Capital Resources Cash Used in Operations Cash used in operations for the year ended December 31, 1996 was $38.1 million compared to $67.3 million for the year ended December 31, 1995. Accounts receivable for the period decreased by $20.2 million or 10%, primarily as a result of the Company's decrease in net sales and the impact of Consolidation and Other Charges of $26.9 million related to increased reserves for doubtful or uncollectible accounts. Inventory for the period decreased $28.2 million or 15% as a result of (i) the Company's decrease in net sales, (ii) Consolidation and Other Charges of $17.7 million relating to the write-down to its net-realizable value of inventory of labels which the Company's Independent Distribution Group no longer anticipates distributing and (iii) an on-going inventory reduction initiative implemented as part of the Consolidation Plan. Accounts payable and accrued expenses increased by $38.2 million or 17%, primarily as a result of Consolidation and Other Charges of $20.0 million. Cash Used in Investing Activities The Company's capital expenditures for the year ended December 31, 1996, were $16.2 million compared to $18.0 million for the year ended December 31, 1995. The capital spending during the year ended December 31, 1996 was primarily focused on the modernization of the Company's Coral Springs, Florida facility and the acquisition of computer hardware to enable the execution of the Consolidation Plan. Total capital expenditures related to these two activities were $14.1 million for 1996. The Company spent $18.5 million for the acquisition of proprietary music rights in the year ended December 31, 1996, compared to $20.9 million for the year ended December 31, 1995. The Company anticipates continued expenditures related to the acquisition of proprietary music rights as opportunities are presented that are consistent with the Company's long term objectives. Consolidation Plan The Company anticipates cash requirements of approximately $20.0 million to fully complete its Consolidation Plan. Cash Provided from Financing Activities During the year ended December 31, 1996, the Company generated net proceeds from financing activities of $61.5 million consisting primarily of: (i) $42.25 million of Series A Convertible Preferred Stock issued on July 16, 1996, and (ii) $15 million of Series B Convertible Preferred Stock and 6% Exchangeable Notes due 2001. On March 31, 1997, the Company and Chase Manhattan Bank, as agent for the banks (the "Senior Lenders") who are parties to the Third Amended and Restated Credit Agreement (the "Credit Agreement") agreed to amended the Credit Agreement to waive covenant defaults in existence prior to December 31, 1996, and to modify the financial covenants for future periods. Additionally, the amended Credit Agreement requires that the Company raise at least $35 million in equity capital (the "Equity Condition") before July 1, 1997. Although management believes that the Company will be able to raise such equity, the failure to complete such financing prior to the specified date will constitute an event of default under the Credit Agreement. There can be no assurance that the Company will be in compliance with the modified convenants in future periods or satisfy the Equity Condition prior to July 1, 1997. In the event that the Company fails to meet its covenants or does default in its obligations under the Credit Agreement, the Senior Lenders would have the right to terminate the revolving credit facility and declare all outstanding loans, interest and other amounts payable under the Credit Agreement, immediately due and payable. In the event of such termination and acceleration, the Company would be unable to satisfy its obligations under the Credit Agreement without obtaining additional financing from third parties. In order to satisfy the Equity Condition, the cash requirements of the Consolidation Plan, enhance the Company's working capital position and provide needed capital for the expansion of the Company's proprietary content business, the Company is actively pursuing various of the following financing alternatives, including: (i) an investment, subject to certain conditions, from a group including its existing investors to acquire newly-issued securities of the Company or one of its subsidiaries; (ii) an investment proposal from a third party, subject to a due diligence investigation and other conditions, to make a significant capital commitment to the Company in connection with a general recapitalization of the Company; and (iii) a rights offering of $35 million of convertible preferred stock in which Wasserstein & Co. has agreed, to act as a stand-by purchaser for up to $17.5 million of rights, subject to certain conditions, including, other shareholders subscribe for not less than $17.5 milion in rights. Although no assurances can be given, the Company believes that it will be successful in obtaining the financing necessary to satisfy the Equity Condition through one of the foregoing alternatives or other alternatives which should provide it with adequate working capital to achieve its business plans though the remainder of 1997. Forward-Looking Statements Forward-looking statements herein are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as the Company "believes," "expects," "anticipates," or words of sumilar import. Similarly, statements that describe the Company's future plans, objectives, estimates or goals are forward-looking statements. There are certain important factors that could cause results to differ materially from those anticipated by forward-looking statements made herein. Investors are cautioned that all forward-looking statements involve risks and uncertainty. In addition to the factors discussed above, among the factors that could cause actual results to differ materially are the following: availability of new release product, pricing strategies of competitors, public demand for various styles of recorded music, product returns from customers and overall economic conditions. New Accounting Pronouncements In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share (FAS 128). FAS 128 specifies new standards designed to improve the EPS information provided in financial statements by simplifying the existing computational guidelines, revising the disclosure requirements, and increasing the comparability of EPS data on an international basis. Some of the changes made to simplify the EPS computations include: (a) eliminating the presentation of primary EPS and replacing it with basic EPS, with the principal difference being that common stock equivalents are not considered in computing basic EPS, (b) eliminating the modified treasury stock method and the three percent materiality provision, and (c) revising the contingent share provisions and the supplemental EPS data requirements. FAS 128 also makes a number of changes to existing disclosure requirements. FAS 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. The Company has not yet determined the impact of the implementation of FAS 128. Item 8. Index Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Accountants 32 Consolidated Balance Sheets 33 Consolidated Statements of Operations 34 Consolidated Statement of Stockholders' Equity 35 Consolidated Statements of Cash Flow 36 Notes to Consolidated Financial Statements 38 Report of Independent Accountants The Board of Directors and Stockholders of Alliance Entertainment Corp. We have audited the accompanying balance sheets of Alliance Entertainment Corp. and subsidiaries as of December 31, 1995 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Alliance Entertainment Corp. and subsidiaries as of December 31, 1995 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Miami, Florida February 28, 1997, except for the information in Note 4, as to which the date is March 31, 1997 PART I - FINANCIAL INFORMATION Item 1. Financial Statements ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, (Amounts in Thousands, Except Share Data)
1995 1996 ----------------- -------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 12,852 $ 8,669 Accounts receivable, less allowance for doubtful accounts of 1995 $4,964; 1996 $15,558 193,785 173,619 Inventory 192,604 164,380 Advances and other prepaid expenses 24,609 22,739 Refundable income taxes 783 11,260 Deferred income taxes 9,061 5,798 ----------------- -------------- Total current assets 433,694 386,465 ----------------- -------------- INVESTMENTS, at cost 782 1,100 PROPERTY AND EQUIPMENT 24,826 33,793 COPYRIGHTS, less accumulated amortization 64,150 62,917 COST IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED, less accumulated amortization 97,262 93,727 COVENANTS NOT TO COMPETE, less accumulated amortization 10,586 8,366 DEFERRED INCOME TAXES 1,894 9,798 OTHER ASSETS, less accumulated amortization 12,214 16,916 --------------- ------------ TOTAL ASSETS $ 645,408 $ 613,082 ================= ============ CURRENT LIABILITIES AND STOCKHOLDERS' EQUITY Notes payable $ 73,700 $ 72,671 Current maturities of long-term debt 8,983 8,305 Current obligations under capital leases 432 582 Accounts payable and accrued expenses 229,088 267,187 Income taxes payable 434 826 ----------------- -------------- Total current liabilities 312,637 349,571 ----------------- -------------- LONG-TERM DEBT 234,622 236,215 OBLIGATIONS UNDER CAPITAL LEASES 367 1,133 DEFERRED INCOME TAXES 8,955 9,109 COMMITMENTS STOCKHOLDERS' EQUITY Series A convertible preferred stock, $.01 par value, 886,240 shares authorized, shares issued and outstanding 1995 0; 1996 422,500 ( $43,812 liquidation preference) - 4 Series B convertible preferred stock, $.01 par value, 300,000 shares authorized, shares issued and outstanding 1995 0; 1996 57,500 ( $5,760 liquidation preference) - 1 Common stock, $.0001 par value, 100,000,000 shares authorized, shares issued and outstanding 1995 35,638,331; 1996 44,764,853 3 4 Additional paid-in capital 71,276 146,665 Employee notes for stock purchases (67) (67) Retained earnings (deficit) 17,369 (131,286) Foreign currency translation adjustment 246 1,733 ----------------- -------------- Total stockholders' equity 88,827 17,054 ----------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 645,408 $ 613,082 ================= ==============
The accompanying notes are an integral part of these financial statements. ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, (Amounts in Thousands, Except Share Data)
1994 1995 1996 ----------------- -------------- -------------- Net sales $ 535,195 $ 720,325 $ 691,099 Cost of sales 442,004 575,552 603,721 ----------------- -------------- -------------- Gross profit 93,191 144,773 87,378 Selling, general and administrative expenses 56,714 97,496 144,402 Restructuring and asset impairment charges - - 62,498 Amortization of intangible assets 6,315 10,500 12,568 ----------------- -------------- -------------- 63,029 107,996 219,468 ----------------- -------------- -------------- 30,162 36,777 (132,090) ----------------- -------------- -------------- Other income (expense) Amortization of deferred financing costs (599) (1,325) (1,903) Other income (expense) - net 240 (1,218) 3,198 Interest expense (7,533) (22,142) (33,760) ----------------- -------------- -------------- (7,892) (24,685) (32,465) ----------------- -------------- -------------- Income (loss) before income taxes 22,270 12,092 (164,555) Provision (benefit) for income taxes 9,427 6,820 (15,900) ----------------- -------------- -------------- Net income (loss) $ 12,843 $ 5,272 $ (148,655) ================= ============== ============== Earnings (loss) per common share and common share equivalents $ .38 $ .16 $ (3.82) ================= ============== ============== Net income (loss) applicable to common stock used in computing earnings (loss) per common share $ 12,843 $ 5,272 $ (150,877) ================= ============== ============== Weighted average number of shares of common stock and equivalents outstanding 34,214,304 39,099,500 39,540,216 ================= ============== ==============
The accompanying notes are an integral part of these financial statements.
ALLIANCE ENTERTAINMENT CORP. AND SUBISIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Amounts in Thousands, Except Share Data) Capital Stock Issued ------------------------------------------------------ Employee Foreign Series A Series B Additional Notes for Retained Currency Preferred Preferred Common Paid-In Stock Earnings Translation Stock Stock Stock Capital Purchases (Deficit) Adjustment ---------- ------------ ---------- ------------- ------------ ------------ --------- Balance at December 31, 1993 $ - $ - $ 3 $ 42,397 $ (36) $ (746) $ - Issuance of 2,273,223 shares of common stock for purchase of companies - - - 13,707 - - - Exercise of options for 262,500 shares of commonstock in exchange for employee notes - - - 31 (31) - - Exercise of options for 249,500 shares of common stock - - - 51 - - - Exercise of warrants for 100 shares of common stock - - - 1 - - - Adjustment for costs incurred in connection with Trinity Merger - - - (224) - - - Net income - - - - - 12,843 - Translation adjustment - - - - - - 435 ---------- ------------ ---------- ---------- ---------- --------- ----------- Balance at December 31, 1994 - - 3 55,963 (67) 12,097 435 Issuance of 147,309 shares of common stock for purchase of company - - - 1,300 - - - Exercise of options for 125,000 shares of common stock in exchange for employee notes - - - 15 (15) - - Payment of employee note - - - - 15 - - Exercise of options and warrants for 1,502,287 shares of common stock - - - 4,614 - - - Tax benefit related to exercise of employee stock options - - - 1,602 - - - Exchange of 4,347,095 A Warrants and 4,393,064 B Warrants for 543,387 and 337,928 shares of common stock, respectively, and costs of exchange offer, including the issuance of 66,375 shares of common stock - - - (518) - - - Exchange of $8,000,000 of preferred stock and accumulated dividends of subsidiary for 1,518,972 shares of common stock - - - 8,300 - - - Net income - - - - - 5,272 - Translation adjustment - - - - - - (189) ---------- ------------ ---------- ------------- ------------ ------------ --------- Balance at December 31, 1995 - - 3 71,276 (67) 17,369 246 Exercise of options and warrants for 2,372,563 shares of common stock - - - 2,969 - - - Issuance of 6,753,959 shares of common stock for purchase of companies - - 1 27,074 - - - Issuance of 422,500 shares of series A convertible preferred stock 4 - - 40,761 - - - Issuance of 57,500 shares of series B convertible preferred stock - 1 - 6,807 - - - Deemed dividend on issuance of series B convertible preferred stock - - - (2,222) - - - Net loss - - - - - (148,655) - Translation adjustment - - - - - - 1,487 ========== ============ ========== ============= ============ ============ ========= Balance at December 31, 1996 $ 4 $ 1 $ 4 $ 146,665 $ (67) $ (131,286) $ 1,733 ========== ============ ========== ============= ============ ============ =========
The accompanying notes are an integral part of these financial statements. ALLIANCE ENTERTAINMENT CORP. AND SUBISIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, (Amounts in Thousands)
1994 1995 1996 ----------------- -------------- -------------- Cash Flows From Operating Activities Net income (loss) $ 12,843 $ 5,272 (148,655) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 9,270 15,645 19,994 Restructuring and asset impairment charges - - 55,908 Other non cash charges - - 27,037 Change in assets and liabilities: net of effect of acquisitions (Increase) in accounts receivable (42,038) (44,987) (9,865) (Increase) decrease in inventory (33,783) (46,399) 825 (Increase) decrease in prepaid expenses and other 5,054 (5,786) (2,979) (Increase) in deferred income taxes (1,113) - (5,505) Increase in accounts payable and accrued expenses 50,631 12,656 34,488 Increase (decrease) in income taxes payable 1,834 (3,694) (10,038) ----------------- -------------- -------------- Net cash provided by (used in) operating activities 2,698 (67,293) (38,790) ----------------- -------------- -------------- Cash Flows From Investing Activities Purchase of property and equipment, net (3,594) (17,965) (16,215) (Increase) in copyrights - (20,863) (18,462) (Increase) in other assets (1,260) (336) (5,676) Purchase of businesses including costs, net of cash acquired (74,080) (40,909) 11,149 ----------------- -------------- -------------- Net cash used in investing activities (78,934) (80,073) (29,204) ----------------- -------------- -------------- Cash Flows From Financing Activities Increase (decrease) in excess of outstanding checks over bank balance (48) 5,874 2,093 Proceeds from issuance of stock (172) 12,024 48,321 Proceeds from borrowings 240,000 489,649 313,664 Payments on borrowings (155,109) (347,636) (301,336) Payments for financing costs (3,021) (7,734) (1,250) ----------------- -------------- -------------- Net cash provided by financing activities 81,650 152,177 61,492 ----------------- -------------- -------------- Effect of foreign currency translation 435 (189) 2,319 Net increase (decrease) in cash and cash equivalents 5,849 4,622 (4,183) Cash and cash equivalents Beginning of period 2,381 8,230 12,852 ----------------- -------------- -------------- End of period $ 8,230 $ 12,852 $ 8,669 ================= ============== ==============
The accompanying notes are an integral part of these financial statements. ALLIANCE ENTERTAINMENT CORP. AND SUBISIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued YEAR ENDED DECEMBER 31, (Amounts in Thousands)
1994 1995 1996 ----------------- -------------- -------------- Supplemental Disclosure of Cash Flow Information Cash payments for interest $ 6,997 $ 14,092 $ 30,921 Cash payments for income taxes $ 7,711 $ 10,217 $ 2,690 Supplemental Disclosure of Noncash Investing and Financing Activities Common stock issued to employees for notes $ 31 $ 15 $ - Acquisition of subsidiary Cash purchase price, net of cash acquired $ 74,080 $ 40,909 $ (11,149) Working Capital acquired, net of cash and cash equivalents $ (3,345) $ 133 $ 2,813 Fair value of other assets acquired, principally property and equipment 2,277 5,652 1,267 Copyrights 51,236 - - Cost in excess of net assets of business acquired 39,360 38,594 11,856 Covenant not to compete 5,000 2,528 - Long-term debt assumed (1,741) (81) (10) Long-term debt incurred (5,000) (4,600) - Common stock issued (13,707) (1,317) (27,075) ----------------- -------------- -------------- $ 74,080 $ 40,909 $ (11,149) ================= ============== ==============
The accompanying notes are an integral part of these financial statements. ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Nature of Business and Significant Accounting Policies: Nature of Business: Alliance Entertainment Corp. (the "Company"), through its wholly-owned subsidiaries, is a fully integrated independent music company which operates in two segments of the music industry, the distribution of music and music related products through traditional as well as emerging retail channels (the "Distribution Segment") and the creation and marketing of proprietary content rights consisting of both new artists and catalog product in several genres (the "Proprietary Segment"). The Company's operations are located in the United States, United Kingdom and Canada. The Company has disposed of its Brazilian and German Operations (see Note 3). Management Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates inherent in the preparation of the accompanying consolidated financial statements include management's forecast of future cash flows used as a basis to assess recoverability of intangible assets such as copyrights and cost in excess of net assets acquired. Sales in the music industry generally give certain customers the right to return product. The Company provides reserves for inventory, accounts receivable and artists advances. In addition, the Company's suppliers generally permit the Company to return products that are in the suppliers current product listing. Management periodically reviews its significant accounting estimates, and it is reasonably possible that reserves may change based on actual results and other factors. Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned domestic and foreign subsidiaries. All material intercompany accounts and transactions are eliminated in consolidation. Inventories: Inventories consisting of primarily distributed products are stated at the lower of cost or market with cost determined principally on the average cost basis. Foreign Currency Translation: The Company accounts for translation of foreign currency in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation". For operating subsidiaries where the functional currency is the local currency rather than the U.S. dollar, cumulative translation adjustments are reflected as a separate component of Stockholder's Equity. The Company's Brazilian subsidiaries which are under contract for sale are considered by the terms of SFAS No. 52 to be in a "highly inflationary" economy and accordingly the U.S. dollar has been used as the functional currency. Therefore, certain assets of these operations are translated at historical exchange rates and all translation adjustments have been reflected in the consolidated statement of operations. ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Nature of Business and Significant Accounting Policies, (Continued): Revenue Recognition: Revenue from the sale and distribution of pre-recorded music, music accessories and other related products is recognized when the products are shipped. Income from the sale or licensing of media rights is recognized when the sale has been completed or obligations of the licensor have been performed, including delivery of the master of such rights to the licensee. Property and Depreciation: Property and equipment is carried at cost. Depreciation, including amortization of equipment held under capital leases, is computed using straight-line and accelerated methods over the estimated useful lives of the various classes of depreciable assets or, in the case of equipment held under capital leases, over the lesser of the useful life or the lease term. Maintenance and repairs are expensed as incurred. Upon the sale or disposition of property and equipment, the related costs and accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in income. Major renewals and betterments are capitalized. Intangibles and Other Long-Lived Assets: Copyrights and masters are carried at cost and are amortized on a straight line basis over the estimated useful lives of the copyrights and masters, generally five to twenty years. The cost in excess of net assets of businesses acquired at the respective acquisition dates is amortized on a straight line basis principally over 20 years. Covenants not to compete are carried at cost and are amortized on a straight line basis over the respective terms of the covenants, ranging from five to ten years. Deferred loan costs, amounting to $10,923,000 in 1995 and $10,188,000 in 1996 are included in other assets and are amortized over the terms of the related loans. The Company evaluates the recoverability of intangibles at the operating group level through analysis of operating results and consideration of other significant events or changes in the business environment. The determination of whether impairment exists is made on the basis of undiscounted expected future cash flows from operations before interest for the remaining amortization period. If undiscounted expected future cash flows are not sufficient to support the recorded asset, an impairment is recognized to reduce the carrying value of the related intangibles based on the expected discounted cash flows of the related operating group. Substantial intangibles have been written off as of December 31, 1996 in connection with certain management restructuring initiatives which has resulted in, among other things, decisions to exit or dispose of certain foreign activities for nominal consideration (see Note 3). Income Taxes: Income taxes are computed in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." The statement applies an asset and liability approach that requires the recognition of deferred tax assets and liabilities based on the difference between the financial statement and the tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance reduces deferred tax assets when it is deemed more likely than not that some portion or all of the deferred tax assets will not be realized. Cash and Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or less, when purchased, to be cash equivalents. ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Nature of Business and Significant Accounting Policies, (Continued): Per Share Data: Primary earnings (loss) per common share is computed by dividing net earnings (loss) available to common stockholders by the weighted average number of common shares and, as appropriate, dilutive common stock equivalents outstanding for the period. The treasury stock method for determining the dilutive effect of common stock equivalents is modified to limit the application of funds derived from the exercise of options and warrants to the repurchase of common stock to 20% of the common stock outstanding at the end of each fiscal period. In the application of the modified treasury stock method, funds derived in excess of the 20% limitation were assumed to have been used to reduce interest bearing debt. The application of the modified treasury stock method in fiscal year 1995 resulted in an adjustment to net income of approximately $ 858,000, for the purpose of earnings per share computations, to reflect reduced interest expense, net of the related income tax benefit. In determining net loss per share in fiscal year 1996, net loss applicable to common shareholders was increased by a deemed dividend of approximately $2.2 million recognized upon the issuance of the Company's Series B convertible preferred stock in December 1996. Fully diluted earnings per share have not been presented because the effect is anti-dilutive. Stock Options: Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation," encourages but does not require companies to record compensation cost for stock based employee compensation plans at fair value. The Company has chosen to continue to account for stock based compensation using the intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation cost for stock options is measured based on the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the exercise price of the option. Any current income tax benefit from the exercise and early disposition of stock options is accounted for as a credit to additional paid-in-capital. Change in Accounting Standards: In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share (FAS 128). FAS 128 specifies new standards designed to improve the EPS information provided in financial statements by simplifying the existing computational guidelines, revising the disclosure requirements, and increasing the comparability of EPS data on an international basis. Some of the changes mad to simplify the EPS computations include: (a) eliminating the presentation of primary EPS and replacing it with basic EPS, with the principal difference being that common stock equivalents are not considered in computing basic EPS, (b) eliminating the modified treasury stock method and the three percent materiality provision, and (c) revising the contingent share provisions and the supplemental EPS data requirements. FAS 128 also makes a number of changes to existing disclosure requirements. FAS 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. The Company has not yet determined the impact of the implementation of FAS 128. Reclassifications: Certain amounts appearing in the 1994 and 1995 consolidated financial statements have been reclassified to conform with the 1996 presentation. Note 2 - Business Combinations: On February 4, 1994, the Company acquired all of the outstanding shares of Airlie, Inc. ("Abbey Road") and entered into a covenant not to compete with its majority shareholder and chief executive officer. The consideration for the acquisition and covenant not to compete of $30,766,000 and $5,000,000, respectively, consisted of (1) $17,690,000 in cash, (2) 1,897,778 shares of common stock valued at $12,810,000, (3) a $5,000,000 note to sellers, and (4) other acquisition costs of $266,000. ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 2 - Business Combinations, (Continued): During September 1994, the Company, through AEC Holdings (UK) Limited, its wholly owned subsidiary, acquired the issued and outstanding share capital of Castle Communications, plc ("Castle"). The purchase price, paid in cash, was approximately $38,570,000, with other acquisition costs of approximately $2,561,000. During 1994, the Company acquired Premiere Artist Services, Inc., Disquemusic Ltda., Brasison Ltda., ExecuSoft Inc., Concord Jazz, Inc. and certain assets of Nova Distributors and Fiebra Latina for an aggregate initial stock and cash consideration of approximately $13,447,000, including other acquisition costs of $267,000. In connection with an acquisition made in 1994, the Company agreed to issue additional shares of its common stock to the selling shareholders upon the occasion of specified events. During 1995, the Company made cash payments to the selling shareholders in the amount of $1,475,000 in lieu of the issuance of additional shares. These payments have been included as an element of the cost of the acquisition. On July 26, 1995, the Company acquired through merger INDI Holdings, Inc. ("INDI") for a total consideration of $25,525,000 in cash and notes, as adjusted. In connection with the acquisition of INDI, the Company refinanced substantially all existing INDI indebtedness, in the amount of approximately $19,300,000. On September 5, 1995, the Company acquired One Way Records, Inc. and an affiliated Independent Label (together, "One Way"), for a total consideration of $16,500,000 in cash, notes and 147,309 shares of Alliance common stock. In connection with the acquisition of One Way, the Company refinanced substantially all existing One Way indebtedness in the amount of approximately $4,700,000. The merger agreement among the Company, One Way and the One Way selling shareholders provided for the payment of additional consideration to the selling shareholders based on the operating profit of One Way for fiscal year 1995, as defined. This additional consideration was paid in March 1997 through the issuance of 225,352 shares of Alliance common stock to the selling shareholders. On August 27, 1996, the Company acquired Red Ant L.L.C., ("Red Ant"), from Companies owned by Mr. Alvin N. Teller and Wasserstein & Co., Inc., ("WCI"), in exchange for (i) 760,823 shares of the Company's common stock issued to Mr. Teller and 5,957,928 shares of Common Stock issued to WCI and its affiliates and (ii) the right for Mr. Teller and WCI affiliates to receive additional shares of common stock contingent upon the market price of the Common Stock achieving defined target prices or upon certain events. The acquisition of Red Ant for shares of the Company's Common Stock with an aggregate value of approximately $26,875,000 and other acquisition costs of $1,109,000 resulted in the recognition of costs in excess of net assets acquired in the amount of $8,720,000. Mr. Teller has become Co-Chairman, Chief Executive Officer and President of Alliance. Also, in October, 1996 the Company acquired Matrix Software, Inc. for an aggregate initial stock and cash consideration of approximately $400,000, plus other acquisition costs of $149,000. In connection with the acquisition, the Company agreed to the payment of additional cash and stock consideration upon the occasion of specified events in the maximum amount of $3,100,000. The acquisitions have been accounted for as purchases and accordingly, the acquired assets and liabilities have been recorded at their estimated fair values at the respective acquisition dates. The results of operations of these acquired entities are included in the consolidated results of operations for the periods subsequent to their respective acquisition dates. ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 2 - Business Combinations, (Continued) Unaudited pro forma data giving effect to the purchases of significant subsidiaries in 1995 as if they had been consummated as of the beginning of 1995 are shown below. The pro forma data has been prepared for comparative purposes only and does not purport to be indicative of what would have occurred had the acquisitions been made at that date or the results which may occur in the future. 1995 ------------------- Net Sales $784,430,000 Net Loss (535,000) Net Loss Per Share $(.02) Pro-forma financial information has not been presented by the Company with respect to the 1996 acquisitions because such information would not be materially different from the historical information presented herein. Note 3 - Restructuring and Other Charges: On November 14, 1996, the Company announced a significant Consolidation Plan (the "Consolidation Plan") involving its North American operations. Pursuant to the Consolidation Plan the Company anticipates the closure of five of the Company's remaining eight domestic distribution facilities (one facility was closed in February 1996) and the centralization of all administrative functions for the Company's One Stop Group and Independent Distribution Group. Additionally, under the Consolidation Plan, the administrative functions of the Company's three domestic proprietary labels (Red Ant, Castle (US) and Concord Jazz) will be consolidated under Red Ant. The Consolidation Plan is expected to be completed by March 1998 and includes the elimination of approximately 851 employee positions. The eliminated positions are principally comprised of warehouse, sales, management and administrative employees. The Company recorded a $33.6 million restructuring charge in fiscal year 1996, $30.6 million of which was recorded in the fourth quarter, to account for the cost incurred as a result of adopting the Consolidation Plan. Restructuring and asset impairment charges reported in fiscal year 1996 included $21.9 million while the remainder was charged to cost of sales. The restructuring charge recorded included severance and benefits for employees to be terminated ($8.9 million), lease termination costs ($4.0 million) and adjustments to the carrying value of certain assets such as inventory and leasehold improvements ($20.7 million). In the fourth quarter of 1996, management finalized its evaluation of the possible divestiture of the Company's Brazilian operations and Premier Artists Services (PAS) subsidiary and committed to a plan of divestiture. The divestiture is expected to be completed in the first quarter of 1997 and will result in the disposal of the subsidiaries for nominal consideration. The Company recorded losses in the fourth quarter in the amount of $33.7 million reflecting the results of operations of these subsidiaries and the reduction of the carrying value of its investment in these operations to their respective net realizable values. Restructuring and asset impairment charges reported in fiscal year 1996 included charges for the impairment of goodwill in the amount of $11.7 million and the write-down of the residual net assets in the amount of $8.7 million as a result of the divestiture of these operations. ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3 - Restructuring and Other Charges,(Continued): Also, during the fourth quarter, the Company made a decision to discontinue the exploitation of video rights in the United Kingdom and close the Company's German operation. Restructuring and asset impairment charges reported in fiscal year 1996 included charges of $17.8 million to write-down the carrying value of video intangibles and $2.4 million to recognize exit costs, incurred in connection with this decision. In addition to the restructuring charges recorded in connection with the adoption of the Consolidation Plan, the Company recorded additional provisions in fiscal year 1996 for uncollectable accounts and the write-down of inventory to net realizable value in the amount of $29.4 million. These amounts reflect the Company's experience with a number of adverse factors pervasive throughout the recorded music industry including a) over expansion of the retail sector serving the industry, b) discounting of product by both major and alternative retailers, and c) changes in demographics and other factors effecting the demand for pre-recorded music product. While these industry conditions were a fundamental consideration in the Company's decision to implement the Consolidation Plan, these provisions and write-downs would have been recognized even if management had not adopted a formal restructuring plan. Lastly, the Company recorded non-recurring charges of approximately $2.0 million related to the termination of a merger agreement with Metromedia International Group, Inc. The total liabilities established during the year to account for all restructuring and other non-recurring charges were approximately $23.4 million of which $20.0 million were still unpaid as of December 31, 1996. The following table summarizes the impact of charges described above by financial line: Financial Line Amount Cost of Sales $40,948,000 Selling, General and Administrative Expenses 15,435,000 Restructuring and Asset Impairment Charges 62,498,000 ------------------ Total $118,881,000 ================== ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 - Debt: Borrowings under long-term credit facilities as of December 31, 1995 and 1996 are comprised of the following:
1995 1996 ---- ---- Long Term Portion of Revolving Credit Agreement $60,000,000 $60,000,000 Term Loan with Banking Syndicate 47,000,000 41,000,000 6% Exchangeable Notes, net of unamortized discount of $4,444,000 - 10,000,000 11 1/4% Series B Senior Subordinated Notes due 2005 125,000,000 125,000,000 Mortgage Bond Payable 6,975,000 6,650,000 Promissory Notes Payable to former stockholders of acquired businesses, bearing interest primarily at 7% with varying principal and interest payments made semi-annually through July 1, 1998 2,900,000 1,734,000 Other Obligations Payable through 2002 1,730,000 136,000 ----------------- ----------------- 243,605,000 244,520,000 Less Current Maturities 8,983,000 8,305,000 ----------------- ----------------- $234,622,000 $236,215,000 ================= =================
The term loan and revolving credit agreements (the "Agreement") entered into with a syndicate of banks, and as amended at various dates through March 1997, provide for borrowings of up to $150 million under the revolving credit agreement and a term loan of $50 million. The term loan is payable in quarterly installments through June 2001 and provides for interest at the Company's option ranging from 0.25% - 1.5% over the Chase Manhattan Bank prime rate or 1.75% - 3% over the LIBOR rate, subject to adjustment under certain circumstances. The interest rate on the borrowings under the term loan was 8.69% as of December 31, 1996 and ranged from 8.75% to 10% as of December 31, 1995. Borrowings are available under the revolving credit facility based on eligible accounts receivable and inventory balances and bear interest at The Chase Manhattan Bank prime rate (8.25% at December 31, 1996 and 8.5% at December 31, 1995) plus a spread (1.25% at December 31, 1996) ranging from 0% to 1.25% or at the LIBOR Interest Rate plus a spread (2.75% at December 31, 1996) ranging from 1.5% to 2.75% depending upon the maintenance of certain financial ratios. Interest rates on the borrowings under the revolving credit facility ranged from 8.38% to 9.5% and 8.5% to 9.75% as of December 31, 1996 and 1995, respectively. The credit agreement provides for a commitment fee of .5% on the unused portion of the line. The Agreement places certain restrictions on the Company and certain of its subsidiaries, including restrictions on payment of dividends and requires the maintenance of net worth (as defined), and certain liquidity, debt coverage and other financial ratios. ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 - Debt, (Continued): In addition, the Agreement provides the banks the ability to terminate the revolving credit facility and declare all outstanding loans, interest and other amounts payable under the Agreement, immediately due and payable, upon a change in control of the Company, as defined. The term of the revolving credit facility expires on July 25,1999 subject to renewal under certain conditions. The Company considers $60 million of borrowings under the revolving credit facility as of December 31, 1995 and 1996, to be long term which amounts have been included in long-term debt. The unused portion of the revolving credit facility at December 31, 1996 was approximately $14,400,000 million. The borrowings, under the agreement, are collateralized by substantially all of the assets of the Company and its subsidiaries. On March 31, 1997, the Company and Chase Manhattan Bank, as agent for the banks (the "Senior Lenders") who are parties to the Third Amended and Restated Credit Agreement (the "Credit Agreement") agreed to amended the Credit Agreement to waive covenant defaults in existence prior to December 31, 1996, and to modify the financial covenants for future periods. Additionally, the amended Credit Agreement requires that the Company raise at least $35 million in equity capital (the "Equity Condition") before July 1, 1997. Although management believes that the Company will be able to raise such equity, the failure to complete such financing prior to the specified date will constitute an event of default under the Credit Agreement. There can be no assurance, that the Company will be in compliance with the modified convenants in future periods or satisfy the Equity Condition prior to July 1, 1997. In the event that the Company fails to meet its covenants or does default in its obligations under the Credit Agreement, the Senior Lenders would have the right to terminate the revolving credit facility and declare all outstanding loans, interest and other amounts payable under the Credit Agreement, immediately due and payable. In the event of such termination and acceleration, the Company would be unable to satisfy its obligations under the Credit Agreement without obtaining additional financing from third parties. In order to satisfy the Equity Condition, the cash requirements of the Consolidation Plan enhance the Company's working capital position and provide needed capital for the expansion of the Company's proprietary content business, the Company is actively pursuing various of the following financing alternatives, including: (i) an investment, subject to certain conditions, from a group including its existing investors to acquire newly-issued securities of the Company or one of its subsidiaries; (ii) an investment proposal from a third party, subject to a due diligence investigation and other conditions, to make a significant capital commitment to the Company in connection with a general recapitalization of the Company; and (iii) a rights offering of $35 million of convertible preferred stock in which Wasserstein & Co. has agreed, to act as a stand-by purchaser for up to $17.5 million of rights, that subject to certain conditions, including other shareholders subscribe for not less than $17.5 milion in rights. Although no assurances can be given, the Company believes that it will be successful in obtaining the financing necessary to satisfy the conditions of the Credit Agreement through one of the foregoing alternatives or other alternatives to provide it with adequate working capital to achieve its business plans though the remainder of 1997. On December 20, 1996, the Company entered into a Purchase Agreement among WCI, Cypress Ventures Inc., ("CVI") a wholly owned subsidiary of WCI, and BT Capital Partners, Inc. ("BTC"), pursuant to which the Company issued 57,500 shares of its Series B Convertible Preferred Stock, par value $0.01 per share (the "Series B Preferred Stock"), for $5 million to CVI, as well as $2.5 million and $7.5 million aggregate principal amount of the Company's 6% Exchangeable Notes due 2001 ("Exchangeable Notes") issued to CVI and BTC, respectively. The preferred stock has a cumulative dividend rate of 6% per annum, payable in additional shares of preferred stock and shall rank pari passu with the Company's Series A Convertible Preferred Stock. Subject to prior approval by the holders of the outstanding common stock of the Company of the issuance of sufficient shares of common stock, both the Series B Preferred Stock and the Notes are convertible into shares of common stock of the Company at an initial conversion price of $1.25 per share. The Series B Preferred Shares and Exchangeable Notes were recorded based on estimates of each instruments fair value at the time of issuance. The difference between the estimate of fair value of each instrument and the proceeds received from its issuance was accounted for as a deemed dividend on the preferred stock and unamortized discount on the issuance of debt. The fair value of each of these securities was estimated based on the number of shares of underlying common stock that the instruments are ultimately convertible into, the quoted market price of the Company's common stock at the time of the issuance of the securities and a marketability discount taking into account limits on the transferability of the common shares which may be acquired upon conversion. ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 - Debt, (Continued): In addition, the Purchase Agreement provides for a second stage of financing which is anticipated to occur in the first half of 1997, consisting of a rights offering (the "Rights Offering") of $35 million of Series C Convertible Preferred Stock, par value $0.01 per share (the "Series C Preferred Stock") of the Company. Completion of the Rights Offering is subject to further amendments to the Company's credit facilities satisfactory to WCI, CVI and BTC and other customary conditions. The Series C Preferred Stock that is proposed to be issued by the Company pursuant to the Rights Offering will be similar to the Series B Preferred Stock, but, subject to prior approval by the holders of the outstanding common stock of the Company of the issuance of sufficient shares of common stock, will convert into the Company's common stock at a conversion price equal to the lesser of $2.25 or 75% of the market price per share of common stock at the time of conversion, subject to adjustment. On July 25, 1995, the Company issued $ 125,000,000 of 11 1/4% Senior Subordinated Notes due 2005 (the "Notes") under an indenture among the Company, certain guarantor subsidiaries and Bankers Trust Company as trustee. In November 1995, the Notes were registered pursuant to the Securities Act of 1933. Interest on the Subordinated Notes is payable semi-annually. The indenture includes a number of restrictive covenants, including a limit on the payment of dividends by the Company or its guarantor subsidiaries in certain circumstances. In addition, the indenture provides that upon a change in control, as defined, the Company is obligated to make an offer to purchase all outstanding notes at a purchase price equal to 101% of the principal balance plus accrued and unpaid interest. The Notes are redeemable by the Company beginning on July 8, 2000 at redemption price of 106% of the principal balance. The redemption premium is reduced to 100% beginning on July 15, 2003. Pursuant to the terms of the indenture, the Company's payment obligations under the Notes are jointly and severally guaranteed by certain subsidiaries of the Company which are parties to the indenture. The subsidiary guarantors' obligations under their guarantee are subordinated, to the same extent as the obligation of the Company in respect of the Notes, to the prior payment in full of all senior indebtedness of such subsidiary, which include any guarantee issued by such subsidiary that constitutes senior indebtedness. The obligations of each subsidiary under its guarantee are only limited to the maximum amount that would not result in the obligation of such subsidiary under its guarantee constituting a fraudulent conveyance or fraudulent transfer under applicable law. On July 27, 1995, the Company received $6,975,000 from the City of Coral Springs, Florida (the "City") which represented the proceeds of a taxable bond offering by the City in connection with the Company's purchase of land and building. The bonds are payable in annual installments through the year 2005 and bear interest based on a floating rate (5.9% at December 31, 1996). The bonds are collateralized by letters of credit issued by Sun Trust Bank. The letters of credit carry an annual fee of 0.75% and are collateralized by a mortgage on the acquired land and building. The letter of credit was approximately $7,149,000 and $6,816,000 at December 31, 1995 and 1996, respectively. Aggregate maturities of long-term debt including the portion of the revolving credit facility the Company considers to be long-term are as follows: Year ended December 31, 1997 $8,305,000 1998 9,296,000 1999 69,604,000 2000 11,659,000 2001 6,718,000 After 2001 138,938,000 ------------- $244,520,000 ============= ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 - Debt, (Continued): Interest on selling stockholder promissory notes in 1994, 1995 and 1996 was, $425,000, $331,000, and $139,000 respectively. The fair value of the Company's debt exclusive of the Notes approximates its carrying value, and was determined with reference to the stated rates, terms and maturities of existing debt as compared to current market conditions. The fair value of the Company's Notes as of December 31, 1996 and 1995 was $91,250,000 and $125,000,000, respectively. Included in accounts payable at December 31, 1995 and 1996 are $7,327,000 and $9,420,000 respectively, of uncleared checks which were subsequently funded from borrowings under the revolving credit agreement. Note 5 - Capital Stock: In addition to the issuance of Series B Preferred Stock described in Note 4, on July 16, 1996, the Company entered into a Preferred Stock Purchase Agreement with BTC and BCI Growth IV, LP ("BCI") pursuant to which the Company issued a total of $42.25 million of new preferred stock (Series A Convertible Preferred Stock), the proceeds of which were used to fund the purchase of catalog and other proprietary rights and for general corporate purposes. BTC and BCI purchased $35 and $7.25 million of the preferred stock, respectively. The preferred stock has a cumulative dividend rate of 7 7/8% per annum, payable in additional shares of preferred stock, and is convertible into shares of the Company's common stock at a conversion rate equal to $6.10 per share of Common Stock subject to anti-dilution adjustments. The preferred stock shall be entitled to vote with the holders of common stock on any and all matters presented to the holders of common stock. In May 1995, AEC Americas, Inc. ("AEC Americas"), a wholly-owned subsidiary of the Company, issued $8.0 million of convertible preferred stock which during December 1995, together with accumulated and unpaid dividends, was exchanged pursuant to its terms, for 1,518,972 shares of the Company's common stock. Pursuant to an exchange offer, which was completed in March 1995, the Company issued 881,315 shares of its common stock upon the tender of 4,347,096 Class A Warrants and 4,393,064 Class B Warrants, previously outstanding. Costs of this exchange offer of approximately $916,000 and the issuance of 66,675 shares of common stock were charged to additional paid in capital. In 1993, in connection with the extinguishment of certain debt, the redemption of certain preferred stock and a merger, the Company issued warrants to purchase 727,950 and 657,500 shares of common stock at $5 and $8, respectively. In each 1995 and 1996, 10,000 shares were issued upon the exercise of 10,000 warrants at $5 per share. These warrants will expire in February 1998. Also in 1993, warrants to purchase 250,000 shares of common stock at $.02 were issued as consideration for financing arrangements. These warrants were exercised in 1996. The following is a summary of outstanding warrants to acquire the Company's common stock at December 31, 1996: Number of Exercise Expiration Shares Price Date 305,323 $5.20 1997 707,950 5.00 1998 657,500 8.00 1998 ---------- Outstanding at December 31, 1996: 1,670,773 ========== ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 6 - Property and Equipment: Property and equipment at December 31, 1995 and 1996, is comprised of the following:
1995 1996 ---------- ---------- Land $ 2,149,000 $ 1,845,000 Buildings 8,605,000 7,191,000 Building improvements 5,063,000 9,892,000 Machinery and equipment 3,877,000 4,854,000 Furniture and fixtures 12,242,000 22,268,000 Transportation equipment 1,805,000 1,567,000 ------------- ------------- 33,741,000 47,617,000 Less accumulated depreciation and ( 8,915,000) (13,824,000) amoritization -------------- ------------- $ 24,826,000 $ 33,793,000 ============ ===========
Included in Property and Equipment at December 31, 1996 is certain equipment held under capital leases, with an original cost of $3,283,000 and accumulated amortization of $1,454,000 at December 31, 1996. Depreciation expense was $2,275,000; $3,820,000 and $5,523,000 for the years ended December 31, 1994, 1995, and 1996, respectively. Note 7 - Income Taxes: Income tax expense (benefit) is comprised of the following components: 1994 1995 1996 ---- ---- ---- Current: Federal $ 8,647,000 $ 4,243,000 $(10,440,000) State 1,360,000 971,000 - Foreign 755,000 2,158,000 321,000 --------------- --------------- ---------------- 10,762,000 7,372,000 (10,119,000) --------------- --------------- ---------------- Deferred: Federal (1,416,000) (129,000) 779,000 State (259,000) 111,000 - Foreign 340,000 (534,000) (6,560,000) --------------- --------------- ---------------- (1,335,000) (552,000) (5,781,000) --------------- --------------- ---------------- Total: Federal 7,231,000 4,114,000 (9,661,000) State 1,101,000 1,082,000 - Foreign 1,095,000 1,624,000 (6,239,000) =============== =============== ================ $ 9,427,000 $ 6,820,000 $(15,900,000) =============== =============== ================ ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7 - Income Taxes, (Continued): The differences between the U.S. federal statutory tax rate and the Company's effective rate are as follows: 1994 1995 1996 ---- ---- ---- Tax at Statutory Rate 35.0% 35.0% (35.0)% State Taxes, Net 3.2 5.8 - Non-Deductible Amortization 3.6 9.6 1.0 Foreign Taxes at Differing Rates - 5.6 1.9 Other - Net 0.5 0.4 0.4 Change in Valuation Allowance - - 22.0 --------- ---------- ----- 42.3% 56.4% (9.7)% ========= ========== ======== Income (loss) before income taxes in 1995 and 1996 included approximately $2,719,000 and $(27,991,000) respectively, of income from foreign operations. The financial reporting bases of investments in the United Kingdom and Canada is different than their tax bases. In accordance with SFAS 109, a deferred tax liability is not recorded for the excess because the investments are essentially permanent. A reversal of the Company's plans to permanently invest in these operations would cause the excess to become taxable. On December 31, 1995 and 1996, these cumulative temporary differences were approximately $2,606,000 and $(16,465,000) respectively. The significant components of the net deferred tax asset and liability as of December 31, 1995 and 1996 were as follows: 1995 1996 ---- ---- Current Deferred Tax Assets: Inventory $2,447,000 $2,385,000 Accounts Receivable 1,768,000 6,106,000 Accrued Liabilities 4,846,000 22,936,000 --------- ---------- Current Deferred Tax Assets 9,061,000 31,427,000 --------- ---------- Long-Term Deferred Tax Assets: Advances 1,180,000 - Net Operating Loss & Capital Loss - 28,424,000 Other 714,000 948,000 ----------- ----------- Long-Term Deferred Tax Assets 1,894,000 29,372,000 ---------- ---------- Total Deferred Tax Assets 10,955,000 60,799,000 ---------- ---------- Long-Term Deferred Tax Liabilities: Masters (1,656,000) (1,587,000) Copyrights (7,287,000) (7,522,000) Other (12,000) - ------------ ----------- Total Deferred Tax Liabilities (8,955,000) (9,109,000) ----------- ----------- Deferred Income Taxes, Net 2,000,000 51,690,000 Less Valuation Allowance - (45,203,000) ---------------- ------------ Net Deferred Tax Asset $2,000,000 $6,487,000 ========== ========== ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7 - Income Taxes, (Continued): At December 31, 1996, the Company had available net operating loss carryforwards for federal, state and foreign income tax reporting purposes in the approximate amount of $53,000,000, $80,000,000 and $17,500,000, respectively. The losses expire at various dates for state and foreign purposes while the federal losses expire in 2011. Capital loss carryforwards exist at December 31, 1996 in the approximate amount of $7,000,000 expiring in 2001. The utilization of certain loss carryforwards is subject to limitations under U.S. Federal Income Tax Laws. At December 31, 1996, the Company had $60,799,000 of unrecognized net deferred tax assets available to offset future taxable income. A valuation allowance has been provided against these deferred tax assets as it is presently deemed to be more likely than not that the benefits generated by these tax assets will not be fully utilized. Management believes that the Company will generate sufficient taxable earnings to recover net deferred tax assets of $15,596,000. Determination of future taxable earnings is based on the Company's historical earnings performance, expected cost savings relating to the Consolidation Plan and projected industry growth. The Company continues to evaluate the realizability of its deferred tax assets and its estimate is subject to change. Note 8 - Stock Option Plans: The Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. SFAS No. 123 "Accounting for Stock-Based Compensation" was issued by the FASB in 1995 and, if fully adopted, changes the methods for recognition of cost on plans similar to those of the Company. Adoption of SFAS No. 123 is optional; however, pro forma disclosures as if the Company adopted the cost recognition requirements under SFAS No. 123 in 1996 are presented below. The Company generally offers fixed stock option plans which provide for the granting of non-qualified and incentive stock options to certain employees and members of the Board of Directors of the Company. Generally, options outstanding under the Company's stock option plans: (i) are granted at prices which equate to or are above the market value of the stock on the date of grant, (ii) vest ratably over a three, four or five year service vesting period, and (iii) expire either five or ten years subsequent to award. A summary or the status of the Company's fixed stock options as of December 31, 1994, 1995 and 1996 and changes during the year ended on those dates is presented below: 1994 ------------------------------ Weighted Average Shares Exercise Price Outstanding at beginning of year 5,614,550 $2.43 Granted 2,946,300 5.86 Exercised (512,000) .16 Canceled (176,659) 5.42 ---------------- Outstanding at end of year 7,872,191 3.82 ---------------- Options exercisable at year-end 4,488,000 ---------------- Options available for future grant 5,124,709 ---------------- ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8 - Stock Option Plans, (Continued): 1995 ------------------------------ Weighted Average Shares Exercise Price Outstanding at beginning of year 7,872,191 $3.82 Granted 1,939,500 6.39 Exercised (1,131,775) 2.06 Canceled (157,589) 5.77 -------------- Outstanding at end of year 8,522,327 4.62 -------------- Options exercisable at year-end 4,272,009 -------------- Options available for future grant 10,215,432 -------------- Weighted average fair value of options granted during the year $2.52 -------------- 1996 ----------------------------- Weighted Average Shares Exercise Price Outstanding at beginning of year 8,522,327 $4.62 Granted 7,271,250 5.89 Exercised (2,029,355) 1.26 Canceled (105,354) 5.56 -------------- Outstanding at end of year 13,658,868 5.78 -------------- Options exercisable at year-end 7,339,267 -------------- Options available for future grant 3,205,502 -------------- Weighted average fair value of options granted during the year $2.76 -------------- The fair value of each option granted during 1995 and 1996 is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: 1995 1996 ------------------- ------------------- Expected Life (Years) 5 8 Risk-Free Interest Rate 6.72% 6.47% Expected Volatility 30.84% 29.07% Dividend Yield 0% 0% ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8 - Stock Option Plans, (Continued): The following table summarizes information about stock options outstanding at December 31, 1996:
Options Outstanding Options Exercisable ------------------------------------------------------ ----------------------------------- Number Number Range of Exercise Outstanding at Wtgd. Avg. Remaining Wtgd. Avg. Exercisable at Wtgd. Avg. Prices 12/31/96 Contractual Life Exercise Price 12/31/96 Exercise Price - -------------------- ------------------- ------------------------ ----------------- ------------------- ----------------- $.82 150,000 6.0 $ .82 150,000 $ .82 $4.88 to $7.26 12,812,868 5.8 $5.70 6,635,272 $5.57 $7.38 to $9.31 696,000 3.4 $8.34 553,995 $8.39 - -------------------- ------------------- ------------------------ ----------------- ------------------- ----------------- $.82 to $9.31 13,658,868 5.6 $5.78 7,339,267 $5.69 - -------------------- ------------------- ------------------------ ----------------- ------------------- -----------------
Had compensation cost for the Company's 1995 and 1996 grants for stock-based compensation plans been determined consistent with SFAS No. 123, the Company's net income (loss), net income (loss) applicable to common stock, and net income (loss) per common share for 1995 and 1996 would approximate the pro forma amounts below:
1995 1995 1996 1996 As Reported Pro Forma As Reported Pro Forma ---------------- ---------------- ---------------------- ---------------------- Net income (loss) $ 5,272,000 $ 2,918,000 $ (148,655,000) $ (157,088,000) ---------------- ---------------- ---------------------- ---------------------- Net income (loss) applicable to common stock $ 5,272,000 $ 2,918,000 $ (150,877,000) $ (159,310,000) ---------------- ---------------- ---------------------- ---------------------- Net income (loss) per common share $ .16 $ .10 $ (3.82) $ (4.03) ---------------- ---------------- ---------------------- ----------------------
The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. SFAS No. 123 does not apply to awards prior to 1995, and additional awards in future years are anticipated. Note 9 - Leases: The Company has certain equipment leases, which have been accounted for as capital leases. In addition, the Company also leases facilities, computer and other equipment under various operating leases. Rent expense under all operating leases was $1,600,000, $3,369,000 and $4,339,000 for the years ended December 31, 1994, 1995, and 1996, respectively. ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 9 - Leases, (Continued): Future minimum payments under operating leases with terms of one year or more consisted of the following at December 31, 1996: Year Ending Operating December 31, Leases ------------ ------ 1997 $3,663,000 1998 3,340,000 1999 2,888,000 2000 2,713,000 2001 1,916,000 Thereafter 9,309,000 ----------- $23,829,000 =========== Note 10 - Business Activities: The Company makes a substantial amount of its sales to large customers, primarily retail chain stores. At December 31, 1995 and 1996, the ten largest customer accounts receivable balances represented $79,072,000 and $81,929,000 respectively. In addition, at December 31, 1995 and 1996, unsecured foreign accounts represented approximately 11% and 12% respectively, of accounts receivable. The Company conducts ongoing credit evaluations of its customers and requires all new customers to prepay orders or to pay COD until the customer establishes a credit history with the Company. The Company's operations by business segment for the years ended December 31, 1994, 1995 and 1996 were as follows:
Proprietary 1994 Distribution Product Corporate Consolidated Revenues $511,326,000 $23,869,000 $ - $535,195,000 Operating Income (Loss) 39,305,000 2,832,000 (11,975,000)* 30,162,000 Identifiable Assets 222,046,000 99,364,000 81,209,000 402,619,000 Depreciation and amortization 1,844,000 2,633,000 4,793,000 9,270,000 Capital Expenditures 2,454,000 378,000 762,000 3,594,000 1995 Revenues 657,124,000 63,014,000 187,000 720,325,000 Operating Income (Loss) 45,419,000 3,639,000 (12,281,000)* 36,777,000 Identifiable Assets 392,889,000 120,426,000 132,093,000 645,408,000 Depreciation and Amortization 3,112,000 7,225,000 5,308,000 15,645,000 Capital Expenditures 5,312,000 1,795,000 10,858,000 17,965,000
All amounts for 1996 are presented after Restructuring and Other Charges (see Note 3).
1996 Revenues 617,885,000 72,933,000 281,000 691,099,000 Operating Income (Loss) (48,527,000) (25,737,000) (57,826,000)* (132,090,000) Identifiable Assets 326,085,000 133,191,000 153,806,000 613,082,000 Depreciation and Amortization 3,913,000 8,357,000 7,724,000 19,994,000 Capital Expenditures 5,277,000 2,231,000 8,707,000 16,215,000
* Includes $4.1 $6.4 and $7.2 million of amortization associated with acquisition of companies in 1994, 1995 and 1996 respectively. ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10 - Business Activities, (Continued): Information about the Company's foreign operations and geographic sales for the year ended December 31, 1994, 1995 and 1996 is summarized as follows:
Foreign Operations: 1994 Brazil United Kingdom & Europe Canada ---- ------ ----------------------- ------ Sales $11,935,000 $20,782,000 $ - Operating Income 2,233,000 1,758,000 - Identifiable Assets 13,365,000 93,591,000 - 1995 Brazil United Kingdom & Europe Canada ---- ------ ----------------------- ------ Sales $35,684,000 $58,645,000 $4,065,000 Operating Income 5,309,000 2,755,000 109,000 Identifiable Assets 41,003,000 112,220,000 3,458,000 1996 Brazil United Kingdom & Europe Canada ---- ------ ----------------------- ------ Sales $18,308,000 $58,885,000 $6,986,000 Operating Income (Loss) (6,247,000) (19,441,000) 825,000 Identifiable Assets - 0 - 110,080,000 5,733,000
The Company's approximate sales by geographic region excluding its foreign operations, presented above, are as follows:
1994 1995 1996 ---- ---- ---- United States $361,183,000 $451,754,000 $448,136,000 South America and the Caribbean 58,465,000 43,632,000 41,682,000 Pacific Rim 52,744,000 103,515,000 79,605,000 Europe and Other 30,086,000 23,030,000 37,497,000 -------------- -------------- ------------- $502,478,000 $621,931,000 $606,920,000 ============ ============ ============
No individual customer accounted for 10% or more of the Company's consolidated sales in 1994, 1995 and 1996. Note 11 - Related Party Transactions: The Company has employed law firms which directors are either member of, or of counsel. In each instance the law firms are compensated on the normal hourly rate for services rendered. The Company periodically makes loans to officers and directors. At December 31, 1996 and 1995, the Company had loans to officers outstanding in an aggregate amount of approximately $1,187,000 and $480,000 respectively In September 1995, the Company entered into a lease for a warehouse and office building in Albany, New York, with a partnership owned by certain of the One Way selling shareholders, one of whom is an officer of the Company. The amount of rent charged to expense, relating to this lease in fiscal year 1995 and 1996 was approximately $108,000 and $347,000 respectively. ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 11 - Related Party Transactions, (Continued): In connection with the acquisition of INDI in July 1995, the Company assumed an obligation under an operating lease for a warehouse and office building in Dallas, Texas which are owned by one of the INDI selling shareholders. The amount of rent charged to expense, relating to this lease in fiscal year 1995 and 1996 was approximately $40,000 and $107,000 respectively. In May 1995, the Company entered into a management agreement with Bain Capital, Inc. (Bain), pursuant to which the Company retained Bain as a consultant in connection with various financial transactions for a three year term. The management agreement provides for the payment of a consulting fee of $ 200,000 during the initial year of the agreement and a minimum of $ 150,000 for each year thereafter. The Company paid Bain a fee of $ 550,000 for services rendered in connection with the issuance of its Senior Subordinated Notes in July 1995. This amount was capitalized as an element of deferred financing costs. Certain affiliates of Bain are principal holders of the Company's common stock. In connection with the acquisition of Red Ant, the Company paid a $300,000 fee to WCI. Also, in connection with the Purchase Agreement in December 1996, the Company paid a fee of $250,000 each to WCI and BTC. Pursuant to the Rights Offering the Company paid to WCI a fee of 7,500 shares of Series B Preferred Stock in consideration of WCI entering into a standby purchase commitment to purchase $17.5 million worth of rights provided that, among other things, shareholders subscribe for at least $17.5 million of rights in the Rights Offering. In addition, the Company has agreed to a financing fee to WCI and BTC on the closing date of the Rights Offering in an aggregate amount of $1,050,000. Note 12 - Retirement Plan: During 1995, the Company implemented a qualified contributory savings plan (the "Plan") as allowed under Section 401(K) of the Internal Revenue Code. The Plan permits participant contributions and allows elective Company contributions based on each participants contribution. Participants may elect to defer up to 15% of their annual compensation subject to an annual cap by contributing amounts to the Plan. The Company approved contributions of approximately $118,000 and $143,000 for the years ended December 31, 1995 and 1996, respectively. Note 13 - Contingencies: The Company is party to ordinary routine litigation incidental to its business. The Company believes that the ultimate resolution of pending litigation will not have a material effect on the Company's financial position, results of operations or cash flows. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Item 11. EXECUTIVE COMPENSATION Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Items 10, 11, 12 and 13 have been omitted from this report inasmuch as Alliance intends to file with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this report a definitive Proxy Statement for the Annual Meeting of Stockholders of Alliance scheduled to be held on June 27, 1997 at which such meeting the Stockholders will vote upon the election of directors. The information under the caption "Election of Directors" in such Proxy Statement is incorporated herein by reference. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements Financial Statements are included in Item 8, "Financial Statements and Supplementary Data." See "Index to Financial Statements" set in Item 8. (b) Reports on Form 8-K The Company's current report on Form 8-K, dated November 14, 1996, was filed by the Company as an Item 5 Form 8-K to announce the implementation of a significant Consolidation Plan. Furthermore, a Form 8-K dated December 20, 1996 was filed to report under Item 5 that the Company entered into a Purchase Agreement with Wasserstein & Co., Inc. ("WCI"), Cypress Ventures, Inc. a wholly owned subsidiary of WCI, ("CVI") and BT Capital Partnership, Inc. ("BT") pursuant to which the Company issued 57,500 shares of Series B Preferred Stock as well as $2.5 million and $7.5 million aggregate principal amount of the Company's 6% Exchangeable Notes due 2001 to CVI and BT. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Cash Provided From Financing Activities." (c) Exhibits: Exhibit Number Description of Exhibit 2.1 Merger Agreement dated December 20, 1995 by and among Metromedia International Group, Inc., Alliance Merger Corp. and the Registrant. (Incorporated by reference from Exhibit 1 filed in the Registrant's Form 8-K dated December 21, 1995 (File No. 0-20182).) 2.2 Termination and Release Agreement dated April 29, 1996. (Incorporated by reference from Exhibit 1 filed in the Registrant's Form 8-K dated April 29, 1996 (File No. 1-13054).) 3.1 Certificate of Incorporation, as amended. (Incorporated by reference from Exhibit 3.1 filed in the Registrant's Amendment No. 1 to Registration Statement on Form S-4 filed September 22, 1995 (Registration No. 33-95386).) 3.2 Revised and Restated By-Laws. (Incorporated by reference from Exhibit 3.2 filed in the Registrant's Form 10-Q for the period ended September 30, 1996. (File No.1-13054).) 3.3 Certificate of Designations. (Incorporated by reference from Exhibit 3.3 filed in the Registrants Form 10-Q for the period ended September 30,1996. (File No. 1-13054).) 4.1 Restated Stockholders' Agreement dated as of November 30, 1993. (Incorporated by reference from Exhibit 4.1 filed in the Registrant's Registration Statement on Form S-3 dated September 22, 1995 (Registration No. 33-97280).) 4.2 Amendment to Restated Stockholders' Agreement dated as of May 18, 1995. (Incorporated by reference from Exhibit 4.2 filed in the Registrant's Registration Statement on Form S-3 dated September 22, 1995 (Registration No. 33-97280).) 4.3 Indenture dated July 25, 1995 among the Company, the Subsidiary Guarantors and Bankers Trust Company, as trustee. (Incorporated by reference from Exhibit 4.1 filed in the Registrant's Registration Statement on Form S-4 filed August 3, 1995 (Registration No. 33-95386).) 4.4 First Supplemental Indenture dated July 26, 1995 among the Company, the Subsidiary Guarantors and Bankers Trust Company, as trustee. (Incorporated by reference from Exhibit 4.2 filed in the Registrant's Amendment No. 1 to Registration Statement on Form S-4 filed September 22, 1995 (Registration No. 33-95386).) 4.5 Registration Rights Agreement dated July 25, 1995 among the Company, the Subsidiary Guarantors and the Initial Purchasers. (Incorporated by reference from Exhibit 4.3 filed in the Registrant's Registration Statement on Form S-4 filed August 3, 1995 (Registration No. 33-95386).) 4.6 Purchase Agreement dated July 18, 1995 among the Company, the Guarantors and the Initial Purchasers. (Incorporated by reference from Exhibit 4.4 filed in the Registrant's Registration Statement on Form S-4 filed August 3, 1995 (Registration No.33-95386).) 4.7 Second Supplemental Indenture dated September 6, 1995 among the Company, the Subsidiary Guarantors and Bankers Trust Company, as trustee. (Incorporated by reference from Exhibit 4.5 filed in the Registrant's Amendment No. 1 to Registration Statement on Form S-4 filed September 22, 1995 (Registration No. 33-95386).) 4.8 Purchase Agreement made as of May 18, 1995, between AEC Americas Inc., and Bain Capital Fund IV L.P., Bain Capital Fund IV-B L.P., BCIP Associates and BCIP Trust Associates, L.P. (Incorporated by reference from Exhibit 4.5 filed in the Registrant's Form 10-Q for the period ended June 30, 1995 (File No. 1-13054).) 4.9 Parent Covenant Agreement dated as of May 18, 1995, by and between Alliance Entertainment Corp., AEC Americas, Inc., and Bain Capital Fund IV L.P., Bain Capital Fund IV-B L.P., BCIP Associates and BCIP Trust Associates, L.P. (Incorporated by reference from Exhibit 4.6 filed in the Registrant's Form 10-Q for the period ended June 30, 1995 (File No. 1-13054).) 4.10 Third Supplemental Indenture dated February 26, 1996, among the Company, the Subsidiary Guarantors and Bankers Trust Company as Trustee. (Incorporated by reference from Exhibit 4.10 filed in the Registrant's Form 10-Q for the period ended March 31, 1996 (File No. 1-13054).) 4.11 Preferred Stock Purchase Agreement dated July 16, 1996, between the Company, BT Capital Partners, Inc. and BCI Growth IV, L.P. (Incorporated by reference from Exhibit 4.11 filed in the Registrant's Form 8-K dated July 16,1996. (File No. 1-13054).) 4.12 Voting Agreement dated as of August 15,1996, among Joseph Bianco, John Friedman, Peter Kaufmann, Elliot Newman, Robert Marx, Alvin Teller, Bain Capital, Inc., BT Capital Partners Inc., U.S. Equity Partners, L.P., U.S. Equity Partners (Offshore) L.P. and Wasserstein & Co., Inc. (Incorporated by reference from Exhibit 1 (E) filed in the Registrant's Form 8-K dated August 15, 1996 (File No. 1-13054).) 10.1 Incentive Stock Option Plan for Executives of Jerry Bassin, Inc. (Incorporated by reference from Exhibit 10.1 filed as part of the Proxy and Prospectus in connection with the Special Meeting held on November 30, 1993 (File No. 33-68816).) 10.2 1992 Non-Qualified Stock Option Plan. (Incorporated by reference from Exhibit 10.2 filed as part of the Proxy and Prospectus in connection with the Special Meeting held on November 30, 1993 (File No. 33-68816).) 10.3 1993 Stock Option Plan. (Incorporated by reference from Exhibit 10.3 filed as part of the Proxy and Prospectus in connection with the Special Meeting held on November 30, 1993 (File No. 33-68816).) 10.4 1993 Stock Option Incentive Plan. (Incorporated by reference from Exhibit 10.4 filed as part of the Proxy and Prospectus in connection with the Special Meeting held on November 30, 1993 (File No. 33-68816).) 10.5 Amendment and Restated Employment Agreement dated as of August 15, 1996, between the Company and Joseph J. Bianco. (Incorporated by reference from Exhibit 10.5 filed in the Registrant's Form 10-Q for the period ended September 30, 1996 (File No. 1-13054).) 10.6 Amended and Restated Employment Agreement dated as of August 15, 1996, between the Company and Anil K. Narang. (Incorporated by reference from Exhibit 10.6 filed in the Registrant's Form 10-Q for the period ended September 30, 1996 (File No. 1-13054).) 10.7* Employment Agreement dated as of November 1, 1995, between the Company and Timothy J. Dahltorp. 10.8 Amended and Restated Employment Agreement dated as of August 15, 1996 between the Company and Elliot B. Newman. (Incorporated by reference from Exhibit 10.8 filed in the Registrant's Form 10-Q for the period ended September 30, 1996 (File No. 1-13054).) 10.9* Employment Agreement dated as of September 5, 1995 between the Company and David H. Schlang. 10.10 Lease dated March 25, 1993 between Howard L. Bellowe and E. James Judd (as Landlord) and Encore Distributors, Inc., relating to the premises located at 2345 Delgany Street, Denver, Colorado. (Incorporated by reference from Exhibit 10.11 filed as part of the Proxy and Prospectus in connection with the Special Meeting held on November 30, 1993 (File No. 33-68816).) 10.12 Stock Sale Agreement dated December 11, 1992 between R. Tobias Knobel and the Registrant. (Incorporated by reference from Exhibit 10.20 filed as part of the Proxy and Prospectus in connection with the Special Meeting held on November 30, 1993 (File No. 33-68816).) 10.13 Merger Agreement dated August 11, 1993 among the Registrant, CD Acquisition Corp., Titus Oaks Records, Inc., Alan Meltzer and Diana Meltzer. (Incorporated by reference from Exhibit 10.21 filed as part of the Proxy and Prospectus in connection with the Special Meeting held on November 30, 1993 (File No. 33-68816).) 10.14 Engagement Letter dated October 29, 1992 between the Registrant and Tucker Anthony Incorporated. (Incorporated by reference from Exhibit 10.22 filed in the Registrant's Form 10-K for the year ended December 31, 1993 (File No. 1-13054).) 10.15 Amendment of Stock Sale Agreement and Employment Agreement dated as of September 30, 1993 between R. Tobias Knobel and the Registrant. (Incorporated by reference from Exhibit 10.23 filed in the Registrant's Form 10-K for the year ended December 31, 1993 (File No. 1-13054).) 10.16 Form of Employment Agreement dated as of March 14, 1994 between the Registrant and Eric S. Weisman. (Incorporated by reference from Exhibit 10.28 filed in the Registrant's Form 10-K for the year ended December 31, 1993 (File No. 1-13054).) 10.17 Form of 1994 Long-Term Incentive and Share Award Plan.(Incorporated by reference from Exhibit 10.29 filed in the Registrant's Form 10-K for the year ended December 31, 1993 (File No. 1-13054).) 10.18 Form of Amendment to the 1994 Long-Term Incentive and Share Award Plan. (Incorporated by reference from Exhibit 10.18 filed in the Registrant's Form 10-K for the year ended December 31, 1995 (File No 1-13054).) 10.19 Engagement Letter dated September 9, 1993 between the Registrant and PaineWebber Incorporated. (Incorporated by reference from Exhibit 10.30 filed in the Registrant's Form 10-K for the year ended December 31, 1993 (File No. 1-13054).) 10.20 Engagement Letter dated May 27, 1993 between the Registrant and Bear, Stearns & Co. Inc. (Incorporated by reference from Exhibit 10.31 filed in the Registrant's Form 10-K for the year ended December 31, 1993 (File No. 1-13054).) 10.21 Asset Purchase Agreement dated December 16, 1993 between the Registrant and Nova Distributing Corp. (Incorporated by reference from Exhibit 10.32 filed in the Registrant's Form 10-K for the year ended December 31, 1993 (File No. 1-13054).) 10.22 Merger Agreement dated as of February 4, 1994 between the Registrant and Airlie, Inc. (Incorporated by reference from Exhibit 10.35 filed in the Registrant's Form 8-K dated February 4, 1994 (File No. 1-13054).) 10.23* Extention Agreement to Employment Agreement dated July 31,1996, between the Company and Eric Weisman. 10.25 Offer Document dated July 28, 1994 from AEC Holdings (UK) Limited to the Shareholders of Castle and press release issued in the United Kingdom in connection therewith. (Incorporated by reference from Exhibit 10.41 filed in the Registrant's Form 10-Q for the quarterly period ended June 30, 1994 (File No. 1-13054).) 10.26 Lease between the Registrant and The Northwestern Mutual Life Insurance Company dated January 12, 1995, relating to the premises located at 15050 Shoemaker Avenue, Santa Fe Springs, California. (Incorporated by reference from Exhibit 10.45 filed in the Registrant's Form 10-K for the fiscal year ended December 31, 1994 (File No. 1-13054).) 10.27 Third Amended and Restated Credit Agreement and Guaranty dated as of July 25, 1995 among the Company, the Guarantors, the Banks and The Chase Manhattan Bank, N.A., as Agent. (Incorporated by reference from Exhibit 10.50 filed in the Registrant's Registration Statement on Form S-4 filed August 3, 1995 (Registration No. 33-95386).) 10.28 Merger Agreement dated as of September 1, 1995 relating to One Way Records, Inc. (Incorporated by reference from Exhibit 10.51 filed in the Registrant's Amendment No. 1 to Registration Statement on Form S-4 filed September 22, 1995 (Registration No.33-95386).) 10.29 Merger Agreement dated as of September 1, 1995 relating to Deja Vu Music, Inc. (Incorporated by reference from Exhibit 10.52 filed in the Registrant's Amendment No. 1 to Registration Statement on Form S-4 filed September 22, 1995 (Registration No.33-95386).) 10.30 Management Consulting Agreement dated as of May 10, 1995, among Alliance Entertainment and Bain Capital, Inc. (Incorporated by reference from Exhibit 10.51 filed in the Registrant's Form 10-Q for the period ended June 30, 1995 (File No. 1-13054).) 10.31 Merger Agreement by and between the Company, INDI Acquisition Corp. and INDI Holdings Inc., dated July 17, 1995. (Incorporated by reference from Exhibit 2.3 filed in the Registrant's Form 10-Q for the period ended June 30, 1995 (File No. 1-13054).) 10.33 Quota Purchase Agreement dated October 11, 1995, relating to the acquisition of Distribuidora de Discos E Fitas Canta Brasil Ltda. (Incorporated by reference from Exhibit 10.33 filed in the Registrant's Form 10-Q for the period ended March 31, 1996. (File No. 1-13054).) 10.34 Distribution Agreement dated June 21, 1996, between the Company and EMI-Capitol Music Group. (Incorporated by reference from Exhibit 2 filed with the Registrant's Form 8-K dated June 21, 1996. (File No. 1-13054).) 10.35 Letter of Intent dated July 1, 1996, between the Company and Matrix Software, Inc. (Incorporated by reference from Exhibit 10.35 filed with the Registrant's Form 10-Q for the period ended June 30, 1996 (File No. 1-13054).) 10.36 First Amendment to Third Amended and Restated Credit Agreement and Guaranty dated as of September 30, 1995, among the Company, AEC Holdings (UK) Limited, the Guarantors, the Banks and The Chase Manhattan Bank, N.A., as Agent. (Incorporated by reference from Exhibit 10.36 filed with the Registrant's Form 10-Q for the period ended June 30, 1996 (File No. 1-13054).) 10.37 Second Amendment to Third Amended and Restated Credit Agreement and Guaranty dated as of December 31, 1995, among the company, AEC Holdings (UK) Limited, the Guarantors, the Banks and The Chase Manhattan Bank, N.A., as Agent. (Incorporated by reference from Exhibit 10.37 filed with the Registrant's Form 10-Q for the period ended June 30, 1996 (File No. 1-13054).) 10.38 Third Amendment to Third Amended and Restated Credit Agreement and Guaranty dated as of June 30, 1996, among the Company, AEC Holdings (UK) Limited, Castle Communication Limited, the Guarantors, the Banks and The Chase Manhattan Bank, N.A., as Agent. (Incorporated by reference from Exhibit 10.38 filed with the Registrant's Form 10-Q for the period ended June 30, 1996 (File No. 1-13054).) 10.39 Stock Acquisition and Merger Agreement dated as of August 15, 1996, by and among the Company, Alvin N. Teller, Wasserstein & Co. Inc., U.S. Equity Partners L.P. and others. (Incorporated by reference from Exhibit 1 filed with the Registrant's Form 8-K dated August 15, 1996 (File No. 1-13054).) 10.40 The 1994 Long Term Incentive and Share Award Plan. (Incorporated by reference from the Registrant's Registration Statement on Form S-8 filed on June 10, 1994. (File No.33-80134).) 10.41 Amendment No. 1 to the 1994 Long Term Incentive and Share Award Plan. (Incorporated by reference from the Registrant's Registration Statement on Form S-8 filed on September 5, 1995. (File No. 33-96592).) 10.42 Employment Agreement dated as of August 15, 1996, between Alliance Entertainment Corp. and Alvin N. Teller. (Incorporated by reference from Exhibit 10.42 filed with the Registrant's Form 10-Q for the period ended September 30, 1996. (File No. 1-13054).) 10.43 Stock Option Agreement between Alliance Entertainment Corp. and Alvin N. Teller dated August 15, 1996. (Incorporated by reference from Exhibit 10.43 filed with the Registrant's Form 10-Q for the period ended September 30, 1996. (File No. 1-13054).) 10.44 Engagement Letter Agreement among the Company and Wasserstein Perella & Co., Inc. dated as of August 15, 1996. (Incorporated by reference from Exhibit 10.44 filed with the Registrant's Form 10-Q for the period ended September 30, 1996. (File No. 1-13054).) 10.45 Right of First Refusal Agreement dated as of August 15,1996, by and among Alvin N. Teller, Joe Bianco and Anil Narang. (Incorporated by reference from Exhibit 10.45 filed with the Registrant's Form 10-Q for the period ended September 30, 1996. (File No. 1-13054).) 10.46 Fourth Amendment to Third Amended and Restated Credit Agreement and Guaranty among the Company, AEC Holdings (UK) Limited, Castle Communications Limited, The Guarantors, the Banks, and The Chase Manhattan Bank, N.A., as Agent. (Incorporated by reference from Exhibit 10.46 filed with the Registrant's Form 10-Q for the period ended September 30, 1996. (File No. 1-13054).) 10.47 Purchase Agreement among Wasserstein & Co. Inc., Cypress Ventures, Inc., and BT Capital Partners, Inc. dated December 20, 1996, including exhibits thereto. Incorporated by reference from Exhibit 10.47 filed with the Registrant's Form 8-K dated December 20, 1996. (File No. 1-13054).) 11.1* Statement Re: Computation of Earnings (Loss) per Share. 21.1* Amended List of Subsidiaries of the Registrant. 23.1* Consent of Coopers & Lybrand L.L.P. 27.1* Financial Data Schedule *Filed herewith. (d) Financial Statement Schedules Item Page Schedule I - Condensed Financial Information of Registrant. 66 Schedule II - Valuation and Qualifying Accounts. 70 All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or not applicable; and therefore have been eliminated. Report of Independent Accountants --------------------------------- The Board of Directors and Stockholders of Alliance Entertainment Corp. Our report on the consolidated financial statements of Alliance Entertainment Corp. is included on page 32 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedules listed in the index of this Form 10-K. In our opinion, the financial statements schedules referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly. in all material respects, the information required to be included therein. Coopers & Lybrand L.L.P. Miami, Florida March 31, 1997
SCHEDULE I - ALLIANCE ENTERTAINMENT CORP. (Parent Company Only) BALANCE SHEETS DECEMBER 31, (Amounts in Thousands, Except Share Data) 1995 1996 ----------------- -------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,036 $ 1,523 Accounts receivable, less allowance for doubtful accounts 945 (5,189) Due from affiliates 127,948 106,219 Prepaid expenses (1,983) 446 Refundable income taxes 3,642 11,096 Deferred income taxes 6,840 5,491 ----------------- -------------- Total current assets 138,428 119,586 ----------------- -------------- INVESTMENT IN SUBSIDIARIES 111,734 84,022 OTHER INVESTMENTS, at cost 109 299 PROPERTY AND EQUIPMENT 3,693 1,980 COPYRIGHTS, less accumulated amortization 5,892 5,581 COST IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED, less accumulated amortization 84,189 81,354 COVENANTS NOT TO COMPETE, less accumulated amortization 10,108 8,028 DEFERRED INCOME TAXES 847 2,175 OTHER ASSETS, less accumulated amortization 11,536 15,119 --------------- ------------ -- TOTAL ASSETS $ 366,536 $ 318,144 ================= ============ CURRENT LIABILITIES AND STOCKHOLDERS' EQUITY Notes payable $ 52,000 $ 47,001 Current maturities of long-term debt 4,180 4,744 Accounts payable and accrued expenses 10,742 34,826 ----------------- -------------- Total current liabilities 66,922 86,571 ----------------- -------------- LONG-TERM DEBT 209,365 214,635 DEFERRED INCOME TAXES 1,668 1,617 COMMITMENTS STOCKHOLDERS' EQUITY Series A convertible preferred stock, $.01 par value, 886,240 shares authorized, shares issued and outstanding 1995 0; 1996 422,500 ( $43,812 liquidation preference) - 4 Series B convertible preferred stock, $.01 par value, 300,000 shares authorized, shares issued and outstanding 1995 0; 1996 57,500 ( $5,760 liquidation preference) - 1 Common stock, $.0001 par value, 100,000,000 shares authorized, shares issued and outstanding 1995 35,638,331; 1996 44,764,853 3 4 Additional paid-in capital 71,276 146,665 Employee notes for stock purchases (67) (67) Retained earnings (deficit) 17,369 (131,286) ----------------- -------------- Total stockholders' equity 88,581 15,321 ----------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 366,536 $ 318,144 ================= ==============
ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES (Parent Company Only) STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, (Amounts in Thousands) 1994 1995 1996 ----------------- -------------- -------------- Cost of Sales $ - $ (126) $ - Selling, general and administrative expenses (7,881) (8,597) (43,331) Restructuring and asset impairment charges - - (30,730) Equity in income (loss) of subsidiaries 23,771 22,753 (41,297) Amortization of intangible assets (4,094) (3,672) (4,919) Amortization of deferred financing costs (593) (1,293) (1,860) Other income (expense) - net 107 (437) (341) Interest expense (4,672) (12,922) (20,119) ----------------- -------------- -------------- Income (loss) before income taxes 6,638 (4,294) (142,597) Provision (benefit) for income taxes (6,205) (9,566) 6,058 ----------------- -------------- -------------- Net income (loss) $ 12,843 $ 5,272 $ (148,655) ================= ============== ==============
ALLIANCE ENTERTAINMENT CORP. AND SUBISIDIARIES (Parent Company Only) STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, (Amounts in Thousands) 1994 1995 1996 ----------------- -------------- -------------- Net income (loss) $ 12,843 $ 5,272 $ (148,655) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 4,793 5,269 7,147 Undistributed (earnings) loss of subsidiaries (23,771) (22,753) 41,297 Restructuring and asset impairment charges - - 35,680 Other non cash charges - - 6,505 Change in assets and liabilities, net of effect of acquisitions: (Increase) in accounts receivable (348) (428) (371) Decrease in inventory - 268 (Increase) decrease in prepaid expenses (63) (267) 509 (Increase) in deferred income taxes (449) - (30) Increase in accounts payable and accrued expenses 8,912 8,060 22,966 Increase (decrease) in income taxes payable 883 (5,531) (7,453) ----------------- -------------- -------------- Net cash provided by (used in) operating activities 2,800 (10,110) (42,405) ----------------- -------------- -------------- Purchase of property and equipment, net (762) (1,774) 1,345 (Increase) in other assets (201) (626) (5,019) Purchase of businesses including costs, net of cash acquired (37,454) (41,226) (1,993) ----------------- -------------- -------------- Net cash used in investing activities (38,417) (43,626) (5,667) ----------------- -------------- -------------- Increase in excess of outstanding checks over bank balance - 1,010 Net financing proceeds to subsidiaries (17,457) (94,755) (355) Proceeds from issuance of stock (172) 12,024 48,321 Proceeds from borrowings 222,287 487,712 192,000 Payments on borrowings (161,268) (347,636) (191,165) Payments for financing costs (3,119) (7,507) (1,252) ----------------- -------------- -------------- Net cash provided by financing activities 40,271 49,838 48,559 ----------------- -------------- -------------- Net increase (decrease) in cash and cash equivalents 4,654 (3,898) 487 Cash and Cash Equivalents: Beginning of period 280 4,934 1,036 ----------------- -------------- -------------- End of period $ 4,934 $ 1,036 $ 1,523 ================= ============== ==============
ALLIANCE ENTERTAINMENT CORP. AND SUBISIDIARIES (Parent Company Only) STATEMENTS OF CASH FLOWS - Continued YEAR ENDED DECEMBER 31, (Amounts in Thousands) 1994 1995 1996 ----------------- -------------- -------------- Cash payments for interest $ 5,385 $ 10,949 $ 25,667 Cash payments for income taxes $ 7,382 $ 8,748 $ 1,451 and Financing Activities Common stock issued to employees for notes $ 31 $ 15 $ - Acquisition of subsidiary Cash purchase price $ 37,454 $ 41,226 $ 1,993 Investment in equity of subsidiaries $ 25,721 $ 3,949 $ 17,212 Cost in excess of net assets of business acquired 25,440 38,594 11,856 Common Stock issued (13,707) (1,317) (27,075) ----------------- -------------- -------------- $ 37,454 $ 41,226 $ 1,993 ================= ============== ==============
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS ALLIANCE ENTERTAINMENT CORP. AND SUBSIDIARIES (Dollars in Thousands) - --------------------- --------------------- --------------------------- ---------------------- ---------------------- Col A Col B Col C Col D Col E Additions - --------------------- --------------------- --------------------------- ---------------------- ---------------------- - --------------------- --------------------- ------------ -------------- ---------------------- ---------------------- Description (2) Balance at Beginning Charged to Charged to Deductions (1) Balance at End of Period Costs and Other of Period Expenses Accounts - --------------------- --------------------- ------------ -------------- ---------------------- ---------------------- Year Ended December 31, 1996: Deducted from asset accounts: Allowance for doubtful accounts $4,964 $14,528 $3,934 $15,558
(1) Principally represents write off of bad debts. (2) Allowance for doubtful accounts includes reserves for trade and other receivables. Amounts for the Years Ended December 31, 1995, and 1994 have not been included herein as the balances were not individually significant. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ALLIANCE ENTERTAINMENT CORP. By: /s/Alvin N. Teller ------------------------------------------------- Co-Chairman, Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated:
Signatures Title Date /s/Alvin N. Teller __________________________ Co-Chairman, Chief Executive Officer March 25, 1997 Alvin N. Teller and President (Principal Executive Officer); Director __________________________ Co-Chairman; Director March , 1997 Randall J. Weisenburger /s/Timothy Dahltorp __________________________ Executive Vice President, Chief March 31, 1997 Timothy Dahltorp Financial Officer (Principal Financial and Accounting Officer) and Treasurer /s/Joseph J. Bianco __________________________ Vice Chairman; Director March 25, 1997 Joseph J. Bianco __________________________ Vice Chairman; Director March , 1997 Anil K. Narang __________________________ Director March , 1997 Elliot B. Newman /s/W. Townsend Ziebold, Jr. __________________________ Deputy Vice Chairman; Director March 27, 1997 W. Townsend Ziebold, Jr. /s/Douglas B. Brent __________________________ Director March 31, 1997 Douglas B. Brent /s/Robert C. Gay __________________________ Director March 28, 1997 Robert C. Gay /s/ Robert Marakovits __________________________ Director March 31, 1997 Robert Marakovits
EX-10 2 EX-10.7 EMPLOYMENT AGREEMENT dated as of the 1st day of November, 1995, by and between Alliance Entertainment Corp., a Delaware corporation having its principal office at 110 East 59th Street, New York, NY 10022, (the "Company"), and Timothy J. Dahltorp, residing at 12 Old Farm Hill Road, Newtown, Connecticut 06470 (the "Executive"). RECITALS: The Company desires to employ the Executive, and the Executive desires to accept such employment by the Company, upon the terms and conditions hereinafter set forth. In consideration of the mutual covenants and agreements set forth herein, the parties agree as follows: 1. Employment and Duties. The Company agrees to employ the Executive as Senior Vice President / Deputy Chief Financial Officer and Treasurer from the date hereof until February 2, 1996, and from and after February 2, 1996 as the Executive Vice President / Chief Financial Officer and Treasurer of the Company, and the Executive accepts such employment and agrees to perform all duties and services consistent with the Executive's position. The Executive agrees to devote substantially all of the Executive's business time, attention and energy to perform the Executive's duties and services hereunder. 2. Term of Employment. This Agreement shall commence on the date hereof and end on December 31, 2000, unless sooner terminated as provided in Section 5 hereof (the "Employment Period"). 3. Consideration and Benefits. 3.1 Base Salary and Percentage Salary. The Company shall pay the Executive a base salary per annum (the "Base Salary") equal to the Executive's Base Salary being paid as of the date hereof. Beginning on January 1, 1996, the Company shall pay the Executive a Base Salary of Two Hundred Seventy Thousand Dollars ($270,000) per annum. The Base Salary for each year after the year commencing January 1, 1996 may be increased from time to time in the sole discretion of the Board and in any event will be increased annually to reflect corresponding increases in the United States Department of Labor, Bureau of Labor Statistics, Consumer Price Index, All Urban Consumers, United States City Average, all items (1982-88 = 100). Base Salary shall be payable at such intervals as salaries are paid by the Company to its other executive employees. 3.2 Bonus. In addition to the Base Salary, with respect to each fiscal year during the Employment Period, the Company shall pay the Executive a bonus (the "Bonus") in an amount to be determined by the Board of Directors in its sole discretion. 3.3 Benefit Plans. During the Employment Period, the Executive shall be entitled to participate in all plans adopted for the general benefit of the Company's employees or executive employees, such as pension plans, medical plans, investment plans and group or other insurance plans and benefits (including disability and life insurance plans), to the extent that the Executive is and remains eligible to participate therein and subject to the eligibility provisions of such plans in effect from time to time. The Executive shall be reimbursed for his reasonable out-of-pocket expenses incurred in the performance of his duties upon submission of appropriate evidence thereof in conformity with normal Company policy. 3.4 Officer Loan. The Company agrees to forgive an officer loan in the amount of $12,500 over the first two years of the employment period, at a rate of $6,250 per annum. 4. Vacation. For each year during the Employment Agreement, the Executive shall be entitled to paid vacation as follows: the greater of (a) three (3) weeks or (b) the number of weeks vacation provided to executives pursuant to Company policy. 5. Automobile. In order to enable Executive to carry out his duties, the Executive shall receive an automobile allowance of Six Hundred Dollars ($600.00) per month for every month during the Employment Period, in lieu of the use of a Company-owned or leased vehicle. 6. Termination. 6.1 Death. This Agreement shall automatically terminate upon the death of the Executive, whereupon the Company shall be obligated to pay to the Executive's estate any unpaid Base Salary through the date of death, and the Bonus, if any, as determined by the Board of Directors. Amounts payable under this Section 6.1 shall be payable at the times and intervals set forth in Sections 3.1 and 3.2 hereof. 6.2 Disability. The Company shall have the right to terminate this Agreement during the continuance of any Disability of the Executive, as hereinafter defined, upon fifteen (15) days prior notice to the Executive during the continuance of the Disability. "Disability" for purposes of this Section 6.2 shall mean an inability by the Executive to perform a substantial portion of the Executive's duties hereunder by reason of physical or mental incapacity or disability for a total of one hundred eighty (180) days or more in any consecutive period of three hundred and sixty-five (365) days, as determined by the Board of Directors in its good faith judgment. In the event of a termination by reason of the Executive's Disability, the Company shall be obligated to pay the Executive any unpaid Base Salary through the date of termination, and Bonus, if any, as determined by the Board of Directors. Amounts payable under this Section 6.2 shall be payable at the times and intervals set forth in Sections 3.1 and 3.2 hereof. 6.3 Termination for Cause. The Company may terminate this Agreement for cause. As used herein, cause shall mean (i) the Executive shall have committed an act of fraud, embezzlement or misappropriation against the Company or committed a material breach of fiduciary duty owed to the Company; or (ii) the Executive shall have been convicted by a court of competent jurisdiction of any felony or crime involving moral turpitude, other than (a) violations of federal, state or local obscenity laws relating to the distribution of prerecorded music, video cassettes and other media products, or (b) criminal violations of federal antitrust or securities laws arising out of the performance of the Executive's duties hereunder; or (iii) the Executive shall have breached his obligations under Sections 7 and 8 of this Agreement; or (iv) the Executive's willful failure or refusal to timely comply with a written directive of the Board of Directors of the Company, provided that such directive is consistent with the Executive's position; and provided further that such directive does not require the commission by the Executive of an illegal act. Upon such termination, the Company shall only be obligated to pay the Executive his Base Salary pre-rated to the date of termination and any then accrued benefits. 6.4 Termination for Other Reason. If the Executive's employment is terminated other than by reason of (i) death, (ii) Disability, (iii) for cause, or (iv) the Executive's voluntary termination of employment, then the Company shall pay the Executive severance pay equal to the balance of the Base Salary payable hereunder for the term of this Agreement. Such amount shall be payable at the times and intervals set forth in Sections 3.1 and 3.2 hereof. The Company's obligation to make payments hereunder to the Executive shall immediately cease upon the Executive's subsequent death or disability. In addition, the Company shall continue to provide Executive's disability insurance coverage. The obligation of the Company to provide disability insurance shall cease on the fifth anniversary of the date hereof. 7. Restrictions. 7.1 Confidentiality. (i) The Executive recognizes that the Executive's position with the Company is one of trust and confidence. The Executive acknowledges that, during the course of the Executive's employment with the Company, the Executive will necessarily become acquainted with confidential information relating to the customers (including names, addresses and telephone numbers) of the Company, and trade secrets, processes, methods of operation and other information, which the Company regards as confidential and in the nature of trade secrets (collectively "Confidential Information"). The Executive acknowledges and agrees that the Confidential Information is of incalculable value to the Company and that the Company would suffer damage if any of the Confidential Information was improperly disclosed. (ii) The Executive covenants and agrees that the Executive will not, at any time during or after the termination of the Executive's relationship with the Company, reveal, divulge, or make known to any person, firm or corporation, any Confidential Information made known to the Executive or of which the Executive has become aware, regardless of whether developed, prepared, devised or otherwise created in whole or in part by the efforts of the Executive, except and to the extent that such disclosure is necessary to carry out the Executive's duties for the Company. The Executive further covenants and agrees that the Executive shall retain all Confidential Information in trust for the sole benefit of the Company, and will not divulge or deliver or show any Confidential Information to any unauthorized person including, without limitation, any other employer of the Executive, and the Executive will not make use thereof in an independent business related to the business of the Company. (iii) The Executive agrees that, upon termination of the Executive's employment with the Company, for any reason whatsoever, or for no reason, and at any time, the Executive shall return to the Company all papers, documents and other property of the Company employment which relate to Confidential Information, and the Executive will not retain copies of any such papers, documents or other property for any purpose whatsoever. 7.2 Non-Competition. The Executive agrees that during the Employment Period, and for a period of one (1) year following the termination thereof, either voluntarily or by the Company for any reason or no reason, the Executive shall not, (i) engage, directly or indirectly, in North America, alone or as a shareholder, partner, officer, director, employee or consultant of any other business organization, in the business of the wholesale or independent distribution of prerecorded music, music videos and accessories, including, without limitation, the development of software, the sale, licensing or leasing of software and hardware and the rendering of services in connection with such distribution business (the "Business"), (ii) divert to any organization in the Business any customer of the Company or any of its subsidiaries or business units, or (iii) hire, solicit or encourage any officer, employee or consultant of the Company or any of its subsidiaries to leave its employ for employment by or with any organization in the Business; provided, however, that the Executive may own less than five (5%) percent of the outstanding capital stock of any other corporation in the Business and provided further that nothing herein contained shall prevent the Executive from purchasing or otherwise beneficially owning, without restriction on amount, any securities issued by the Company. If at any time the provisions of this Section 7.2 shall be determined to be invalid or unenforceable, by reason of being vague or unreasonable as to area, duration or scope of activity, this Section 7.2 shall be considered divisible and shall become and be immediately amended to only such area, duration and scope of activity as shall be determined to be reasonable and enforceable by the court or other body having jurisdiction over the matter; and the Executive agrees that this Section 7.2 as so amended shall be valid and binding as though any invalid or unenforceable provision had not been included herein. 8. Work Product. The Executive agrees that all innovations, inventions, improvements, developments, methods, designs, analyses, drawings, reports, and all similar or related information which relates to the Company's actual business or product lines or any business or product lines which the Company has taken significant action to pursue, and which are conceived, developed or made by the Executive while employed by the Company (any of the foregoing, hereinafter "Work Product"), belong to the Company. The Executive will promptly disclose all such Work Product to the Board of Directors and perform all actions reasonably requested by the Board to establish and confirm such ownership (including, without limitation, assignments, consents, powers of attorney and other instruments). 9. Enforcement. The Executive acknowledges that the Company will suffer substantial and irreparable damages not readily ascertainable or compensable in terms of money in the event of the breach of any of the Executive's obligations under Sections 7 and 8 hereof. The Executive therefore agrees that the provisions of Sections 7 and 8 shall be construed as an agreement independent of the other provisions of this Agreement and any other agreement and that the Company, in addition to any other remedies (including damages) provided by law, shall have the right and remedy to have such provisions specifically enforced by any court having equity jurisdiction thereof. The rights and remedies (including damages) provided by law, shall have the right and remedy to have such provisions specifically enforced by any court having equity jurisdiction thereof. The rights and remedies set forth in this Section 9 shall be in addition to, and not in lieu of, any other rights and remedies available to the Company under law or equity. 10. Miscellaneous Provisions. 10.1 Entire Agreement. This Agreement sets forth the entire agreement and understanding between the parties with respect to the subject matter hereof and supersedes all prior agreements, arrangements, and understandings between the parties with respect to the subject matter hereof. 10.2 Modification. This Agreement may be amended, modified, superseded, canceled, renewed or extended, and the terms or covenants hereof may be waived, only by a written instrument executed by both of the parties or in the case of a waiver, by the party waiving compliance. 10.3 Waiver. The failure of either party at any time or times to require performance of any provision hereof in no manner shall affect the right at a later time to enforce the same. No waiver by either party of a breach of any term or covenant contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such breach or a waiver of any other term or covenant contained in this Agreement. 10.4 Notices. All notices, demands, consents or other communications hereunder shall be in writing and shall be given (and shall be deemed to have been duly given) upon the earlier of receipt, one business day after being sent by telecopier or three business days after being sent by registered or certified mail to the parties at the addresses set forth above or to such other address as either party shall hereafter specify by notice to the other party. Irrespective of the foregoing, notice of change of address shall be effective only upon receipt. 10.5 Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of New York applicable to contracts made and to be performed wholly within such state. 10.6 Arbitration. Any controversy or claim arising out of or relating to this Agreement, the making, interpretation or the breach thereof, other than a claim solely for injunctive relief for any alleged breach of the provisions of Sections 7 or 8 as to which the parties shall have the right to apply for specific performance to any court having equity jurisdiction, shall be resolved by arbitration in New York, New York, in accordance with the Commercial Arbitration Rules of the American Arbitration Association and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof and any party to the arbitration may, if such party so elects, institute proceedings in any court having jurisdiction for the specific performance of any such award. The powers for the arbitrator or arbitrators shall include, but not be limited to, the awarding of injunctive relief. The arbitrator shall include in any award in the prevailing party's favor the amount of his or its reasonable attorney's fees and expenses and all other reasonable costs and expenses of the arbitration. In the event the arbitrator does not rule in favor of the prevailing party in respect of all the claims alleged by such party, the arbitrator shall include in any award in favor of the prevailing party the amount of his or its reasonable costs and expenses of the arbitration as he deems just and equitable under the circumstances. Except as provided above, each party shall bear his or its own attorney's fees and expenses and the parties shall bear equally all other costs and expenses of the arbitration. 10.7 Assignability. This Agreement, and the Executive's rights and obligations hereunder, may not be assigned by the Executive. The Company may assign its rights, together with its obligations hereunder, only to a successor by merger or by the purchase of all or substantially all of the assets and business of the Company and such rights and obligations shall inure to, and be binding upon, any such successor. 10.8 Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the parties and their respective legal representatives, heirs, permitted successors and permitted assigns. 10.9 Headings and Word Meanings. Headings and titles in this Agreement are for convenience of reference only and shall not control the construction or interpretation of any provisions hereof. The words "herein," "hereof," "hereunder" and words of similar import, when used anywhere in this Agreement, refer to this Agreement as a whole and not merely to a subdivision in which such words appear, unless the context otherwise requires. The singular shall include the plural unless the context otherwise requires. 10.10 Separability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. THE EXECUTIVE THE COMPANY Alliance Entertainment Corp. /s/Timothy Dahltorp By: - -------------------------------------- ------------------------------- Timothy J. Dahltorp EX-10 3 EX-10.9 EMPLOYMENT AGREEMENT, dated as of the 5th of September, 1995, by and between Alliance Entertainment Corp., a Delaware corporation having its principal office at 110 East 59th Street New York, NY 10022, (the "Company") and David H. Schlang, residing at 433 Ridgehill Road, Schenectady, New York 12303 (the "Executive"). The Company desires to employ the Executive, and the Executive desires to accept such employment by the Company, upon the terms and conditions hereinafter-set forth. In consideration of the mutual covenants and agreements set forth herein the parties agree as follows: 1. Employment and Duties. (a) The Company agrees to employ the Executive as President and Chief Operating Officer of each of One Way Records, Inc. ("One Way") and Deja Vu Music, Inc.("Deja Vu"), subsidiaries of the Company, and as Senior Vice President of the Company, and the Executive accepts such employment and agrees to perform all duties and services consistent with the Executive's positions. The Executive agrees to devote substantially all of the Executive's business time, attention and energy to perform the Executive's duties and services hereunder; provided, however, the foregoing shall not prohibit the Executive from engaging in passive investments (including real estate investments) and activities supervising his own investments, serving as a director of a corporation whose business is not related to the business of Alliance, One Way or Deja Vu, or acting as a partner in One Prospect Avenue Partners, a New York partnership. (b) Executive's duties are set forth in Exhibit A, which is attached hereto and made a plan hereof 2. Term of Employment This Agreement shall commence on the date hereof and end on the fifth anniversary of the date hereof unless sooner terminated as provided in Section 7 hereof (the "Employment Period"). For purposes hereof, the one year period commencing on the date hereof and ending on the first anniversary of the date hereof and each one year period thereafter ending on an anniversary of the date hereof shall be referred to herein as a "Contract Year." 3. Consideration and Benefits. 3.1 Base Salary and Percentage Salary. The Company shall pay the Executive a base salary of Three Hundred Twenty Five Thousand Dollars ($325,000) per annum ("Base Salary'), commencing in the first Contract Year. The Base Salary for each Contract Year after the first Contract Year may be increased from time to time in the sole discretion of the Board of Directors of the Company (sometimes hereinafter referred to as the "Board" or the "Board of Directors" and in any event will be increased annually to reflect corresponding increases in the United States Department of Labor, Bureau of Lab-or Statistics, Consumer Price Index, All Urban Consumers, United States City Average, all items (1982-88 = 100). . Ease Salary shall be payable at such intervals as salaries are paid by the Company to its other executive employees. 3.2 Bonus. With respect to each fiscal year of the Company during the Employment Period, the Company shall pay the Executive a bonus (the "Bonus") in an amount to be determined by the Board of Directors in its sole discretion. Any such Bonus shall be paid at such times as bonuses are paid by the Company to its other executive employees. The Bonus shall be pro rated for the year ended December 31, 1995 and for the last partial fiscal year of the Employment Period. 3.3 [Intentionally Omitted.] 3.4 Benefit Plans. (a) During the Employment Period, the Executive s hall be entitled to participate in all plans adopted for the general benefit of the Company's employees or executive employees, such as pension plans, medical plans, investment plans and group or other insurance plans and benefits (including disability and life insurance plans). to the extent that the Executive is and remains eligible to participate therein and subject to the eligibility provisions of such plans in effect from time to time. Anything in the foregoing to the contrary notwithstanding, the Company will maintain health insurance for the Executive and his daughter comparable to the coverage the Executive now has for himself and his daughter. In the event that the Executive's employment with the Company is terminated hereunder for any reason whatsoever (including, but not limited to, expiration of the term hereof or voluntary resignation by the Executive), the Company shall, to the extent permitted by the applicable insurance carrier, include the Executive and each member of his family in the group health insurance plan offered by the Company or its subsidiaries to its full-time salaried employees; provided that the Executive sbal.1, at bis, sole cost and expense, pay all health insurance premiums and any other expenses in Connection therewith as they become due or reimburse the Company therefor, as the case may be. (b) The Executive shall be reimbursed for his reasonable out-of pocket expenses incur-red in the performance of his duties upon submission of appropriate evidence thereof in conformity with normal Company policy. 4. Vacation. For each Contract Year during the Employment Period, the Executive shall be entitled to paid vacation as follows: the greater of (a) four (4) weeks or (b) the number of weeks' vacation provided to executives similarly situated pursuant to Company Policy. 5. Automobile. The Company shall assume the lease of the automobile currently leased by One Way for the exclusive use and benefit of the Executive. Upon termination of the current lease, the Company sham enter into a lease for the benefit of the Executive for a luxury automobile chosen by Executive and comparable to the automobile currently leased for Executive, on terms consistent with the Company's policy with respect to automobiles. The lease shall contain a clause allowing the Executive to purchase the automobile at the termination of the term of the lease. 6. Place of Employment. The Executive's principal place of employment with the Company shall be the current premises of One Way at 15 Industrial Park Road, Albany, New York or the Company's offices In New York, New York. 7. Termination. 7.1 Death. This Agreement shall automatically terminate upon the death of the Executive, whereupon the Company shall be obligated to pay to the Executive's estate any unpaid Base Salary through the date of death, and the Bonus, if any, as determined by the Board of Directors. Amounts payable under this Section 7A shall be payable at the times and intervals set forth in Sections 3.1 and 3.2 hereof. 7.2 Disability. The Company shall have the right to terminate this Agreement during the continuants of any Disability of the Executive, as hereinafter defined, upon fifteen (15) days prior notice to the Executive during the continuance of the Disability. "Disability for purposes of this Section 7.2 shall mean an inability by the Executive to perform a substantial portion of the Executive's duties hereunder by reason of physical or mental incapacity or disability for a total of one honored eighty (180) days or more in any consecutive period of three hundred and sixty-five (365) days, as determined by the Board of Directors in its good faith judgment. In order to enable the Board of Directors to determine whether the Executive has a physical or mental incapacity, at the Company's request and expense, the Executive agrees to submit to an examination by a physician to be agreed upon between the Company and the Executive; provided, however, that if the Company and the Executive are unable to agree as to a physician within ten (10) days of the date of the Company's request then the Company's good faith decision as to the physician shall bc binding on the Executive. In the event of a termination by reason of the Executive's Disability, the Company shall be obligated to pay the Executive any unpaid Base Salary through the date of termination, and the Bonus, if any, as determined by the Board of Directors. Amounts payable under this Section 7.2 shall be payable at the times and intervals set forth in Section 3.1 hereof. 7.3 Termination for Cause. The Company may terminate this Agreement for cause. As used herein, cause. shall mean (i) the Executive shall have committed an act of fraud, embezzlement or intentional misappropriation against the Company or committed a material breach of fiduciary duty owed to the Company, or (ii) the Executive shall have been convicted by a court of competent jurisdiction of any felony or crime involving moral turpitude, other than (a) violations of federal, state or local obscenity laws relating to the distribution of prerecorded music, video cassettes and other media products or (b) criminal violations of federal antitrust or securities laws arising out of the performance of the Executive's duties hereunder (provided that in the event such conviction is reversed on appeal, the Executive shall be reinstated to his former position and paid all back pay); or (iii) the Executive shall have breached his obligations under Section 8 and 9 of this Agreement; or (iv) the Executive's willful failure or refusal to timely comply with a written directive of the Board of Directors of the Company, provided that such directive is consistent with the Executive's position; and provided further that such directive does not require the commission by the Executive of an illegal act. In the event of a termination for cause, the Company shall be obligated to pay the Executive any unpaid Base Salary through the date of termination, and the Bonus, if any, as determined by the Board of Directors. Amounts payable under this Section 73 shall be payable at the times and intervals set forth in Sections 3.1 and 3.2 hereof. 7.4 Voluntary Termination. The Executive may terminate this Agreement upon delivery to the Company of not less than thirty (30) days' written notice of the Executives desire to so terminate. In the event of a voluntary termination by the Executive, in addition to any amounts payable to the Executive as provided in Section 11.7 herein, the Company shall be obligated to pay the Executive any unpaid Base Salary through the date of termination and the Bonus, if any, as determined by the Board of Directors. Amounts payable under this Section 7.4 shall be payable at the times and intervals set forth in Sections 3.1 and 3.2 hereof. 7.5 Termination for Other Reason. If the Executive's employment is terminated other than by reason of (i) death, (ii) disability, (iii) for cause, or (iv) the Executive's voluntary termination of employment other than for good reason, then the Company shal1 pay the Executive severance pay equal to the balance of the Base Salary and the Bonus payable hereunder for the term of this Agreement. Such amount shall he payable at the times and intervals set forth in Sections 3.1 and 3.2 hereof the Company's obligation to make payments hereunder to the Executive shall immediately cease upon the Executive's sub sequent death or Disability. In addition the Company shall continue to provide Executive disability and health Insurance coverage. Subject to the third sentence of Section 3.4 4 hereof, the obligation of the Company to provide disability and health insurance shall cease on the fifth anniversary of the date hereof Further, the following obligations of the Company to the Executive, if any exist at the time, of such termination, shall immediately vest and otherwise become due and payable upon such termination: (i) a unexercised stock options previously granted to the Executive shall vest; and (ii) the Executive shall have the right at any time following such termination to demand that the Company effect the registration under the Securities Act of 1933, as amended, and any applicable state securities laws of the shares of common stock of the Company then owned by the Executive and not previously registered, if any, for disposition by the Executive in an underwritten offering upon terms and under procedures no less favorable to the Executive than those provided In any agreement between the Company and any other shareholder of the Company respecting the registration of shares of such other shareholder. 8. Restrictions 8.1 Confidentiality. (i) The Executive recognizes that the Executive's position with the Company is one of trust and confidence. The Executiva acknowledges that, during the course of the Executive's employment with the Company, the Executive will necessarily become acquainted with confidential information relating to the customers (including names, addresses and telephone numbers) of the Company, and trade secrets, processes, methods of operation and other information, which the Company regards as confidential and in the nature of trade secrets (collectively "Confidential Information.") The Executive acknowledges and agrees that the Confidential Information is of incalculable value to the Company and that the Company would suffer damage if any of the Confidential Information was improperly disclosed. (ii) The Executive covenants and agrees that the Executive will not at any time during or after the termination of the Executive's relationship with the Company, reveal, divulge, or make known to any person, firm or corporation, any confidential Information made known to the Executive or of which the Executive has become aware, regardless of whether developed, prepared, devised or otherwise created In whole or in pan by the efforts of the Executive, except and to the extent that such disclosure is necessary to carry out the Executive's duties for the Company as determined by the Executive in the good faith exercise of the Executive's discretion. The Executive further covenants and agrees that the Executive shall retain all Confidential Information in trust for the sole benefit of the Company, and will not divulge or deliver or show any Confidential Information to any unauthorized person including, without limitation, any other employer of the Executive, and the Executive will not make use thereof in an independent business related to the business of the Company. (iii) The Executive agrees that, upon termination of the Executive employment with the Company. for any reason whatsoever, or for no reason, and at any time, the Executive shall return to the Company all papers, documents and other property of the Corn any placed in the Executive custody or obtained by the Executive during the course of the Executive employment which relate to Confidential Information, and the Executive will not retain copies of any such papers, documents or other property for any purpose whatsoever. (iv) Notwithstanding anything herein to the contrary, Confidential Information shall not include any such information which is publicly available, was previously known to the Executive or was provided to the Executive by a third party with a legal right to disclose same. 8.2 No-Competition. (a) The Executive agrees that during the Employment Period, the Executive shall not: (i) engage, directly or indirectly, in North America, alone or as a shareholder, partner, officer, director, employee or consultant of any other business organization, in the business of the wholesale or independent distribution of prerecorded music, music Videos and accessories (the 'Business'), (ii) divert to any organization In the Business any customer of the Company or any of its subsidiaries or business units, or (iii) hire, solicit or encourage any officer, employee or consultant of the Company or any of its subsidiaries to leave its employ for employment by or with any organization in the Business. Notwithstanding the forego4 however, nothing contained herein shall prohibit the Executive from (1) being employed by any of Warner Elecktra Atlantic, Polygram Group Distribution, Cema Distribution, UNI Distribution Corp., BMG Distribution, or Sony Music Entertainment, Inc.; (2) engaging in the business of manufacturing or producing recorded music; (3) owning less than five (5%) percent of the outstanding capital stock of any other corporation in the Business, including, without restriction, SPJ Music, Inc.; (4) purchasing or otherwise beneficially-owning, without restriction on amount, any securities issued by the Company; or (5) otherwise pursuing a passive investment strategy other than in the Business. (b) The Executive further agrees to the "Restrictions", as hereinafter defined, for the periods and on The conditions hereinafter set forth. Clauses (ii) and (iii) of Section 8.2(a) and the following Additional Restriction, all as modified by Clauses (1) through (5) of Section 8.2(a), shall hereinafter be referred to as the "Restrictions." The "Additional Restriction" shall mean that: the Executive shall not engage, directly or indirectly, in North America, alone or as a shareholder, partner, officer, director, employee or consultant of any other business organization, in the wholesale distribution of prerecorded budget music: (i) In the event the Executive's employment by the Company terminates during the First Contract year, then the Executive agrees to be bound by the Restrictions for a period of two (2) years from the date of such termination, provided that the Company continues to pay to the Executive the then-applicable Base Salary during such two-year period; (ii) In the event the Executive's employment by the Company terminates during the Second Contract year, then the Executive agrees to be bound by the Restrictions for a period of one (1) year from the date of such termination, provided that the Company continues to pay to the Executive the then-applicable Base Salary during such one-year period; (iii) In the event the Executive's employment by the Company terminates during the Third Contract year, then the Executive agrees to be bound by the Restrictions for a period of six (6) months from the date of such termination, provided that the Company continues to pay to the Executive the then-applicable Base Salary during such six-month period. Base Salary amounts payable under this Section 8.2(b) shall be payable at the time and intervals set forth in Section 3.1 hereof. (c) If at any time the provisions of this Section 8.2 shall be determined to be invalid or unenforceable, by reason of being vague or unreasonable as to area, duration or scope of activity, this Section 81 shall be considered divisible and . shall become and be immediately amended to only such area, duration and scope of activity as shall be determined to be reasonable and enforceable by the court or other body having jurisdiction over the matter; and the Executive agrees that this Section 8.2 as so amended shall be valid and binding as though any invalid or unenforceable provision bad not been included herein. 9. Work Product. The Executive agrees that all innovations, inventions, improvements developments, methods, designs, analyses, drawings, reports, and all similar or related information which relates to the Company's actual business or product lines or any business or product lines which the Company has taken significant fiction to pursue, and which are conceived, developed or made by the Executive while employed by the Company (any of the foregoing, hereinafter "Work Product"), belong to the Company. The Executive will promptly disclose all such Work Product to the Board of Directors and perform all actions reasonably requested by the Board to establish and confirm such ownership (including without limitation, assignments, consents, powers of attorney and other instruments). 10. Enforcement. The Executive acknowledges that the Company will suffer substantial and irreparable damages not readily ascertainable or compensable in terms of money In the event of the breach of any of the Executive's obligations under Sections 8 and 9 hereof. The Executive therefore agrees that the provisions of Sections 8 and 9 shall be, construed as an agreement independent of the other provisions of this Agreement and any other agreement and that the Company, in addition to any other remedies (including damages) provided by law, shall have the right and remedy to have such provisions specifically enforced by any court having equ4 jurisdiction thereto the rights and remedies Set forth in this Section 10 shall be in addition to, and not in lieu of, any other rights and remedies available to the Company under law and equity. 11. Miscellaneous Provisions. 11.1 Entire Agreement. This Agreement sets forth the entire agreement and understanding between the par-ties with respect to the subject matter hereof and supersedes all prior agreements, arrangements, and understandings between the parties with respect to the subject matter hereof. - 11.2 Modification. This Agreement may be amended, modified, superseded, canceled, renewed or extended, and the terms of covenants hereof may be waived, only by a written instrument executed by both of the parties or in the case of a waiver, by the party waiving compliance. 11.3 Waiver. The failure of either party at any time or times to require performance of any provision hereof in no manner shall affect the right at a later time to enforce the same. No waiver by either party of a breach of any term or covenant contained in this Agreement whether by conduct or otherwise, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such breach or a waiver of any other term or covenant contained in this Agreement. 11.4 Notices. All notices, demands consents or other communications hereunder shall be in writing and shall be given (and shall be deemed to have been duly given) upon the earlier of receipt, one business day after being sent by telecopier or five (5).business days after being sent by registered or certified mail to the parties at the addresses set forth above or to such other address as either party shall hereafter specify by notice to the other party. Irrespective of the foregoing notice of change of address shall be effective only upon receipt. 11.5 Governing Law This Agreement Shall be construed in accordance with and governed by laws of the State of New York applicable to contracts made and to be performed wholly within such state. 11.6 Arbitration. Any controversy or claim arising out of or relating to this Agreement, the making, interpretation or breach thereof other than a claim solely for injunctive relief for any alleged breach of the provisions of Sections 8 or 9 as to which the parties shall have the right to apply for specific performance to any court having equity jurisdiction, shall be resolved by arbitration in New York, New York, in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof and any party to the arbitration may, if such party so elects, institute proceedings in any court having jurisdiction for the specific performance of any such award. Toe powers of the arbitrator or arbitrators shall include, but not be limited to, the awarding of injunctive relief. The arbitrator shall include in any award in the prevailing party's, favor the amount of his or its reasonable attorney's fees and expenses and all other reasonable costs and expenses of the arbitration. In the event the arbitrator does not rule in favor of the prevailing party in respect of all the claims alleged by such party, the arbitrator shall include in any award In favor of the prevailing party the amount of his or its reasonable costs and expenses of the arbitration as be deems just and equitable under the circumstances. Except as provided above, each party shall bear his or its own attorneys fees and expenses, and the parties shall bear equally all other costs and expenses of the arbitration. 11.7 Assignability. This Agreement, and the Executive's rights and obligations hereunder, may not be assigned by the Executive. The Company may assign its rights, together with its obligations hereunder, only to a successor by merger or by the purchase of all or substantially all of the assets and business of the Company, and such rights and obligations shall inure to, and be binding upon, any such successor; provided, however, upon the occurrence of any such assignment (i) all unexerci5ed stock options previously granted to the Executive shall vest; and (U) the Executive shall have the right to demand registration of the shares of common stock of the Company or the Company's successor, as applicable, then owned by the Executive and not previously registered, if any, as set forth in paragraph 7-5 hereof. 11.8 Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the parties and their respective legal representatives, heirs, permitted successors and permitted assigns. 11.9 Headings and Word Meanings. Headings and titles in this Agreement are for convenience of reference only and shall not control the construction or interpretation of any provisions hereof. The words "herein," "hereof," "hereunder" and words of similar import, when used anywhere in this Agreement, refer to this Agreement as a whole and not merely to a subdivision in which such words appear, unless the context otherwise requires. The singular shall include the plural unless the context otherwise requires. 11.10 Separability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering -invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. ALLIANCE ENTERTAINMENT CORP. THE EXECUTIVE By /s/Joseph J. Bianco By /s/David H. Schlang - -------------------------------------- ----------------------------- Joseph J. Bianco David H. Schlang Chairman and Chief Executive Officer ACKNOWLEDGED AND AGREED as of the date first written above: ONE WAY RECORDS, INC. By /s/Joseph J. Bianco ---------------------------------------- DEJA VU MUSIC, INC. By/s/Joseph J. Bianco ---------------------------------------- EXHIBIT A Executive's Duties The Executive shall perform such duties, consistent with the Executive's position, as shall be from time to time directed by the Board of Directors of the Company. The Executive may buy surplus or "cut-out" audio and video products from the suppliers he chooses, in his sole discretion, subject only to the Executive's fiduciary duty to the Company. EX-10 4 EX-10.23 EXTENSION AGREEMENT TO EMPLOYMENT AGREEMENT EXTENSION AGREEMENT TO EMPLOYMENT AGREEMENT dated July 31, 1996 (this "Agreement") between ALLIANCE ENTERTAINMENT CORP., a Delaware corporation (the "Company) and ERIC S. WEISMAN (the "Executive"). RECITALS: The Company and the Executive entered into an Employment Agreement dated April, 1994 (the "1994 Agreement"), pursuant to which the Company employed the Executive, and the Executive accepted such employment by the Company, on the terms and conditions set forth therein and; The Company desires to extend the term of employment of the Executive, and the Executive desires to accept such extension of his employment by the Company, upon the terms and conditions hereinafter set forth. In consideration of the mutual covenants and agreements set forth herein, the parties agree as follows: 1. Employment and Duties. The Company agrees to extend the term of employment of the Executive as Senior Executive Vice President / Strategic Planning and New Business Development of the Company, and the Executive accepts such extension of his employment and agrees to perform all duties and services consistent with the Executive's position. The Executive agrees to devote substantially all of the Executive's business time, attention and energy to perform the Executive's duties and services hereunder. 2. Term of Employment. This Agreement shall commence on the date hereof and end on the third anniversary of the date hereof, unless sooner terminated as provided in Section 5 hereof (the "Employment Period"). 3. Consideration and Benefits. 3.1 Base Salary and Percentage Salary. The Company shall pay the Executive the base salary of $235,000 (the 'Base Salary). The Base Salary shall be increased to $270,000 on January 1, 1997, and may be further increased from time to time in the sole discretion of the Board; and in any event the Base Salary will be increased annually to reflect corresponding increases in the United States Department of Labor, Bureau of Labor Statistics, Consumer Price Index, All Urban Consumers, United States City Average, all items (1982-88 = 100). Base Salary shall be payable at such intervals as salaries are paid by the Company to its other executive employees. 3.2 Bonus. With respect to each fiscal year during the Employment Period, the Company shall pay the Executive a bonus (the 'Bonus') in an amount to be determined by the Board of Directors in its sole discretion. 3.3 Benefit Plans. During the Employment Period, the Executive shall be entitled to participate in all plans adopted for the general benefit of the Company's employees or executive employees, such as pension plans, medical plans, investment plans and group or other insurance plans and benefits, (including disability and life insurance plans) to the extent that the Executive is and remains eligible to participate therein and subject to the eligibility provisions of such plans in effect from time to time. The Executive shall be reimbursed for his reasonable out-of-pocket expenses incurred in the performance of his duties upon submission of appropriate evidence thereof in conformity with normal Company policy. 4. Vacation. For each year during the Employment Agreement, the Executive shall be entitled to paid vacation as follows: the greater of (a) three (3) weeks or (b) the number of weeks' vacation provided to executives pursuant to Company policy. 5. Automobile. The provisions of the 1994 Agreement with respect to a luxury automobile provided for the benefit of the Executive shall continue through the Employment Period. The Executive shall be entitled to the benefits of the Company's policy with respect to incidental automobile expense reimbursements, including the costs of insurance. 6. Termination. 6.1 Death. This Agreement shall automatically terminate upon the death of the Executive, whereupon the Company shall be obligated to pay to the Executive's estate any unpaid Base Salary through the date of death, and the Bonus, if any, as determined by the Board of Directors. Amounts payable under this Section 6.1 shall be payable at the times and intervals set forth in Section 3.1 hereof 6.2 Disability. The Company shall have the right to terminate this Agreement during the continuance of any Disability of the Executive, as hereinafter defined, upon fifteen (15) days prior notice to the Executive during the continuance of the Disability. 'Disability" for purposes of this Section 6.2 shall mean an inability by the Executive to perform a substantial portion of the Executive's duties hereunder by reason of physical or mental incapacity or disability for a total of one hundred eighty (180) days or more in any consecutive period of three hundred and sixty-five (365) days, as determined by the Board of Directors in its good faith judgment. In the event of a termination by reason of the Executive's Disability, the Company shall be obligated to pay the Executive any unpaid Base Salary through the date of termination, and Bonus, if any, as determined by the Board of Directors. Amounts payable under this Section 6.2 shall be payable at the times and intervals set forth in Section 3.1 hereof 6.3 Termination for Cause. The Company may terminate this Agreement for cause. As used herein, cause shall mean (i) the Executive shall have committed an act of fraud, embezzlement or misappropriation against the Company or committed a material breach of fiduciary duty owed to the Company; or (ii) the Executive shall have been convicted by a court of competent jurisdiction of any felony or crime involving moral turpitude, other than (a) violations of federal, state or local obscenity laws relating to the distribution of prerecorded music, video cassettes and other media products, or (b) criminal violations of federal antitrust or securities laws arising out of the performance of the Executive's duties hereunder; or (iii) the Executive shall have breached his obligations under Section 8 and 9 of this Agreement; or (iv) the Executive's willful failure or refusal to timely comply with a written directive of the Board of Directors of the Company, provided that such directive is consistent with the Executive's position; and provided further that such directive does not require the commission by the Executive of an illegal act. Upon such termination, the Company shall only be obligated to pay the Executive his Base Salary pre-rated to the date of termination and any then accrued benefits. 6.4 Termination for Other Reason. If the Executive's employment is terminated other than by reason of death, (ii) Disability, (iii) for cause, or (iv) the Executive's voluntary termination of employment, then the Company shall pay the Executive severance pay equal to the balance of the Base Salary payable hereunder for the term of this Agreement. Such amount shall be payable at the times and intervals set forth in Sections 3.1 and 3.2 hereof. The Company's obligation to make payments hereunder to the Executive shall immediately cease upon the Executive's subsequent death or disability. In addition the Company shall continue to provide Executive's disability insurance coverage. The obligation of the Company to provide disability insurance shall cease on the fifth anniversary of the date hereof. 7. Restrictions. 7.1 Confidentiality. (i) The Executive recognizes that the Executive's position with the Company is one of trust and confidence. The Executive acknowledges that, during the course of the Executive's employment with the Company, the Executive will necessarily become acquainted with confidential information relating to the customers (including names, addresses and telephone numbers) of the Company, and trade secrets, processes, methods of operation and other information, which the Company regards as confidential and in the nature of trade secrets (collectively "Confidential Information'". The Executive acknowledges and agrees that the Confidential Information is of incalculable value to the Company and that the Company would suffer damage if any of the Confidential Information was improperly disclosed. (ii) The Executive covenants and agrees that the Executive will not, at any time during or after the termination of the Executive's relationship with the Company, reveal, divulge, or make known to any person, firm or corporation, any Confidential Information made known to the Executive or of which the Executive has become aware, regardless of whether developed, prepared, devised or otherwise created in whole or in part by the efforts of the Executive, except and to the extent that such disclosure is necessary to carry out the Executive's duties for the Company. The Executive further covenants and agrees that the Executive shall retain all Confidential Information in trust for the sole benefit of the Company, and will not divulge or deliver or show any Confidential Information to any unauthorized person including, without limitation, any other employer of the Executive, and the Executive will not make use thereof in an independent business related to the business of the Company. (iii) The Executive agrees that, upon termination of the Executive's employment with the Company, for any reason whatsoever, or for no reason, and at any time, the Executive shall return to the Company all papers, documents and other property of the Company employment which relate to Confidential Information, and the Executive will not retain copies of any such paper, documents or other property for any purpose whatsoever. 7.2 Non-Competition. The Executive agrees that during the Employment Period, and for a period of one (1) year following the termination thereof, either voluntarily or by the Company for any reason or no reason, the Executive shall not, (i) engage, directly or indirectly, in North America, alone or as a shareholder, partner, officer, director, employee or consultant of any other business organization, in the business of the wholesale or independent distribution of prerecorded music, music videos and accessories, including, without limitation, the development of software, the sale, licensing or leasing of software and hardware and the rendering of services in connection with such distribution business (the 'Business'), (ii) divert to any organization in the Business any customer of the Company or any of its subsidiaries or business units, or (iii) hire, solicit or encourage any officer, employee or consultant of the Company or any of its subsidiaries to leave its employ for employment by or with any organization in the Business; provided, however, that the Executive may own less than five (5%) percent of the outstanding capital stock of any other corporation in the Business and provided further that nothing herein contained shall prevent the Executive from purchasing or otherwise beneficially owning, without restriction on amount, any securities issued by the Company. If at any time the provisions of this Section 7.2 shall be determined to be invalid or unenforceable, by reason of being vague or unreasonable as to area, duration or scope of activity, this Section 7.2 shall be considered divisible and shall become and be immediately amended to only such area, duration and scope of activity as shall be determined to be reasonable and enforceable by the court or other body having jurisdiction over the matter; and the Executive agrees that this Section 7.2 as so amended shall be valid and binding as though any invalid or unenforceable provision had not been included herein. 8. Work Product. The Executive agrees that all innovations, inventions, improvements, developments, methods, designs, analyses, drawings, reports, and all similar or related information which relates to the Company's actual business or product lines or any business or product lines which the Company has taken significant action to pursue, and which are conceived, developed or made-by the Executive while employed by the Company (any of the foregoing, hereinafter 'Work Product'), belong to the Company. The Executive will promptly disclose all such Work Product to the Board of Directors and perform all actions reasonably requested by the Board to establish and confirm such ownership (including, without limitation, assignments, consents, powers of attorney and other instruments). 9. Enforcement. The Executive acknowledges that the Company will suffer substantial and irreparable damages not readily ascertainable or compensable in terms of money in the event of the breach of any of the Executive's obligations under Sections 7 and 8 hereof The Executive therefore agrees that the provisions of Sections 7 and 8 shall be construed as an agreement independent of the other provisions of this Agreement and any other agreement and that the Company, in addition to any other remedies (including damages) provided by law, shall have the right and remedy to have such provisions specifically enforced by any court having equity jurisdiction thereof. The rights and remedies (including damages) provided by law, shall have the right and remedy to have such provisions specifically enforced by any court having equity jurisdiction thereof The rights and remedies set forth in this Section 9 shall be in addition to, and not in lieu of, any other rights and remedies available to the Company under law or equity. 10. Miscellaneous Provisions. 10.1 Entire Agreement. This Agreement sets forth the entire agreement and understanding between the parties with respect to the subject matter hereof and supersedes all prior agreements, arrangements, and understandings between the parties with respect to the subject matter hereof 10.2 Modification. This Agreement may be amended, modified, superseded, canceled renewed or extended, and the terms or covenants hereof may be waived, only by a written instrument executed by both of the par-ties or in the case of a waiver, by the party waiving compliance. 10.3 Waiver. The failure of either party at any time or times to require performance of any provision hereof in no manner shall affect the right at a later time to enforce the same. No waiver by either party of a breach of any term or covenant contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such breach or a waiver of any other term or covenant contained in this Agreement. 10.4 Notices. All notices, demands, consents or other communications hereunder shall be in writing and shall be given (and shall be deemed to have been duly given) upon the earlier of receipt, one business day after being sent by telecopier or three business days after being sent by registered or certified mail to the parties at the addresses set forth above or to such other address as either party shall hereafter specify by notice to the other party. Irrespective of the foregoing, notice of change of address shall be effective only upon receipt. 10.5 Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of New York applicable to contracts made and to be performed wholly within such state. 10.6 Arbitration. Any controversy or claim arising out of or relating to this Agreement, the making, interpretation or the breach thereof, other than a claim solely for injunctive relief for any alleged breach of the provisions of Sections 7 or 8 as to which the parties shall have the right to apply for specific performance to any court having equity jurisdiction, shall be resolved by arbitration in New York, New York, in accordance with the Commercial Arbitration Rules of the American Arbitration Association and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof and any party to the arbitration may, if such party so elects, institute proceedings in any court having jurisdiction for the specific performance of any such award. The powers for the arbitrator or arbitrators shall include, but not be limited to, the awarding of injunctive relief The arbitrator shall include in any award in the prevailing party's favor the amount of his or its reasonable attorney's fees and expenses and all other reasonable costs and expenses of the arbitration. In the event the arbitrator does not rule in favor of the prevailing party in respect of all the claims alleged by such party, the arbitrator shall include in any award in favor of the prevailing party the amount of his or its reasonable costs and expenses of the arbitration as he deems just and equitable under the circumstances. Except as provided above, each party shall bear his or its own attorney's fees and expenses and the parties shall bear equally all other costs and expenses of the arbitration. 10.7 Assignability. This Agreement, and the Executive's rights and obligations hereunder, may not be assigned by the Executive. The Company may assign its rights, together with its obligations hereunder, only to a successor by merger or by the purchase of all or substantially all of the assets and business of the Company and such fights and obligations shall inure to, and be binding upon, any such successor. 10.8 Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the parties and their respective legal representatives, heirs, permitted successors and permitted assigns. 10.9 Headings and Word Meanings Headings and titles in this Agreement are for convenience of reference only and shall not control the construction or interpretation of any provisions hereof. The words "herein," hereof," "hereunder" and words of similar import, when used anywhere in this Agreement, refer to this Agreement as a whole and not merely to a subdivision in which such words appear, unless the context otherwise requires, The singular shall include the plural unless the context otherwise requires. 10.10 Separability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. ALLIANCE ENTERTAINMENT CORP. ERIC S. WEISMAN /s/Joseph J. Bianco /s/Eric S. Weisman - -------------------------------- ------------------------ Joseph J. Bianco Chief Executive Officer EX-11 5 EXHIBIT 11
Exhibit 11 - Statement Re: Computation of Earnings (Loss) Per Share - -------------------------------------------------------------------- 1994 1995 1996 ---- ---- ---- Net Income (Loss) $ 12,843,000 $ 5,272,000 $ (148,655,000) Preferred Stock Dividends - - (2,222,000) Assumed interest reduction, net of taxes, under the modified treasury stock method (3) - 857,630 - ----------------- ---------------- ------------------ Net Income (Loss) Applicable to Common Stock $ 12,843,000 $ 6,129,630 $ (150,877,000) ----------------- ---------------- ------------------ Weighted average common stock outstanding 30,866,332 33,201,559 39,540,216 Common stock Equivalents (2) 3,347,972 5,897,941 - ----------------- ---------------- ------------------ Number of Shares Used in Per Share Calculation 34,214,304 39,099,500 39,540,216 ----------------- ---------------- ------------------ Net Income (Loss) $ .38 $ .16 $ (3.82) ================= ================ ==================
(1) Fully diluted per share data is not presented because the computation is the same as the primary per share data and involves only incremental common stock equivalent shares resulting from differences in average and period ending market prices under the treasury method. (2) Common stock equivalents represent the incremental shares outstanding of stock options and warrants granted in excess of one year prior to the Company's S-4 registration statement as well as periods subsequent to the merger using the "if converted treasury stock" method for 1994. For 1995, common stock equivalents represent the incremental shares outstanding of stock options and warrants using the "modified treasury stock" method. This method was applied due to the number of shares of common stock obtainable upon exercise of outstanding warrants in the aggregate exceeding 20% of the number of common shares outstanding. (3) Due to the application of the "modified treasury stock" method the assumed proceeds from the outstanding options and warrants were applied to repurchase 20% of the common shares outstanding. The remaining proceeds were applied towards the reduction of debt and the assumed interest reduction, net of taxes, is added to net income (loss) applicable to common stock. EX-21 6 EXHIBIT 21 EXHIBIT 21
U.S. Employer State of Date of Identification Name of Corporation Incorporation Incorporation Number Ownership U.S. Corporations Alliance Entertainment Corp. Delaware 11/22/91 13-3645913 Publicly Traded f/k/a Trinity Capital Opportunity Corp. Passport Music Distributors, Inc. Colorado 1/29/85 84-0975592 Alliance Entertainment f/k/a Encore Distributors, Corp. Incorporated AEC Americas, Inc. Delaware 6/1/94 13-3781117 Alliance Entertainment Corp. Alliance Ventures, Inc. Delaware 12/14/93 13-3781118 Alliance Entertainment f/k/a ARD Acquisition Corp. Corp. f/k/a Nova Acquisition Corp. Premier Artist Services, Inc. Florida 11/23/83 59-2351475 Alliance Ventures, Inc. Alliance Talent Florida 10/15/93 13-3737846 Alliance Ventures, Inc. f/k/a Alliance Latin, Inc. Premier Signatures, Inc. Florida 6/17/93 36-3913889 Premier Artists Services, Inc. FL Acquisition Corp. California 4/12/94 33-0626613 Alliance Entertainment Corp. Corporate Entertainment Florida 10/1/88(A) 13-3487033 Alliance Ventures, Inc. Productions Partnership Execusoft, Inc. Florida 9/1/84 59-2447808 Alliance Entertainment Corp. Castle Communications (U.S), Inc. Delaware 11/15/94 13-3796175 Alliance Entertainment Corp. Concord Jazz, Inc. California 6/7/74 94-2268761 Alliance Ventures, Inc. The Jazz Alliance California 3/27/78 94-2618544 Alliance Ventures, Inc. AEC Acquisition Corp. Delaware 11/30/94 13-3798622 Alliance Entertainment Corp. Passport Music Worldwide, Inc. Delaware 2/23/95 13-3810616 Alliance Entertainment Corp. Independent National Delaware 4/13/92 13-3680377 Alliance Entertainment Distributors, Inc. Corp. One Way Records, Inc. New York 8/28/95 14-1787267 Alliance Entertainment Corp. Deja Vu Music, Inc. New York 8/28/95 14-1787268 Alliance Entertainment Corp. AEC One Stop Group, Inc. Delaware 8/8/95 13-3863787 Alliance Entertainment f/k/a One Way Records, Inc. Corp. A.E. Land Corp. Delaware 4/18/95 13-3796175 Alliance Entertainment Corp. Alliance Acquisition Corp. Delaware 8/8/95 13-3903521 Alliance Entertainment Corp. Matrix Software, Inc. Delaware 10/8/96 13/3911523 Alliance Entertainment Corp. Red Ant Holdings, Inc. Delaware 10/17/94 13-3794457 Alliance Entertainment Corp. Red Ant Box, Inc. Delaware 5/31/96 95-4587231 Alliance Entertainment Corp. Red Ant LLC Delaware 6/21/96 95-4590016 Red Ant Holdings, Inc. & Red Ant Box, Inc. (A) Date Partnership Formed U.S. Employer State of Date of Identification Name of Corporation Incorporation Incorporation Number Ownership Foreign Corporations Disquemusic Comercial Brazil 1983 AEC Americas - 99% Importadora Ltda. Alliance Ventures, Inc. - 1% Brasison Distribuidora de Discos Brazil AEC Americas - 99% Ltda. Alliance Ventures, Inc. - 1% Distribuidora de Discos E Fitas Brazil AEC Americas Canta Brasil Ltda. AEC Holdings (UK) Limited United Kingdom 4/94 Alliance Entertainment Corp. Castle Communications PLC United Kingdom 7/26/87 99-0119503 AEC Holdings (UK) Limited DOJO Limited United Kingdom 7/16/90 Castle Communications PLC - 80% Castle Home Video Limited United Kingdom 8/13/85 Castle Communications PLC- (Dormant) Hendring Limited United Kingdom 4/17/84 Castle Communications PLC - 99.5% Masterpiece Music Productions United Kingdom 3/15/84 Castle Communications Limited PLC- (Dormant) Knight Records Limited United Kingdom 6/4/88 Castle Communications PLC- (Dormant) Castle Target International United Kingdom 11/27/89 Castle Communications Limited PLC- (Dormant) Eastern Light Productions Limited United Kingdom 10/30/89 Castle Communications PLC - 80% White Metal Music Limited United Kingdom 5/11/88 Castle Communications PLC - 80% Remaining 20% acquired 10/9/95 Castle Copyrights Limited United Kingdom 6/12/92 Castle Communications PLC Kaz Records Limited United Kingdom 9/20/83 Castle Communications PLC Castle Communications Germany 1990 Castle Communications PLC (Deutschland) Gmbh Castle Entertainment Om Finland 1986 Castle Communications PLC The St. Clair Entertainment Canada 11/22/94 Alliance Entertainment Group Inc. Corp.
EX-23 7 CONSENT OF INDEPENDENT ACCOUNTANTS CONSENT OF INDEPENDENT ACCOUNTANTS ------------- We consent to the incorporation by reference in the registration statements of Alliance Entertainment Corp. and subsidiaries on Form S-3 (No. 33-97280) and Form S-8 (No. 33-80134) of our reports dated February 28, 1997, except for the information in Note 4, as to which the date is March 31, 1997, on our audits of the consolidated financial statements and financial statement schedules of Alliance Entertainment Corp. and subsidiaries as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, which reports are included in this Annual Report on form 10-K. Coopers & Lybrand L.L.P. Miami, Florida March 31, 1997 EX-27 8 FDS --
5 This Schedule contains summary financial information extracted from Consolidated Balance Sheets as of December 31, 1996, and Consolidated Statements of Operations for the Year Ended December 31, 1996, and is qualified in its entirety by reference to such financial statements. 1,000 12-mos DEC-31-1996 JAN-01-1996 DEC-31-1996 8,669 0 173,619 15,291 164,380 386,465 33,793 13,824 613,082 349,571 237,348 0 5 4 17,045 613,082 691,099 691,099 603,721 603,721 0 14,528 35,663 (164,555) (15,900) (148,655) 0 0 0 (148,655) (3.82) (3.82)
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