-----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, DfrURkxLKQmRA+1EwRS9I+ji9T/TBvJZuztq0A+/dhCMqxfHI0AwX1Adf+gcEhux E6VL1YQZ1I1iyJF8qXqa5w== 0000950152-98-006577.txt : 19980813 0000950152-98-006577.hdr.sgml : 19980813 ACCESSION NUMBER: 0000950152-98-006577 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 24 FILED AS OF DATE: 19980811 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAMELOT MUSIC HOLDINGS INC CENTRAL INDEX KEY: 0001054423 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL- COMPUTER & PRERECORDED TAPE STORES [5735] IRS NUMBER: 133735306 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-56811 FILM NUMBER: 98682722 BUSINESS ADDRESS: STREET 1: 8000 FREEDOM AVE., NW CITY: NORTH CANTON STATE: OH ZIP: 44720 BUSINESS PHONE: 3309492282 S-1/A 1 CAMELOT MUSIC HOLDINGS, INC.--S-1/AMENDMENT #1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 11, 1998 REGISTRATION NO. 333-56811 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ CAMELOT MUSIC HOLDINGS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 5735 13-3735306 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.) incorporation or organization) Classification Code No.)
8000 FREEDOM AVENUE, N.W. NORTH CANTON, OHIO 44720 (330) 494-2282 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------------ JAMES E. BONK CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER 8000 FREEDOM AVENUE, N.W. NORTH CANTON, OHIO 44720 (330) 494-2282 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------ COPIES TO: THOMAS F. MCKEE, ESQ. VALERIE FORD JACOB, ESQ. CALFEE, HALTER & GRISWOLD LLP FRIED, FRANK, HARRIS, SHRIVER & JACOBSON 1400 MCDONALD INVESTMENT CENTER ONE NEW YORK PLAZA 800 SUPERIOR AVENUE NEW YORK, NY 10004 CLEVELAND, OHIO 44114 (212) 859-8000 (216) 622-8200
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [X] ------------------------ CALCULATION OF REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM AMOUNT OF TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE - ---------------------------------------------------------------------------------------------------------- Common Stock, $.01 par value........ $150,000,000 $51,725 - ---------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to paragraph (o) of Rule 457 under the Securities Act of 1933. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. 2 EXPLANATORY NOTE This registration statement contains two forms of prospectus: one to be used in connection with a United States and Canadian offering of the registrant's Common Stock (the "U.S. Prospectus") and one to be used in connection with a concurrent international offering of the Common Stock (the "International Prospectus"). The International Prospectus will be identical to the U.S. Prospectus except that it will have a different front cover page, underwriting section and back cover page. The U.S. Prospectus is included herein and is followed by the alternate pages to be used in the International Prospectus. The alternate pages to be used in the International Prospectus have been labeled "Alternate Page for International Prospectus." 3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED AUGUST 11, 1998 PROSPECTUS SHARES CAMELOT MUSIC HOLDINGS, INC. COMMON STOCK ------------------------ All of the shares of Common Stock of Camelot Music Holdings, Inc. (together with its subsidiaries, "Camelot" or the "Company") offered hereby are being sold by certain stockholders (the "Selling Stockholders") of the Company. See "Principal and Selling Stockholders." The Selling Stockholders acquired their shares upon the Company's emergence from bankruptcy pursuant to Section 1145(a) of the United States Bankruptcy Code or in open market transactions thereafter. The Company is not selling shares of Common Stock in the Offerings and will not receive any proceeds from the sale of any shares of Common Stock offered hereby. Of the shares of Common Stock offered hereby, shares are being offered for sale initially in the United States and Canada by the U.S. Underwriters and shares are being offered for sale initially in a concurrent offering outside the United States and Canada by the International Managers. The initial public offering price and the underwriting discount per share will be identical for both Offerings. See "Underwriting." Prior to the Offerings, there has been a limited public market for the Common Stock. It is currently estimated that the initial public offering price will be between $ and $ per share. The initial public offering price does not necessarily bear any direct relationship to the market prices of the Common Stock as reported on the OTC Bulletin Board prior to the Offerings. The closing bid price of the Common Stock on August 10, 1998 was $37 per share. For a discussion relating to factors to be considered in determining the initial public offering price, see "Underwriting." The Company has applied for quotation of the Common Stock on the Nasdaq National Market System under the symbol "CMLT." SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) SELLING STOCKHOLDERS(2) - --------------------------------------------------------------------------------------------------------------- Per Share...................... $ $ $ - --------------------------------------------------------------------------------------------------------------- Total(3)....................... $ $ $ - --------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have agreed to indemnify the several Underwriters against certain liabilities, including certain liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) The Company has agreed to pay expenses of the Offerings estimated at $ . (3) The Selling Stockholders have granted to the U.S. Underwriters and the International Managers options to purchase up to an additional shares and shares of Common Stock, respectively, in each case exercisable within 30 days after the date hereof, solely to cover over-allotments, if any. If such options are exercised in full, the total Price to Public, Underwriting Discount and Proceeds to Selling Stockholders will be $ , $ and $ , respectively. See "Underwriting." ------------------------ The shares of Common Stock are offered by the several Underwriters, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of certain legal matters by counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the shares of Common Stock will be made in New York, New York on or about , 1998. ------------------------ MERRILL LYNCH & CO. MORGAN STANLEY DEAN WITTER MCDONALD & COMPANY SECURITIES, INC. ------------------------ The date of this Prospectus is , 1998. 4 [Photographs depicting Camelot Music and The Wall Stores, together with the Camelot Music and The Wall logos and mottos.] Certain persons participating in the Offerings may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock. Such transactions may include stabilizing, the purchase of Common Stock to cover syndicate short positions and the imposition of penalty bids. For a description of these activities, see "Underwriting." 2 5 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, information in this Prospectus assumes that the Underwriters' over-allotment options have not been exercised and reflects a -for-one stock split consummated prior to commencement of the Offerings. Pro forma financial information included herein gives effect to the adoption of fresh-start reporting and the acquisition by the Company of certain assets of The Wall Music, Inc. ("The Wall") as if each took place at the beginning of the period presented. The Company's fiscal year ends on the Saturday closest to February 28th. Fiscal years are identified according to the calendar year in which they begin (i.e., the fiscal year ended February 28, 1998 is referred to herein as "Fiscal 1997"). THE COMPANY Camelot Music Holdings, Inc. ("Camelot" or the "Company") is a leading mall-based retailer of prerecorded music and accessories and is one of the largest music retailers in the United States based on store count. As of July 31, 1998, the Company operated 493 stores in 37 states nationwide and in Puerto Rico under three brand names: Camelot Music, founded in 1956, and operating 304 stores with a significant store base concentration in the Midwest and Southeast regions of the United States; The Wall, operating 148 stores primarily in the Mid-Atlantic and Northeast regions of the United States; and Spec's Music, Inc. ("Spec's"), operating 41 stores in south Florida and Puerto Rico. The Company acquired certain assets of The Wall effective February 28, 1998 ("The Wall Acquisition"), and it acquired Spec's, a music retailer, on July 29, 1998 (the "Spec's Acquisition"). The Company believes that each chain benefits from name recognition and a loyal customer base in its primary markets of operation. For Fiscal 1997, the Company had pro forma net sales of $554.1 million ($396.2 million excluding The Wall) and earnings of $27.2 million ($15.9 million excluding (i) The Wall, (ii) special items and (iii) the reinstatement of vendor discounts). The Company believes that the Spec's Acquisition will enhance its competitive position in the Southeastern United States and give the Company a leading position in the south Florida market. See " -- Recent Developments." Camelot offers a broad range of prerecorded music, including compact discs ("CDs"), cassettes, pre-recorded video cassettes, digital versatile discs ("DVDs") and accessories such as blank audio and video cassettes as well as music and tape care products. The Company seeks to position itself as the mall-based music specialist for prerecorded music, and advertises under the motto "No One Knows Your Music Better." The Company's stores average 4,350 square feet in size and typically offer over 20,000 stock keeping units ("SKUs"), including both high-volume Billboard Top 100 titles ("hits") and a broad offering of older releases and diverse music categories ("catalog"). The Company believes its product offering enables it to attract a diverse customer base and reduce its dependence on any one music genre. In Fiscal 1997, the Company's average sales per square foot, including The Wall, was approximately $293 which the Company believes is among the highest for mall-based retailers of prerecorded music. The Company believes its broad product offering, supported by a high level of customer service from its knowledgeable sales force, combined with its competitive pricing strategy and attractive locations within regional malls, position it to benefit from the favorable trends occurring in the prerecorded music industry. The Company believes that the total market for prerecorded music and music videos in the United States amounted to $12.2 billion in 1997. The Company believes that revenues in the music and music video market in the United States have doubled over the last ten years and has grown at a compounded annual rate of 8.2% during that time. Industry growth rates do not reflect the Company's historical growth and are not necessarily indicative of its growth during future periods. The Company's revenues have grown at a 7.8% compounded annual rate over the last ten years, although its revenues grew over the past five years at a compounded annual rate of 2.3%. During the 1980s the music retail industry experienced rapid growth fueled by: (i) the introduction of new products such as the CD; (ii) a relatively large number of popular new releases which increased customer traffic and sales; and (iii) the rapid expansion of mall-based music retailers. These factors led, in the early 1990s, to the competitive intrusion of non-traditional music retailers such as consumer electronics stores and discount stores and to increased price competition. By mid-1994, these competitive factors, combined with the contraction of the replacement CD market and a comparative lack of successful new releases, led to deteriorating profitability in the music retail industry. Beginning in mid-1997, conditions in the music retail industry began to improve as a result of: (i) the significant reduction in competitive square footage resulting from the reduction in the total number of traditional music retail stores from approximately 5,000 in 1995 to approximately 4,200 in 1997, including a net 3 6 reduction of 600 retail stores by the top five traditional music retailers, based on store count; (ii) an improvement in retail pricing as music vendors, beginning in 1996, strengthened minimum advertised pricing ("MAP") guidelines, which the Company believes decreased the intensity levels of price-based competition for prerecorded music; and (iii) a resurgence in popular new releases. The Company has historically been privately held. In 1993, the Company was acquired in a highly leveraged transaction by an investment group led by a private investment firm and members of the Company's current management (the "1993 Acquisition"). The 1993 Acquisition resulted in significant debt service obligations. This significant debt service and the industry conditions described above combined to impair Camelot's operating and financial condition and led the Company to file a voluntary petition for protection under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in August 1996 (the "Petition Date"). See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Camelot's joint plan of reorganization (the "Plan of Reorganization") was confirmed by the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") on December 12, 1997 and became effective on January 27, 1998 (the "Plan Effective Date"). Under the Plan of Reorganization, substantially all of the claims against the Company existing as of the Petition Date were exchanged for shares of Common Stock. Approximately $423.0 million of unsecured claims were exchanged for 10,167,824 shares of Common Stock valued at an amount equal to one share for each $47.95 of claim, and approximately $41.5 million of secured claims were exchanged for 2,211,111 shares of Common Stock valued at an amount equal to one share for each $18.75 of claim. All pre-petition ownership interests in the Company were canceled. Prior to and during its reorganization under the protection of the Bankruptcy Court, Camelot was able to substantially improve the competitive positioning of its business and significantly improve its financial position. These improvements included: (i) closing 96 underperforming stores; (ii) renegotiating unfavorable leases on certain of its remaining stores; (iii) returning certain overstock inventory to its vendors; and (iv) eliminating liabilities totaling approximately $485 million, including indebtedness of approximately $412 million. In addition, during the same period, Camelot invested $7.5 million to upgrade, develop and implement sophisticated merchandising, distribution, replenishment, and financial software packages, all of which were fully operational by the end of Fiscal 1997. The Company's new and upgraded information systems enable management to (i) allocate specific merchandise to a specific store, thereby improving sell-through rates and reducing returns to vendors; (ii) improve the efficiency of its replenishment system to reduce stock-outs and lower distribution center operating costs; (iii) better track profitability by SKU, store and region; and (iv) automate invoice matching to reduce corporate labor costs. The Company also developed and implemented a new marketing and data warehousing system, which became fully operational in April 1998, to better capture transaction specific data to facilitate the further development of the Company's customer loyalty programs and improve the effectiveness of its advertising programs by targeting specific customers with promotional material tailored to their buying patterns. Over the last two fiscal years, as the Company focused on improving the competitiveness of its business, revenues increased 1.0% as the Company closed 83 stores and opened no new stores. The Company believes the improved industry conditions, the modifications to its operations and financial condition, its infrastructure investments and its strong market position, provide Camelot with distinct competitive advantages and position it for accelerated growth and continued improvement in profitability. Key elements of the Company's growth strategy include: - Strengthen Competitive Position in Existing Markets. The Company intends to strengthen its store base and increase sales by relocating certain existing stores to larger stores and selectively opening new stores in existing markets. New stores will be opened to fill out existing markets and leverage the Company's distribution, advertising and field management costs. As of July 31, 1998, approximately 280 of the Company's 493 stores were less than 4,000 square feet in size compared to its current prototype store of 5,000-6,000 square feet. The Company intends to relocate many of these stores to larger facilities within the same regional mall. The Company believes these relocations will better facilitate its merchandising strategy, including the broader presentation of higher-margin catalog titles. At July 31, 1998, the Company had identified 100 such stores for relocation. In Fiscal 1998, the Company plans to relocate 20 stores and open four new stores in existing markets. Of these 24 projects, seven have been completed and 4 7 lease commitments have been signed for three more. In Fiscal 1999, the Company expects to relocate 17 stores and open 20 new stores. - Improve Operating Margins. The Company has significantly improved its operating margin to 3.6% of net sales (2.5% excluding special items) in Fiscal 1997 from a loss of 3.5% of net sales (a loss of 1.9% excluding special items) in Fiscal 1996. The Company believes that significant opportunities exist to continue to improve its operating profit margin. The Company seeks to increase its gross profit margin primarily through: (i) improved pricing for the Company's products; (ii) enhanced trade terms; (iii) reduced product returns, through a more systematic allocation of products; and (iv) adjusting its merchandise mix to emphasize higher-margin catalog items as it relocates its stores to larger facilities. In addition, the Company expects to leverage its general and administrative and warehousing and distribution costs as it opens new stores or acquires stores in existing markets. The Company's warehouse and distribution center is currently operating at between 30% and 40% of capacity and the Company believes it could support approximately 500 additional stores without a significant increase in capital expenditures for its warehouse and distribution facilities. - Pursue Acquisitions. The Company believes its industry leading position, experienced management team and improved capitalization position Camelot to pursue selective acquisition opportunities in the music retail industry. Camelot targets mall-based retailers of prerecorded music in existing or contiguous market areas which possess attractive real estate locations. The Company's strategy is to improve such retailers' operating results by remerchandising the stores to conform to Camelot's prototype, implementing its information systems and integrating the acquired operations in order to benefit from economies of scale in distribution, advertising, and management costs. Effective February 28, 1998, the Company purchased certain assets of The Wall for $72.4 million, which significantly enhanced Camelot's market share in the Mid-Atlantic and Northeast regions of the United States. At May 31, 1998, the Company had improved product mix at all of The Wall's stores, targeted for closure 11 underperforming stores, implemented its information systems and reduced costs by eliminating The Wall's corporate infrastructure and phasing out its distribution facilities. See "Unaudited Pro Forma Condensed Consolidated Financial Data." On July 29, 1998, the Company acquired Spec's. See "-- Recent Developments." RECENT DEVELOPMENTS On July 29, 1998, the Company acquired Spec's under the terms of an Agreement and Plan of Merger dated June 3, 1998 (the "Spec's Merger Agreement"). Spec's is a Miami, Florida-based retailer of prerecorded music operating 41 stores in south Florida and Puerto Rico. As of July 29, 1998, Spec's operated 16 mall stores and 25 stores in shopping centers and free-standing locations. The Company believes the Spec's Acquisition will enhance its competitive position in the Southeastern United States and give the Company a leading position in the south Florida market. The cash purchase price for the Spec's Acquisition was $28 million (including related acquisition costs and the repayment of Spec's indebtedness) and was funded primarily with amounts available under the Company's Amended Credit Facility (as defined herein) as well as accumulated cash. See "Risk Factors -- Risks of Restrictions by Lenders" and "Description of Certain Indebtedness." See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Based on public filings by Spec's, during the twelve months ended January 31, 1998, Spec's had revenues of $66.2 million and an operating loss of $4.1 million (excluding restructuring charges, store closing expenses and impairment of long-lived assets). The Company expects to achieve cost savings through the reduction or elimination of Spec's corporate and distribution infrastructure and intends to close two underperforming stores. --------------- The Company was incorporated in Delaware on September 30, 1993. Its principal executive offices are located at 8000 Freedom Avenue, N.W., North Canton, Ohio 44720 and its telephone number is (330) 494-2282. 5 8 THE OFFERINGS The offering of shares of the Company's Common Stock, par value $.01 per share, in the United States and Canada (the "U.S. Offering") and the offering of shares of the Common Stock outside the United States and Canada (the "International Offering") are collectively referred to herein as the "Offerings." Common Stock offered by the Selling Stockholders.............................. shares Common Stock to be outstanding after the Offerings(1).............................. 10,175,932 shares Use of Proceeds............................. The Company will not receive any proceeds from the sale of Common Stock offered by the Selling Stockholders. Proposed Nasdaq National Market System Symbol.................................... "CMLT"
- --------------- (1) Does not include (i) 948,594 shares of Common Stock reserved for issuance under the Company's stock option plans of which options to purchase an aggregate of 734,000 shares of Common Stock will be outstanding upon completion of the Offerings and (ii) up to 1,730 shares of Common Stock reserved for issuance to certain former creditors of the Company pursuant to the Plan of Reorganization. See "Shares Eligible for Future Sale," "Management -- Executive Compensation" and "Management -- Director Compensation." RISK FACTORS Purchasers of Common Stock in the Offerings should carefully consider the risk factors set forth under the caption "Risk Factors" and the other information included in this Prospectus prior to making an investment decision. 6 9 SUMMARY UNAUDITED PRO FORMA FINANCIAL INFORMATION AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA) The following table presents summary unaudited pro forma financial data of the Company for the twelve months ended and as of February 28, 1998. The column entitled "Pro Forma Combined Fiscal 1997 (Fresh-Start)" gives effect to the adoption by the Company of fresh-start reporting which was effective as of January 27, 1998. The column entitled "Pro Forma Combined Fiscal 1997 (The Wall)" gives effect both to fresh-start reporting as well as The Wall Acquisition which was effective February 28, 1998. In both cases, the pro forma data assume these events occurred on March 2, 1997. The pro forma financial information does not give effect to the Spec's Acquisition. The summary unaudited pro forma financial data are not necessarily indicative of operating results that would have been achieved had these events been consummated on the date indicated and should not be construed as representative of future operating results. The unaudited pro forma financial data should be read in conjunction with the financial statements and related notes thereto of the Company and The Wall and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus.
PRO FORMA PRO FORMA COMBINED COMBINED FISCAL 1997 FISCAL 1997 (FRESH-START)(1) (THE WALL)(1) ---------------- ------------- INCOME STATEMENT DATA Net sales................................................... $396,208 $554,120 Cost of sales............................................... 256,881 352,056 -------- -------- Gross profit................................................ 139,327 202,064 Selling, general and administrative expenses................ 108,214 151,226 Depreciation and amortization............................... 6,437 10,124 Special items(2)............................................ (4,443) (4,443) -------- -------- Income before interest expense, other income (expenses), net, reorganization income (expenses), income taxes and extraordinary item........................................ 29,119 45,157 Interest expense............................................ (178) (588) Other income (expenses), net................................ 2,639 -- -------- -------- Income before reorganization income (expenses), income taxes and extraordinary item.................................... 31,580 44,569 Reorganization income (expenses)(3)......................... -- -- -------- -------- Income before income taxes and extraordinary item........... 31,580 44,569 (Provision) benefit for income taxes........................ (12,316) (17,383) Extraordinary item, net of tax(4)........................... -- -- -------- -------- Net income.................................................. $ 19,264 $ 27,186 ======== ======== Earnings per share(5)....................................... $ 2.67 Weighted average shares outstanding(5)...................... 10,176 SELECTED OPERATING DATA Gross square footage (000's)................................ 1,309 1,862 Sales per square foot....................................... $ 306 $ 293
(footnotes on page 9) 7 10 SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE, SELECTED STORE AND SELECTED OPERATING DATA) The following table presents summary historical consolidated financial data of the Company and its predecessor (the "Predecessor") as of the dates and for the periods indicated. The summary historical consolidated financial data should be read in conjunction with the financial statements and related notes thereto of the Company and The Wall and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus.
PREDECESSOR(6) THE COMPANY PREDECESSOR(6) THE COMPANY --------------------------------------------- ------------ --------------- ----------- PERIOD PERIOD PERIOD PERIOD MARCH 2, FEBRUARY 1, MARCH 2, MARCH 1, 1997 TO 1998 TO COMBINED 1997 TO 1998 TO FISCAL FISCAL FISCAL JANUARY 31, FEBRUARY 28, FISCAL MAY 31, MAY 30, 1994 1995 1996 1998(7) 1998(7) 1997(8) 1997 1998 -------- --------- -------- ----------- ------------ -------- --------------- ----------- INCOME STATEMENT DATA Net sales.............. $459,077 $ 455,652 $396,502 $372,561 $ 27,842 $400,403 $ 82,815 $ 113,456 Cost of sales.......... 289,887 302,481 263,072 243,109 17,662 260,771 53,820 71,147 -------- --------- -------- -------- ----------- -------- -------- ----------- Gross profit........... 169,190 153,171 133,430 129,452 10,180 139,632 28,995 42,309 Selling, general and administrative expenses............. 128,158 135,441 117,558 99,553 9,240 108,793 26,407 36,213 Depreciation and amortization......... 21,146 26,570 23,290 20,484 527 21,011 5,454 1,765 Special items(2)....... -- 211,520 6,523 (4,443) -- (4,443) -- 350 -------- --------- -------- -------- ----------- -------- -------- ----------- Income (loss) before interest expense, other income (expenses), net, reorganization income (expenses), income taxes and extraordinary item... 19,886 (220,360) (13,941) 13,858 413 14,271 (2,866) 3,981 Interest expense....... (30,655) (38,319) (17,418) (221) (12) (233) (61) (86) Other income (expenses), net...... (5,026) (4,978) (1,160) (185) 295 110 (69) 263 -------- --------- -------- -------- ----------- -------- -------- ----------- Income (loss) before reorganization income (expenses), income taxes and extraordinary item... (15,795) (263,657) (32,519) 13,452 696 14,148 (2,996) 4,158 Reorganization income (expenses)(3)........ -- -- (31,845) 26,501 -- 26,501 (1,113) -- -------- --------- -------- -------- ----------- -------- -------- ----------- Income (loss) before income taxes and extraordinary item... (15,795) (263,657) (64,364) 39,953 696 40,649 (4,109) 4,158 (Provision) benefit for income taxes......... (3,070) (474) -- (289) (115) (404) -- (1,603) Extraordinary item, net of tax(4)............ -- -- -- 228,911 -- 228,911 -- -- -------- --------- -------- -------- ----------- -------- -------- ----------- Net income (loss)...... $(18,865) $(264,131) $(64,364) $268,575 $ 581 $269,156 $ (4,109) $ 2,555 ======== ========= ======== ======== =========== ======== ======== =========== Basic earnings per share(5)............. $ 0.06 $ 0.25 Diluted earnings per share(5)............. $ 0.06 $ 0.24 Weighted average number of common shares outstanding -- basic(5)... 10,176,162 10,176,162 Weighted average number of common shares outstanding -- diluted(5).. 10,176,162 10,469,914 SELECTED STORE DATA Number of stores: Open at beginning of period............. 392 401 388 315 305 315 315 305 Opened during period............. 21 14 -- -- -- -- -- 1 Closed during period............. 12 27 73 10 -- 10 -- 1 Acquired during period............. -- -- -- -- -- -- -- 150 -------- --------- -------- -------- ----------- -------- -------- ----------- Open at end of period............. 401 388 315 305 305 305 315 455 ======== ========= ======== ======== =========== ======== ======== =========== SELECTED OPERATING DATA Gross square footage (000's)(9)........... 1,511 1,563 1,329 1,309 1,309 1,309 1,329 1,930 Sales per square foot(6).............. $ 304 $ 292 $ 298 -- -- $ 306 $ 62 $ 59 Comparable store sales increase (decrease)(10)....... (2.6%) (5.6%) (3.5%) -- -- 6.8% 1.7% 1.0%
(footnotes on page 9) 8 11
THE COMPANY AT MAY 30, 1998 --------------- BALANCE SHEET DATA Cash and cash equivalents................................... $ 15,680 Working capital............................................. 114,517 Total assets................................................ 303,894 Long-term debt.............................................. -- Stockholders' equity........................................ 197,692(11)
- --------------- (1) For information regarding the pro forma adjustments made to the Company's historical financial data, see "Unaudited Pro Forma Condensed Consolidated Financial Data." (2) Includes certain items, including the reversal of program reward redemption reserves aggregating $4.4 million (income) in Fiscal 1997 when the Company discontinued its manual "punch card" version of its customer loyalty program and replaced it with a more limited automated customer loyalty program, the write-down of the fair value of long-lived assets in Fiscal 1996 resulting in a charge of $6.5 million and the write-down of goodwill in Fiscal 1995, principally related to the 1993 Acquisition. See Note 15 to the Company's Consolidated Financial Statements. In the first quarter of Fiscal 1998 the Company incurred a $0.4 million (expense) relating to the Offerings. (3) During Fiscal 1997, reorganization income related principally to adjustments to prepetition claims that were discharged or received no amount of recovery, offset by net adjustments to fair value, and professional fees and other expenses related to the bankruptcy proceedings. During Fiscal 1996, reorganization expense primarily reflected a provision for store closings (including related lease rejection damage claims) and the write-off of financing costs associated with prepetition indebtedness as well as professional fees. (4) As a result of the Company's reorganization, in Fiscal 1997 the Company recorded a one-time gain of $228.9 million associated with the extinguishment of its prepetition debt. (5) The pro forma combined net income per share data is presented in accordance with SFAS No. 128 and assumes: (i) the Company emerged from bankruptcy and adopted fresh-start reporting on March 2, 1997; (ii) The Wall Acquisition occurred on March 2, 1997; and (iii) the Company's 1998 Stock Option Plan and Outside Directors Stock Option Plan were established on March 2, 1997. Awards of options under these plans are not dilutive on a pro forma basis and, therefore, basic and diluted data are the same. With respect to historical combined net income per share, see Note 3 to the Company's year end and interim Consolidated Financial Statements. (6) The financial information for the Predecessor entity relates to the operations of Camelot Music Holdings, Inc. prior to its emergence from the protection of the Bankruptcy Court on the Plan Effective Date. (7) As of January 31, 1998, the Company adopted fresh-start reporting in accordance with AICPA Statement of Position 90-7, which resulted in a new entity for financial reporting purposes. Financial information for the period March 2, 1997 to January 31, 1998 reflects the operations of the Company's Predecessor prior to emergence from bankruptcy. Financial information for the period February 1, 1998 to February 28, 1998 reflects the operations of the Company after the Plan Effective Date and the adoption of fresh-start reporting. (8) Combined Fiscal 1997 financial data represents a summation (on two different bases of accounting due to the adoption of fresh-start reporting on the Plan Effective Date) of the financial data for the Predecessor from March 2, 1997 to January 31, 1998 and the financial data for the Company from February 1, 1998 to February 28, 1998. See "Unaudited Pro Forma Condensed Financial Data." (9) Sales per square foot is based on the gross square footage for Camelot stores only and excludes The Wall stores. (10) The percentage change in comparable store sales is calculated as the net change in sales for each comparable store for the equivalent period in the prior year. The percentage change in comparable store sales is based on comparable store sales for Camelot stores only and excludes The Wall stores. Comparable stores are stores that have been operating for more than 12 months since first opening. During the 13th month of operations, new stores are considered comparable stores. Stores which have been relocated are treated as comparable stores. Closed stores are not categorized as comparable stores. (11) Does not reflect estimated expenses associated with the Offerings. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--General." 9 12 RISK FACTORS In addition to the other information in this Prospectus, the following factors should be considered carefully by prospective investors in evaluating an investment in the Common Stock offered by this Prospectus. This Prospectus contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as those discussed elsewhere in this Prospectus. COMPETITION The prerecorded music retail industry is highly competitive. Consumers have numerous options through which to purchase prerecorded music and other home entertainment products, including chain retailers (such as the Company) specializing in prerecorded music, consumer electronics superstores, non-mall multimedia superstores, discount stores, grocery, convenience and drug stores, direct-mail programs via telephone, the Internet or television, local music retailers and mail order music clubs. Certain of Camelot's competitors have greater financial and other resources than the Company. In addition, during the past several years, many retailers sought to increase their share of the retail prerecorded music market by engaging in near- or below-cost pricing. This resulted in unprecedented price competition which had a material adverse effect on the Company's results of operations and financial condition. While this intense price competition lessened somewhat during 1997, the Company expects that the retail sales environment will continue to present challenges into the foreseeable future, and there can be no assurance that price competition or other competitive challenges will not have a material adverse effect on the Company's results of operations and financial condition. The Company also competes for consumer time and spending with all leisure time activities, such as movie theaters, television, home computer and Internet use, live theater, sporting facilities and spectator events, travel, amusement parks, and other family entertainment centers. The impact of the increasing use of these entertainment options in recent years has been a reduction in customer traffic and revenues for mall-based prerecorded music retailers such as the Company. The Company's ability to compete successfully depends on its ability to secure and maintain attractive and convenient locations, market and manage merchandise effectively and attractively, offer an extensive product selection and knowledgeable customer service as well as provide effective management. See "Business -- Competition." UNCERTAINTIES REGARDING MAP GUIDELINES During 1996, music vendors strengthened MAP guidelines, which are intended to promote certain minimum retail prices for prerecorded music products by providing incentives to retailers to comply with the terms of the programs. MAP guidelines set forth minimum retail prices at which a vendor's merchandise is to be sold if a retailer desires to receive cooperative advertising support from such vendor. Efforts by music vendors to strengthen these MAP guidelines were an important factor in the improvement in overall industry conditions during 1997 and the Company believes that these efforts also contributed to its improved financial performance during recent periods. In response to consumer complaints, the United States Federal Trade Commission (the "FTC") is currently investigating the music vendors' MAP guideline programs in order to determine whether the programs violate provisions of federal anti-trust laws. A decision by the FTC to institute proceedings or take other action which results in the relaxation or elimination of the MAP guidelines would have a material adverse effect on the Company's results of operations and financial condition. There can be no assurance that deep-discount pricing practices will not return, or that if they do, that the Company will be able to remain competitive without a material adverse effect on its financial condition and results of operation. RISKS RELATED TO GROWTH STRATEGY The Company's growth strategy involves store relocations (including enlargements), the opening of new stores, as well as selective acquisitions of music retailers. Each component of the Company's strategy involves significant risks. Selection of locations for new stores and the relocation of existing stores requires the Company to identify attractive locations for its stores, obtain leases on favorable terms for those locations and, in the case of 10 13 new stores, hire and retain qualified store personnel or, in the case of relocated stores, accurately assess relocation costs and the likely return on investment. Relocation of existing stores also will result in a loss of revenue and income from those stores during transitional periods, which may have a material adverse effect on the Company's results of operations and financial condition. There can be no assurance as to the Company's ability to successfully relocate or open new stores or as to the effect of remodelings and store openings on the Company's financial condition and results of operations. Selective acquisitions of other music retailers are also a component of the Company's strategy. The Wall was the Company's first major acquisition, and the Company recently completed the Spec's Acquisition. The Company expects to face significant competition for acquisition candidates, which may limit the number of acquisition opportunities and lead to higher acquisition prices. There can be no assurance that the Company will be able to successfully integrate and profitably manage The Wall or Spec's or that it will be able to identify, acquire, successfully integrate or profitably manage additional acquisitions without substantial costs, delays or other financial or operational difficulties. Further, acquisitions involve a number of special risks, including adverse short-term effects on the Company's results of operations, potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities, diversion of management's attention, the failure to retain key personnel of the acquired business, increased expenses for accounting and computer systems (including reprogramming such computer systems to effectively handle transactions in the year 2000 and beyond), the effects of amortization of acquired intangible assets (such as goodwill) and risks associated with unanticipated events or liabilities, some or all of which could have a material adverse effect on the Company's results of operations and financial condition. Although the Company has conducted what it believes to be a prudent level of review regarding the operational condition of The Wall and Spec's, and expects to conduct a similar level of review regarding any future acquisitions, the Company cannot ascertain the actual value of acquisition targets until it assumes operating control of such entities. In certain cases, the Company may be required to file applications and obtain clearances under applicable federal antitrust laws or receive approval of a target company's shareholders (as with Spec's) before consummation of an acquisition. These regulatory requirements or shareholder solicitations may restrict or delay the Company's acquisitions and may increase the cost of completing such transactions. Although the Company from time to time engages in discussions with prospective acquisition candidates, the Company is not currently a party to any definite agreement or an agreement in principle with respect to any acquisitions. The timing, size and success of the Company's acquisition efforts and the associated capital commitments cannot be readily predicted. The Company intends to use cash, borrowings under the Amended Credit Facility and/or shares of Common Stock to finance future acquisitions. If the Company does not have sufficient cash resources, its growth could be limited unless it is able to obtain additional capital through debt or equity financings. The availability of debt or equity financing is subject to, among other things, market conditions. If the Common Stock does not maintain a sufficient market value, or if potential acquisition candidates are otherwise unwilling to accept Common Stock in consideration for the sale of their businesses, the Company may be required to use more of its cash resources, if available, to finance its acquisition activities. The failure of the Common Stock to maintain a sufficient market value also may adversely affect the Company's ability to engage in future equity financings. There can be no assurance that the Company will be able to obtain the additional financing it may need to implement its business strategy on terms that it finds acceptable, if at all. DEPENDENCE ON HIT RELEASES The Company's business is dependent upon the production of hit releases by recording artists. Hit releases are important for generating customer traffic and sales in the Company's stores. During recent years, industry growth and sales of music and video products slowed due to a lack of strong new releases. The dependence on these products can create cyclical trends that do not necessarily reflect general trends in the economy. The timing of these cycles and the future availability of hit releases is beyond the control of the Company. The absence of new hit releases or a decline in the number of hit releases could have a material adverse effect on the Company's results of operations and financial condition. 11 14 RISK ASSOCIATED WITH NEW TECHNOLOGIES Historically, prerecorded music was one of the few forms of inexpensive, reusable home entertainment available to consumers. In recent years, the number of new home entertainment products has grown significantly. Certain new technologies, such as the compact disc, have benefited the music retail industry. However, the proliferation of other entertainment technologies, such as cable and broadcast satellite television, videos, computer games, the Internet and other technologies, have intensified the competition among various entertainment alternatives for consumer entertainment spending. There can be no assurance as to the effect of the introduction of these and other new entertainment alternatives on the music retail industry or the Company. In addition, technological innovations in the music industry do not necessarily result in increased levels of sales or profitability. The success of technologies such as Digital Audio Technology, DVD and other format innovations depends upon consumer acceptance of the new technology, industry agreement on a standard, the availability of product for consumer purchase and the cost of that product. The switch of consumers from one format to another, such as the switch from records to audio cassettes, and the later shift from cassettes to CDs, may also reduce sales of the existing format. Sales may be adversely affected and product returns may be increased if the Company does not carry the right balance of old and new formats. This could cause the Company to carry excess inventory. There can be no assurance as to the Company's success in interpreting the desires of customers or predicting which new technologies or formats will be accepted by consumers. HISTORY OF LOSSES The Company has experienced significant losses during three of the past four fiscal years. During Fiscal 1994, 1995, and 1996, the Company realized net losses of $18.9 million, $264.1 million and $64.4 million, respectively. These losses were the result of many factors, including the write-down of long-lived assets (principally goodwill), restructuring charges, changes in the competitive environment, interest expense resulting from indebtedness incurred in the 1993 Acquisition and the comparative lack of hit releases. In Fiscal 1997, the Company had net income of $269.2 million ($19.3 million on a pro forma basis after adjusting for fresh-start reporting and excluding The Wall). There can be no assurance that the Company will be profitable in future periods or that it will not realize significant losses. ABSENCE OF LONG-TERM CONTRACTS WITH SUPPLIERS; POTENTIAL SUPPLIER CONSOLIDATION The Company purchases its prerecorded music directly from a large number of manufacturers. During Fiscal 1997, approximately 77% of purchases, net of returns, were made from the following six suppliers: BMG Distribution, Sony Music Entertainment, Inc., Universal Music and Video Distribution, Inc., Warner/Electra/ Atlantic Corporation, Polygram Group Distribution, Inc. and EMI Music Distribution (collectively, the "Big Six Vendors"). Twenty other vendors accounted for an additional 13% of purchases, net of returns, during such period. As is standard in the industry, the Company does not maintain long-term contracts with any of its suppliers, and the Company's purchases are made through purchase orders. During the bankruptcy proceedings, the Company's access to customary trade terms was severely limited. After the Effective Date, the Company was able to negotiate customary trade terms with most of its suppliers, including the Big Six Vendors. The Company believes that the resumption of customary trade terms and the enjoyment of positive vendor relations are fundamental to its success in the marketplace. However, there can be no assurance that the Company will be able to maintain these customary trade terms or enjoy positive vendor relations in the future. The loss of these positive vendor relations and/or customary trade terms could have a material adverse effect on the results of operations and financial condition of the Company. See "Business -- Suppliers." A number of the Big Six Vendors have recently stopped accepting returns of open products from all of their retail customers. This trend has had an adverse impact on the Company's financial condition and results of operations. There can be no assurance that this trend will be reversed or that the Company's vendors will not make other modifications to their policies which have an adverse effect on the Company. Seagram Co., Ltd., owner of Universal Music and Video Distribution, Inc., has recently announced its intention to acquire Polygram Group Distribution, Inc. Seagram Co., Ltd. has indicated publicly that it may intend to seek cost savings through the integration of its two music vendors. There can be no assurance that this acquisition and any resulting integration of two of the Big Six Vendors will not have a material adverse effect on the Company. 12 15 SEASONALITY OF SALES The Company's business is seasonal in nature. In Fiscal 1997, approximately 35% of revenues, and all of its income before interest expense, other income (expenses), net, reorganization income (expenses), income taxes and extraordinary item and its net income before extraordinary item were generated in the Company's fiscal fourth quarter. In anticipation of increased sales activity during these months, the Company purchases substantial amounts of inventory and hires a significant number of temporary employees to bolster its permanent store staff. Quarterly results are affected by, among other things, new product offerings, store openings and closings, and sales performance of existing stores. Consumer spending in the peak retail season may be affected by factors outside the Company's control, including consumer demand, weather that affects consumer traffic and general economic conditions. A failure to generate substantial holiday season sales, including as a result of merchandise delivery delays due to receiving or distribution problems, could have a material adverse effect on the results of operations and financial condition of the Company. DEPENDENCE ON KEY PERSONNEL The Company is dependent to a large extent on its ability to attract, motivate and retain an adequate labor force, including management, sales, merchandising and other personnel. The Company is also dependent to a significant extent upon the continued efforts of its senior management team, including in particular its President and Chief Executive Officer, James E. Bonk. The Company has entered into an employment agreement with Mr. Bonk which expires on December 31, 2000 and has entered into severance agreements with all of its executive officers. If, for any reason, such key personnel do not continue to be active in management, the Company's operations could be materially adversely affected. The Company does not maintain key-man life insurance policies on any of its executive officers. See "Management." MINIMUM WAGE INCREASES The Company employs a number of sales associates and other personnel, including temporary employees hired during the periods in which the Company experiences significantly increased sales, who are paid on an hourly basis. Many of these hourly employees are paid at or near the minimum wage. Increases in the minimum wage result in adjustments to the compensation of not only those hourly employees who are paid minimum wage, but also to the compensation paid to more highly compensated hourly employees. Increases in the minimum wage have had a significant effect on the Company's compensation expense during prior periods, and any future increases could have a material adverse effect on the Company's results of operations and financial condition. INTERNAL REVENUE SERVICE CLAIM The Internal Revenue Service ("IRS") asserted in the bankruptcy proceedings a priority tax claim against the Company of approximately $7.9 million (the "IRS Claim"). Under the Plan of Reorganization, any allowed priority tax claim of the IRS would be paid over six years, with quarterly amortization of interest and principal, at an interest rate of 9.0%. The Company acknowledges a priority tax obligation to the IRS of approximately $0.8 million and has established a reserve in that amount. The Company disputes the validity of the balance of the IRS Claim, the large majority of which relates to a proposed disallowance by the IRS of certain deductions for interest payments made by Camelot in connection with its corporate-owned life insurance program (the "COLI Deductions"). The Company filed an objection (the "COLI Objection") to the IRS Claim with the Bankruptcy Court to the extent that the IRS seeks to disallow the COLI Deductions. In response to the COLI Objection, the IRS filed a motion (the "Withdrawal Motion") with the United States District Court for the District of Delaware (the "District Court") seeking to have the COLI Objection resolved by the District Court rather than the Bankruptcy Court. The Withdrawal Motion was granted on May 29, 1998, and the proceeding is now before the District Court as Civil Action No. 97-695 (MMS). The District Court approved a Joint Discovery Plan on July 6, 1998. The Joint Discovery Plan mandates that all discovery be served or issued so as to be completed on or before June 30, 1999. The Company has established a reserve in an amount sufficient to cover the $0.8 million priority tax obligation that it has acknowledged in the bankruptcy proceeding. In the event that a judgment is rendered against the Company in an amount exceeding the reserve established with respect to this matter, the Company's 13 16 results of operations would be materially adversely affected. Such a judgment, unless paid or bonded for appeal, would also be an Event of Default under the Company's Amended Credit Facility (as defined). RISKS OF RESTRICTIONS BY LENDERS AND COLLATERAL ARRANGEMENTS The Company's Amended Credit Facility contains certain financial and negative covenants which, among other things, limit the ability of the Company and its subsidiaries to incur indebtedness, make investments, create or permit liens, make capital expenditures, make guarantees or pay dividends. Additionally, the Company is currently and will continue to be required to meet certain financial covenants under the Amended Credit Facility, including minimum consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA"). There can be no assurance that the Company will not experience difficulty meeting its financial covenants under the Amended Credit Facility. If the Company is unable to comply with the covenants under the Amended Credit Facility, such indebtedness could be declared immediately due and payable. The obligations of the Company's wholly owned subsidiary Camelot Music Inc. ("CMI") under the Amended Credit Facility are guaranteed by the Company and by all of CMI's subsidiaries; these obligations are collateralized by substantially all of CMI's and its subsidiaries assets. The Company has pledged to its lenders the capital stock of CMI, and CMI has pledged to the lenders the capital stock of its subsidiaries. If the Company defaulted on its indebtedness, the lenders under the Amended Credit Facility would be able to foreclose on the collateral and utilize other remedies available to secured lenders. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Description of Certain Indebtedness." YEAR 2000 COMPLIANCE The inability of computers, software and other equipment utilizing microprocessors to recognize and properly process data fields containing a two-digit year is commonly referred to as the Year 2000 compliance issue. As the year 2000 approaches, such systems may be unable to accurately process certain data-based information. The Company has assessed its systems and equipment with respect to Year 2000 and has developed a project plan. Many of the Year 2000 issues have been addressed. The Company is in the process of installing a new back office point of sale system to address Year 2000 issues at the store level, including the processing of credit card transactions. The remaining Year 2000 issues will be addressed either with scheduled systems upgrades or through the Company's internal systems development staff. The incremental costs will be charged to expense as incurred and are not expected to have a material impact on the financial position or the results of operations of the Company. The Company does not know the Year 2000 status of its vendors or of other third parties with whom it does business. The Company could be adversely impacted if Year 2000 modifications are not properly completed by either the Company or its vendors, banks or any other entity with whom the Company conducts business. CONTROL BY PRINCIPAL STOCKHOLDERS Upon completion of the Offerings, the Company's five principal stockholders will collectively own approximately % of the outstanding Common Stock of the Company. As a result, these stockholders will be able to significantly influence the outcome of all matters requiring stockholder approval, including the election of Directors and approval of significant corporate transactions. Such concentration of ownership may have the effect of delaying or preventing a change in control of the Company. See "Principal and Selling Stockholders" and "Description of Capital Stock." MATERIAL BENEFITS TO UNDERWRITERS Merrill Lynch, Pierce, Fenner & Smith Incorporated is a Selling Stockholder and will receive approximately $ million of gross proceeds from the sale of shares in the Offerings. Merrill Lynch, Pierce, Fenner & Smith Incorporated is one of the underwriters of the Offerings. Morgan Stanley & Co., Incorporated, one of the underwriters of the Offerings, is under common ownership with Van Kampen Merritt Prime Rate Income Trust ("Van Kampen"), a stockholder of the Company. Van Kampen is not selling any shares of Common Stock in the Offerings. See "Use of Proceeds," "Certain Transactions" and "Principal and Selling Stockholders." 14 17 PRIOR BANKRUPTCY On August 9, 1996 (the "Petition Date"), the Company and its subsidiaries filed petitions for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The Plan of Reorganization became effective on January 27, 1998. The bankruptcy proceeding, among other things, permitted the Company to terminate certain of its leases with its current mall owners. Many of the elements of the Company's strategy depend upon its relationships with key vendors, mall owners and customers. Though the Company is no longer a debtor-in- possession in any bankruptcy proceeding, the effect of this proceeding on past or potential mall owners, customers, vendors or employees cannot be determined. ABSENCE OF DIVIDENDS AND RESTRICTION ON PAYMENT OF DIVIDENDS The Company does not expect to pay dividends for the foreseeable future. The Company's New Working Capital Facility restricts, and its Amended Credit Facility will restrict the ability of the Company to pay dividends on the Common Stock. See "Dividend Policy" and "Description of Certain Indebtedness." CERTAIN ANTI-TAKEOVER PROVISIONS IN DELAWARE LAW AND THE COMPANY'S BY-LAWS Certain provisions of Delaware law and the Company's By-Laws could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of the Company. The Company is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which will prohibit the Company from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. The application of Section 203 also could have the effect of delaying or preventing a change in control of the Company. See "Description of Capital Stock." In addition, the Company's By-Laws provide that for nominations of Directors and other business to be brought before an annual meeting by a stockholder, such stockholder must give written notice to the Company with respect to such nomination or other matter a specified period in advance of the meeting. This provision may tend to discourage a proxy contest or other takeover bid for the Company. DILUTION Purchasers of the shares of Common Stock offered hereby will suffer immediate and substantial dilution in the amount of $ per share. See "Dilution." SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS AGREEMENT Upon completion of the Offerings, of the 30,000,000 authorized shares of Common Stock, 10,177,662 shares of Common Stock are anticipated to be issued and outstanding. Of these 10,177,662 shares of Common Stock, the shares purchased in the Offerings will be freely tradable without restriction under the Securities Act of 1933, as amended (the "Securities Act") by persons who are not affiliates of the Company. In addition, the 9,835,559 shares of Common Stock issued on the Effective Date and the 328,873 shares of Common Stock issued pursuant to the Plan of Reorganization since the Effective Date were issued pursuant to an exemption from the registration requirements of the Securities Act (and of any state or local laws) provided by Section 1145(a)(1) of the Bankruptcy Code. At August 1, 1998, up to an additional 1,730 shares of Common Stock may be issued by the Company pursuant to the Plan of Reorganization. All shares of Common Stock issued pursuant to the Plan of Reorganization may be resold by the holders thereof without registration unless any such holder is deemed to be an "underwriter" with respect to such securities, as defined in Section 1145(b)(1) of the Bankruptcy Code. Four stockholders (including three Selling Stockholders) holding an aggregate of shares of Common Stock after giving effect to the Offerings may be deemed to be underwriters pursuant to Section 1145(b)(1) and were provided with certain demand and piggyback registration rights under the terms of a registration rights agreement (the "Registration Rights Agreement") with the Company. See "Shares Eligible for Future Sale -- Registration Rights Agreement." On May 5, 1998, an additional 10,000 shares of Common Stock were issued pursuant to an order of the Bankruptcy Court to certain persons for their significant contributions to the bankruptcy case. The Company believes that an aggregate of shares of Common Stock, 15 18 including the shares held by the stockholders who are parties to the registration rights agreement, may currently be sold pursuant to Rule 144 under the Securities Act in compliance with the notice, manner of sale, current public reporting and volume limitations of Rule 144 (of which shares of Common Stock held by the Selling Stockholders are subject to the lock-up arrangements described herein) and shares may be sold without restriction. The 948,594 shares of Common Stock reserved for issuance upon exercise of outstanding options will become eligible for resale under Rule 144 one year subsequent to the date or dates that the holders of such options exercise the same. Subsequent to the Offerings, the Company intends to file a registration statement on Form S-8 with respect to the 734,000 shares of Common Stock reserved for issuance upon exercise of all outstanding options (whether vested or unvested) and the 214,594 shares of Common Stock reserved for issuance pursuant to future option grants. Upon registration, such shares upon issuance would be freely tradable by persons who are not "affiliates" of the Company. In addition, "affiliates" of the Company could sell such shares pursuant to Rule 144 under the Securities Act in compliance with the resale volume limitations of Rule 144. The Company, its Directors, executive officers and management employees and the Selling Stockholders and other shareholders holding an aggregate of shares of Common Stock prior to the Offerings have agreed that they will not, directly or indirectly, without the prior written consent of Merrill Lynch on behalf of the Underwriters, offer, sell, grant any option to purchase or otherwise dispose of any shares of Common Stock, or any securities convertible into or exchangeable or exercisable for, Common Stock, for a period of 180 days after the closing date of the Offerings. Stockholders holding shares have entered into lock-up agreements, while stockholders holding shares have not entered into such agreements. No prediction can be made as to the effect, if any, that future sales of shares of Common Stock, or the availability of shares of Common Stock for future sale, will have on the market price of the shares of Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock (including shares of Common Stock issued upon the exercise of outstanding stock options), or the perception that such sales could occur, could adversely affect the prevailing market prices for the Common Stock. See "Shares Eligible for Future Sale." ABSENCE OF ESTABLISHED PUBLIC MARKET AND POTENTIAL VOLATILITY OF STOCK PRICE Prior to the Offerings, there has been a limited public market for the Company's Common Stock, and there can be no assurance that an active trading market will develop or be sustained in the Common Stock. See "Price Range of Common Stock." The initial public offering price of the Common Stock will be determined by negotiations among the Company, the Selling Stockholders and the Underwriters. The initial public offering price does not necessarily bear any direct relationship to the market prices of the Common Stock as reported on the OTC Bulletin Board prior to the Offerings and may have no relationship to the price at which the Common Stock will trade after completion of the Offerings. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The stock market has from time to time experienced extreme price and volume fluctuations that have been unrelated to the operating performance of particular companies. The market price for the Common Stock may be highly volatile depending on various factors, including but not limited to the state of the national economy, stock market conditions, industry research reports, actions by governmental agencies, litigation involving the Company, the Company's most recent quarterly earnings, announcements by the Company or its competitors and general conditions in the music retailing industry. 16 19 PRICE RANGE OF COMMON STOCK The Company's Common Stock has traded on the OTC Bulletin Board under the symbol "CMHDA" since February 27, 1998. The following table sets forth the range of high and low closing bid prices for the Common Stock for the periods indicated as reported by the National Association of Securities Dealers, Inc. These prices represent inter-dealer prices, without adjustment for retail mark-ups, mark-downs or commissions and do not necessarily represent actual transactions. The Company has applied for quotation of the Common Stock on the Nasdaq National Market System under the symbol "CMLT."
PRICE RANGE ------------------ HIGH LOW ------- ------- FISCAL 1997: Fourth Quarter (February 27, 1998)........................ $ 40.00 $ 35.00 FISCAL 1998: First Quarter............................................. $ 41.00 $ 33.00 Second Quarter (through August 10, 1998).................. 44.00 37.00
On August 10, 1998, the closing bid price of the Common Stock as reported on the OTC Bulletin Board was $37.00 per share. Based upon information provided by the Company's transfer agent, as of July 28, 1998 there were 742 holders of the Common Stock. The initial public offering price of the Common Stock will not necessarily bear any direct relationship to the trading prices on the OTC Bulletin Board. DIVIDEND POLICY The Company has never declared or paid cash dividends on its Common Stock. The Company currently intends to retain any earnings for use in its business and therefore does not anticipate paying any dividends in the foreseeable future. In addition, the Company's Amended Credit Facility limits its ability to pay dividends under certain circumstances. See "Description of Certain Indebtedness." Any future determination as to the payment of cash dividends will depend on a number of factors, including future earnings, capital requirements, the financial condition and prospects of the Company and any restrictions under credit agreements existing from time to time. There can be no assurance that the Company will pay dividends in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 17 20 CAPITALIZATION The following table sets forth the capitalization of the Company as of May 30, 1998. This table should be read in conjunction with the "Selected Consolidated Financial Data" and the Consolidated Financial Statements and notes thereto included elsewhere in this Prospectus.
AT MAY 30, 1998 --------------- (IN THOUSANDS, EXCEPT SHARE DATA) Current maturities of long-term debt........................ $ -- ======== Long-term debt, excluding current maturities (1)............ $ -- ======== Stockholder's equity: Common Stock, $.01 par value, 30,000,000 shares authorized, 10,177,662 shares issued and outstanding (2).................................................... $ 102 Additional paid-in capital................................ 194,454 Retained earnings (3)..................................... 3,136 -------- Total stockholders' equity........................ 197,692 -------- Total capitalization.............................. $197,692 ========
- --------------- (1) As of July 31, 1998, the Company had $25.0 million of indebtedness outstanding pursuant to the term loan under the Amended Credit Facility. The Company borrowed $25.0 million under the term loan in order to finance substantially all of the cash purchase price of the Spec's Acquisition. See "Risk Factors -- Risks of Restrictions by Lenders," "Prospectus Summary -- Recent Developments," "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Description of Certain Indebtedness." (2) See Note 13 to the Company's Consolidated Financial Statements. (3) Does not reflect estimated expenses associated with the Offerings. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General." 18 21 DILUTION The net tangible book value of the Company as of May 30, 1998 was $303.9 million or $26.00 per share of Common Stock. Net tangible book value per share is determined by dividing the net tangible book value by the number of outstanding shares of Common Stock, including the assumed exercise of all vested options, after consummation of the Offerings. The net tangible book value dilution per share shown below represents the difference between the amount per share paid by purchasers of Common Stock in the Offerings and the net tangible book value per share of Common Stock. The following table illustrates the per share dilution: Initial public offering price per share..................... $ Net tangible book value per share........................... $ 26.00 -------- Net tangible book value dilution per share.................. $ ========
The following table summarizes, on a pro forma basis as of May 31, 1998, the differences between the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share of Common Stock paid by the current stockholders and by the investors purchasing shares of Common Stock in the Offerings, at the assumed initial public offering price of $ per share of Common Stock.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE --------------------- ----------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------ ------- ------ ------- --------- Current Stockholders (1)............ % $ % $ New investors....................... ---------- ----- ------------ ----- Total..................... 100.0% $ 100.0% ========== ===== ============ =====
- --------------- (1) Ownership figures for current stockholders exclude an aggregate of 354,500 shares of Common Stock that may be acquired upon the exercise of currently exercisable options at an exercise price of $20.75 per share under the Company's stock option plans. See "Management -- Stock Option Plan" and "Management -- Director Compensation." 19 22 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA The accompanying unaudited pro forma condensed consolidated statement of operations for Fiscal 1997 reflects the historical statement of operations of the Company, adjusted to reflect the effects of (i) fresh-start reporting and (ii) The Wall Acquisition (each as discussed herein), as if each had occurred as of the beginning of the period presented. The Company adopted the American Institute of Certified Public Accountants Statement of Position ("SOP") 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code." Pursuant to the guidance provided by SOP 90-7, the Company adopted fresh-start reporting for its Consolidated Financial Statements effective as of January 31, 1998, the last day of the Company's fiscal month end. Under fresh-start reporting, the reorganization value of the Company has been allocated to the emerging Company's assets on the basis of the purchase method of accounting. All of the reorganization value was attributable to specific tangible assets of the emerging entity and no amount has been recorded as intangible assets or as "Reorganization Value in Excess of Amounts Allocable to Identifiable Assets." Effective February 28, 1998, the Company acquired certain assets and assumed certain liabilities and operating lease commitments of The Wall from WH Smith Group Holdings USA, Inc. for a cash purchase price of $72.4 million. The Wall was a wholly owned subsidiary of WH Smith Group Holdings USA, Inc. and an indirect wholly owned subsidiary of the WH Smith Group, plc, a publicly held United Kingdom corporation. The purchase price exceeded the fair value of the net assets acquired by approximately $27.0 million, which amount will be amortized on a straight line basis over 30 years. The acquisition was accounted for under the purchase method of accounting. The unaudited pro forma condensed consolidated financial data and accompanying notes should be read in conjunction with the Consolidated Financial Statements and related notes of the Company and the financial statements and related notes of The Wall, all of which are included elsewhere in this Prospectus. The Company believes that the assumptions used in the following statements provide a reasonable basis on which to present the pro forma financial data. The fresh-start reporting allocation is subject to the resolution of the contingency with the IRS discussed in Note 18 to the Consolidated Financial Statements of the Company. The purchase price allocation related to The Wall Acquisition is subject to final adjustment based on the resolution of certain contingencies related to merchandise inventory return reserves and the finalization of acquisition costs. The unaudited pro forma condensed consolidated financial data are provided for informational purposes only and should not be construed to be indicative of the Company's results of operations had The Wall Acquisition been consummated on the dates assumed and are not intended to constitute projections with regards to the Company's results of operations for any future period. 20 23 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FISCAL 1997 (IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL ------------ HISTORICAL HISTORICAL THE ------------ -------------- COMPANY THE WALL PREDECESSOR (PERIOD (PERIOD (PERIOD FEBRUARY 1, MARCH 2, MARCH 2, 1997 PRO FORMA 1998 TO PRO FORMA 1997 TO PRO FORMA TO JANUARY 31, ADJUSTMENTS FEBRUARY 28, FRESH-START FEBRUARY 28, ADJUSTMENTS 1998) (FRESH-START) 1998) COMBINED 1998) (THE WALL) -------------- ------------- ------------ ----------- ------------ ----------- INCOME STATEMENT DATA Net sales............. $372,561 $ (4,195)(1) $27,842 $396,208 $172,212 $(14,300)(10) Cost of sales......... 243,109 (3,890)(1)(2) 17,662 256,881 104,175 (9,000)(10) -------- --------- ------- -------- -------- -------- Gross profit........ 129,452 (305) 10,180 139,327 68,037 (5,300) Selling, general and administrative expenses............ 99,553 (579)(1)(3) 9,240 108,214 54,505 (11,493)(10)(11) (12)(13) Depreciation and amortization........ 20,484 (14,574)(1)(4) 527 6,437 6,725 (3,038)(14) Special items......... (4,443) -- (4,443) 4,164 (4,164)(15) -------- --------- ------- -------- -------- -------- Income before interest expense, other income (expenses), net, reorganization income (expenses), and income taxes.... 13,858 14,848 413 29,119 2,643 13,395 Interest expense...... (221) 55(5) (12) (178) -- (410)(16) Other income (expenses), net..... (185) 2,529(6)(7) 295 2,639 -- (2,639)(16) -------- --------- ------- -------- -------- -------- Income before reorganization income (expenses), and income taxes.... 13,452 17,432 696 31,580 2,643 10,346 Reorganization income (expenses).......... 26,501 (26,501)(7)(8) -- -- -- -------- --------- ------- -------- -------- -------- Income (loss) before income taxes........ 39,953 (9,069) 696 31,580 2,643 10,346 (Provision) benefit for income taxes.... (289) (11,912)(9) (115) (12,316) (2,206) (2,861)(17) -------- --------- ------- -------- -------- -------- Net income (loss)..... $ 39,664 $ (20,981) $ 581 $ 19,264(20) $ 437 $ 7,485 ======== ========= ======= ======== ======== ======== Earnings per share(18)........... Weighted average shares outstanding(18)..... PRO FORMA COMBINED ----------- INCOME STATEMENT DATA Net sales............. $ 554,120 Cost of sales......... 352,056 ----------- Gross profit........ 202,064 Selling, general and administrative expenses............ 151,226 Depreciation and amortization........ 10,124 Special items......... (4,443) ----------- Income before interest expense, other income (expenses), net, reorganization income (expenses), and income taxes.... 45,157 Interest expense...... (588) Other income (expenses), net..... -- ----------- Income before reorganization income (expenses), and income taxes.... 44,569 Reorganization income (expenses).......... -- ----------- Income (loss) before income taxes........ 44,569 (Provision) benefit for income taxes.... (17,383) ----------- Net income (loss)..... $ 27,186(19) =========== Earnings per share(18)........... $ 2.67 Weighted average shares outstanding(18)..... 10,176,162
See accompanying notes to unaudited pro forma condensed consolidated statement of operations. 21 24 NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FRESH-START REPORTING PRO FORMA ADJUSTMENTS NOTES (1) To eliminate operating results of ten stores closed in conjunction with the Company's reorganization as follows: sales ($4,195); cost of sales ($2,740); selling, general and administrative expenses ($1,123); and depreciation and amortization ($377). (2) During the reorganization period certain trade vendors denied the Company the right to take prompt payment discounts. The amounts and period of denial varied by vendor. The adjustment of ($1,150) reinstates cash discounts to normal and customary trade payment terms. (3) To adjust selling, general and administrative expenses for the following: (i) record the effects of fair value adjustments for favorable and unfavorable lease value amortization of $578; (ii) record the effects of fair value adjustments for average rent expense of $1,011; and (iii) record the effects of capitalizing internal use software costs (SOP 98-1) of ($1,045). (4) To reduce depreciation and amortization expense for the following: (i) eliminate Predecessor Company goodwill amortization of ($1,840); (ii) record the effects of amortizing capitalized internal software costs (SOP 98-1) of $105; (iii) eliminate Predecessor Company depreciation expense of ($18,644); and (iv) record depreciation expense of $6,182 for the adjusted fixed asset values based on historical lives and half-year convention. (5) To eliminate historical commitment fee expense of ($221) and record new commitment fee expense of $166 based on the terms of the New Working Capital Facility of .375%. (6) To adjust amortization of deferred financing fees for the New Working Capital Facility by ($218). (7) To reclassify interest income of $2,311 from reorganization income. The interest income consists of interest earned on cash accumulated during the Chapter 11 proceedings due to the nonpayment of prepetition liabilities subject to compromise and was recorded as a reorganization item in accordance with SOP 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code." (8) To eliminate reorganization income (including interest income of $2,311 included therein) which will not be incurred subsequent to the Plan Effective Date. (9) To reverse income tax effect of fresh-start reporting adjustments and record the income tax effect of pro forma adjustments for items that are deductible for income tax purposes, using an assumed rate of 39%. THE WALL ACQUISITION PRO FORMA ADJUSTMENTS NOTES (10) To reflect adjustment for operating results of 18 stores not acquired by the Company for sales ($3,600); cost of sales ($2,300); and selling, general and administrative expenses ($1,900); and to adjust operating results for 11 stores acquired which will be closed and are reserved for as part of the acquisition strategy as follows: sales ($10,700); cost of sales ($6,700); and selling, general and administrative expenses ($3,800). (11) To eliminate duplicate payroll and related costs of ($4,313) associated with the corporate employees not acquired, and to eliminate duplicate corporate facility costs of ($400) for contracts not acquired. (12) To eliminate duplicate payroll and related costs of ($710) associated with distribution center employees not acquired. (13) To adjust selling, general and administrative expenses for the following: (i) record the effects of fair value adjustments for favorable and unfavorable lease value amortization of ($1,120) and (ii) record the effects of fair value adjustments for average rent expense of $750. (14) To reduce depreciation and amortization for the following: (i) to reverse historical depreciation and amortization of ($6,725); (ii) to record new goodwill amortization of $898 (based on straight-line amortization over a 30-year period); (iii) to record trade name amortization of $380 (based on straight-line amortization over a two-year period); and (iv) to record new depreciation expense of $2,409 for revalued property, plant and equipment. (15) To eliminate special charges of ($4,164) which represent the write-down on long-lived assets which were either not acquired or recorded at fair value. 22 25 (16) To eliminate interest income of $2,639 and reflect additional interest expense of $410 as a result of incremental borrowings needed to finance The Wall Acquisition. (17) To record the income tax effect of pro forma adjustments assuming an income tax rate of 39%. PRO FORMA COMBINED PER SHARE DATA (18) The pro forma combined net income per share data is presented in accordance with SFAS No. 128 and assumes: (i) the Company emerged from bankruptcy and adopted fresh-start reporting on March 2, 1997; (ii) The Wall Acquisition occurred on March 2, 1997; and (iii) the Company's 1998 Stock Option Plan and Outside Directors Stock Option Plan were established on March 2, 1997. Awards of options under these plans are not dilutive on a pro forma basis and, therefore, basic and diluted data are the same. With respect to historical combined net income per share, see Note 3 to the Company's Consolidated Financial Statements. OTHER INFORMATION (19) Pro forma fresh-start combined net income of $19.3 million in Fiscal 1997 would have been $15.9 million when adjusted to reflect (i) the elimination of a $4.4 million ($2.7 million, net of tax) special item and (ii) a $1.2 million ($0.7 million, net of tax) increase to cost of goods sold to reflect the absence of customary trade payment terms during fiscal 1997. Pro forma combined net income of $27.2 million for Fiscal 1997, adjusted for (i) and (ii) above and a $2.1 million ($1.3 million, net of tax) increase to selling, general and administrative expenses to reflect accruals associated with The Wall Acquisition, would have been $22.5 million. 23 26 SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE, SELECTED STORE AND SELECTED OPERATING DATA) The selected consolidated financial data as of and for the fiscal year ended August 31, 1993 and the 30 days ended September 30, 1993 have been derived from the audited and internal financial statements of the Pre-Predecessor prior to the 1993 Acquisition. The selected consolidated financial data as of and for the period from October 1, 1993 to February 26, 1994 and the fiscal years ended February 25, 1995, March 2, 1996 and March 1, 1997, and the period March 2, 1997 to January 31, 1998 have been derived from the audited financial statements of the Predecessor. The selected consolidated financial data of the Company as of and for the period February 1, 1998 to February 28, 1998 has been derived from the audited financial statement of the Company. The selected consolidated financial data of the Company for the period March 2, 1997 to May 31, 1997 and March 1, 1998 to May 30, 1998 and as of May 31, 1997 and May 30, 1998 has been derived from the unaudited financial statements of the Company. The selected consolidated financial data set forth below should be read in conjunction with the audited and unaudited historical financial statements of the Company, including the notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" that appear elsewhere in this Prospectus. As a result of the implementation of fresh-start reporting, the consolidated financial data for the Company is not comparable to that of the Predecessor or the Pre-Predecessor. As a result of implementing purchase accounting for the 1993 Acquisition, the consolidated financial data of the Pre-Predecessor is not comparable to that of the Predecessor.
PRE-PREDECESSOR(1) PREDECESSOR(2) --------------------------- ----------------------------------------------------------------- PERIOD OCTOBER 1, 1993 PERIOD FISCAL YEAR 30 DAYS TO MARCH 2, ENDED ENDED FEBRUARY 1997 TO AUGUST 31, SEPTEMBER 30, 26, FISCAL FISCAL FISCAL JANUARY 31, 1993 1993(3) 1994 1994 1995 1996 1998(4) ----------- ------------- ----------- ------------ ---------- -------- ------------ INCOME STATEMENT DATA Net sales............. $421,467 $ 28,958 $206,246 $ 459,077 $ 455,652 $396,502 $372,561 Cost of sales......... 256,773 17,737 123,227 289,887 302,481 263,072 243,109 -------- -------- -------- --------- ---------- -------- -------- Gross profit.......... 164,694 11,221 83,019 169,190 153,171 133,430 129,452 Selling, general and administrative expenses............. 116,174 9,611 53,249 128,158 135,441 117,558 99,553 Depreciation and amortization......... 13,110 1,135 7,465 21,146 26,570 23,290 20,484 Special items (6)..... -- -- 8,330 -- 211,520 6,523 (4,443) -------- -------- -------- --------- ---------- -------- -------- Income (loss) before interest expense, other income (expenses), net, reorganization income (expenses), income taxes and extraordinary item... 35,410 475 13,975 19,886 (220,360) (13,941) 13,858 Interest expense...... (2,022) (188) (10,693) (30,655) (38,319) (17,418) (221) Other income (expenses), net...... (1,210) (93) (1,548) (5,026) (4,978) (1,160) (185) -------- -------- -------- --------- ---------- -------- -------- Income (loss) before reorganization income (expenses), income taxes and extraordinary item... 32,178 194 1,734 (15,795) (263,657) (32,519) 13,452 Reorganization income (expenses)(7)........ -- -- -- -- -- (31,845) 26,501 -------- -------- -------- --------- ---------- -------- -------- Income (loss) before income taxes and extraordinary item... 32,178 194 1,734 (15,795) (263,657) (64,364) 39,953 (Provision) benefit for income taxes..... (10,949) (34) (2,678) (3,070) (474) -- (289) Extraordinary item, net of tax(8)........ -- -- -- -- -- -- 228,911 -------- -------- -------- --------- ---------- -------- -------- Net income (loss)..... $ 21,229 $ 160 $ (944) $ (18,865) $ (264,131) $(64,364) $268,575 ======== ======== ======== ========= ========== ======== ======== Basic earnings per share(9)............. Diluted earnings per share(9)............. Weighted average number of common shares outstanding-basic(9)... Weighted average number of common shares outstanding-diluted(9).. THE THE COMPANY PREDECESSOR(2) COMPANY ------------ -------------- ---------- PERIOD PERIOD PERIOD FEBRUARY 1, MARCH 2, MARCH 1, 1998 TO COMBINED 1997 TO 1998 TO FEBRUARY 28, FISCAL MAY 31, MAY 30, 1998(4) 1997(5) 1997 1998 ------------ -------- -------------- ---------- INCOME STATEMENT DATA Net sales............. $ 27,842 $400,403 $ 82,815 $ 113,456 Cost of sales......... 17,662 260,771 53,820 71,147 -------- -------- -------- ---------- Gross profit.......... 10,180 139,632 28,995 42,309 Selling, general and administrative expenses............. 9,240 108,793 26,407 36,213 Depreciation and amortization......... 527 21,011 5,454 1,765 Special items (6)..... -- (4,443) -- 350 -------- -------- -------- ---------- Income (loss) before interest expense, other income (expenses), net, reorganization income (expenses), income taxes and extraordinary item... 413 14,271 (2,866) 3,981 Interest expense...... (12) (233) (61) (86) Other income (expenses), net...... 295 110 (69) 263 -------- -------- -------- ---------- Income (loss) before reorganization income (expenses), income taxes and extraordinary item... 696 14,148 (2,996) 4,158 Reorganization income (expenses)(7)........ -- 26,501 (1,113) -- -------- -------- -------- ---------- Income (loss) before income taxes and extraordinary item... 696 40,649 (4,109) 4,158 (Provision) benefit for income taxes..... (115) (404) -- (1,603) Extraordinary item, net of tax(8)........ -- 228,911 -- -- -------- -------- -------- ---------- Net income (loss)..... $ 581 $269,156 $ (4,109) $ 2,555 ======== ======== ======== ========== Basic earnings per share(9)............. $ 0.06 -- -- $ 0.25 Diluted earnings per share(9)............. $ 0.06 -- -- $ 0.24 Weighted average number of common shares outstanding-basic(9). 10,176,162 10,176,162 Weighted average number of common shares outstanding-diluted(9 10,176,162 10,469,914
(continued on following page) 24 27
PRE-PREDECESSOR(1) PREDECESSOR(2) --------------------------- ----------------------------------------------------------------- PERIOD OCTOBER 1, 1993 PERIOD FISCAL YEAR 30 DAYS TO MARCH 2, ENDED ENDED FEBRUARY 1997 TO AUGUST 31, SEPTEMBER 30, 26, FISCAL FISCAL FISCAL JANUARY 31, 1993 1993(3) 1994 1994 1995 1996 1998(4) ----------- ------------- ----------- ------------ ---------- -------- ------------ SELECTED STORE DATA Number of stores: Open at beginning of period............. 324 365 366 392 401 388 315 Open during period... 20 1 7 21 14 -- -- Closed during period............. 5 -- -- 12 27 73 10 Acquired during period............. 26 -- 19 -- -- -- -- -------- -------- -------- --------- ---------- -------- -------- Open at end of period............. 365 366 392 401 388 315 305 ======== ======== ======== ========= ========== ======== ======== SELECTED OPERATING DATA Gross square footage (000's)(10).......... 1,273 1,281 1,393 1,511 1,563 1,329 1,309 Sales per square foot(11)............. $ 331 -- -- $ 304 $ 292 $ 298 -- Comparable store sales increase (decrease)(12)....... -- -- -- (2.6%) (5.6%) (3.5%) -- BALANCE SHEET DATA (AT END OF PERIOD) Working capital....... $ 73,263 $ 73,329 $ 30,448 $ 58,127 $ (167,129) $125,329 $149,018 Total assets.......... 227,720 236,052 545,484 551,370 308,670 258,648 260,319 Current portion of long-term debt....... 578 9,203 2,555 12,565 285,878 -- -- Long-term debt, net of current portion...... 21,283 21,283 328,845 354,235 110,882 -- -- Liabilities subject to compromise........... -- -- -- -- -- 484,811 -- Stockholders' equity (deficit)............ 130,418 130,579 75,643 56,778 (203,940) (268,304) 194,368 THE THE COMPANY PREDECESSOR(2) COMPANY ------------ -------------- ---------- PERIOD PERIOD PERIOD FEBRUARY 1, MARCH 2, MARCH 1, 1998 TO COMBINED 1997 TO 1998 TO FEBRUARY 28, FISCAL MAY 31, MAY 30, 1998(4) 1997(5) 1997 1998 ------------ -------- -------------- ---------- SELECTED STORE DATA Number of stores: Open at beginning of period............. 305 315 315 305 Open during period... -- -- -- 1 Closed during period............. -- 10 -- 1 Acquired during period............. -- -- -- 150 -------- -------- -------- ---------- Open at end of period............. 305 305 315 455 ======== ======== ======== ========== SELECTED OPERATING DATA Gross square footage (000's)(10).......... 1,309 1,309 1,329 1,930 Sales per square foot(11)............. -- $ 306 $ 62 $ 59 Comparable store sales increase (decrease)(12)....... -- 6.8% 1.7% 1.0% BALANCE SHEET DATA (AT END OF PERIOD) Working capital....... $110,143 $110,143 $124,608 $ 114,517 Total assets.......... 342,281 342,281 254,132 303,894 Current portion of long-term debt....... -- -- -- -- Long-term debt, net of current portion...... -- -- -- -- Liabilities subject to compromise........... -- -- 484,497 -- Stockholders' equity (deficit)............ 194,949 194,949 (272,421) 197,692
- --------------- (1) The financial information for the Pre-Predecessor entity relates to the operations of Camelot Music, Inc. prior to the 1993 Acquisition which was effective September 30, 1993. (2) The financial information for the Predecessor entity relates to the operations of Camelot Music Holdings, Inc. prior to its emergence from bankruptcy on the Plan Effective Date. (3) In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been recorded in the interim financial statements presented. The Company's business is seasonal, and therefore, the interim results are not indicative of the results for a full year. (4) As of January 31, 1998, the Company adopted fresh-start reporting in accordance with AICPA Statement of Position 90-7, which resulted in a new entity for financial reporting purposes. Financial information for the period from March 2, 1997 to January 31, 1998 reflects the operations of the Company's Predecessor prior to its emergence from bankruptcy. Financial information for the period from February 1, 1998 to February 28, 1998 reflects the operations of the Company after the Plan Effective Date and the adoption of fresh-start reporting. (5) Combined Fiscal 1997 consolidated financial data represents a summation (on two different bases of accounting due to the adoption of fresh-start reporting on the Plan Effective Date) of the financial data for the Predecessor entity from March 2, 1997 to January 31, 1998 and the financial data for the Company from February 1, 1998 to February 28, 1998. See "Unaudited Pro Forma Condensed Consolidated Financial Data." (6) Includes certain items, including the reversal of program reward redemption reserves aggregating $4.4 million (income) in Fiscal 1997 when the Company discontinued its manual "punch card" version of its customer loyalty program and replaced it with a more limited automated program, the write-down of the fair value of long-lived assets in Fiscal 1996 resulting in a charge of $6.5 million, the write-down of goodwill in Fiscal 1995, principally related to the 1993 Acquisition and restructuring charges of $8.3 million. In the first quarter of Fiscal 1998, the Company incurred a $0.4 million (expense) relating to the Offerings. (7) During Fiscal 1997, reorganization income related principally to adjustments to prepetition claims that were discharged or received no amount of recovery, offset by net adjustments to fair value, and professional fees and other expenses related to the bankruptcy proceedings. During Fiscal 1996, reorganization expense primarily reflected a provision for store closings (including related lease rejection damage claims) and the write-off of financing costs associated with prepetition indebtedness as well as professional fees. (8) As a result of the Company's reorganization, in Fiscal 1997 the Company recorded a one-time gain of $228.9 million associated with the extinguishment of prepetition claims of approximately $428 million. (9) See Note 3 to the Company's year end and interim Consolidated Financial Statements. (10) Gross square footage is based on Camelot stores only and excludes The Wall stores. (11) Sales per square foot is based on the gross square footage for Camelot stores only and excludes The Wall stores. (12) The percentage change in comparable store sales is calculated as the net change in sales for each comparable store for the equivalent period in the prior year. Comparable stores are stores that have been operating for more than 12 months since first opening. During the 13th month of operations, new stores are considered comparable stores. Stores which have been relocated are treated as comparable stores. Closed stores are not categorized as comparable stores. 25 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Camelot was founded in 1956 as a third-party supplier of music to general merchandise retailers such as regional drug, grocery, variety and discount stores. In 1965, the Company opened its first retail outlet as a leased department in a Canton, Ohio area discount store. Over the next several years, the Company began to operate mall-based prerecorded music stores and leased music departments in discount stores. The Company has been privately held since its founding. On November 12, 1993, Investcorp S.A., an international investment banking firm, arranged for certain of its affiliates, other non-U.S. investors and Camelot senior management to purchase the stock of Camelot Music, Inc. for approximately $420.0 million (the "1993 Acquisition"). This purchase price was funded with $80.0 million in cash, approximately $240.0 million of borrowings by the Company's predecessor from institutional lenders provided under the terms of a credit agreement, $50.0 million of subordinated debentures and $50.0 million of Camelot Music, Inc.'s preferred stock. During the 1980s the music retail industry experienced rapid growth fueled by: (i) the introduction of new products such as the CD; (ii) a relatively large number of popular new releases which increased customer traffic and sales; and (iii) the rapid expansion of mall-based music retailers. These factors led, in the early 1990s, to the competitive intrusion of non-traditional music retailers such as consumer electronics stores and discount stores and to increasing price competition. By mid-1994 these competitive factors, combined with the contraction of the replacement CD market and a comparative lack of successful new releases, led to deteriorating profitability in the music retail industry. Beginning in mid-1997, conditions in the music retail industry began to improve as a result of: (i) the significant reduction in competitive square footage resulting from the reduction in the total number of traditional music retail stores from approximately 5,000 in 1995 to approximately 4,200 in 1997, including a net reduction of 600 retail stores by the top five traditional music retailers, based on store count; (ii) an improvement in retail pricing as music vendors, beginning in 1996, strengthened MAP guidelines, which the Company believes decreased the intensity levels of price-based competition for prerecorded music; and (iii) a resurgence in popular new releases. The significant debt service burden resulting from the 1993 Acquisition and the industry conditions described above combined to impair Camelot's operating and financial condition and led the Company to file a voluntary bankruptcy petition in August 1996. The Plan of Reorganization was confirmed by the Bankruptcy Court and became effective on January 27, 1998 (the "Plan Effective Date"). Over the last two fiscal years, as the Company focused on improving the competitiveness of its business, revenues increased 1.0% as the Company closed 83 stores and opened no new stores. During this same period the Company significantly improved its operating margin to 3.6% of net sales (2.5% excluding special items) in Fiscal 1997 from a loss of 3.5% of net sales (a loss of 1.9% excluding special items). Because the Company is not offering any shares of Common Stock in the Offerings, expenses incurred by the Company in connection with the Offerings are being charged to earnings in the periods incurred. The Company currently estimates incurring expenses associated with the Offerings of $1.0 million. In addition, on June 4, 1998 each non-employee Director of the Company received an option to purchase shares of Common Stock at an exercise price of $20.75 per share See "Management -- Executive Compensation -- Stock Option Plan" and "-- Director Compensation." Based upon the difference between the exercise price of these options and the market price of a share of the Company's Common Stock on the date of grant, the Company will recognize approximately $241,000 in compensation expense in connection with these option awards during the second quarter of Fiscal 1998. RECENT DEVELOPMENTS On July 29, 1998, the Company acquired Spec's under the terms of the Spec's Merger Agreement. Spec's is a Miami, Florida-based retailer of prerecorded music operating 41 stores in Florida and Puerto Rico. As of July 29, 1998, Spec's operated 16 mall stores and 25 stores in shopping centers and free-standing locations. The 26 29 Company believes the Spec's Acquisition will enhance its competitive position in the Southeastern United States and give the Company a leading position in the south Florida market. The cash purchase price for the Spec's Acquisition was approximately $28 million (including related acquisition costs and the repayment of Spec's indebtedness) and was funded primarily with amounts available under the Company's Amended Credit Facility as well as accumulated cash. See "-- Liquidity and Capital Resources." Based on public filings by Spec's, during the twelve months ended January 31, 1998, Spec's had revenues of $66.2 million and an operating loss of $4.1 million (excluding restructuring charges, store closing expenses and impairment of long-lived assets). The Company expects to achieve cost savings through the reduction or elimination of Spec's corporate and distribution infrastructure and intends to close two underperforming stores. RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Selected Historical Financial and Operating Data and the Consolidated Financial Statements of the Company and accompanying notes included elsewhere in this Prospectus. The Company's fiscal year ends on the Saturday closest to February 28. Any fiscal years or period designated herein is by the calendar year in which the fiscal year commences. The Company completed a comprehensive financial restructuring pursuant to the Plan of Reorganization under the United States Bankruptcy Code, which became effective on January 27, 1998. The Company's emergence from bankruptcy required the Company, in accordance with SOP 90-7, to adopt "fresh-start reporting" as of January 31, 1998. See Note 2 to the Company's Consolidated Financial Statements included elsewhere herein. Due to a revaluation of assets and liabilities and adoption of a new basis of accounting resulting from fresh-start reporting, the results of operations for periods subsequent to January 31, 1998 are not comparable to the results of operations for prior periods. The following discussion and analysis of the results of operations compare (i) the Company's results of operations for the thirteen weeks ended May 30, 1998 with the results of operations for the thirteen weeks ended May 31, 1997, (ii) a summation of the Company's results of operations for the period February 1, 1998 to February 28, 1998 and the period March 2, 1997 to January 31, 1998 ("Combined Fiscal 1997" or "Fiscal 1997") with the results of operations for the 52 week period ended March 1, 1997 ("Fiscal 1996") and (iii) the Company's results of operations for Fiscal 1996 with the results of operations for the 53-week period ended March 2, 1996 ("Fiscal 1995"). Although results for periods subsequent to January 31, 1998 are not comparable to results for prior periods, information is presented on a combined basis in order to provide investors with information covering a complete fiscal year of operations. Management believes that presentation of information with respect to Combined Fiscal 1997 facilitates investor comprehension of the Company's performance for Fiscal 1997 in relation to the prior periods presented. During Fiscal 1995, the Company experienced adverse business conditions resulting principally from increased competition, which led to diminished operating results and downward revisions to forecasted future results. Accordingly, management determined that certain long-lived assets were impaired and wrote those assets down by $202.9 million. Additional impaired asset write-downs of $6.5 million were recorded in Fiscal 1996. These charges are reflected in "special items." Income (loss) before interest expense, other income (expenses), net, reorganization income (expenses), income taxes and extraordinary item would have been a loss of $8.8 million in Fiscal 1995 (a loss of 1.9% of net sales) and a loss of $7.4 million in Fiscal 1996 (a loss of 1.9% of net sales), excluding such charges. 27 30 The following table shows certain statement of operations line items as a percentage of net sales during the three most recent fiscal years and for the first quarters of Fiscal 1998 and Fiscal 1997.
PERCENTAGE OF NET SALES --------------------------------------------------------------------------------- PRO FORMA PRO FORMA FIRST FIRST COMBINED COMBINED COMBINED QUARTER QUARTER FISCAL FISCAL FISCAL FISCAL 1997 FISCAL 1997 FISCAL FISCAL 1995 1996 1997(1) (FRESH-START)(2) (THE WALL)(2) 1997 1998 ------ ------ -------- ---------------- ------------- ------- ------- Net sales.................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales................................ 66.4 66.3 65.1 64.8 63.5 65.0 62.7% ----- ----- ----- ----- ----- ----- ----- Gross profit................................. 33.6 33.7 34.9 35.2 36.5 35.0 37.3 Selling, general and administrative expenses................................... 29.7 29.7 27.2 27.3 27.3 31.9 31.9 Depreciation and amortization................ 5.8 5.9 5.2 1.6 1.8 6.6 1.6 Special items(3)............................. 46.4 1.6 (1.1) (1.1) (0.7) -- 0.3 ----- ----- ----- ----- ----- ----- ----- Income (loss) before interest expense, other income (expenses), net, reorganization income (expenses), income taxes and extraordinary item......................... (48.3) (3.5) 3.6 7.4 8.1 (3.5) 3.5 Interest expense............................. (8.4) (4.4) (0.1) -- (0.1) -- -- Other income (expenses), net................. (1.1) (0.3) -- 0.7 -- (0.1) 0.2 ----- ----- ----- ----- ----- ----- ----- Income (loss) before reorganization income (expenses), income taxes and extraordinary item....................................... (57.8) (8.2) 3.5 8.1 8.0 (3.6) 3.7 Reorganization income (expenses)............. -- (8.0) 6.6 -- -- (1.3) -- ----- ----- ----- ----- ----- ----- ----- Income (loss) before income taxes and extraordinary item......................... (57.8) (16.2) 10.1 8.1 8.0 (4.9) 3.7 (Provision) benefit for income taxes......... (0.1) -- (0.1) (3.1) (3.1) -- (1.4) Extraordinary item, net of tax............... -- -- 57.2 -- -- -- -- ----- ----- ----- ----- ----- ----- ----- Net income (loss)............................ (57.9)% (16.2)% 67.2% 5.0% 4.9% (4.9)% 2.3% ===== ===== ===== ===== ===== ===== =====
- --------------- (1) Results of operations for Fiscal 1997 are presented on a combined basis reflecting a summation of the Predecessor's operations for the period March 2, 1997 to January 31, 1998 and the Company's operations for the period February 1, 1998 to February 28, 1998. (2) See "Unaudited Pro Forma Condensed Consolidated Financial Data" and the notes thereto. (3) Includes certain items, including the reversal of program reward redemption reserves aggregating $4.4 million (income) in Fiscal 1997 when the Company discontinued its manual "punch card" version of its customer loyalty program and replaced it with a more limited automated customer loyalty program, the write-down of the fair value of long-lived assets in Fiscal 1996 resulting in a charge of $6.5 million and an impaired asset write-down of $202.9 million for Fiscal 1995, including $201.1 million associated with the write-down of goodwill, principally related to the 1993 Acquisition. THIRTEEN WEEKS ENDED MAY 30, 1998 COMPARED TO THE THIRTEEN WEEKS ENDED MAY 31, 1997. Net sales. Net sales increased 37.0% to $113.5 million in the first quarter of Fiscal 1998 compared to $82.8 million in the first quarter of Fiscal 1997. The Company acquired 150 stores on February 28, 1998 as a result of The Wall Acquisition. The increase in sales was primarily as result of The Wall Acquisition which added $31.4 million to net sales for the quarter. Comparable store sales (based on 305 Camelot stores) increased 1.0%, primarily due to increases in retail pricing of catalog goods during the first quarter of Fiscal 1998 versus the prior year. Comparable store sales for The Wall for the first quarter of Fiscal 1998 increased by approximately 10% compared to the first quarter of Fiscal 1997 (when the Company did not own The Wall). During this period, the Company opened one store and closed one store. As of May 30, 1998, the Company operated 455 stores compared to 315 stores as of May 31, 1997. Gross profit. Gross profit increased 45.9% to $42.3 million in the first quarter of Fiscal 1998 compared to $29.0 million in the first quarter of Fiscal 1997. Gross profit as a percentage of net sales improved to 37.3% in the first quarter of Fiscal 1998 from 35.0% in the first quarter of Fiscal 1997. The increase in gross profit was a result 28 31 of less promotional retail pricing, an increased mix of higher margin catalog sales, the resumption of normal trade terms (including the availability of prompt payment discounts) and the acquisition of The Wall stores. The Wall Acquisition accounted for $12.2 million of the increase in gross profit. Selling, general and administrative expenses. Selling, general and administrative expenses increased 37.1% to $36.2 million in the first quarter of Fiscal 1998 from $26.4 million in the first quarter of Fiscal 1997. During the quarter The Wall stores contributed $9.2 million to the increase in selling, general and administrative expenses (1.6% of net sales). Selling, general and administrative expenses as a percentage of net sales was consistent with the first quarter of Fiscal 1997 at 31.9%. Depreciation and amortization. Depreciation and amortization decreased 67.3% to $1.8 million in the first quarter of Fiscal 1998 from $5.5 million in the first quarter of Fiscal 1997. The reduction was the result of fresh-start accounting and purchase accounting adjustments which significantly decreased the depreciable basis of property, plant and equipment. Special items. In the first quarter of Fiscal 1998 the Company incurred $0.4 million (expense) relating to the Offerings. Income (loss) before other income (expenses), net, reorganization expenses, and income taxes. As a result of the foregoing, income (loss) before interest expense, other income (expenses), net, reorganization expenses and income taxes as a percentage of net sales increased to 3.5% or $4.0 million in the first quarter of Fiscal 1998 as compared to a loss of $2.9 million or 3.5% as a percentage of net sales in the first quarter of Fiscal 1997. Other income (expenses), net. The Company's other income (expenses), net, increased to $0.2 million (income) in the first quarter of Fiscal 1998 from $.1 million (expenses) in the first quarter of Fiscal 1997. Other income (expenses), net includes the Company's interest income and financing charges. Other income in the prior year quarter was netted against reorganization expenses as required during the bankruptcy proceedings. Reorganization expenses. The Company recorded no reorganization expenses in the first quarter of Fiscal 1998 compared to reorganization expenses of $1.1 million in the first quarter of Fiscal 1997. During Fiscal 1997 the reorganization expenses primarily reflected professional fees and other expenses related to the bankruptcy proceedings. No expense has been incurred in Fiscal 1998 due to the Company's emergence from Chapter 11 on January 31, 1998. Income taxes. The Company's provision for income taxes for the first quarter of Fiscal 1998 was $1.6 million compared to no income tax recorded during the first quarter of Fiscal 1997. The Company anticipates an effective tax rate of approximately 39.7% with respect to Fiscal 1998 pretax income. The Company believes that it is more likely than not that it will be able to use the deferred tax assets at February 28, 1998. Under the provisions of the Internal Revenue Code, no net operating losses remain to offset the Company's future operating income. In addition, the write-off of unprofitable stores as a part of the Plan, the forgiveness of debt and the related reduction in future interest expense and the write-off of reorganization expense as a part of emergence from bankruptcy will all contribute to future taxable income. Therefore, no valuation allowance has been established to offset these deferred tax assets. Net income. As a result of the foregoing, the Company recognized net income of $2.6 million during the first quarter of Fiscal 1998, as compared to a net loss of ($4.1) million in the first quarter of Fiscal 1997. Excluding special items and reorganization expenses, the Company recognized net income in the first quarter of Fiscal 1998 of $2.9 million, as compared to a net loss of $(3.0) million in the first quarter of Fiscal 1997. COMBINED FISCAL 1997 COMPARED TO FISCAL 1996 Net sales. Net sales increased 1.0% to $400.4 million in Fiscal 1997 compared to $396.5 million in Fiscal 1996. Comparable store sales increased 6.8%, primarily as a result of retail price increases on selected catalog titles resulting from the institution of MAP pricing and decreased competition in the marketplace and secondarily due to a comparably stronger new release schedule. During Fiscal 1997, the Company did not open any stores and closed ten stores. The Company acquired 150 stores on February 28, 1998 as a result of The Wall Acquisition. The Company operated 455 stores at the end of Fiscal 1997 compared to 315 stores at the end of Fiscal 1996. 29 32 On a pro forma combined basis giving effect to the adoption of fresh-start reporting at the beginning of Fiscal 1997 ("Pro Forma (Fresh-Start)"), Pro Forma (Fresh-Start) net sales during Fiscal 1997 were $396.2 million. On a pro forma combined basis giving further effect to The Wall Acquisition as if it had occurred at the beginning of Fiscal 1997 ("Pro Forma (The Wall) "), Pro Forma (The Wall) net sales during Fiscal 1997 were $55.4 million. Gross profit. Gross profit increased 4.6% to $139.6 million in Fiscal 1997 compared to $133.4 million in Fiscal 1996. Gross profit as a percentage of net sales improved to 34.9% in Fiscal 1997 from 33.7% in Fiscal 1996. For purposes of determining the Company's gross profit, cost of sales is comprised of product costs, freight, inventory shrink and prompt payment discounts. The increase in gross profit was the result of decreased competition and an increasing mix of higher margin catalog sales and the resumption of normal trade terms (including the availability of prompt payment discounts), offset in part by lower margins earned on non-music products such as laser video and software products that the Company was in the process of discontinuing. The Company recorded a charge of $2.0 million in Fiscal 1997 for the discontinuance of these product lines. Gross margins were also impacted negatively as a result of a recent industry-wide trend in which vendors have implemented policies prohibiting the return of open products for credit. The Company expects the trend to continue in Fiscal 1998. The Company has modified its inventory distribution systems in response to this trend. Opened products returned by customers are segregated from other returns and sent to liquidators for resale. The Company has also begun a program of repackaging certain opened product and selling it as used product at selected stores. In addition, the Company has modified its return policies to more closely monitor customer returns in an effort to reduce returns of opened product. The costs associated with this effort have not been material. Pro Forma (Fresh-Start) gross profit as a percentage of net sales was 34.9%, primarily reflecting the effect of the elimination of the cost of sales associated with the operations of ten stores closed during Fiscal 1997 and the reinstatement of vendor discounts. Pro Forma (The Wall) gross profit as a percentage of net sales was 36.5%, primarily reflecting the higher margins associated with The Wall's operations. Selling, general and administrative expenses. Selling, general and administrative expenses decreased 7.5% to $108.8 million in Fiscal 1997 from $117.6 million in Fiscal 1996. Selling, general and administrative expenses, as a percentage of net sales, decreased to 27.2% in Fiscal 1997 compared to 29.7% in Fiscal 1996. Selling, general and administrative expenses include payroll, occupancy and net advertising costs, utilities, distribution costs and general and administrative costs. The improvement in selling, general and administrative expenses as a percentage of net sales was principally due to (i) temporary rent concessions negotiated during the reorganization which have reduced store occupancy costs as a percentage of net sales, (ii) increases in cooperative advertising support from vendors and (iii) cost savings associated with restructuring and automating the Company's customer loyalty program. The Company expects these rent concessions to be phased out during 1999 and 2000. Pro Forma (Fresh-Start) and Pro Forma (The Wall) selling, general and administrative expenses were 27.2% of net sales. The pro forma selling, general and administrative expenses resulted from the exclusion of net sales from the ten Camelot stores closed during Fiscal 1997 and from The Wall stores that were not acquired by The Company or which were targeted for closure subsequent to The Wall Acquisition. Depreciation and amortization. Depreciation and amortization decreased 9.9% to $21.0 million in Fiscal 1997 from $23.3 million in Fiscal 1996. The reduction was primarily attributable to store closings during Fiscal 1996 and Fiscal 1997. Pro Forma (Fresh-Start) depreciation and amortization expense was 1.6% of net sales, primarily reflecting the elimination of depreciation and amortization expense resulting from fair value adjustments to property, plant and equipment elimination of Predecessor Company goodwill amortization. Pro Forma (The Wall) depreciation and amortization expense was 1.8% of net sales, and primarily reflects the elimination of historic depreciation and amortization expense, offset in part by new amortization expense for revalued property, plant and equipment. Special items. In Fiscal 1997 the Company discontinued the manual "punch card" version of its customer loyalty program and replaced it with an automated program targeted to its most frequent and highest spending customers. The reduction in the program resulted in the reversal of program reward redemption reserves 30 33 aggregating $4.4 million (income). In Fiscal 1996 the Company wrote down the fair value of long-lived assets resulting in a charge of $6.5 million. Special items on a Pro Forma (Fresh-Start) basis as a percentage of net sales were comparable with historic combined Fiscal 1997 levels. Reflecting the higher pro forma sales resulting from The Wall Acquisition, special items as a percentage of Pro Forma (The Wall) net sales were (0.7%). Income (loss) before interest expense, other income (expenses), net, reorganization income (expenses), income taxes and extraordinary item. As a result of the foregoing, income (loss) before interest expense, other income (expenses), net, reorganization income (expenses), income taxes and extraordinary item as a percentage of net sales increased to 3.6% (2.5% excluding special items) or $14.3 million in Fiscal 1997 as compared to a loss of $13.9 million or a loss of 3.5% as a percentage of net sales (a loss of 1.9% excluding special items) in Fiscal 1996. Interest expense. The Company's interest expense declined to $0.2 million in Fiscal 1997 from $17.4 million in Fiscal 1996. The decline in interest expense was primarily attributable to the cessation of accruals on prepetition indebtedness upon the filing of the Company's bankruptcy petition. Other income (expenses), net. The Company's other income (expenses), net decreased to $0.1 million in Fiscal 1997 from $18.6 million in Fiscal 1996. Other income (expenses), net includes the Company's financing charges. Financing costs decreased to $0.4 million in Fiscal 1997 from $1.9 million in Fiscal 1996. Pro Forma (Fresh-Start) other income (expenses) net was 0.7% of net sales and primarily reflects the reclassification of interest income from reorganization income. Reorganization income (expenses). The Company realized reorganization income of $26.5 million in Fiscal 1997 compared to reorganization expense of $31.8 million in Fiscal 1996. During Fiscal 1997, the reorganization income related principally to adjustments to prepetition claims that were discharged or received no amount of recovery, offset by net adjustments to fair values, and professional fees and other expenses related to the bankruptcy proceedings. During Fiscal 1996, the reorganization expense primarily reflected a provision for store closings (including related lease rejection damage claims), and the write-off of financing costs associated with prepetition indebtedness, as well as professional fees. No reorganization income was recognized on a pro forma basis. Income taxes. The Company's provision for income taxes during Fiscal 1997 was $0.4 million compared to no income tax recorded during Fiscal 1996. Differences between the effective tax rate and the statutory tax rate are due primarily to the recording of valuation allowances against deferred tax assets. The Company anticipates an effective tax rate of approximately 40% with respect to Fiscal 1998 pre-tax income. Extraordinary item. As a result of the Company's reorganization, in Fiscal 1997 the Company recorded a one-time gain of $228.9 million associated with the extinguishment of its prepetition claims of approximately $428 million. Net income. As a result of the foregoing, the Company recognized net income of $269.2 million during Fiscal 1997, as compared to a net loss of $64.4 million in Fiscal 1996. Excluding special items, reorganization income (expenses) and extraordinary item, the Company recognized net income in Fiscal 1997 of $9.3 million, as compared to a net loss of $26.0 million in Fiscal 1996. FISCAL 1996 COMPARED TO FISCAL 1995 Net sales. Net sales decreased 13.0% to $396.5 million in Fiscal 1996 from $455.7 million in Fiscal 1995. Comparable store sales declined 3.2% in Fiscal 1996 due to the comparative lack of strong product releases, a decline in CD replacement sales and increased price-based competition led by price decreases by non-traditional music retailers, such as consumer electronics retailers. The decrease in total sales was primarily due to the closing of 73 stores in Fiscal 1996, a decrease in comparable store sales and the impact of one less week of sales in Fiscal 1996. The Company opened no new stores in Fiscal 1996. 31 34 Gross profit. Gross profit decreased 12.9% to $133.4 million in Fiscal 1996 compared to $153.2 million in Fiscal 1995. Gross profit as a percentage of net sales remained relatively constant at 33.7% in Fiscal 1996 and 33.6% in Fiscal 1995. The decrease in gross profit was primarily due to the effects of increased price-based competition and the comparative lack of strong new releases. Selling, general and administrative expenses. Selling, general and administrative expenses decreased 13.2% to $117.6 million in Fiscal 1996 from $135.4 million in Fiscal 1995. Selling, general and administrative expenses, as a percentage of net sales, remained constant at 29.7% in Fiscal 1996 and Fiscal 1995. The decrease in selling, general and administrative expenses was principally due to the reduction in the number of stores operated by the Company from 388 to 315 and a related reduction in corporate and store operating costs. Depreciation and amortization. Depreciation and amortization decreased 12.3% to $23.3 million in Fiscal 1996 from $26.6 million in Fiscal 1995. The decrease was a result of store closings. Special items. During Fiscal 1995, the Company adopted Financial Accounting Standards Board Statement No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("Statement No. 121"), issued in March 1995. In connection with the adoption of Statement No. 121, the Company recorded an impaired asset write-down of $202.9 million for Fiscal 1995, including $201.1 million associated with the write-down of goodwill, principally related to the 1993 Acquisition. Additional impaired asset write-downs of $6.5 million were recorded in Fiscal 1996. These write-downs resulted from the identification by management of significant adverse changes in the Company's business climate late in the third quarter of Fiscal 1995 that continued into Fiscal 1996. These changes were largely due to increasing competition which led to operating results that were less than expected. As a result, management reviewed the carrying values of long-lived assets, primarily goodwill and property, plant and equipment, for recoverability and possible impairment, particularly in light of sales declines that began in 1995 and continued during 1996. These sales declines resulted from general declines in customer traffic in malls, the increase in non-mall, high-volume, low-priced superstores and the lack of strong music product releases. While the Company's mall-based music stores reacted with increased promotional pricing, the Company's higher cost structure relative to these non-mall superstores, which was principally related to occupancy costs, limited the Company's ability to compete effectively. In addition, in Fiscal 1995, the Company incurred a charge of $3.4 million for the expiration of put agreements, which had been issued in November 1993. Additionally, due to the increasingly competitive retail environment, the Company incurred a restructuring charge in Fiscal 1995 of $5.2 million, primarily related to store closings prior to the Petition Date. Income (loss) before interest expense, other income (expenses), net, reorganization income (expenses), income taxes and extraordinary item. As a result of the foregoing, income (loss) before interest expense, other income (expenses), net, reorganization income (expenses), income taxes and extraordinary item decreased to $13.9 million in Fiscal 1996 from $220.4 million in Fiscal 1995. Interest expense. The Company's interest expense declined to $17.4 million in Fiscal 1996 from $38.1 million in Fiscal 1995. In connection with the bankruptcy proceedings, the Company did not record interest on its prepetition debt subsequent to the Petition Date. During the bankruptcy proceedings, the Company entered into an agreement with various lenders to obtain debtor-in-possession financing (the "DIP Agreement"). After the Petition Date, borrowings under the DIP Agreement were significantly lower than the prepetition debt obligations. Therefore, the Company's financing costs in Fiscal 1996 were significantly lower than in Fiscal 1995. Other income (expenses), net. Other income (expenses), net decreased to $1.2 million in Fiscal 1996 from $5.2 million in Fiscal 1995. Other expenses included the net costs of corporate owned life insurance programs of $1.3 million in Fiscal 1996 and $1.5 million in Fiscal 1995. The Fiscal 1996 expenses also reflect the receipt of $1.9 million upon the termination of a business development agreement. Reorganization income (expenses). Reorganization income (expenses) was $31.8 million in Fiscal 1996 as a result of the bankruptcy proceedings, including professional fees of $4.9 million, the write-off of financing fees from the 1993 Acquisition of $16.0 million, a provision for store closing costs of $4.9 million and related lease rejection claims of $7.6 million. 32 35 Income Taxes. There was no provision for income taxes during Fiscal 1996. In Fiscal 1995, the Company's provision for income taxes was $0.5 million. Net income. As a result of the foregoing, the Company recognized a net loss of $64.3 million in Fiscal 1996 and a net loss of $264.1 million in Fiscal 1995. Excluding special items and reorganization expense, the Company recognized a net loss of $26.0 million in Fiscal 1996, as compared to a net loss of $52.6 million in Fiscal 1995. LIQUIDITY AND CAPITAL RESOURCES The Company's cash needs fluctuate during the course of the fiscal year. During the first three quarters, the Company's cash flow from operations typically is consumed by payments to suppliers and store maintenance, renovation expenditures and opening new stores, including relocations. During the fourth quarter, the Company has historically relied on borrowings under its credit facilities to provide it with liquidity to purchase inventory for sale during the holiday season. Pursuant to the Plan of Reorganization, a wholly owned subsidiary of the Company, CMI, entered into a Revolving Credit Agreement dated January 27, 1998 (the "New Working Capital Facility") with a number of financial institutions. The New Working Capital Facility provided the Company with advances of up to $50.0 million during peak periods (October to December) and $35.0 million during non-peak periods (January to September), bore interest at floating rates and matured on January 27, 2002. The aggregate availability under the New Working Capital Facility was limited to a borrowing base equal to 35.0% of inventory during peak periods and 30.0% of inventory during non-peak periods. On June 12, 1998, the Company signed the first amendment and waiver to the New Working Capital Facility (the "Amended Credit Facility"). The Amended Credit Facility increases the borrowing base to 60.0% of inventory during all periods, modifies existing limitations on capital expenditures, waived certain covenants in order to permit the Spec's Acquisition and provided a $25.0 million term loan to finance the Spec's Acquisition. The term loan under the Amended Credit Facility will be amortized in semi-annual installments over a three year period beginning January 31, 1999. The amortization payments will be $3.0 million, $2.0 million, $6.0 million, $4.0 million, $6.0 million and $4.0 million. CMI's obligations under the Amended Credit Facility are guaranteed by the Company and all of CMI's subsidiaries; those obligations are collateralized by substantially all of the Company's and its subsidiaries' assets. The Company has pledged to the lenders under the Amended Credit Facility the capital stock of CMI, and CMI has in turn pledged to such lenders the capital stock of its subsidiaries. The Company and its subsidiaries are currently subject to certain customary negative covenants under the Amended Credit Facility which, under certain circumstances, limit their ability to incur additional indebtedness, pay dividends, make capital expenditures and engage in certain extraordinary corporate transactions. The Amended Credit Facility also requires the Company to maintain minimum consolidated levels of earnings before interest, taxes, depreciation and amortization ("EBITDA"). The Company is currently in compliance with all of these covenants. See "Description of Certain Indebtedness." As of July 31, 1998, the Company had $25.0 million outstanding under the term loan portion of the Amended Credit Facility. On July 29, 1998, the Company acquired Spec's for a cash purchase price of $3.30 per share. Approximately $28 million was required to fund the payment of the purchase price and the repayment of Spec's outstanding indebtedness and acquisition costs. The Company funded the Spec's Acquisition with the $25.0 million term loan provided under the Amended Credit Facility and accumulated cash balances. Management believes the principal effects of the Spec's Acquisition on its financial position will be the debt service and amortization requirements associated with the term loan. The Company also anticipates recording approximately $18 million in goodwill as a result of the Spec's Acquisition, which will be amortized over a 30-year period. The Company's cash flow from operating activities increased to $54.9 million in Fiscal 1997 compared to cash flow from operating activities of $16.3 million in Fiscal 1996. The increase in cash generated from operating activities primarily reflects the Company's net income of $269.2 million in Fiscal 1997 ($19.3 million on a pro forma basis after adjusting for fresh-start reporting and excluding The Wall) as compared to a net loss of $64.4 million in Fiscal 1996, together with increases in trade payables resulting from improved credit terms, increases in accrued expenses and amounts payable in connection with The Wall Acquisition. The Company's cash flow from operating activities increased to $6.1 million for the period March 1, 1998 to May 30, 1998 compared to cash flow from operating activities of $6.0 million for the period March 2, 1997 to May 31, 1997. 33 36 Net cash used in investing activities increased to $12.9 million in Fiscal 1997, as compared to $4.0 million in Fiscal 1996, primarily as a result of the Company's higher level of capital expenditures during Fiscal 1997. Net cash used in investing activities increased to $73.0 million for the period March 1, 1998 to May 30, 1998 compared to net cash used in investing activities of $1.9 million for the period March 2, 1997 to May 31, 1997, as a result of $71.2 million invested in connection with The Wall Acquisition. The Company made capital expenditures of $9.8 million during Fiscal 1997 as compared with capital expenditures of $4.3 million in Fiscal 1996. Capital expenditures during Fiscal 1997 were comprised of $2.5 million in enhancements to information systems (including enhancements associated with the anticipated integration of The Wall's operations) and $7.3 million in store remodeling, maintenance and expansions. Fiscal 1996 capital expenditures were primarily attributable to store remodeling, maintenance and expansions. The Company made capital expenditures of $1.8 million for the period March 1, 1998 to May 30, 1998 compared to capital expenditures of $1.9 million for the period March 2, 1997 to May 31, 1997. Capital expenditures for both periods were primarily attributable to store remodeling, maintenance and expansions. Net cash used in financing activities increased to $0.8 million in Fiscal 1997, as compared to $0.6 million in Fiscal 1996. Net cash used in financing activities in Fiscal 1997 primarily related to the payment of financing fees, while net cash used in financing activities in Fiscal 1996 related to repayment of borrowings under the Company's then-existing credit agreement and the payment of financing fees, offset in part by the proceeds of such borrowings and other long term debt. No cash was used in financing activities for the period March 1, 1998 to May 30, 1998 compared to net cash used in financing activities of $0.025 million for the period March 2, 1997 to May 31, 1997. The Company currently anticipates that capital expenditures aggregating approximately $22.4 million will be incurred in Fiscal 1998, of which $12.6 million is anticipated to relate to new, relocated and remodeled stores, $6.0 million is anticipated to relate to an upgraded store point of sale ("POS") system, and the balance of which relates to general corporate purposes. The Company anticipates making capital expenditures of $22.6 million during Fiscal 1999, substantially all of which is anticipated to relate to new, relocated and remodeled stores. The Company expects that the total investment for each new store will be approximately $0.6 million, including inventory (net of vendor funding), leasehold improvements, signage, and furniture, fixtures and equipment and excluding pre-opening expenses. Pre-opening expenses, which consist primarily of non-recurring costs such as employee recruiting and training, supplies and various miscellaneous expenditures, are expected to average approximately $15,000 per store and will be expensed as incurred. The cost of opening a new store can vary based on the size of the particular store, construction costs in various markets and other factors. The Company generally is able to determine whether a new store will be profitable after the store has been open for a period of 12 months. The IRS asserted in the bankruptcy proceedings a priority tax claim against the Company of approximately $7.9 million. Under the Plan of Reorganization, any allowed priority tax claim of the IRS would be paid over six years, with quarterly amortization of interest and principal, at an interest rate of 9.0%. The Company acknowledges a priority tax obligation to the IRS of approximately $0.8 million and has established a reserve in that amount. The Company disputes the validity of the balance of the IRS claim. In the event that a judgment is rendered against the Company in an amount exceeding the reserves established with respect to this matter, the Company's results of operations would be materially adversely affected. Such a judgment, unless paid or bonded for appeal, would be an Event of Default under the Company's Amended Credit Facility. See "Business -- Legal Proceedings" and "Risk Factors -- Internal Revenue Service Claim." As of May 30, 1998, the Company had cash and working capital of approximately $15.7 million and $114.5 million, respectively, compared to cash of $82.5 million and working capital of $110.1 million at February 28, 1998. Approximately $72.4 million in cash was used subsequent to year-end to pay the purchase price for The Wall Acquisition. The Company's primary sources of funds are expected to be cash from operations supplemented by borrowings under the Amended Credit Facility. The Company's primary ongoing cash requirements will be to finance working capital, primarily inventory purchases, and to make capital expenditures for store relocations and new store openings and for upgraded POS systems and continuing information systems maintenance. Management believes that cash flows from its restructured operations and available working capital, 34 37 supplemented by the borrowings under the Amended Credit Facility, will enable the Company to meet its working capital and capital expenditure needs in Fiscal 1998 and Fiscal 1999. SELECTED QUARTERLY RESULTS OF OPERATIONS The following table sets forth certain unaudited quarterly statement of operations data for the period from March 3, 1996 to May 30, 1998, as well as such data expressed as a percentage of yearly totals for the period indicated. This data has been derived from unaudited Consolidated Financial Statements that, in the opinion of the Company, include all adjustments necessary for fair presentation of such information when read in conjunction with the Company's audited Consolidated Financial Statements and notes thereto. The Company's business is seasonal in nature. In Fiscal 1997, approximately 35% of its revenues, and all of its income (loss) before interest expense, other income (expenses) net, reorganization income (expenses) net, income taxes and extraordinary item and its net income before extraordinary item was generated in the Company's fiscal fourth quarter. Quarterly results are affected by, among other things, new product offerings, store openings and closings, and sales performance of existing stores.
FISCAL 1996 ($ IN THOUSANDS) --------------------------------------------------------------- FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER TOTAL ------------- -------------- ------------- -------------- -------- Net sales............... $ 90,704 $ 90,132 $83,600 $132,066 $396,502 Gross profit............ 31,318 30,393 28,131 43,588 133,430 Operating income (loss) (1)................... (6,398) (6,642) (7,352) 6,451 (13,941)
COMBINED FISCAL 1997 ($ IN THOUSANDS) --------------------------------------------------------------- FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER (2) TOTAL ------------- -------------- ------------- -------------- --- -------- Net sales............... $ 82,815 $ 89,257 $88,178 $140,153 $400,403 Gross profit............ 28,995 31,451 28,621 50,565 139,632 Operating income (loss) (1)................... (2,866) (346) 183 17,300 14,271
FISCAL 1998 ($ IN THOUSANDS) FIRST QUARTER ---------------- Net sales............. $113,456 Gross profit.......... 42,309 Operating income...... 3,981
- --------------- (1) For purposes of this presentation, operating income (loss) means the Company's income (loss) before interest expense, other income (expenses) net, reorganization income (expenses) net, income taxes and extraordinary item for each of the periods presented. (2) Results for the fourth quarter of Fiscal 1997 are presented on a combined basis reflecting a summation of the Predecessor's operations to January 31, 1998 and the Company's operations for the period February 1, 1998 to February 28, 1998. INFLATION The Company believes that the inflationary environment in the Company's markets in the past several years has not had a material impact on the Company's revenues or results of operations. Borrowings under the Amended Credit Facility, however, will be at variable rates of interest and increases in such interest rates, if not mitigated by other Company actions, could adversely impact the Company's results of operations. YEAR 2000 COMPLIANCE The inability of computers, software and other equipment utilizing microprocessors to recognize and properly process data fields containing a two-digit year is commonly referred to as the Year 2000 compliance issue. As the year 2000 approaches, such systems may be unable to accurately process certain data-based information. The Company has assessed its systems and equipment with respect to Year 2000 and has developed 35 38 a project plan. Many of the Year 2000 issues have been addressed. The Company is in the process of installing a new back office POS system to address Year 2000 issues at the store level, including the processing of credit card transactions. The remaining Year 2000 issues will be addressed either with scheduled systems upgrades or through the Company's internal systems development staff. The incremental costs will be charged to expense as incurred and are not expected to have a material impact on the financial position or the results of operations of the Company. The Company does not know the Year 2000 status of its vendors or of other third parties with whom it does business. The Company could be adversely impacted if Year 2000 modifications are not properly completed by either the Company or its vendors, banks or any other entity with whom the Company conducts business. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Financial Accounting Standards Board Statement No. 128, "Earnings per Share" ("Statement No. 128"), issued in February 1997 and effective for fiscal years ending after December 15, 1997, establishes and simplifies standards for computing and presenting earnings per share ("EPS"). The Company has complied with Statement No. 128. Financial Accounting Standards Board Statement No. 130, "Reporting Comprehensive Income" ("Statement No. 130"), issued in June 1997 and effective for fiscal years ending after December 15, 1997, establishes standards for reporting and display of the total net income and the components of all other nonowner changes in equity, or comprehensive income (loss) in the statement of operations, in a separate statement of comprehensive income (loss) or within the statement of changes of stockholder's equity. The Company has had no significant items of other comprehensive income. Financial Accounting Standards Board Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS 131"), issued in June 1997 and effective for fiscal years beginning after December 15, 1997, will change the way companies report selected segment information in annual financial statements and also requires those companies to report selected segment information in interim financial statements. The Company has evaluated the impact of the application of the new rules on the Company's Consolidated Financial Statements and the new rules will not change its financial presentation. Financial Accounting Standards Board Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"), issued in June, 1998 and effective for all fiscal quarters of fiscal years beginning after June 15, 1999, with earlier application permitted, requires companies to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company has evaluated the impact of the application of the new rules on the Company's Consolidated Financial Statements and the new rules will not change its financial presentation. The Accounting Standards Executive Committee Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), issued in March 1998 and effective for fiscal years beginning after December 15, 1998 with earlier application permitted, provides guidance on accounting for the costs of computer software developed or obtained for internal use. The Company has adopted SOP 98-1 as of the date of emergence from bankruptcy as required by fresh-start reporting. See Note 4 to the Company's Consolidated Financial Statements. The Accounting Standards Executive Committee Statement of Position 98-5, "Accounting for the Costs of Start-up Activities" ("SOP 98-5"), issued in April 1998 and effective for fiscal years beginning after December 15, 1998 with earlier application permitted, provides guidance on the financial reporting of start-up costs and organization costs. The Company has adopted SOP 98-5 as of the date of emergence from bankruptcy as required by fresh-start reporting. See Note 4 to the Company's Consolidated Financial Statements. FORWARD LOOKING STATEMENTS This Prospectus includes forward-looking statements, including statements regarding, among other items, (i) the Company's anticipated growth strategies, including the Company's intention to expand current stores and open new stores, (ii) the Company's intention to consider additional acquisitions, (iii) anticipated trends in the Company's businesses, (iv) future expenditures for capital projects, including the Company's intention to install a new back office point of sale system, and (v) the Company's intention to seek to improve its operational efficiencies. These forward-looking statements are based largely on the Company's expectations and are subject 36 39 to a number of risks and uncertainties, certain of which are beyond the Company's control. Actual results could differ materially from these forward-looking statements as a result of the factors described in "Risk Factors" including, among others, (i) changes in the competitive marketplace, including pricing changes and addition of new stores by the Company's competitors, and (ii) changes in the trends in the retail music industry. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this Prospectus will in fact transpire. 37 40 BUSINESS Camelot is a leading mall-based retailer of prerecorded music and accessories and is one of the largest music retailers in the United States based on store count. As of July 31, 1998, the Company operated 493 stores in 37 states nationwide and in Puerto Rico under three brand names: Camelot Music, founded in 1956, operating 304 stores with a significant store base concentration in the Midwest and Southeast regions of the United States; The Wall, operating 148 stores primarily in the Mid-Atlantic and Northeast regions of the United States; and Spec's, operating 41 stores in South Florida and Puerto Rico. The Company acquired certain assets of The Wall effective February 28, 1998 and it acquired Spec's on July 29, 1998. The Company believes that each chain benefits from name recognition and a loyal customer base in their primary markets of operation. For Fiscal 1997, the Company had pro forma net sales and earnings of $554.1 million ($396.2 million excluding The Wall) and earnings of $27.2 million ($15.9 million excluding (i) The Wall, (ii) special items and (iii) the reinstatement of vendor discounts). On July 29, 1998, the Company acquired Spec's, a music retailer operating 41 stores in south Florida and Puerto Rico. The Company believes that the Spec's Acquisition will enhance its competitive position in the Southeastern United States and give the Company a leading position in the south Florida market. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent Developments." Camelot offers a broad range of prerecorded music, including CDs, cassettes, prerecorded video cassettes, DVDs and accessories such as blank audio and video cassettes and music and tape care products. The Company seeks to position itself as the mall-based music specialist for prerecorded music, and advertises under the motto "No One Knows Your Music Better." The Company's stores average 4,350 square feet in size and typically offer over 20,000 SKUs, including both high-volume hits and the Company's catalog. The Company believes its product offering enables it to attract a diverse customer base thereby reducing its dependence on any one genre of music. In Fiscal 1997, the Company's average sales per square foot was approximately $293, including The Wall, which the Company believes is among the highest for mall-based retailers of prerecorded music. The Company believes its broad product offering, supported by a high level of customer service from its knowledgeable sales force, combined with its competitive pricing strategy and attractive locations within regional malls, positions Camelot to benefit from the favorable trends occurring in the prerecorded music industry. The Company believes that the total market for prerecorded music and music videos in the United States amounted to $12.2 billion in 1997. The Company believes that revenues in the music and music video market in the United States have doubled over the last ten years and has grown at a compounded annual rate of 8.2% during such period. Industry growth rates do not reflect the Company's historical growth and are not necessarily indicative of its growth during future periods. The Company's revenues have grown at a 7.8% compounded annual rate over the last ten years, although its revenues grew over the past five years at a compounded annual rate of 2.3%. During the 1980s the music retail industry experienced rapid growth fueled by: (i) the introduction of new products such as the CD; (ii) a relatively large number of popular new releases which increased customer traffic and sales; and (iii) the rapid expansion of mall-based music retailers. These factors led, in the early 1990s, to the competitive intrusion of non-traditional music retailers such as consumer electronics stores and discount stores and to increasing price competition. By mid-1994, these competitive factors, combined with the contraction of the replacement CD market and a comparative lack of successful new releases led to deteriorating profitability in the music retail industry. Beginning in mid-1997, conditions in the music retail industry began to improve as a result of: (i) the significant reduction in competitive square footage resulting from the reduction in the total number of traditional music retail stores from approximately 5,000 in 1995 to approximately 4,200 in 1997, including a net reduction of 600 retail stores by the top five traditional music retailers, based on store count; (ii) an improvement in retail pricing as music vendors, beginning in 1996, strengthened MAP guidelines, which the Company believes decreased the intensity levels of price-based competition for prerecorded music; and (iii) a resurgence in popular new releases. The Company has historically been privately held. In 1993, the Company was acquired in a highly leveraged transaction by an investor group led by a private investment firm and members of the Company's current management. The 1993 Acquisition resulted in significant debt service obligations. This significant debt service and the industry conditions described above combined to impair Camelot's operating and financial condition and led the Company to file a voluntary petition for protection under Chapter 11 of the Bankruptcy Code in August 38 41 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Camelot's Plan of Reorganization was confirmed by the Bankruptcy Court on December 12, 1997 and became effective on January 27, 1998. Under the Plan of Reorganization, substantially all of the claims against the Company existing as of the Petition Date were exchanged for shares of Common Stock. Approximately $423.0 million of unsecured claims were exchanged for 10,167,824 shares of Common Stock valued at amount equal to one share for each $47.95 of claim, and approximately $41.5 million of secured claims were exchanged for 2,211,111 shares of Common Stock valued at an amount equal to one share for each $18.75 of claim. All pre-petition ownership interests in the Company were cancelled. Prior to and during its reorganization under the protection of the Bankruptcy Court, Camelot was able to substantially improve the competitive positioning of its business and significantly improve its financial position. These improvements included: (i) closing 96 underperforming stores; (ii) renegotiating unfavorable leases on certain of its remaining stores; (iii) returning certain overstock inventory to its vendors; and (iv) eliminating its liabilities totaling approximately $485 million, including indebtedness of approximately $412 million. In addition, during the same period, Camelot invested $7.5 million to upgrade, develop and implement sophisticated merchandising, distribution, replenishment, and financial software packages, all of which were fully operational by the end of Fiscal 1997. The Company's new and upgraded information systems enable management to (i) allocate specific merchandise to a specific store, thereby improving sell-through rates and reducing returns to vendors; (ii) improve the efficiency of its replenishment system to reduce stock-outs and lower distribution center operating costs; (iii) better track profitability by SKU, store and region; and (iv) automate invoice matching to reduce corporate labor costs. The Company also developed and implemented a new marketing and data warehousing system, which became fully operational in April 1998, to better capture transaction specific data to facilitate the further development of the Company's customer loyalty programs and improve the effectiveness of its advertising programs by targeting specific customers with promotional material tailored to their buying patterns. Over the last two fiscal years, as the Company focused on improving the competitiveness of its business, revenues increased 1.0% as the Company closed 83 stores and opened no new stores. The Company believes the improved industry conditions, the modifications to its operations and financial condition, its infrastructure investments and its strong market position, provide Camelot with distinct competitive advantages and position it for accelerated growth and continued improvement in profitability. Key elements of the Company's growth strategy include: - Strengthen Competitive Position in Existing Markets. The Company intends to strengthen its store base and increase sales by relocating certain existing stores to larger stores and selectively opening new stores in existing markets. New stores will be opened to fill out existing markets and leverage the Company's distribution, advertising and field management costs. As of July 31, 1998, approximately 280 of the Company's 493 stores were less than 4,000 square feet in size compared to its current prototype store of 5,000-6,000 square feet. The Company intends to relocate many of these stores to larger facilities within the same regional mall. The Company believes these relocations will better facilitate its merchandising strategy, including the broader presentation of higher-margin catalog titles. At July 31, 1998, the Company had identified 100 such stores for relocation. In Fiscal 1998, the Company plans to relocate 20 stores and open four new stores in existing markets. Of these 24 projects, seven have been completed and lease commitments have been signed for three more. In Fiscal 1999, the Company expects to relocate 17 stores and open 20 new stores. - Improve Operating Margins. The Company has significantly increased its operating profit margin to 3.6% of net sales (2.5% excluding special items) in Fiscal 1997 from a loss of 3.5% of net sales (a loss of 1.9% excluding special items) in Fiscal 1996. The Company believes that significant opportunities exist to continue to increase its operating profit margin. The Company seeks to increase its gross profit margin primarily through: (i) improved pricing for the Company's products; (ii) enhanced trade terms; (iii) reduced product returns through a more systematic allocation of products; and (iv) adjusting its merchandise mix to emphasize higher-margin catalog items as it relocates its stores to larger facilities. In addition, the Company expects to leverage its general and administrative and warehousing and distribution costs as it opens new stores or acquires stores in existing markets. The Company's warehouse and 39 42 distribution center is currently operating between 30% and 40% of capacity and the Company believes it could support approximately 500 additional stores without a significant increase in capital expenditures for its warehouse and distribution facilities. - Pursue Acquisitions. The Company believes its industry leading position, experienced management team and improved capitalization position Camelot to pursue selective acquisition opportunities in the music retailing industry. Camelot targets mall-based retailers of prerecorded music in existing or contiguous market areas which possess attractive real estate locations. The Company's strategy is to improve such retailers' operating results by remerchandising the stores to conform to Camelot's prototype, implementing its information systems and integrating the acquired operations in order to benefit from economies of scale in distribution, advertising, and management costs. Effective February 28, 1998, the Company purchased certain assets of The Wall for $72.4 million, which significantly enhanced Camelot's market share in the Mid-Atlantic and Northeast regions of the United States. At May 31, 1998, the Company had improved product mix at all of The Wall's stores, targeted for closure 11 underperforming stores, implemented its information systems and reduced costs by eliminating The Wall's corporate infrastructure and phasing out its distribution facilities. See "Unaudited Pro Forma Condensed Consolidated Financial Data." On July 29, 1998, the Company acquired Spec's. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent Developments." RECENT ACQUISITIONS The Company has completed two acquisitions since the January 27, 1998 Plan Effective Date. Effective February 28, 1998, the Company acquired certain assets and assumed certain liabilities and operating lease commitments of The Wall pursuant to an Asset Purchase Agreement dated December 10, 1997. Prior to its acquisition by the Company, The Wall was a mall-based music store chain owned by W.H. Smith (USA), Inc. that operated 150 stores in the Mid-Atlantic region of the United States. The total purchase price paid by the Company for the business of The Wall was $89.4 million, including a cash purchase price of $72.4 million, assumption of liabilities aggregating $14.7 million, and acquisition costs of $2.3 million. The purchase price was subject to adjustment based on the resolution of certain contingencies related to merchandise inventory return reserves and finalization of acquisition costs. No adjustment to the purchase price was made. On July 29, 1998, the Company completed its acquisition of all of the issued and outstanding shares of Common Stock of Spec's. Spec's operates 41 stores in south Florida and Puerto Rico, including 16 mall stores and 25 stores in shopping centers and free standing locations. Prior to the acquisition, Spec's was a public company and its Common Stock was traded on the Nasdaq SmallCap Market. Under the terms of an Agreement and Plan of Merger dated June 3, 1998, SM Acquisition, Inc., a wholly-owned subsidiary of the Company, was merged with and into Spec's (the "Merger"). Upon consummation of the Merger, each share of Spec's Common Stock issued and outstanding prior to the Merger was converted into the right to receive $3.30 per share in cash, and each outstanding option to purchase shares of Spec's Common Stock was surrendered in exchange for a cash payment equal to the excess, if any, of $3.30 per share over the exercise price of such option. The total purchase price payable in connection with the Spec's Acquisition was approximately $28 million, including repayment of bank debt of approximately $9.2 million, the assumption of liabilities of approximately $11 million, and acquisition costs of approximately $2.0 million. In addition, Ann Spector Lieff, Spec's President and Chief Executive Officer, entered into a consulting and non-competition agreement under the terms of which she agreed to be available to consult with the Company's Chief Executive Officer for a period beginning 60 days after the date of the Merger and ending on the first anniversary of the Merger. Under the terms of this agreement, Ms. Lieff will be entitled to continue to receive salary payments for 60 days after the Merger and will receive a severance payment of $58,000 at the end of such period. Thereafter, Ms. Lieff will receive consulting fees aggregating approximately $100,000 during the term of the agreement. The agreement also provides that Ms. Lieff may not directly or indirectly engage in the specialty music business in any area in which the Company conducts business during the term of the agreement. 40 43 INDUSTRY The Company believes that the total market for prerecorded music and music videos in the United States in 1997 amounted to $12.2 billion. The Company believes that revenues in the music and music video market in the United States have doubled over the last ten years and has grown at a compound annual rate of 8.2% during such period. Industry growth rates do not reflect the Company's historical growth and are not necessarily indicative of its growth during future periods. The Company's revenues have grown at a 7.8% compounded annual rate over the last ten years, although its revenues grew over the past five years at a compounded annual rate of 2.3%. The music retail industry is comprised of a number of participants operating in a variety of store formats. Participants in the industry include dedicated music retailers, such as the Company, operating in mall-based stores, shopping centers and free standing locations, as well as mass merchants (such as Wal-Mart, K-Mart and Target), electronics superstores (such as Best Buy and Circuit City), department stores (such as Sears and Montgomery Ward) and other retailers that offer music as part of a wide variety of product offerings. Other retailers of music products include mail-order music clubs and, in recent years, companies that offer CDs and tapes via the Internet. During the 1980s, the music retail industry experienced significant growth in sales and earnings fueled by the introduction of new products and the release of extremely popular recordings. The most important new product was the CD. The popularity of the CD format caused many consumers to replace their old vinyl album and cassette collections with CDs. Expansion of the retail music business attracted new entrants into the industry. During the mid 1990s, this increased competition arising out of the entry of non-traditional competitors, such as electronics superstores, as well as the contraction of the CD replacement market, the relative lack of hit releases and the lack of new technology formats, combined to depress profit margins for music retailers. The total number of traditional music retail stores decreased from approximately 5,000 in 1995 to approximately 4,200 in 1997, including a net reduction of 600 retail stores by the top five traditional music retailers, based on store count. Conditions in the music retail industry improved during 1997. Store closings prompted by the financial condition of many industry participants have led to a better leasing environment, with many mall owners increasingly willing to allow retailers to improve locations and reduce occupancy costs. Music distribution companies have taken steps to reduce retail price competition through the implementation and enforcement of new MAP guidelines. MAP guidelines generally state that a music distribution company will not authorize any advertising funds for any media or in-store programs that advertise a price lower than a specified price. In addition, a music retailer who violates the MAP guidelines will not receive advertising funds from the music distribution company for a period ranging from 60 to 90 days. The Company believes the music retail industry will experience additional consolidation in the next few years, as the increasing level of sophistication required to operate profitably will continue to make it difficult for smaller retailers to compete effectively. STORE FORMAT The Company operates its stores under the "Camelot Music," "The Wall" and "Spec's" names. The Company's stores provide a broad selection of CDs, tapes and video and related products in a customer friendly environment. Substantially all of the Company's stores are located in shopping malls and range in size from 1,500 to 23,500 square feet, averaging 4,350 square feet. As of July 31, 1998, approximately 280 of the Company's 493 stores were less than 4,000 square feet in size compared to its current prototype store of 5,000-6,000 square feet in size. The larger stores are in more prominent mall locations and carry a broader inventory of catalog products in order to appeal to the high-volume purchaser. The Company emphasizes in-store presentation, broad product selection and competitive pricing to attract the casual buyer. At July 31, 1998, the Company operated 304 Camelot Music stores in 34 states, 148 The Wall stores in the Mid-Atlantic and Northeastern regions of the United States and 41 Spec's stores in south Florida and Puerto Rico. As a result of The Wall's name recognition and loyal customer base in its primary markets, the Company has determined to maintain separate identities for its stores. 41 44 The following table sets forth information regarding the size ranges of the Company's stores and the number of stores within each range as of July 31, 1998.
STORE SIZE (SQUARE FOOTAGE) NUMBER OF STORES ---------------- ---------------- Over 5,000.............................................. 126 4,000 to 4,999.......................................... 85 Under 3,999............................................. 282 ---- Total......................................... 493 ====
The Company's strategy for its mall stores is to operate profitable stores in high-traffic locations while controlling occupancy costs. The Company's site selection strategy focuses on using the more favorable leasing environment to establish dominant positions in key regional malls. Camelot has identified a target group of approximately 100 stores where opportunities exist to strengthen the Company's competitive position by improving and expanding store locations within these malls and, often, obtaining exclusive arrangements with mall owners. PRODUCTS The Company's stores focus on providing a broad selection of prerecorded music, but also carry a limited selection of prerecorded videocassettes, blank audio and videocassettes, music and tape care products, carrying cases, storage units, sheet music and personal electronics. During the past several years, sales of prerecorded music have accounted for approximately 88% of the Company's revenues. Camelot Music, The Wall and Spec's stores offer a wide array of CDs and prerecorded audio cassettes. Sales of CDs are expected to continue to become a larger portion of total prerecorded music sales, while sales of prerecorded audio cassettes are expected to decline as a proportion of such sales. The Company's strategy is to provide a greater number of titles to choose from than its mall-based rivals. The Company's stores typically carry between approximately 18,000 and 25,000 titles of prerecorded music, depending on store size and location. These titles include "hits," which represent the best-selling newer releases, and catalog items, representing older but still popular releases that customers purchase to build their collections. The Company's stores offer a full assortment of CDs, prerecorded audio cassettes, prerecorded video cassettes and related accessories. Sales by category as a percentage of net sales over the past three fiscal years were as follows:
PERCENTAGE OF NET SALES ----------------------------------------- COMBINED PRODUCT FISCAL 1995 FISCAL 1996 FISCAL 1997 - ---------------------------------------------------------- ----------- ----------- ----------- Compact discs............................................. 57.4% 63.3% 67.0% Prerecorded audio cassettes............................... 20.7 17.3 14.8 Singles................................................... 5.3 5.7 5.8 Accessories............................................... 5.3 5.6 5.9 Prerecorded video cassettes............................... 5.5 4.3 4.5 Cut outs and budget....................................... 1.6 0.9 0.3 Laser..................................................... 3.2 2.0 1.0 Software/games............................................ 0.5 0.3 0.2 Other..................................................... 0.5 0.6 0.5 ----- ----- ----- Total........................................... 100.0% 100.0% 100.0% ===== ===== =====
The Company seeks to have the most popular hits available at all times while maximizing the selection of popular catalog titles. Store management works with corporate merchandise allocators to tailor product offerings to local customer tastes and to maximize the availability of the most popular items at each store relative to store size and location. 42 45 Typically, the Company's stores carry approximately 1,500 titles of prerecorded videocassettes. The Company has discontinued sales of lower margin laserdiscs and computer software products in an effort to focus on higher margin prerecorded music products. DISTRIBUTION Central to the Company's strategy of providing broad merchandise selection to its customers is its ability to distribute products quickly and cost-effectively to its stores. The Company's distribution center, located adjacent to the corporate headquarters in North Canton, Ohio, receives and ships the vast majority of the Company's merchandise (although many new releases are shipped directly to the stores from suppliers). Distribution center employees pick, pack and ship over 37 million units annually. The Company's distribution center currently operates at between 30% and 40% of total capacity, providing sufficient excess capacity to support significant future store growth and distribution requirements of potential acquisitions. The Company currently has the right to use The Wall's distribution center under a contractual arrangement with WH Smith Group Holdings (USA), Inc. This arrangement will expire in August 1998. Subsequent to that time, the Company will service all of its stores from its existing facility. Inventory is shipped to each store at least once a week via several common carriers, supplemented with expedited shipments as required by individual store sales velocity analysis. All carriers are "less-than-load" carriers (i.e., carriers with whom the Company contracts for less than all available storage space) enabling the Company to maximize transportation efficiencies while minimizing costs. The Company's sophisticated inventory management system links together store POS merchandising and distribution systems, enabling the distribution center to replenish inventory in stores within two to four days of sale, depending upon geographic proximity to the distribution facility. Enhancements to this system implemented at the Company's Camelot Music stores in the early part of Fiscal 1998 permit the Company to manage the replacement of individual SKUs on an automated basis, based on model stocks calculated by reference to sales information. These enhancements enable the Company to react more quickly to increasing sales velocities for specific titles resulting from promotions, concert tours or other media events, and also permit it to ramp down replenishment as sales of specific titles decline. The Company anticipates that The Wall stores will be incorporated into this enhanced inventory management system during the current fiscal year. MARKETING The Company employs marketing and advertising programs to increase customer awareness of Camelot as the mall music specialist. The programs include regular use of local, regional and national media outlets such as radio, television, newspaper, magazines, freestanding inserts, direct mail and the Company's site on the World Wide Web. While emphasizing Camelot's music specialist position, the Company's marketing programs also promote the immediate availability of new hit music releases as well as the Company's extensive catalog selection. In the retail entertainment industry, music and video companies generally provide funds on a title-by-title basis to promote new releases and, occasionally, on a label-wide basis. When the Company runs pre-authorized advertising with respect to a specific title or label, the related supplier generally reimburses the Company for 100% of the cost of such advertising as well as the associated costs of production and development of the creative concept. A significant portion of the Company's total advertising costs has been funded by suppliers through these programs. See Note 3 to the Company's Consolidated Financial Statements. Customer-specific relationship marketing programs are a key component of the Company's marketing effort. Camelot discontinued the manual "punch card" version of its "Repeat Performer" frequent buyer program in mid-1997. The Company's new marketing information system has permitted it to replace the manual version of the Repeat Performer program with a more limited electronic, automated frequent buyer program targeting the Company's most frequent and highest spending customers. Camelot initiated a limited chainwide roll-out of this program to its most frequent and highest spending customers during 1997, and intends to significantly expand the program in 1998. The manual version of the program was not capable of tracking sales or providing customer-specific or transaction-specific data. The automated Repeat Performer program captures demographic and music 43 46 preference data upon customer sign-up as well as item-specific transaction data each time Repeat Performer customers make a purchase. The Company also collects e-mail addresses of its customers to which it can send promotional materials. Customers are rewarded for attaining specific purchase levels by receiving discounts on merchandise. The rewards encourage loyalty and promote use of the bar-coded Repeat Performer card at each transaction. The Company thereby obtains valuable information about the buying preferences of its most loyal customers. The collected data is used to develop customer-specific direct mail programs that are designed to generate increased sales levels and purchase frequency. The customer-specific information obtained through the Repeat Performer program allows the Company to better understand its customers and to tailor direct mail marketing programs to individual customer preferences. The direct mail programs generally are funded by music and video companies who wish to promote their products directly to Camelot customers who are known to purchase items similar to the advertised titles. The Company also intends to assimilate The Wall stores into its overall marketing strategy. While the Company plans to maintain and support the separate identity of The Wall stores, its objective is to integrate The Wall into global marketing campaigns supporting both Camelot Music and The Wall stores. As part of this effort, the Company intends to implement modifications to The Wall's "Buzz Club" frequent buyer program during the current fiscal year to conform it to the new Repeat Performer program. The Company also expects to continue The Wall's lifetime warranty program for damaged goods. The capabilities of the Company's new marketing system also permit it to measure the effectiveness of individual promotional efforts, including radio, television and direct mail programs, internal merchandising changes, new signage and visual marketing presentations, new store configurations, changed inventory mix and other in-store initiatives. The ability to measure the effectiveness of these programs will permit Camelot to modify marketing efforts based on the effectiveness of these campaigns. SUPPLIERS The Company purchases its prerecorded music directly from a large number of manufacturers. During Fiscal 1997, approximately 77% of purchases, net of returns, were made from the Big Six Vendors. Twenty other vendors accounted for an additional 13% of purchases during such period. Historically, Camelot has enjoyed trade terms that have generally included (a) the ability to return unsold current releases at invoice cost less customary merchandise return charges, (b) a 2% discount for payments made within 60 days of invoice and (c) credit limits sufficient to permit at least 60 days dating on inventory purchases. Return privileges enable the Company to ensure that it will have sufficient product in stock to meet customer demand without subjecting the Company to extensive risk that a particular item will not meet sales expectations. During the bankruptcy proceedings, the Company's access to these customary trade terms was severely limited. After the Effective Date, the Company was once again able to negotiate customary trade terms with most of its suppliers, including the Big Six Vendors. Recently, a number of vendors have implemented policies prohibiting the return of opened product for credit. INFORMATION SYSTEMS The Company has made significant investments in its information systems during the past three years, including the installation of new merchandising and marketing systems, which will be implemented throughout its stores during Fiscal 1998. Camelot's merchandising systems provide it with the ability to monitor inventory levels, analyze changes in inventory and replenish inventory on an automated basis, based on model stocks calculated by reference to sales information. These capabilities permit the Company to react quickly to changes in sales velocities for specific titles or products and to better measure the effectiveness of advertising, promotional and merchandising programs. The Company's marketing system provides it with the ability to collect a variety of customer and transaction specific data from participants in its relationship marketing programs, which allows it to tailor relationship marketing efforts to each customer's purchase patterns and music preferences. This system is part of the Company's larger Data Warehouse/COREMA system, which enables it to record and preserve two years of transaction-specific information for every store. The Company is also in the process of replatforming its back-office POS system. The new system will enable the Company to standardize the Camelot Music and The 44 47 Wall POS systems and bring those systems into Year 2000 compliance while retaining existing in-store POS devices at its Camelot Music stores. EMPLOYEES As of July 31, 1998, the Company employed approximately 2,215 full-time employees and 3,995 part-time employees. As of such date, the Company employed approximately 167 individuals at its corporate headquarters, 305 at its distribution center, and 5,738 at its stores. None of the Company's employees is represented by a union. The Company believes that its employee relations are good. COMPETITION The prerecorded music market is highly competitive. Competition is based on breadth of product offering, price, location of stores, convenience and customer service. Consumers have numerous options in purchasing prerecorded music and other home entertainment products, including chain retailers specializing in prerecorded music, consumer electronic superstores, non-mall multimedia superstores, discount stores, grocery, convenience and drug stores, direct-mail programs via telephone, the Internet or television and local music retailers. Additionally, consumers have more home entertainment options available with the increasing use of personal computers in homes. The impact of these trends in recent years has been a reduction in customer traffic and revenues for mall-based music retailers such as the Company. While several major retail chains have recently opened and expanded their store presence in the markets in which the Company operates, there has been some easing in the competitive environment in 1997 as a result of the closing of under-performing stores by several mall-based competitors and the downsizing of music departments within certain non-mall competitors. Pricing pressures have also eased as a result of less near- or below-cost pricing by certain non-mall competitors. Several major suppliers of prerecorded music have begun to enforce MAP programs, which provide incentives for retailers to comply with the terms of the programs. Enforcement of the MAP programs has contributed to stabilizing retail prices of prerecorded music in 1997. However, the FTC is currently investigating the MAP programs, and there can be no assurance that such programs will continue in the future. There can be no assurance that deep-discount pricing practices will not return, or that if they do, that the Company will be able to remain competitive without a material adverse effect on its results of operations and financial condition. The Company expects that the retail sales environment will continue to present challenges into the foreseeable future. In response to these challenges, the Company will focus on securing and maintaining the most desirable locations within quality regional malls, efficient inventory management, and offering broad, market-specific merchandise selections at competitive prices. The Company also competes for consumer entertainment dollars with leisure time activities such as movie theaters, television, home computer and Internet use, live theater, sporting events, travel, amusement parks and other entertainment centers. SEASONALITY The Company's business is seasonal in nature. In Fiscal 1997, approximately 35% of revenues and all of its income (loss) before interest expense, other income (expenses) net, reorganization income (expenses) net, income taxes and extraordinary item, and net income before extraordinary item was generated in the Company's fiscal fourth quarter. Quarterly results are affected by, among other things, new product offerings, store openings and closings, and sales performance of existing stores. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Selected Quarterly Results of Operations." TRADEMARKS AND SERVICE MARKS The Company operates its stores under the "Camelot Music," "The Wall" and "Spec's" names, which have become important to the Company's business as a result of its advertising and promotional activities. These 45 48 names and other names used in the Company's business have been registered with the United States Patent and Trademark Office. The Company has not experienced any significant patent infringement in recent years. PROPERTIES The Company owns its headquarters facility and distribution center in North Canton, Ohio. All stores operated by Camelot and The Wall are under operating leases with various remaining terms through the year 2009. The leases have terms ranging from one to 20 years. In most instances, the Company pays, in addition to minimum rent, real estate taxes, utilities, common area maintenance costs and percentage rents which are based upon sales volume. Certain store leases provide the Company with an early cancellation option if sales for a designated period do not reach a specified level as defined in the lease. The following table lists the number of leases due to expire or terminate in each fiscal year based on fixed lease term, giving effect to early cancellation options and excluding renewal options.
CAMELOT EXPIRATION DATES MUSIC THE WALL SPEC'S COMPANY TOTAL ---------------- ------- -------- ------ ------------- 1998............................................. 42 16 10 68 1999............................................. 29 14 6 49 2000............................................. 35 12 7 54 2001............................................. 50 24 2 76 2002............................................. 27 23 1 51 2003............................................. 34 14 3 51 2004............................................. 42 24 9 75 2005 and thereafter.............................. 45 21 3 69 --- --- -- --- 304 148 41 493 === === == ===
The Company's leases generally do not contain renewal options. Although the Company has historically been successful in renewing most of its store leases when they have expired, there can be no assurance that Camelot will continue to be able to do so on acceptable terms or at all. Many of the Company's current landlords were landlords under leases with respect to which the Company's obligations were terminated during the bankruptcy proceedings. If the Company is unable to renew leases for its stores as they expire, or find favorable locations on acceptable terms, there can be no assurance that such failures will not have a material adverse effect on the Company's financial condition and results of operations. 46 49 The following table shows the distribution of the Company's stores by state as of July 31, 1998.
NUMBER OF STORES ----------------------------- CAMELOT STATE MUSIC THE WALL SPEC'S ----- ------- -------- ------ Alabama................................................. 8 -- -- Arkansas................................................ 5 -- -- California.............................................. 9 -- -- Florida................................................. 33 -- 37 Georgia................................................. 14 -- -- Illinois................................................ 10 -- -- Indiana................................................. 8 -- -- Kansas.................................................. 5 -- -- Kentucky................................................ 7 -- -- Louisiana............................................... 5 -- -- Maryland................................................ 5 9 -- Massachusetts........................................... -- 6 -- Michigan................................................ 8 -- -- Missouri................................................ 10 -- -- New Jersey.............................................. 4 20 -- New York................................................ 5 32 -- North Carolina.......................................... 18 1 -- Ohio.................................................... 25 1 -- Oklahoma................................................ 6 -- -- Oregon.................................................. 5 -- -- Pennsylvania............................................ 14 57 -- South Carolina.......................................... 9 -- -- Tennessee............................................... 13 -- -- Texas................................................... 34 -- -- Virginia................................................ 7 14 -- Washington.............................................. 11 -- -- West Virginia........................................... 4 2 -- Wisconsin............................................... 6 -- -- Puerto Rico............................................. -- -- 4 All other states........................................ 16 6 -- ---- --- --- Totals........................................ 304 148 41 ==== === ===
The Company is subject to extensive regulation under environmental and occupational health and safety laws and regulations. In addition, the Comprehensive Environmental Response, Compensation and Liability Act generally imposes joint and several liability for clean-up and enforcement costs, without regard to fault, on parties allegedly responsible for contamination at a site. While the Company is not aware of any current environmental liability, no assurance can be given that the Company will not be liable in the future. LEGAL PROCEEDINGS The Company is involved from time to time in various routine legal and administrative proceedings and threatened legal and administrative proceedings incidental to the ordinary course of its business. Except as described below, the Company is not now involved in any litigation, individually or in the aggregate, which could have a material adverse effect on the Company's business, financial condition, results of operations or cash flows. The IRS asserted in the bankruptcy proceedings a priority tax claim against the Company of approximately $7.9 million on January 10, 1997. Under the Plan of Reorganization, any allowed priority tax claim of the IRS would be paid over six years, with quarterly amortization of interest and principal, at an interest rate of 9.0%. The Company acknowledges a priority tax obligation to the IRS of approximately $0.8 million, and disputes the 47 50 validity of the balance of the IRS Claim, the large majority of which relates to a proposed disallowance by the IRS of the COLI Deductions. On October 15, 1997, the Debtors filed the COLI Objection to the IRS Claim to the extent that the IRS seeks to disallow the COLI Deductions. In response to the COLI Objection, on November 21, 1997 the IRS filed the Withdrawal Motion with the District Court seeking to have the COLI Objection resolved by the District Court rather than the Bankruptcy Court. On May 29, 1998, the District Court granted the Withdrawal Motion, and the proceeding is now before the District Court as Civil Action No. 97-695 (MMS). The District Court approved a Joint Discovery Plan on July 6, 1998. The Joint Discovery Plan mandates that all discovery be served or issued so as to be completed on or before June 30, 1999. In the event that a judgment is rendered against the Company in an amount exceeding the reserve established with respect to this matter, the Company's results of operations would be materially adversely affected. Such a judgment, unless paid or bonded for appeal, would also be an Event of Default under the Company's Amended Credit Facility. 48 51 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information regarding the executive officers and directors of the Company as of July 31, 1998:
NAME AGE POSITION ---- --- -------- James E. Bonk................ 50 President, Chief Executive Officer and Chairman of the Board of Directors Jack K. Rogers............... 48 Executive Vice President, Chief Operating Officer, Secretary and Director Lee Ann Thorn................ 37 Chief Financial Officer and Treasurer George R. Zoffinger.......... 50 Director Stephen H. Baum.............. 56 Director Herbert J. Marks............. 53 Director Michael B. Solow............. 39 Director Marc L. Luzzatto............. 42 Director Larry K. Mundorf............. 50 Vice President of Marketing Lewis S. Garrett............. 48 Vice President of Buying and Merchandising Charles R. Rinehimer III..... 50 Vice President of Stores
James E. Bonk has served as President, Chief Executive Officer and Chairman of the Board of the Company since January 1998, and as President, Chief Executive Officer and Director of the Company since November 1993. Prior to that time he served as Executive Vice President, Chief Operating Officer and Director of the Company since June 1986. Mr. Bonk joined the Company as a store manager in 1968 and held various positions of increasing responsibility from 1968 through 1986. Jack K. Rogers has served as Executive Vice President, Chief Operating Officer, Secretary and a Director of the Company since January 1998. He previously served Camelot as Executive Vice President and Chief Financial Officer from November 1993 to January 1998 and as Vice President Finance, Chief Financial Officer, Secretary and Director of Camelot from June 1988 to November 1993. Lee Ann Thorn has served as Chief Financial Officer and Treasurer of the Company since January 1998. Prior to that time she served as Vice President of Finance and Treasurer of Camelot from November 1993 to January 1998, and also served as Director of Taxes and Payroll for Camelot from May 1988 to November 1993. George R. Zoffinger has served as a Director of the Company since January 1998. He has been President and Chief Executive Officer of Constellation Capital Corp. since March 1998. Mr. Zoffinger served as President, Chief Executive Officer and Director of Value Property Trust from 1995 until that company was purchased by Wellsford Real Properties, Inc. in March 1998. Mr. Zoffinger served as Chairman of the Board of CoreStates New Jersey National Bank from 1994 through its merger into CoreStates Bank, N.A. in 1996. From 1991 through 1994, he served as President and Chief Executive Officer of Constellation Bancorp and its principal subsidiary, Constellation Bank, N.A. Mr. Zoffinger is also a member of the Board of Directors of NJ Resources, Inc. Stephen H. Baum has served as a Director of the Company since January 1998. He has been a principal of The Mead Point Group, an advisor to senior management of service enterprises since 1991. Mr. Baum is chief judge for the Connecticut Award for Excellence and was a senior examiner with the Malcolm Baldridge National Quality Award for several years. He co-founded The Mead Point Group in 1991. Prior to founding The Mead Point Group, Mr. Baum was a partner for ten years with Booz, Allen & Hamilton, where he led the consumer services practice. Herbert J. Marks has served as a Director of the Company since January 1998. He has served at RBC Dominion Securities as Vice President and Manager of the Merger Arbitrage Group since 1997. He has also 49 52 served as Senior Vice President and Managing Director of Tribeca Investments, L.L.C. (a subsidiary of the Travelers Group), Senior Vice President and Director of Research for Kellner Dileo & Co., Senior Vice President and Manager of the Risk Arbitrage Department of Kidder Peabody & Co. and Senior Vice President of the Risk Arbitrage Group of Lehman Brothers Inc. Michael B. Solow has served as a Director of the Company since March 1998. Mr. Solow is currently a partner and Practice Manager for Financial Services Practice at Hopkins & Sutter, a Chicago, Illinois law firm where he has practiced since 1985. Mr. Solow is also a member of the Board of Directors for Chrisken Residential Trust, Inc. and Edwards Arts Products, and has previously served on other corporate boards. Marc L. Luzzatto has served as a Director of the Company since March 1998. Mr. Luzzatto has served as the President and Chief Operating Officer of The Welk Group, Inc., a Santa Monica, California-based company with interests in various entertainment, hospitality and real estate businesses, since 1995. He has been an executive of The Welk Group, Inc. since 1990. Mr. Luzzatto is also a member of the Board of Directors for Welk Direct Marketing, Inc. Mr. Luzzatto has served in various capacities in the investment banking, real estate and legal professions. Larry K. Mundorf has served as Vice President of Marketing for the Company since February 1998. Mr. Mundorf served as President and Chief Operating Officer of National Record Mart, Inc., a music retailer headquartered in Pittsburgh, Pennsylvania, from January 1997 to February 1998 and as that company's Executive Vice President and Chief Operating Officer from January 1996 to January 1997. He served as Vice President of Marketing for Alpha Enterprises, a Canton, Ohio-based supplier to the music and video industry, from 1991 to 1995. Prior to that time, Mr. Mundorf spent 23 years with Camelot, last serving as the Company's Senior Vice President of Operations. Lewis S. Garrett has served as Vice President of Buying and Merchandising of the Company since January 1986, supervising all of the Company's buying and allocation functions. He joined Camelot in 1972. In addition, Mr. Garrett is the Chairman of The National Association of Recording Merchandisers Retailers' Advisory Committee. Charles R. Rinehimer III has served as Vice President of Stores of the Company since May 1994. Previously, Mr. Rinehimer served as Vice President of Store Operations for American Greetings (Summit Corporation) from 1989 to May 1994. TERMS OF DIRECTORS The Board of Directors consists of seven Directors. The Directors of the Company are elected annually for one-year terms. In accordance with Section 8.02 of the Plan of Reorganization, five members of the Board of Directors of the Company (Messrs. Zoffinger, Baum, Marks, Luzzatto and Solow) were appointed by the holders of a majority of the Common Stock upon the Company's emergence from bankruptcy. In addition, James Bonk's employment agreement provides that he will be elected Chairman of the Board of Directors of the Company during the term of the agreement. COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors has three standing committees: a Compensation Committee, an Audit Committee and an Executive Committee. The Compensation Committee has the authority to (i) administer the Company's stock option plans, including the selection of optionees and the timing of option grants, and (ii) review and monitor key employee compensation and benefits policies and administer the Company's management compensation plans. The members of the Compensation Committee are Messrs. Solow, Baum and Zoffinger. See "Management -- Executive Compensation." The Audit Committee recommends the annual appointment of the Company's auditors, with whom the Audit Committee reviews the scope of audit and non-audit assignments and related fees, the accounting principles used by the Company in financial reporting, internal financial auditing procedures and the adequacy of the Company's internal control procedures. Messrs. Marks and Luzzatto serve as members of the Audit Committee. 50 53 The Executive Committee exercises the powers and authority of the full Board during the period between meetings of the entire Board of Directors. Messrs. Bonk, Rogers, Solow and Zoffinger serve as members of the Executive Committee. EXECUTIVE COMPENSATION The following compensation information has been prepared based upon the actual compensation and benefits earned during Fiscal 1997, as well as various employee retention and compensation arrangements which were entered into in connection with the bankruptcy proceedings. The table below sets forth information concerning the annual and long-term compensation for services in all capacities for the Company for Fiscal 1997, with respect to those persons who were (i) the Chief Executive Officer and (ii) the four other most highly compensated executive officers of the Company (collectively, the "Named Executive Officers") at February 28, 1998. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ------------ ANNUAL COMPENSATION SECURITIES ---------------------------- UNDERLYING ALL OTHER NAME AND POSITION YEAR SALARY BONUS(1) OPTIONS/SARS COMPENSATION(2) ----------------- ---- -------- -------- ------------ --------------- James E. Bonk.................... 1997 $358,380 $754,000 110,000 $322,813 President and Chief Executive Officer Jack K. Rogers................... 1997 239,630 375,000 80,000 322,631 Executive Vice President, Chief Operating Officer and Secretary Lee Ann Thorn.................... 1997 147,090 230,000 40,000 2,234 Chief Financial Officer and Treasurer Lewis S. Garrett................. 1997 170,880 182,500 40,000 233,265 Vice President of Buying and Merchandising Charles R. Rinehimer III......... 1997 170,880 187,500 40,000 2,693 Vice President, Stores
- --------------- (1) Represents (a) annual incentive bonuses earned by Messrs. Bonk and Rogers, Ms. Thorn and Messrs. Garrett and Rinehimer of $300,000, $125,000, $80,000, $87,500 and $87,500, respectively, and (b) one-time bankruptcy retention and success bonuses earned by Messrs. Bonk and Rogers, Ms. Thorn and Messrs. Garrett and Rinehimer of $454,000, $250,000, $150,000, $95,000 and $100,000, respectively. (2) Represents (a) payments made by the Company in connection with the buyout of its obligations under its Supplemental Executive Retirement Plan to Messrs. Bonk, Rogers and Garrett of $319,580, $319,580 and $231,054, respectively, and (b) employer matching contributions to the Company's 401(k) Plan on behalf of the Named Executive Officers. STOCK OPTION PLAN The Plan of Reorganization provided for the adoption of the Camelot Music Holdings, Inc. 1998 Stock Option Plan (the "Option Plan"). The Option Plan became effective as of the Plan Effective Date and is administered by the Compensation Committee of the Board of Directors or such other committee of the Board of Directors as it may designate (hereinafter, the "Committee"). Executive and other key salaried employees, including officers, and directors (whether or not also employees) of the Company and its subsidiaries, are eligible 51 54 to receive stock option grants under the Option Plan, as described below. Options granted under the Option Plan may be either "incentive stock options" ("ISOs"), within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or stock options other than ISOs. Subject to certain limitations prescribed by the Option Plan, the Board of Directors may amend, alter, suspend or terminate the Option Plan, and the Committee may amend options outstanding under the Option Plan. As of the Plan Effective Date, 7.5% of the total issued and outstanding shares of Common Stock were reserved for issuance upon exercise of stock options under the Option Plan. As further shares of Common Stock are issued in respect of the ongoing bankruptcy claims reconciliation process, the number of shares reserved for the Option Plan will be adjusted so that at all times the number of shares of Common Stock reserved for issuance upon exercise of options will equal 7.5% of the total shares of Common Stock outstanding on a fully diluted basis. In addition, the Option Plan provides that the Committee shall adjust the shares available under the Option Plan and subject to outstanding options to preserve the benefits intended under the Option Plan or with respect to any options upon certain changes in the outstanding Common Stock, such as by reason of a stock dividend or stock split or a recapitalization, reorganization, merger, issuance of rights to purchase Common Stock or other securities of the Company (other than under the Option Plan), or an extraordinary dividend, spin-off, liquidation or other substantial distribution of Company assets. The Option Plan provides that in the event of a change in control of the Company, as defined in the Option Plan, all outstanding options shall become fully exercisable, and the Committee shall have discretion, either by the terms of the option or by a resolution adopted prior to the occurrence of such event, to substitute for Common Stock covered by any outstanding options, cash or other stock or securities or other consideration issuable by another party to, or receivable by the Company's shareholders in connection with, such transaction, adjusted for the exercise price of the option and as otherwise provided in the Option Plan. Pursuant to the Option Plan, as of the Plan Effective Date, options to purchase 687,000 shares of Common Stock (representing approximately 83% of the total shares of Common Stock reserved for issuance under the Option Plan as of the Plan Effective Date) were granted to 79 members of Camelot's management with an exercise price of $20.75 per share. Both the number of shares subject to such options granted on the Plan Effective Date and the exercise price thereof are subject to adjustment as further shares of Common Stock are issued in respect of the ongoing bankruptcy claims reconciliation process, and in accordance with the Option Plan's provisions regarding changes in capital of the Company, referred to above. All such options granted on the Plan Effective Date are intended to qualify as ISOs and will become exercisable no later than four years from the Plan Effective Date; however, up to 50% of these options may become exercisable prior to the second anniversary of the Plan Effective Date, with the balance becoming exercisable at any time thereafter, if the fair market value of the Common Stock exceeds certain thresholds established at the time such options were granted. On the Plan Effective Date, Mr. Bonk and Mr. Rogers were granted options under the Option Plan to purchase 110,000 and 80,000 shares of Common Stock, respectively, and Messrs. Garrett and Rinehimer and Ms. Thorn were each granted options under the Option Plan to purchase 40,000 shares of Common Stock. In the aggregate, the number of options granted to these five senior executives represents approximately 45% of the total number of shares for which options were granted as of the Plan Effective Date under the Option Plan. Options to purchase the balance of the shares of Common Stock reserved under the Option Plan may be granted by the Committee subsequent to the Plan Effective Date, and such options will have exercise prices and shall be exercisable at such times (not extending beyond ten years from the grant date of the option) and subject to such conditions as determined by the Committee, in accordance with the Option Plan, at the time such options are granted. However, ISOs may not be granted under the Plan after the expiration of ten years following the Plan Effective Date, to the extent required by the Code, and may not have an exercise price less than 100% of the fair market value of the stock covered thereby on the ISO's date of grant. Options granted under the Option Plan generally may not be exercised after ten years from the date granted and are subject to earlier termination upon termination of the optionee's employment with the Company or its subsidiaries under certain circumstances specified in the Option Plan and the optionee's option. The Option Plan provides that the exercise price of an option may be paid in any manner permitted by applicable law and prescribed by the Committee in the option, including, in the Committee's discretion, a broker-assisted exercise program. Options granted as of the Plan Effective Date provide that the option exercise price may be paid by personal check, bank draft or money order; 52 55 through delivery of a full recourse promissory note with the consent of, and upon such payment and other terms and conditions as prescribed by, the Committee; or using a broker-assisted exercise program. OPTION GRANTS IN FISCAL 1997 The following table sets forth certain information relating to grants of stock options made during Fiscal 1997 to the Named Executive Officers under the Company's Stock Option Plan. Such grants are reflected in the Summary Compensation Table above.
INDIVIDUAL GRANTS ------------------------------------------------------ % OF TOTAL POTENTIAL REALIZABLE VALUE NUMBER OF OPTIONS/SARS AT ASSUMED ANNUAL RATES SECURITIES GRANTED TO EXERCISE OF STOCK PRICE APPRECIATION UNDERLYING EMPLOYEES OR FOR OPTION TERM OPTIONS/SARS IN BASE EXPIRATION --------------------------- NAME GRANTED FISCAL YEAR PRICE DATE 5% 10% ---- ------------ ------------ ----------- ---------- ------------ ------------ James E. Bonk................. 110,000 16.0% $20.75 1/27/2008 $1,437,975 $3,640,588 Jack K. Rogers................ 80,000 11.6 20.75 1/27/2008 1,045,800 2,647,700 Lee Ann Thorn................. 40,000 5.8 20.75 1/27/2008 522,900 1,323,850 Lewis S. Garrett.............. 40,000 5.8 20.75 1/27/2008 522,900 1,323,850 Charles R. Rinehimer III...... 40,000 5.8 20.75 1/27/2008 522,900 1,323,850
FISCAL YEAR END OPTION VALUE TABLE The following table provides certain information concerning the number of securities underlying unexercised stock options held by each of the Named Executive Officers as of February 28, 1998. None of the Named Executive Officers exercised any stock options during Fiscal 1997.
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE- OPTIONS AT MONEY OPTIONS AT FEBRUARY 28, 1998 FEBRUARY 28, 1998(1) ---------------------------- ---------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- James E. Bonk.............................. 0 110,000 $0.00 $2,062,500 Jack K. Rogers............................. 0 80,000 0.00 1,500,000 Lee Ann Thorn.............................. 0 40,000 0.00 750,000 Lewis S. Garrett........................... 0 40,000 0.00 750,000 Charles R. Rinehimer III................... 0 40,000 0.00 750,000
- --------------- (1) Represents the total gain which would be realized if all in-the-money options beneficially owned at February 28, 1998 were exercised, determined by multiplying the number of shares underlying the options by the difference between the per share exercise price and $39.50, the estimated fair market value per share of Common Stock as of such date based upon the mean between the bid and asked prices of a share of Common Stock as reported on the OTC Bulletin Board on February 27, 1998. EMPLOYMENT CONTRACTS The Company maintains written severance agreements with Mr. Bonk and all other executive officers. The severance arrangements with Mr. Bonk are a part of his employment contract, as described below. The contracts with the executive officers, including Ms. Thorn and Messrs. Rogers, Garrett, Rinehimer and Mundorf, and other officers, including Messrs. Marsh (Vice President of Information Systems and Chief Information Officer) and Scott (Vice President of Logistics), provide severance benefits in the event the executive is terminated without cause at any time prior to the executive's normal retirement date. An executive would be terminated without cause if the executive's employment is terminated by reason of layoff or reduction in force or for any other reason except (i) the resignation by the executive unless such resignation is preceded by, or reasonably contemporaneous with, (a) a change of the holders of 50% or more of the equity of the Company, (b) a change in the majority of the Company's Board of Directors, (c) merger with less than 50% of the merged entity owned by pre-merger stockholders or (d) sale or abandonment of more than 50% of the Company's revenue-generating assets; or (ii) a 53 56 termination of the executive's employment arising from gross incompetence, insubordination, dishonesty in performance of the Company's duties, or conviction of fraud, theft, embezzlement or any felony. The benefits under the contracts with the executive officers other than Mr. Bonk are for 12 months of salary continuation subject to mitigation, except that the contract with Mr. Rogers provides for severance benefits of 18 months with only the final six months subject to mitigation. These benefits include payment of monthly salary and the continuance of group medical, dental and long-term disability insurance. As of the Plan Effective Date, Camelot amended and extended its employment agreement with Mr. Bonk. Under the terms of the agreement, which expires on December 31, 2000, Mr. Bonk will receive a base salary of at least $400,000 per year and is entitled to participate in the Company's option and bonus plans. This agreement also provides Mr. Bonk with the following severance payments and continued benefits: (i) a lump sum payment of one year's base salary (in the event of Mr. Bonk's death or disability or upon the failure of the Company to renew the agreement for an additional three-year term); and (ii) monthly base salary payments and benefits continuation over the greater of (a) two years or (b) the balance of the term of the agreement if the Company terminates him without cause or in the event of constructive discharge (as defined in such employment agreement) including a change of control of the Company. These payments are subject to mitigation, but only for periods beyond 18 months in the case of the salary payments. The agreement also contains a covenant not to compete with the business of Camelot for a specified period of time in the event of termination. DIRECTOR COMPENSATION Each non-employee Director of the Company receives a quarterly retainer of $3,000, and a fee of $1,000 for each Board meeting attended and a fee of $500 for each Committee meeting attended. Directors may elect to defer some or all of these fees and use deferred amounts to purchase shares of Common Stock once each year at the fair market value of a share on the date of purchase. The Company has also established an Outside Directors' Stock Option Plan (the "Director Plan"). Under the terms of the Director Plan, each Director who is not an employee of the Company or its subsidiaries (an "Outside Director") received a one-time award of options to purchase 2,500 shares of Common Stock at $20.75, which options were vested upon their award. In addition, upon the consummation of the Offerings, each Outside Director will receive a one-time award of options to purchase 7,500 shares of Common Stock at the initial public offering price, which options will vest over a three year period. Further, under the Director Plan, each Outside Director will receive an annual grant to purchase 1,500 shares of Common Stock at the fair market value at the time of the grant, which options will vest over a one year period. Upon election, each new Outside Director will receive a one-time award of options to purchase 10,000 shares of Common Stock at the fair market value at the time of the grant, which options will vest over a three year period. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Shortly before December 12, 1997, the date on which the Plan of Reorganization was confirmed by the Bankruptcy Court, Jon P. Hedley and Charles J. Philippin, two of Camelot's Directors, resigned. Messrs. Hedley and Philippin had been the only members of the Company's Compensation Committee. Accordingly, upon their resignations, such Committee was effectively dissolved. Mr. Philippin had also been President of the Company's Predecessor until his resignation, and Mr. Hedley had been the Vice President, Secretary and Treasurer of the Company's Predecessor until his resignation. Messrs. Hedley and Philippin were also both members of senior management of Investcorp S.A. which the Company believes held, through various affiliates, the vast majority of the outstanding equity interests in, and the direct debt obligations of, the Company. CERTAIN TRANSACTIONS Mr. Solow, a Director of the Company, is a member of the law firm of Hopkins & Sutter. The Company reimbursed Hopkins & Sutter for services which Hopkins & Sutter provided to Van Kampen American Prime Rate Income Trust ("Van Kampen") as a prepetition lender. For Fiscal 1994, Fiscal 1995 and Fiscal 1996, the Company's indebtedness to Van Kampen totaled $30,710,959, $32,601,087 and $33,712,679, respectively. All indebtedness was converted to equity on the Plan Effective Date. 54 57 Mr. Luzzatto, a Director of the Company, is the President and Chief Executive Officer and a Director of the Welk Group, Inc. (the "Welk Group"). During each of the past three fiscal years, the Company has purchased prerecorded music from the Welk Group. The Company's purchases from the Welk Group aggregated $147,256 in Fiscal 1997, $72,245 in Fiscal 1996 and $60,810 in Fiscal 1995. On the January 27, 1998 Plan Effective Date, the Company issued the following amounts of shares of Common Stock to each current owner of more than 5% of the outstanding Common Stock in exchange for the amount of claims noted: Van Kampen Merritt, 1,994,717 shares in exchange for claims aggregating $88,287,616; Fernwood Associates, L.P., 1,549,595 shares in exchange for claims aggregating $62,860,596; Merrill Lynch, 1,466,362 shares in exchange for claims aggregating $59,484,183; Oaktree Capital Management, LLC, 961,740 shares in exchange for claims aggregating $39,013,798; Daystar Partners LLC, 358,115 shares in exchange for claims aggregating $14,527,212; First Union National Bank, 652,952 shares in exchange for claims aggregating $26,487,528; and Yale University, 594,944 shares in exchange for claims aggregating $26,165,121. First Union National Bank ("First Union") and Van Kampen, the beneficial owners of shares representing 5.9% and 19.6% of the Company's Common Stock, respectively, are lenders under the Amended Credit Facility. The maximum amount of First Union's commitment under that facility is $15.0 million, including $10.0 million under the revolving portion of that facility and $5.0 million under the term loan portion of that facility. The maximum amount of Van Kampen's commitment under that facility is $7.5 million, including $5.0 million under the revolving portion of that facility and $2.5 million under the term loan portion of that facility. Van Kampen, Fernwood Associates, L.P., Oaktree Capital Management, LLC and Merrill Lynch are parties to the Registration Rights Agreement with the Company. See "Shares Eligible for Future Sale -- Registration Rights Agreement." The Company believes that these transactions were on terms no less favorable to the Company than could have been obtained from unaffiliated third parties. 55 58 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information with respect to beneficial ownership of the Common Stock as of July 28, 1998, and as adjusted to reflect the sale of the Common Stock offered hereby, by (i) the Selling Stockholders, (ii) each Director, (iii) each Named Executive Officer, (iv) all Directors and executive officers as a group, and (v) each person known by the Company to be the beneficial owner of more than 5% of the Common Stock on a fully diluted basis.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR TO OWNED AFTER THE OFFERINGS NUMBER THE OFFERINGS(2) NAME AND ADDRESS ---------------------- OF SHARES -------------------- OF BENEFICIAL OWNER(1) NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE ---------------------- --------- ---------- --------- ------- ---------- 5% SHAREHOLDERS: Van Kampen-Merritt Prime Rate Income Trust....... 1,994,717 19.6% 1 Parkview Plaza Oakbrook Terrace, Illinois 60180 Fernwood Associates, L.P......................... 1,549,596 15.2% 667 Madison Avenue, 20th Floor New York, New York 10021 Merrill Lynch, Pierce, Fenner & Smith 1,435,782 14.1% Incorporated..................................... Debt & Equity Market Group World Financial Center, North Tower New York, New York 10281 Oaktree Capital Management, LLC(6)............... 968,416 9.5% (in its capacity as general partner and investment manager of OCM Opportunities Fund, L.P. and Columbia/HCA Master Retirement Trust (separate account I)) 550 South Hope Street, 22nd Floor Los Angeles, California 90071 Daystar Partners LLC............................. 750,892 7.4% 411 Theodore Fremd Avenue Rye, New York 10580 First Union National Bank........................ 602,952 5.9% 301 South Cole Street BC-5 Charlotte, North Carolina 28258 Yale University.................................. 549,944 5.4% c/o Daystar Partners LLC 411 Theodore Fremd Avenue Rye, New York 10580 DIRECTORS AND NAMED EXECUTIVE OFFICERS: James E. Bonk.................................... 55,000(3) * 55,000(3) * Jack K. Rogers................................... 40,000(3) * 40,000(3) * Lee Ann Thorn.................................... 20,000(3) * 20,000(3) * Lewis S. Garrett................................. 20,000(3) * 20,000(3) * Charles R. Rinehimer III......................... 20,000(3) * 20,000(3) * George R. Zoffinger.............................. 5,500(3)(4) * 5,500(3) * Stephen H. Baum.................................. 2,500(3) * 2,500(3) * Herbert J. Marks................................. 2,500(3) * 2,500(3) * Marc L. Luzzatto................................. 2,500(3) * 2,500(3) * Michael B. Solow................................. 2,500(3) * 2,500(3) * All Directors and Executive Officers as a 170,500(5) 1.6% 170,500(5) 1.6% Group..........................................
- --------------- * Less than 1%. (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission (the "Commission") and includes voting and investment power with respect to the shares. As to each stockholder, the percentage ownership is calculated by dividing (i) the sum of the number of shares of Common Stock owned by such stockholder plus the number of shares of Common Stock that such stockholder would receive upon the exercise of currently exercisable options held by such stockholder by (ii) the sum of the total number of outstanding shares of Common Stock plus the total number of shares issuable upon exercise of exercisable options. (2) Based on 10,175,932 shares outstanding as of July 28, 1998. Assumes no exercise by the underwriters of their over-allotment options. (3) Includes shares that may be acquired upon exercise of stock options that are exercisable within 60 days of the date of this Prospectus. (4) Includes 3,000 shares owned by Mr. Zoffinger's wife. Mr. Zoffinger disclaims beneficial ownership of these 3,000 shares. (5) Includes 167,500 shares that may be acquired upon exercise of stock options that are exercisable within 60 days of the date of this Prospectus. (6) Matthew S. Barrett, Managing Director of Oaktree Capital Management, LLC since April, 1995, was formerly a director of the Company from January, 1998 to March, 1998. 56 59 DESCRIPTION OF CAPITAL STOCK The Company's Second Amended and Restated Certificate of Incorporation (the "Certificate") authorizes 30,000,000 shares of Common Stock, $.01 par value, and no shares of preferred stock. As of July 28, 1998, 10,175,932 shares of Common Stock were issued and outstanding and, based on information provided by the Company's transfer agent, held by 742 holders of record. To the extent prohibited by the Bankruptcy Code, the Company may not issue non-voting equity securities. Holders of Common Stock are entitled to receive dividends as declared from time to time by the Board of Directors out of funds legally available therefor. In the event of a liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities subject to prior distribution rights of any preferred stock then outstanding. The Common Stock has no preemptive or conversion rights and is not subject to further calls or assessments by the Company. There are no redemption or sinking fund provisions applicable to the Common Stock. All currently outstanding Common Stock of the Company is duly authorized, validly issued, fully paid and nonassessable. The holders of Common Stock are entitled to one vote per share on all matters to be voted upon by the stockholders, and do not have the right to vote cumulatively in the election of Directors. The Board of Directors presently consists of seven members. All Directors hold office for a term of one year and until their successor is duly elected and qualified. Any Director may be removed, with or without cause, by the affirmative vote of a majority of the voting power of all shares of the Company entitled to vote generally in the election of Directors. In general, the Certificate can be amended by the affirmative vote of a majority of the Company's then outstanding shares having voting power thereon. Special meetings of stockholders may be called only by the Chief Executive Officer, by a majority of the Board of Directors or by the holders of 33 1/3% of the voting power of all shares of the Company entitled to vote generally in the election of Directors. The Amended and Restated By-Laws of the Company (the "By-Laws") provide that in order for a stockholder to properly bring nominations or other business before an annual meeting, the stockholder must give timely, written notice thereof in the manner specified in the By-Laws to the Company and such other business must be a proper matter for stockholder action. To be timely, a stockholder's notice generally must be delivered to the Secretary of the Company at its principal executive offices not less than 70 nor more than 90 days prior to the first anniversary of the preceding year's annual meeting. If the Company has not publicly announced the date of the annual meeting at least 80 days prior to the first anniversary of the preceding year's meeting, a stockholder's notice will be timely if delivered no later than the close of business on the tenth day following the date of such public announcement. The Common Stock is currently traded on the OTC Bulletin Board. The Company has applied for quotation of the Common Stock on the Nasdaq National Market System under the symbol "CMLT." THE DELAWARE BUSINESS COMBINATION ACT Section 203 of the General Corporation Law of the State of Delaware (the "Delaware Business Combination Act") imposes a three-year moratorium on business combinations between a Delaware corporation and an "interested stockholder" (in general, a stockholder owning 15% or more of a corporation's outstanding voting stock) or an affiliate or associate thereof unless (a) prior to the interested stockholder becoming such, the board of directors of the corporation approved either the business combination or the transaction resulting in the interested stockholder becoming such; (b) upon consummation of the transaction resulting in the interested stockholder becoming such, the interested stockholder owns 85% of the voting stock outstanding at the time the transaction commenced (excluding from the calculation of outstanding shares beneficially owned by directors who are also officers and certain employee benefit plans); or (c) on or after the interested stockholder becomes such, the business combination is approved by (i) the board of directors and (ii) the holders of at least 66 2/3% of the outstanding shares (other than those beneficially owned by the interested stockholder) at a meeting of stockholders. The Delaware Business Combination Act defines the term "Business Combination" to encompass a wide variety of transactions with, or caused by, an interested stockholder in which the interested stockholder receives or could receive a benefit on other than a pro rata basis with other stockholders. These transactions include 57 60 mergers, certain asset sales, certain issuances of additional shares to the interested stockholder, transactions with the Company which increase the proportionate interest of the interested stockholder or transactions in which the interested stockholder receives certain other benefits. By a provision in its original certificate of incorporation or an amendment thereto or to its by-laws adopted by a majority of the shares entitled to vote thereon, a corporation may elect not to be governed by the Delaware Business Combination Act (provided that any amendment to the certificate of incorporation will not become effective until 12 months after its adoption). The Company has not made such an election and, as a result of the quotation of its shares of Common Stock on the Nasdaq National Market System, the Company will become subject to the Delaware Business Combination Act subsequent to the Offerings. CANCELLATION OF CAPITAL STOCK OUTSTANDING PRIOR TO THE PLAN EFFECTIVE DATE Under the terms of the Plan of Reorganization, all authorized capital stock of the Company existing immediately prior to the Plan Effective Date, whether issued or unissued, and including any right to acquire such capital stock pursuant to any agreement, arrangement, or understanding, or upon exercise of conversion rights, exchange rights, warrants, options or other rights, was deemed canceled and of no further force or effect without any action on the part of the Board of Directors. The holders of such cancelled capital stock and any cancelled right to acquire such stock have no rights arising from or relating to such capital stock (or the stock certificates representing such cancelled stock) or any right to acquire such capital stock. DIRECTOR LIABILITY As permitted by the Delaware General Corporation law, the Certificate contains a provision which under certain circumstances eliminates the personal liability of the directors of the Company to the Company or its stockholders, in their capacity as directors of the Company, for monetary damages for the breach of fiduciary duty as a director. The provision in the Certificate does not change a Director's duty of care, but it does eliminate the possibility of monetary liability for certain violations of that duty, including violations based on grossly negligent business decisions. The provision does not affect the availability of equitable remedies for a breach of the duty of care, such as an action to enjoin or rescind a transaction involving a breach of fiduciary duty; however, in certain circumstances equitable remedies may not be available as a practical matter. The provision in the Certificate does not in any way affect a Director's liability under the federal securities laws. In addition, the By- Laws indemnify its past and present directors for and provide advancements in respect of any expense, liability or loss incurred in connection with any threatened, pending or completed action, suit or proceeding by an individual by reason of the fact that he is or was a director or officer of the Company or serving at the request of the Company in another capacity. The Company has also entered into indemnity agreements pursuant to which it has agreed, among other things, to indemnify its Directors for settlements in derivative actions. ANTI-TAKEOVER EFFECT OF CERTAIN BY-LAW PROVISIONS It is possible that the provisions of the Company's By-Laws that require stockholders to provide advance notice of nominations of Directors and other business to be brought before an annual meeting may tend to discourage a proxy contest or other takeover bid for the Company. The provisions of the Delaware Business Combination Statute also may discourage other companies from making a tender offer for, or acquisitions of substantial amounts of, the Company's Common Stock. This could have an incidental effect of inhibiting changes in management and may also prevent temporary fluctuations in the market price of the Company's Common Stock which often result from actual or rumored takeover attempts. In addition, the provisions of the Certificate eliminating certain liabilities of Directors, the indemnification provisions of the By-Laws and the indemnity agreements may have the effect of reducing the likelihood of derivative litigation against Directors and to deter stockholders from bringing a lawsuit against Directors for breach of their duty of care, even though such an action, if successful, might otherwise have benefited the Company and the stockholders. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is The Bank of New York. 58 61 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offerings, of the 30,000,000 authorized shares of Common Stock, 10,177,662 shares are anticipated to be outstanding. Of these 10,177,662 shares of Common Stock, the shares purchased in the Offerings by persons who are not "affiliates" of the Company will be freely tradable, without restriction under the Securities Act. In addition, the 9,835,559 shares of Common Stock issued on the Plan Effective Date and the 328,873 shares of Common Stock issued pursuant to the Plan of Reorganization since the Plan Effective Date were issued pursuant to the exemption from the registration requirements of the Securities Act (and of any state or local laws) provided by Section 1145(a)(1) of the Bankruptcy Code. At August 1, 1998, up to an additional 1,730 shares of Common Stock may be issued by the Company pursuant to the Plan of Reorganization. All shares of Common Stock issued pursuant to the Plan of Reorganization may be resold by the holders thereof without registration unless, as more fully described below, any such holder is deemed to be an "underwriter" with respect to such securities, as defined in Section 1145(b)(1) of the Bankruptcy Code. Generally, Section 1145(b)(1) defines an "underwriter" as any person who (a) purchases a claim against, interest in, or claim for an administrative expense in the case concerning, the debtor, if such purchase is with a view to distribution of any security received or to be received in exchange for such claim or interest, (b) offers to sell securities offered or sold under the plan for the holders of such securities, (c) offers to buy securities offered or sold under the plan from the holders of such securities, if such offer to buy is made with a view to distribution of such securities and under an agreement made in connection with the plan, with the consummation of the plan or with the offer or sale of securities under the plan or (d) is an "issuer" as such term is used in Section 2(11) of the Securities Act with respect to the securities. Although the definition of the term "issuer" appears in Section 2(4) of the Securities Act, the reference (contained in Section 1145(b)(1)(D) of the Bankruptcy Code) to Section 2(11) of the Securities Act purports to include as "underwriters" all persons who directly or indirectly, through one or more intermediaries, control, are controlled by or are under common control with, an issuer of securities. "Control" (as such term is defined in Rule 405 of Regulation C under the Securities Act) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise. The following holders of Common Stock who, due to the magnitude of their holdings as of the Plan Effective Date, may be deemed to be "underwriters" pursuant to Section 1145(b) of the Bankruptcy Code, are parties with the Company to the Registration Rights Agreement, affording them certain demand and piggyback registration and other rights, all as more fully set forth therein and as described below: Van Kampen - Merritt Prime Rate Income Trust; Fernwood Associates, L.P.; Merrill Lynch, Pierce, Fenner & Smith Incorporated; and Oaktree Capital Management LLC (in its capacity as general partner and investment manager of OCM Opportunities Fund, L.P. and Columbia/HCA Master Retirement Trust) (collectively the "Securities Holders" and individually a "Security Holder"). These four stockholders have agreed not to sell their shares for 180 days after the date hereof. On May 5, 1998, an additional 10,000 shares of Common Stock were issued pursuant to an order of the Bankruptcy Court to certain persons for their significant contributions to the bankruptcy case. The Company believes that shares of Common Stock currently may be sold pursuant to Rule 144 under the Securities Act in compliance with the resale volume limitations of Rule 144. These volume limitations will apply only if and as long as the holders of these shares are "affiliates" of the Company for purposes of Rule 144. In general, under Rule 144 under the Securities Act as currently in effect, a person (or persons whose shares must be aggregated), including a person who may be deemed an "affiliate" of the Company, who has beneficially owned "restricted securities" for at least one year, may sell within any three month period that number of shares that does not exceed the greater of 1% of the then outstanding shares of the Common Stock or the reported average weekly trading volume of the then outstanding shares of Common Stock for the four weeks preceding each such sale. The sales under Rule 144 also are subject to certain manner of sale restrictions and notice requirements and to the availability of current public information about the Company. In addition, a person (or persons whose shares must be aggregated) who owns restricted securities, who is not deemed an "affiliate" of the Company at any time during the 90 days preceding a sale and who acquired such shares at least two years prior to their resale, is entitled to sell such shares under Rule 144(k) without regard to the foregoing requirements. Sales of restricted securities by affiliates of the Company, even after the two-year holding period, must continue to be made in broker's transactions subject to the volume limitations described 59 62 above. As defined in Rule 144, an "affiliate" of an issuer is a person that directly, or indirectly through the use of one or more intermediaries, controls, or is controlled by, or is under common control with, such issuer. Up to 947,094 shares of Common Stock reserved for issuance upon exercise of outstanding options will become eligible for resale under Rule 144 one year subsequent to the date or dates that the holders of such options exercise the same. Subsequent to the Offerings, however, the Company intends to file a registration statement on Form S-8 with respect to the 734,000 shares of Common Stock reserved for issuance upon exercise of outstanding options and the 213,094 shares of Common Stock reserved for issuance pursuant to future option grants. REGISTRATION RIGHTS AGREEMENT Pursuant to the Registration Rights Agreement, any Securities Holder or Securities Holders may, subject to certain limitations, require the Company to file a registration statement with respect to some or all of the Common Stock held by such Securities Holder or Holders (subject to minimum threshold requirements); provided, that no more than two demands may be made during the First Phase (a period of approximately 15 months after January 27, 1998); and provided, further, that if, during the First Phase, the initial demand registration is a shelf registration, no further demands may be made during the First Phase. During the First Phase, the minimum threshold requirement is 10% of the outstanding Common Stock for demand registration and 15% for shelf registration. In the event of a demand registration, the non-requesting Securities Holders and the Company would enjoy "piggy-back" rights with respect to such demand registration, allowing them to participate in the registration on the same terms and conditions as the initiating Securities Holder or Holders; provided that, if marketing factors require a limitation on the number of shares offered, first shares being offered by the Company and then shares offered by piggy-backing stockholders would be reduced. In addition, if the Company offers Common Stock pursuant to a registration statement (other than a registration on Form S-4 or S-8), the Securities Holders would enjoy similar piggy-back rights; provided, that if marketing factors require a limitation on the number of shares offered, the shares being offered by the piggy-backing stockholders would be reduced. The Securities Holders also enjoy the right to participate in private sales of Common Stock by the Company (other than private sales in connection with an acquisition or compensation plan); provided that, if marketing factors require a limitation on the number of shares offered, the shares being offered by the piggy-backing stockholders would be reduced. Subject to certain exceptions, the Company will bear all of its own expenses, and certain expenses incurred by the Securities Holders (including reasonable fees and disbursements of counsel), in connection with any registration of Common Stock pursuant to the Registration Rights Agreement. In addition, the Company will indemnify the Securities Holders for certain liabilities, including liabilities under the Securities Act, in connection with any such registration. In addition, pursuant to the Registration Rights Agreement, if the Company offers stock pursuant to a registration statement, none of the Securities Holders can exercise their demand registration rights during the period beginning on the date the Company issued notice of its intent to file a registration statement and ending 90 days after the closing date of the related offering. In addition, none of the Securities Holders can offer to sell their shares pursuant to a demand registration during the 90-day period following receipt by each Securities Holder of a certificate of an officer of the Company to the effect that the Board of Directors of the Company has in good faith and for valid business reasons requested that the Securities Holders refrain from selling their shares; provided, however, that the identity of a potential purchaser from a Securities Holder shall not constitute a valid business reason. LOCK-UP AGREEMENTS The Company, its Directors and executive officers, members of management, the Selling Stockholders and certain other holders of shares of Common Stock have agreed, subject to certain exceptions, not to directly or indirectly (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of or otherwise dispose of or transfer any shares of Common Stock or securities convertible into or exchangeable or exercisable for Common Stock, whether now owned or thereafter acquired by the person executing the agreement or with respect to which the person executing the agreement thereafter acquires the power of disposition, or file a registration statement under 60 63 the Securities Act with respect to the foregoing or (ii) enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of the Common Stock whether any such swap or transaction is to be settled by delivery of Common Stock or other securities, in cash or otherwise, without the prior consent of Merrill Lynch on behalf of the Underwriters for a period of 180 days after the date of this Prospectus. No prediction can be made as to the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock (including shares issued upon the exercise of the outstanding stock options), or the perception that such sales could occur, could adversely affect the prevailing market prices for the Common Stock. 61 64 DESCRIPTION OF CERTAIN INDEBTEDNESS The summary of the Amended Credit Facility contained herein does not purport to be complete and is qualified in its entirety by reference to the provisions of the Amended Credit Facility, a copy of which will be filed as an exhibit to the Registration Statement of which this Prospectus is a part. CMI, a wholly owned subsidiary of the Company, entered into the New Working Capital Facility, dated as of January 27, 1998, among Camelot Music, Inc., as Borrower, Bank of America National Trust and Savings Association, First Union National Bank, Societe Generale, Van Kampen American Capital Prime Rate Income Trust and The Chase Manhattan Bank, as lenders, and The Chase Manhattan Bank, as Agent. The Company has guaranteed CMI's obligations under the facility. On June 12, 1998, the Company signed the Amended Credit Facility. The Amended Credit Facility provides for loans of up to $50.0 million during the peak period (October through December) and up to $35.0 million during the non-peak period (including in each case up to $5.0 million of letters of credit issued by the Agent). In no case can the amount of loans exceed the borrowing base. The Amended Credit Facility provides a borrowing base set at the lesser of the commitments from the lenders or 60% of eligible inventory during all periods. In Fiscal 1997, eligible inventory during the peak period ranged between approximately $103 million and $139 million, while eligible inventory during the non-peak period ranged between $96 million and $121 million. The Amended Credit Facility also provides the Company with a $25.0 million term loan in addition to the working capital facility. The $25.0 million term loan provided most of the cash financing necessary to complete the Spec's Acquisition. The term loan provided under the Amended Credit Facility will be amortized in semi-annual installments over a three-year period beginning January 31, 1999. The amortization payments will be $3.0 million, $2.0 million, $6.0 million, $4.0 million, $6.0 million and $4.0 million. The Amended Credit Facility will terminate on January 27, 2002. CMI's obligations under the Amended Credit Facility are guaranteed by the Company and by all of CMI's subsidiaries and are collateralized by substantially all of CMI's and its subsidiaries' assets. The Company has pledged to the lenders its capital stock of CMI, and CMI has pledged to the lenders the capital stock of its subsidiaries. Interest Rate Under the Amended Credit Facility loans bear interest, at the option of CMI, at either (a) the Eurodollar Rate (as defined) plus 1.75% or (b) the greater of (i) the Prime Rate charged by the Agent, (ii) the Base CD Rate (as defined) plus 1% and (iii) the Federal Funds Effective Rate (as defined) plus 1/2 of 1%. CMI also pays an annual commitment fee of 3/8 of 1% on the available commitment. CMI is required to use any excess proceeds from asset sales of more than $750,000 first to prepay the term loan and second to reduce the commitments under the revolving credit facility. In addition, CMI is required for 45 consecutive days during each year to reduce the principal amount of all outstanding working capital loans to zero. Covenants The Amended Credit Facility limits the ability of the Company and its subsidiaries to incur additional indebtedness, except (a) existing indebtedness, (b) indebtedness incurred under the Amended Credit Facility, (c) certain indebtedness pursuant to financing leases incurred to acquire, install and implement POS systems and pursuant to other financing leases, (d) intercompany indebtedness, (e) certain indebtedness incurred to finance the acquisition of fixed or capital assets (up to $5.0 million at any time outstanding), (f) certain additional indebtedness, and (g) certain indebtedness of other persons who become parties to the facility or assumed in connection with certain permitted acquisitions or mergers, provided that the indebtedness incurred under (e) and (f) (together with certain permitted contingent obligations) is limited in the aggregate outstanding amount at any given time. In addition, the Company and its subsidiaries are subject to additional negative covenants, including, subject to exceptions, covenants limiting (i) the incurrence or creation of liens, (ii) the incurrence or creation of contingent obligations and similar guarantees, (iii) any merger, consolidation, sale of all or substantially all of its property or other fundamental changes, (iv) sales of its property or assets, including capital stock of its subsidiaries, (v) investments, loans, advances and purchases of securities, (vi) the amounts of capital expenditures 62 65 (e.g., limits of $20.0 million in 1998 (with an additional $8.0 million allowable for POS system expenditures) and $25.0 million in 1999), (vii) the payment of dividends or making payments for the purchase, redemption, retirement or other acquisition of any shares of capital stock, (viii) transactions with affiliates, (ix) changes in the Company's fiscal year and (x) changes in the Company's line of business. In connection with the payment of dividends, the facility provides that the Company can pay cash dividends during any fiscal year to the holders of its capital stock in an amount not to exceed 30% of consolidated net income for the preceding fiscal year, provided that after payment of such dividends there remains borrowing capacity under the revolving credit facility of more than $40.0 million during peak periods and $25.0 million during non-peak periods. The Amended Credit Facility also requires consolidated EBITDA to be at least $32.0 million annually and require the Company to maintain trade credit in amounts and on terms at least as favorable as those included in the Company's budget. The Company must also maintain a system of cash management consistent with its currently existing cash management system which concentrates in one concentration account at least three times each week all funds received and used in the Company's business. The Company expects that it will be able to comply with these covenants for the foreseeable future. Events of Default The Amended Credit Facility includes standard events of default, including, subject to exceptions, those related to (i) defaults in the payment of principal and interest, (ii) materially incorrect representations and warranties, (iii) defaults in the observance or performance of any of the affirmative or negative covenants included in the facility or in the related security and pledge documents, (iv) cross defaults on other indebtedness of more than $1.0 million, (v) certain events of bankruptcy, (vi) certain ERISA events, (vii) certain judgments or decrees involving more than $1.0 million, (viii) the failure of the facility and related documents to be in full force and effect, (ix) CMI ceasing to own all of its subsidiaries or the Company ceasing to own all of CMI, and (x) any person (other than certain permitted holders), singly or in concert with one or more other persons, acquiring or having the power to vote or direct the voting of, 35% or more of the outstanding Common Stock of the Company on a fully diluted basis. 63 66 CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES FOR NON-UNITED STATES HOLDERS The following is a general discussion of certain United States federal tax consequences of the acquisition, ownership and disposition of Common Stock by a Non-United States Holder. This discussion is based upon the United States federal tax law now in effect, which is subject to change, possibly retroactively. For purposes of this discussion, a "Non-United States Holder' means a holder other than a citizen or resident of the United States; a corporation, a partnership or other entity created or organized in the United States or under the laws of the United States or of any political subdivision thereof; or an estate or trust whose income is includible in gross income for United States federal income tax purposes regardless of its source. This discussion does not address aspects of United States federal taxation other than income and estate taxation and does not address all aspects of income and estate taxation or any aspects of state, local, or non-United States taxes. This discussion does not consider any specific facts or circumstances that may apply to a particular Non-United States Holder (including certain United States expatriates). Prospective investors are urged to consult their tax advisors regarding the United States federal tax consequences of acquiring, holding and disposing of Common Stock, as well as any tax consequences that may arise under the laws of any foreign, state, local or other taxing jurisdiction. DIVIDENDS Dividends paid to a Non-United States Holder will generally be subject to withholding of United States Federal income tax at the rate of 30% (or at a reduced tax treaty rate), unless the dividend is effectively connected with the conduct of a trade or business within the United States by the Non-United States Holder, in which case the dividend will be subject to the United States federal income tax on net income on the same basis that applies to United States persons generally. In the case of a Non-United States Holder which is a corporation, such effectively connected income also may be subject to the branch profits tax. Non-United States Holders should consult their tax advisors concerning any applicable income tax treaties that may provide for a lower rate of withholding or other rules different from those described above. Under currently effective United States Treasury regulations (the "Current Regulations"), dividends paid to an address in a foreign country are presumed to be paid to a resident of that country (unless the payor has knowledge to the contrary) for purposes of the withholding discussed above and, under the current interpretation of United States Treasury regulations, for purposes of determining the applicability of a tax treaty rate. Under United States Treasury regulations issued on October 6, 1997 (the "Final Regulations") generally effective for payments made after December 31, 1999, a Non-United States Holder (including, in certain cases of Non-United States Holders that are fiscally transparent entities, the owner or owners of such entities) will be required to provide to the payor certain documentation that such Non-United States Holder (or the owner or owners of such fiscally transparent entities) is a resident of the relevant country in order to claim a reduced rate of withholding pursuant to an applicable income tax treaty. GAIN ON DISPOSITION A Non-United States Holder will generally not be subject to United States federal income tax on gain recognized on a sale or other disposition of Common Stock unless (i) the gain is effectively connected with the conduct of a trade or business within the United States by the Non-United States Holder, (ii) in the case of a Non-United States Holder who is a nonresident alien individual and holds the Common Stock as a capital asset, such holder is present in the United States for 183 or more days in the taxable year of disposition and either such individual has a "tax home" in the United States or the gain is attributable to an office or other fixed place of business maintained by such individual in the United States or (iii) the Company is or has been a "U.S. real property holding corporation" for United States federal income tax purposes (which the Company does not believe that it is or is likely to become). Gain that is effectively connected with the conduct of a trade or business within the United States by the Non-United States Holder will be subject to the United States Federal income tax on net income on the same basis that applies to United States persons generally (and, with respect to corporate holders, under certain circumstances, the branch profits tax) but will not be subject to withholding. Non-United States Holders should consult their own tax advisors concerning any applicable treaties that may provide for different rules. If the Company were or were to become a U.S. real property holding corporation at any time 64 67 during this period, gains realized upon a disposition of Common Stock by a Non-United States Holder which did not directly or indirectly own more than 5% of the Common Stock during this period generally would not be subject to United States federal income tax, provided that the Common Stock is regularly traded on an established securities market. FEDERAL ESTATE TAXES Common Stock owned or treated as owned by an individual who is not a citizen or resident (for United States estate tax purposes) of the United States at the date of death will be included in such individual's estate for United States federal estate tax purposes, unless an applicable estate tax treaty provides otherwise. INFORMATION REPORTING AND BACKUP WITHHOLDING The Company generally must report annually to the IRS and to each Non-United States Holder the amount of dividends paid to, and the tax withheld with respect to, such holder, regardless of whether any tax was actually withheld. This information may also be made available to the tax authorities of a country in which the Non-United States Holder resides. Under the Current Regulations, United States information reporting requirements and backup withholding tax will generally not apply to dividends paid on the Common Stock to a Non-United States Holder at an address outside the United States. Payments by a United States office of a broker of the proceeds of a sale of the Common Stock is subject to both backup withholding at a rate of 31% and information reporting unless the beneficial owner certifies its Non-United States Holder status under penalties of perjury or otherwise establishes an exemption. Information reporting requirements (but not backup withholding) will also apply to payments of the proceeds of sales of the Common Stock by foreign offices of United States brokers, or foreign brokers with certain types of relationships to the United States, unless the broker has documentary evidence in its records that the beneficial owner is a Non-United States Holder (and the broker does not have knowledge to the contrary) and certain other conditions are met, or the beneficial owner otherwise establishes an exemption. Under the Final Regulations, the payment of dividends or the payment of proceeds from the disposition of Common Stock to a Non-United States Holder may be subject to information reporting and backup withholding unless such recipient provides to the payor certain documentation as to its status as a Non-United States Holder or otherwise establishes an exemption. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will, in certain circumstances, be refunded or credited against the Non-United States Holder's United States federal income tax liability, provided that the required information is furnished to the IRS. 65 68 UNDERWRITING Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Morgan Stanley & Co. Incorporated and McDonald & Company Securities, Inc. are acting as representatives (the "U.S. Representatives") of each of the Underwriters named below (the "U.S. Underwriters"). Subject to the terms and conditions set forth in a U.S. purchase agreement (the "U.S. Purchase Agreement") among the Company, CMI, the Selling Stockholders and the U.S. Underwriters, and concurrently with the sale of shares of Common Stock to the International Managers (as defined below), the Selling Stockholders have agreed to sell to the U.S. Underwriters, and each of the U.S. Underwriters severally and not jointly has agreed to purchase from the Selling Stockholders, the number of shares of Common Stock set forth opposite its name below.
NUMBER OF U.S. UNDERWRITER SHARES ---------------- ----------- Merrill Lynch, Pierce, Fenner & Smith Incorporated.............................. Morgan Stanley & Co. Incorporated...................... McDonald & Company Securities, Inc..................... ----------- Total..................................... ===========
The Company, CMI and the Selling Stockholders have also entered into an international purchase agreement (the "International Purchase Agreement") with certain underwriters outside the United States and Canada (the "International Managers" and, together with the U.S. Underwriters, the "Underwriters") for whom Merrill Lynch International, Morgan Stanley & Co. International Limited and McDonald & Company Securities, Inc are acting as lead managers (the "Lead Managers"). Subject to the terms and conditions set forth in the International Purchase Agreement, and concurrently with the sale of shares of Common Stock to the U.S. Underwriters pursuant to the U.S. Purchase Agreement, the Selling Stockholders have agreed to sell to the International Managers, and the International Managers severally have agreed to purchase from the Selling Stockholders, an aggregate of shares of Common Stock. The initial public offering price per share and the total underwriting discount per share of Common Stock are identical under the U.S. Purchase Agreement and the International Purchase Agreement. In the U.S. Purchase Agreement and the International Purchase Agreement, the several U.S. Underwriters and the several International Managers, respectively, have agreed, subject to the terms and conditions set forth therein, to purchase all of the shares of Common Stock being sold pursuant to each such agreement if any of the shares of Common Stock being sold pursuant to such agreement are purchased. Under certain circumstances, under the U.S. Purchase Agreement and the International Purchase Agreement, the commitments of non-defaulting Underwriters may be increased. The closings with respect to the sale of shares of Common Stock to be purchased by the U.S. Underwriters and the International Managers are conditioned upon one another. The U.S. Representatives have advised the Company and the Selling Stockholders that the U.S. Underwriters propose initially to offer the shares of Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus, and to certain dealers at such price less a concession not in excess of $ per share of Common Stock. The U.S. Underwriters may allow, and such dealers may reallow, a discount not in excess of $ per share of Common Stock on sales to certain other dealers. After the initial public offering, the public offering price, concession and discount may be changed. The Selling Stockholders have granted options to the U.S. Underwriters, exercisable for 30 days after the date of this Prospectus, to purchase up to an aggregate of additional shares of Common 66 69 Stock at the initial public offering price set forth on the cover page of this Prospectus, less the underwriting discount. The U.S. Underwriters may exercise these options solely to cover over-allotments, if any, made on the sale of the Common Stock offered hereby. To the extent that the U.S. Underwriters exercise these options, each U.S. Underwriter will be obligated, subject to certain conditions, to purchase a number of additional shares of Common Stock proportionate to such U.S. Underwriter's initial amount reflected in the foregoing table. The Selling Stockholders also have granted options to the International Managers, exercisable for 30 days after the date of this Prospectus, to purchase up to an aggregate of additional shares of Common Stock to cover over-allotments, if any, on terms similar to those granted to the U.S. Underwriters. At the request of the Company, the Underwriters have reserved for sale, at the initial public offering price, up to of the shares offered to be sold to certain employees of the Company and vendors and service providers having business relationships with the Company. The number of shares of Common Stock available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares which are not orally confirmed for purchase within one day of the pricing of the Offerings will be offered by the Underwriters to the general public on the same terms as the other shares offered hereby. The Company, its directors and executive officers, members of management, the Selling Stockholders and certain holders of the Common Stock have agreed, subject to certain exceptions, not to directly or indirectly (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of or otherwise dispose of or transfer any shares of Common Stock or securities convertible into or exchangeable or exercisable for Common Stock, whether now owned or thereafter acquired by the person executing the agreement or with respect to which the person executing the agreement thereafter acquires the power of disposition, or file a registration statement under the Securities Act with respect to the foregoing or (ii) enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of the Common Stock whether any such swap or transaction is to be settled by delivery of Common Stock or other securities, in cash or otherwise, without the prior consent of Merrill Lynch on behalf of the Underwriters for a period of 180 days after the date of this Prospectus. See "Shares Eligible for Future Sale." The U.S. Underwriters and the International Managers have entered into an intersyndicate agreement (the "Intersyndicate Agreement") that provides for the coordination of their activities. Pursuant to the Intersyndicate Agreement, the U.S. Underwriters and the International Managers are permitted to sell shares of Common Stock to each other for purposes of resale at the initial public offering price, less an amount not greater than the selling concession. Under the terms of the Intersyndicate Agreement, the U.S. Underwriters and any dealer to whom they sell shares of Common Stock will not offer to sell or sell shares of Common Stock to persons who are non-U.S. or non-Canadian persons or to persons they believe intend to resell to persons who are non-U.S. or non-Canadian persons, and the International Managers and any dealer to whom they sell shares of Common Stock will not offer to sell or sell shares of Common Stock to U.S. persons or to Canadian persons or to persons they believe intend to resell to U.S. or Canadian persons, except in the case of transactions pursuant to the Intersyndicate Agreement. Prior to the Offerings, there has been a limited public market for the Common Stock of the Company. The initial public offering price will be determined through negotiations among the Selling Stockholders and the U.S. Representatives and the Lead Managers. The factors considered in determining the initial public offering price, in addition to prevailing market conditions, are price-earnings ratios of publicly traded companies that the U.S. Representatives believe to be comparable to the Company, certain financial information of the Company, the history of, and the prospects for, the Company and the industry in which it competes, and an assessment of the Company's management, its past and present operations, the prospects for, and timing of, future revenues of the Company, the present state of the Company's development, and the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to the Company. There can be no assurance that an active market will develop for the Common Stock or that the Common Stock will trade in the public market subsequent to the Offerings at or above the public offering price. The Common Stock is currently traded on the OTC Bulletin Board. The Company has applied for quotation of the Common Stock on the Nasdaq National Market System under the symbol "CMLT." 67 70 Because Merrill Lynch may be deemed to be an affiliate of the Company, the Offerings will be conducted in accordance with Conduct Rule 2720 of the National Association of Securities Dealers, Inc., which requires that the public offering price of an equity security be no higher than the price recommended by a Qualified Independent Underwriter which has participated in the preparation of the Registration Statement and performed its usual standard of due diligence with respect thereto. McDonald & Company Securities, Inc. has agreed to act as Qualified Independent Underwriter with respect to the Offerings, and the public offering price of the Common Stock will be no higher than that recommended by McDonald & Company Securities, Inc. The Underwriters do not intend to confirm sales of the Common Stock offered hereby to any accounts over which they exercise discretionary authority. The Company and the Selling Stockholders have agreed to indemnify the U.S. Underwriters and the International Managers against certain liabilities, including certain liabilities under the Securities Act, or to contribute to payments the U.S. Underwriters and the International Managers may be required to make in respect thereof. Until the distribution of the Common Stock is completed, rules of the Securities and Exchange Commission may limit the ability of the Underwriters and certain selling group members to bid for and purchase the Common Stock. As an exception to these rules, the U.S. Representatives are permitted to engage in certain transactions that stabilize the price of the Common Stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Common Stock. If the Underwriters create a short position in the Common Stock in connection with the Offerings, i.e., if they sell more shares of Common Stock than are set forth on the cover page of this Prospectus, the U.S. Representatives may reduce the short position by purchasing Common Stock in the open market. The U.S. Representatives may also elect to reduce any short position by exercising all or part of the over-allotment option described above. The U.S. Representatives may also impose a penalty bid on certain Underwriters and selling group members. This means that if the U.S. Representatives purchase shares of Common Stock in the open market to reduce the Underwriters' short position or to stabilize the price of the Common Stock, they may reclaim the amount of the selling concession from the Underwriters and selling group members who sold those shares as part of the Offerings. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of the Common Stock to the extent that it discourages resales of Common Stock. Neither the Company nor any of the Underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Common Stock. In addition, neither the Company nor any of the Underwriters makes any representation that the U.S. Representatives will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. Merrill Lynch, a co-manager of the Offerings, is also a Selling Stockholder and will receive a portion of the proceeds of the Offerings. Morgan Stanley & Co. Incorporated, a co-manager of the Offerings, is under common ownership with Van Kampen-Merritt Prime Rate Income Trust, which is the largest stockholder of the Company. LEGAL MATTERS Certain legal matters with respect to the validity of the Common Stock offered hereby will be passed upon for the Company by Calfee, Halter & Griswold LLP, Cleveland, Ohio. Calfee, Halter & Griswold LLP provides legal services to McDonald & Company Securities, Inc. on a regular basis. Certain legal matters relating to the Offerings will be passed upon for the Underwriters by Fried, Frank, Harris, Shriver & Jacobson (a partnership including professional corporations), New York, New York. 68 71 EXPERTS The Consolidated Financial Statements of Camelot Music Holdings, Inc. ("Successor Company") as of February 28, 1998 and for the period February 1, 1998 to February 28, 1998 ("Successor period") and of CM Holdings, Inc. ("Predecessor Company") as of March 1, 1997 and for the period March 2, 1997 to January 31, 1998, the 52 week period ended March 1, 1997 and the 53 week period ended March 2, 1996 ("Predecessor periods"), appearing in this Prospectus, have been audited by PricewaterhouseCoopers LLP, independent accountants, as set forth in their report thereon appearing elsewhere in this Prospectus, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The financial statements of The Wall Music, Inc. for the year ended June 1, 1997 included in this Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein (which report expresses an unqualified opinion and includes an explanatory paragraph referring to the sale of substantially all of the tangible assets and the transfer of certain liabilities of The Wall Music, Inc. effective February 28, 1998), and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. AVAILABLE INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 (together with all amendments, schedules and exhibits thereto, the "Registration Statement") under the Securities Act with respect to the Common Stock offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement, certain portions of which are omitted as permitted by the rules and regulations of the Commission. For further information pertaining to the Company and the Common Stock offered hereby, reference is made to the Registration Statement, including the exhibits thereto and the financial statements, notes and schedules filed as a part thereof. Statements made in this Prospectus regarding the contents of any contract or other document referred to herein or therein are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement or such other document, each such statement being qualified in all respects by such reference. Upon completion of the Offerings, the Company will be subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and, in accordance therewith, will file reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information, as well as the Registration Statement and the exhibits and schedules thereto, may be inspected, without charge, at the public reference facility maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C., 20549 and at the Commission's regional offices located at Seven World Trade Center, Suite 1300, New York, NY 10048 and Northwestern Atrium Center, 500 West Madison Street, Room 1400, Chicago, IL 60661-2511. Copies of such material may also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such materials can also be inspected at the offices of the Nasdaq National Market System at 1735 K Street, N.W., Washington, D.C. 20006 or on the Commission's site on the Internet at http://www.sec.gov. The Company intends to furnish its stockholders with annual reports containing audited financial statements for each fiscal year and interim reports for each of the first three quarters of its fiscal year containing unaudited interim financial information. 69 72 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- CAMELOT MUSIC HOLDINGS, INC. AND ITS PREDECESSOR Condensed Consolidated Balance Sheet (Unaudited) as of May 30, 1998.................................................. F-2 Condensed Consolidated Statements of Operations (Unaudited) for the period March 1, 1998 to May 30, 1998 and the period March 2, 1997 to May 31, 1997...................... F-3 Condensed Consolidated Statements of Cash Flows (Unaudited) for the period March 1, 1998 to May 30, 1998 and the period March 2, 1997 to May 31, 1997...................... F-4 Notes to Condensed Consolidated Financial Statements........ F-5 Report of Independent Accountants........................... F-8 Consolidated Balance Sheets as of February 28, 1998 and March 1, 1997............................................. F-9 Consolidated Statements of Operations for the period February 1, 1998 to February 28, 1998, the period March 2, 1997 to January 31, 1998, the 52 week period ended March 1, 1997 and the 53 week period ended March 2, 1996........ F-10 Consolidated Statements of Stockholders' Equity (Deficit) for the period February 1, 1998 to February 28, 1998, the period March 2, 1997 to January 31, 1998, the 52 week period ended March 1, 1997 and the 53 week period ended March 2, 1996............................................. F-11 Consolidated Statements of Cash Flows for the period February 1, 1998 to February 28, 1998, the period March 2, 1997 to January 31, 1998, the 52 week period ended March 1, 1997 and the 53 week period ended March 2, 1996........ F-12 Notes to Consolidated Financial Statements.................. F-13 THE WALL MUSIC, INC. Independent Auditor's Report................................ F-38 Statements of Operations for the nine months ended February 28, 1998 (unaudited) and March 1, 1997 (unaudited) and for the year ended June 1, 1997............................... F-39 Statements of Stockholder's Equity for the nine months ended February 28, 1998 (unaudited) and for the year ended June 1, 1997................................................... F-40 Statements of Cash Flows for the nine months ended February 28, 1998 (unaudited) and March 1, 1997 (unaudited) and for the year ended June 1, 1997............................... F-41 Notes to Financial Statements............................... F-42
F-1 73 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) (IN THOUSANDS OF DOLLARS)
MAY 30, 1998 -------- ASSETS Current assets: Cash and cash equivalents................................. $ 15,680 Accounts payable.......................................... 2,922 Inventories............................................... 176,659 Deferred income taxes..................................... 6,556 Other current assets...................................... 3,098 -------- Total current assets.............................. 204,915 -------- Property, plant and equipment, net.......................... 40,519 -------- Other non-current assets: Goodwill, net of accumulated amortization of $224 in 1998................................................... 26,726 Intangible assets, net of accumulated amortization of $858 in 1998................................................ 1,336 Deferred income taxes..................................... 18,547 Favorable lease values, net of accumulated amortization of $895 in 1998........................................... 11,253 Other assets.............................................. 598 -------- Total other non-current assets.................... 58,460 -------- Total assets...................................... $303,894 ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable, trade................................... $ 62,805 Accrued expenses and other liabilities.................... 27,593 -------- Total current liabilities......................... 90,398 -------- Long-term liabilities: Revolving credit agreement................................ -- Unfavorable lease values, net of accumulated amortization of $987 in 1998........................................ 12,411 Other long-term liabilities............................... 3,393 -------- Total long-term liabilities....................... 15,804 -------- Commitments and contingencies............................... -- -------- Total liabilities................................. 106,202 -------- Stockholders' equity: Common stock.............................................. 102 Additional paid-in capital................................ 194,454 Retained earnings......................................... 3,136 -------- Total stockholders' equity........................ 197,692 -------- Total liabilities and stockholders' equity........ $303,894 ========
The accompanying notes are an integral part of these condensed consolidated financial statements. F-2 74 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) AND CM HOLDINGS, INC. (PREDECESSOR COMPANY) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
SUCCESSOR PREDECESSOR COMPANY COMPANY ------------ ----------- PERIOD PERIOD MARCH 1, MARCH 2, 1998 TO 1997 TO MAY 30, MAY 31, 1998 1997 ------------ ----------- Net sales................................................... $ 113,456 $ 82,815 Cost of sales............................................... 71,147 53,820 ----------- -------- Gross profit.............................................. 42,309 28,995 Selling, general and administrative expenses................ 36,213 26,407 Depreciation and amortization............................... 1,765 5,454 Special items 350 -- ----------- -------- Income (loss) before other income (expenses), net, reorganization expenses and income taxes........ 3,981 (2,866) ----------- -------- Other income (expenses), net: Interest income........................................... 387 -- Interest expense.......................................... (86) (61) Amortization of financing fees............................ (56) (115) Other, net................................................ (68) 46 ----------- -------- Total other income (expenses), net................ 177 (130) ----------- -------- Income (loss) before reorganization expenses and income taxes.................................... 4,158 (2,996) Reorganization expenses..................................... -- (1,113) ----------- -------- Income (loss) before income taxes................. 4,158 (4,109) (Provision) for income taxes: Current................................................... (1,601) -- Deferred.................................................. (2) -- ----------- -------- Total (provision) for income taxes................ (1,603) -- ----------- -------- Net income (loss)................................. $ 2,555 ($ 4,109) =========== ======== Computation of earnings per share: Basic: Average shares outstanding................................ 10,176,162 * =========== ======== Per share.............................................. $ 0.25 * =========== ======== Diluted: =========== ======== Average shares outstanding................................ 10,176,162 * Net effect of dilutive stock options...................... 293,752 * ----------- -------- Total equivalent shares................................ 10,469,914 * =========== ======== Per share............................................ $ 0.24 * =========== ========
- --------------- * Historical per share data for the Predecessor Company is not meaningful since the Company has been recapitalized and has adopted fresh-start reporting as of January 31, 1998. The accompanying notes are an integral part of these condensed consolidated financial statements. F-3 75 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) AND CM HOLDINGS, INC. (PREDECESSOR COMPANY) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS OF DOLLARS)
SUCCESSOR PREDECESSOR COMPANY COMPANY ------------ ------------ PERIOD PERIOD MARCH 1, MARCH 2, 1998 TO 1997 TO MAY 30, 1998 MAY 31, 1997 ------------ ------------ Cash flows from operating activities: Net income (loss)......................................... $ 2,555 $(4,109) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization excluding financing fees.................................................. 1,765 5,454 Amortization of favorable/unfavorable leases........... (92) -- Amortization of financing fees......................... 56 115 Deferred income taxes.................................. 2 -- Changes in assets and liabilities: Accounts receivable.................................... (1,073) (34) Inventories............................................ (29,987) 1,942 Other current assets................................... 1,779 3,040 Other assets........................................... (155) 43 Accounts payable, trade................................ 32,102 153 Accrued expenses and other liabilities................. (2,449) (799) Accrued income taxes................................... 1,641 (83) Liabilities subject to compromise...................... -- (314) Changes due to reorganization activities: Accrued professional fees.............................. -- 557 -------- ------- Net cash provided by operating activities............ 6,144 5,965 -------- ------- Cash flows from investing activities: Additions to property, plant and equipment................ (1,803) (1,862) Acquisition of The Wall, net of cash acquired............. (71,191) -- -------- ------- Net cash used in investing activities................ (72,994) (1,862) -------- ------- Cash flows from financing activities: Payment of financing fees................................. -- (25) -------- ------- Net cash used in financing activities................ -- (25) -------- ------- (Decrease) increase in cash and cash equivalents............ (66,850) 4,078 Cash and cash equivalents at beginning of period............ 82,530 41,260 -------- ------- Cash and cash equivalents at end of period.................. $ 15,680 $45,338 ======== ======= Supplemental Data: Non-cash investing activities: Common stock issued in settlement of payable for professional services.................................. $ 188 $ -- ======== =======
The accompanying notes are an integral part of these condensed consolidated financial statements. F-4 76 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) AND CM HOLDINGS, INC. (PREDECESSOR COMPANY) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS OF DOLLARS, EXCEPT WHERE OTHERWISE INDICATED) 1. BASIS OF PRESENTATION: CM Holdings, Inc. ("Predecessor Company") was incorporated on September 30, 1993, and acquired all of the outstanding common stock of Camelot Music, Inc. on November 12, 1993. The Predecessor Company subsequently changed its name to Camelot Music Holdings, Inc. and together with Camelot Music, Inc. ("Camelot") emerged from bankruptcy on January 27, 1998. Camelot Music Holdings, Inc. and its subsidiaries are referred to herein as the "Successor Company". The Predecessor Company and the Successor Company are collectively referred to herein as the "Company". The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All significant intercompany accounts and transactions have been eliminated. The accompanying interim condensed consolidated financial statements are unaudited, however in the opinion of management, all adjustments necessary for a fair presentation of such consolidated financial statements have been recorded in the interim financial statements presented. The Company's business is seasonal and therefore the interim results are not indicative of the results for a full year. The significant accounting policies and certain financial information which is required for financial statements in accordance with generally accepted accounting principles, but not for interim financial statement reporting purposes, have been condensed or omitted. The accompanying condensed consolidated financial statements of the Company should be read in conjunction with the audited consolidated financial statements of the Company and the Predecessor Company for the fiscal year ended February 28, 1998, which are included within this Registration Statement. 2. FRESH-START REPORTING On January 31, 1998, the Company implemented the recommended accounting principles for entities emerging from Chapter 11 set forth in the American Institute of Certified Public Accountants Statement of Position 90-7 on Financial Reporting by Entities in Reorganization under the Bankruptcy Code (SOP 90-7). Under this concept, all assets and liabilities were restated to reflect the reorganization value of the reorganized entity, which approximated its fair value at the date of reorganization. In addition, the accumulated deficit of the Company was eliminated and its capital structure was recast in conformity with the plan of reorganization (the "Plan"). As such, the accompanying Company condensed consolidated financial statements as of May 30, 1998 and for the period March 1, 1998 to May 30, 1998, represents that of the Successor Company. The condensed consolidated statement of operations and cash flows for the period March 2, 1997 to May 31, 1997 represent activity of the Predecessor Company and may not be comparable to those of the Successor Company. 3. EARNINGS PER SHARE In February 1997, The Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which was effective for the Successor Company for Fiscal 1997. This standard requires the Successor Company to disclose basic earnings per share and diluted earnings per share. Basic earnings per share is calculated by dividing net income (loss) by the weighted average shares outstanding. Diluted earnings per share is calculated by dividing net income (loss) by the sum of the weighted average shares and additional common shares that would have been outstanding if the dilutive potential common shares had been issued for common stock options from the Successor Company's Stock Option Plan. As required by SFAS No. 128, all outstanding common stock options are considered included even though their exercise may be contingent upon vesting. F-5 77 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) AND CM HOLDINGS, INC. (PREDECESSOR COMPANY) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 4. SPECIAL ITEMS: In the first quarter of Fiscal 1998, the Successor Company incurred $.4 million of expenses related to a filing of a registration statement with the Securities and Exchange Commission. 5. STOCK OPTION PLAN AND PURCHASE AGREEMENTS: The Predecessor Company had established a Management Stock Incentive Plan for certain key employees and a Stock Purchase Agreement with certain key employee shareholders. No compensation expense was recognized based on the terms of these agreements and the agreements were terminated as of the effective date of the Plan with none of the key employees receiving any shares in the Successor Company as a result of these agreements. Effective January 27, 1998, the Successor Company established the Camelot Music Holdings, Inc. 1998 Stock Option Plan (the "Stock Option Plan"). The Stock Option Plan provides for the granting of either incentive stock options or nonqualified stock options to purchase shares of the Company's common stock to officers, directors and key employees responsible for the direction and management of the Company. Vesting of the options was over a four year period with a maximum term of ten years. Based on the terms of the Stock Option Plan vesting has been accelerated based on the market performance of the Company's common stock whereby 50% of the options vested on March 13, 1998 and the remaining vest on January 28, 2000. At May 30, 1998, 343,500 options were exercisable and 825,094 shares of common stock were reserved for future issuance under the Stock Option Plan based on a requirement that 7.5% of total outstanding shares on a diluted basis be reserved for the Stock Option Plan. Information relating to stock options is as follows:
OPTION PRICE TOTAL NUMBER OF PER SHARE EXERCISE SHARES AVERAGE* PRICE --------- ------------ ----------- Shares under option at February 28, 1998.................... 687,000 $20.75 $14,255 Granted..................................................... -- -- -- Exercised................................................... -- -- -- Forfeited................................................... -- -- -- ------- ------ ------- Shares under option May 30, 1998............................ 687,000 $20.75 $14,255 ======= ====== =======
- --------------- * Per share data not in thousands of dollars All outstanding options are qualified options. No compensation expense related to stock option grants was recorded for the period January 28, 1998 to February 28, 1998 as the option exercise prices were above the fair value on the date of grant. Pro forma information regarding net income and net income per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of F-6 78 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) AND CM HOLDINGS, INC. (PREDECESSOR COMPANY) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: Risk-free interest rate..................................... 5.49% Dividend yield.............................................. 0.00% Volatility factor........................................... 36.89% Weighted average expected life.............................. 2 years
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the option's vesting period. The Company's pro forma net income and net income per share for the quarter ended May 30, 1998 were as follows: Net earnings -- as reported................................. $2,555 Net earnings -- pro forma................................... $1,683 Basic earnings per share.................................... $ 0.17 Diluted earnings per share.................................. $ 0.16
6. COMMITMENTS AND CONTINGENCIES: The Successor Company is a party to various claims, legal actions and complaints arising in the ordinary course of business, including proposed pre-petition assessments by the Internal Revenue Service aggregating approximately $7,900 of which the Company has accrued $800. In the opinion of management, all such matters not accrued for are without merit or involve such amounts that unfavorable disposition will not have a material impact on the financial position, results of operations or cash flows of the Successor Company. 7. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS: SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" issued in June, 1998 and effective for all fiscal quarters of fiscal years beginning after June 15, 1999, with earlier application permitted, requires companies to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company has evaluated the impact of the application of the new rules on the Company's Consolidated Financial Statements and the new rules will not change its financial presentation. 8. SUBSEQUENT EVENT: On June 3, 1998, the Successor Company entered into an agreement and plan of merger (the "Merger Agreement") with respect to the proposed acquisition of Spec's Music, Inc. ("Spec's"). Pursuant to the Merger Agreement, the Successor Company will acquire all of Spec's outstanding common stock in exchange for $3.30 per share. The board of directors of both the Successor Company and Spec's have approved the merger. Spec's shareholders approved the merger and the transaction closed on July 29, 1998. F-7 79 REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors and Stockholders of Camelot Music Holdings, Inc.: We have audited the accompanying consolidated balance sheets of Camelot Music Holdings, Inc. ("Successor Company") as of February 28, 1998 and of CM Holdings, Inc. ("Predecessor Company") as of March 1, 1997, and the related consolidated statements of operations, stockholders' equity and cash flows of the Successor Company for the period February 1, 1998 to February 28, 1998 ("Successor period"), and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the period March 2, 1997 to January 31, 1998, the 52 week period ended March 1, 1997 and the 53 week period ended March 2, 1996 ("Predecessor periods"), respectively. These consolidated financial statements are the responsibility of the management of Camelot Music Holdings, Inc. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and the disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. On January 27, 1998, the Company emerged from bankruptcy. As described in Notes 2, 3 and 4 to the consolidated financial statements, the Company accounted for the reorganization as of January 31, 1998 and adopted "fresh-start reporting". As a result, the Successor Company's consolidated financial statements are not comparable to the Predecessor Company's consolidated financial statements since they are presented on a new basis of accounting. In our opinion, the aforementioned Successor Company consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Successor Company as of February 28, 1998, and the consolidated results of its operations and its cash flows for the Successor period, in conformity with generally accepted accounting principles. Further, in our opinion, the Predecessor Company consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Predecessor Company as of March 1, 1997, and the consolidated results of its operations and its cash flows for the Predecessor periods, in conformity with generally accepted accounting principles. As discussed in Notes 3 and 15 to the consolidated financial statements for the 53 week period ended March 2, 1996, the Predecessor Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". In addition, as discussed in Notes 3 and 4 to the consolidated financial statements, on January 31, 1998, in conjunction with the Company's adoption of "fresh-start reporting", the Predecessor Company adopted Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" and Statement of Position 98-5, "Accounting for the Costs of Start-Up Activities". Cleveland, Ohio June 10, 1998 COOPERS & LYBRAND L.L.P. F-8 80 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) AND CM HOLDINGS, INC. (PREDECESSOR COMPANY) CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF DOLLARS)
SUCCESSOR PREDECESSOR COMPANY COMPANY ------------ ----------- FEBRUARY 28, MARCH 1, 1998 1997 ------------ ----------- ASSETS Current assets: Cash and cash equivalents................................. $ 82,530 $ 41,260 Accounts receivable....................................... 1,849 979 Inventories............................................... 146,672 112,537 Deferred income taxes..................................... 6,557 -- Other current assets...................................... 4,877 5,287 -------- -------- Total current assets.............................. 242,485 160,063 -------- -------- Property, plant and equipment, net.......................... 40,220 56,738 -------- -------- Other non-current assets: Goodwill, net of accumulated amortization of $0 in 1997 and $4,025 in 1996..................................... 26,950 41,188 Intangible assets, net of accumulated amortization of $707 in 1997 and $265 in 1996............................... 1,487 350 Deferred income taxes..................................... 18,548 -- Favorable lease values, net of accumulated amortization of $276 in 1997........................................... 12,148 -- Other assets.............................................. 443 309 -------- -------- Total other non-current assets.................... 59,576 41,847 -------- -------- Total assets...................................... $342,281 $258,648 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable, trade................................... $ 30,703 $ 11,398 Accrued expenses and other liabilities.................... 101,639 23,336 -------- -------- Total current liabilities......................... 132,342 34,734 -------- -------- Long-term liabilities: Revolving credit agreement................................ -- -- Unfavorable lease values, net of accumulated amortization of $158 in 1997........................................ 13,398 -- Other long-term liabilities............................... 1,592 7,407 -------- -------- Total long-term liabilities....................... 14,990 7,407 -------- -------- Liabilities subject to compromise........................... -- 484,811 Commitments and contingencies (Notes 2, 4, 7, 12, 16 and 18)....................................................... -- -- -------- -------- Total liabilities................................. 147,332 526,952 -------- -------- Stockholders' equity (deficit): Common stock.............................................. 102 10 Additional paid-in capital................................ 194,266 79,990 Retained earnings (accumulated deficit)................... 581 (348,304) -------- -------- Total stockholders' equity (deficit).............. 194,949 (268,304) -------- -------- Total liabilities and stockholders' equity (deficit)....................................... $342,281 $258,648 ======== ========
The accompanying notes are an integral part of these financial statements. F-9 81 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) AND CM HOLDINGS, INC. (PREDECESSOR COMPANY) CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
SUCCESSOR COMPANY --------- PREDECESSOR COMPANY PERIOD ---------------------------------------------- FEBRUARY 1, PERIOD 52 WEEK 53 WEEK 1998 TO MARCH 2, 1997 PERIOD ENDED PERIOD ENDED FEBRUARY 28, TO JANUARY 31, MARCH 1, MARCH 2, 1998 1998 1997 1996 ------------ -------------- ------------ ------------ Net sales.............................. $ 27,842 $372,561 $396,502 $ 455,652 Cost of sales.......................... 17,662 243,109 263,072 302,481 ----------- -------- -------- --------- Gross profit......................... 10,180 129,452 133,430 153,171 Selling, general and administrative expenses............................. 9,240 99,553 117,558 135,441 Depreciation and amortization.......... 527 20,484 23,290 26,570 Special items.......................... -- (4,443) 6,523 211,520 ----------- -------- -------- --------- Income (loss) before other income (expenses), net, reorganization income (expenses), income taxes and extraordinary item..... 413 13,858 (13,941) (220,360) ----------- -------- -------- --------- Other income (expenses), net: Interest income...................... 328 -- -- 263 Interest expense (contractual interest expense was (1) $58,157 and (2) $41,329).................. (12) (221)(1) (17,418)(2) (38,319) Amortization of financing fees....... (7) (434) (1,856) (3,738) Other, net........................... (26) 249 696 (1,503) ----------- -------- -------- --------- Total other income (expenses), net............ 283 (406) (18,578) (43,297) ----------- -------- -------- --------- Income (loss) before reorganization income (expenses), income taxes and extraordinary item..... 696 13,452 (32,519) (263,657) Reorganization income (expenses)....... -- 26,501 (31,845) -- ----------- -------- -------- --------- Income (loss) before income taxes and extraordinary item....................... 696 39,953 (64,364) (263,657) (Provision) benefit for income taxes: Current.............................. -- (289) -- (376) Deferred............................. (115) -- -- (98) ----------- -------- -------- --------- Total (provision) benefit for income taxes............... (115) (289) -- (474) ----------- -------- -------- --------- Income (loss) before extraordinary item......... 581 39,664 (64,364) (264,131) Extraordinary item, net of tax........................ -- 228,911 -- -- ----------- -------- -------- --------- Net income (loss)............ $ 581 $268,575 $(64,364) $(264,131) =========== ======== ======== ========= Basic and diluted earnings per share... $ .06 * * * =========== ======== ======== ========= Weighted average number of common shares outstanding -- basic and diluted.............................. 10,176,162 ===========
- --------------- * Historical per share data for the Predecessor Company is not meaningful since the Company has been recapitalized and has adopted fresh-start reporting as of January 31, 1998. The accompanying notes are an integral part of these financial statements. F-10 82 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) AND CM HOLDINGS, INC. (PREDECESSOR COMPANY) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS OF DOLLARS)
RETAINED COMMON STOCKS ADDITIONAL EARNINGS -------------------- PAID-IN PUT (ACCUMULATED SHARES DOLLARS CAPITAL AGREEMENTS DEFICIT) TOTAL ---------- ------- ---------- ---------- ------------ --------- PREDECESSOR COMPANY: Balances at February 25, 1995.................... 1,000,000 $ 10 $ 79,990 $(3,413) $ (19,809) $ 56,778 Net loss................ -- -- -- -- (264,131) (264,131) Expiration of put agreements............ -- -- -- 3,413 -- 3,413 ---------- ---- -------- ------- --------- --------- Balances at March 2, 1996.................... 1,000,000 10 79,990 -- (283,940) (203,940) Net loss................ -- -- -- -- (64,364) (64,364) ---------- ---- -------- ------- --------- --------- Balances at March 1, 1997.................... 1,000,000 10 79,990 -- (348,304) (268,304) Net income.............. -- -- -- -- 268,575 268,575 Adoption of "fresh-start reporting"*........... 9,176,162 92 114,276 -- 79,729 194,097 ---------- ---- -------- ------- --------- --------- Balances at January 31, 1998.................... 10,176,162 $102 $194,266 $ -- $ -- $ 194,368 ========== ==== ======== ======= ========= ========= SUCCESSOR COMPANY: Balances at February 1, 1998.................... 10,176,162 $102 $194,266 $ -- $ -- $ 194,368 Net income.............. -- -- -- -- 581 581 ---------- ---- -------- ------- --------- --------- Balances at February 28, 1998.................... 10,176,162 $102 $194,266 $ -- $ 581 $ 194,949 ========== ==== ======== ======= ========= =========
- --------------- * Cancellation of 1,000,000 shares of the Predecessor Company and issuance of 10,176,162 shares of the Successor Company. The accompanying notes are an integral part of these financial statements. F-11 83 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) AND CM HOLDINGS, INC. (PREDECESSOR COMPANY) CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS OF DOLLARS)
SUCCESSOR COMPANY ------------ PREDECESSOR COMPANY PERIOD -------------------------------------------- FEBRUARY 1, PERIOD 52 WEEK 53 WEEK 1998 TO MARCH 2, 1997 PERIOD ENDED PERIOD ENDED FEBRUARY 28, TO JANUARY 31, MARCH 1, MARCH 2, 1998 1998 1997 1996 ------------ -------------- ------------ ------------ Cash flows from operating activities: Net income (loss).................................... $ 581 $268,575 $(64,364) $(264,131) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization excluding financing fees............................................. 527 20,484 23,290 26,570 Amortization of favorable/unfavorable lease values........................................... 118 -- -- -- Amortization of financing fees..................... 7 434 1,856 3,738 Noncash portion of restructuring charges........... -- -- -- 5,238 Write-down of long-lived assets.................... -- -- 6,523 202,869 Expiration of put agreements....................... -- -- -- 3,413 Deferred income taxes.............................. 115 -- -- 98 Other, net......................................... -- -- 451 607 Changes in assets and liabilities: Accounts receivable and refundable income taxes.... (234) (1,438) 2,578 3,437 Inventories........................................ 1,739 4,763 15,216 28,418 Other current assets............................... (87) 2,623 (2,197) (283) Other assets....................................... 706 -- 131 427 Accounts payable, trade............................ (1,449) 22,124 (12,540) 20,149 Accrued expenses and other liabilities............. (874) (5,972) 17,509 (8,414) Accrued income taxes............................... -- 308 647 5,401 Liabilities subject to compromise.................. -- (58,507) -- -- Changes due to reorganization activities: Gain on discharge of prepetition liabilities....... -- (228,911) -- -- Net adjustment in accounts for fair values......... -- 25,527 -- -- Accrued professional fees.......................... -- 2,187 1,717 -- Write-off of financing fees........................ -- -- 15,953 -- Provision for store closing costs.................. -- -- 3,988 -- Provision for lease rejection damages.............. -- -- 7,658 -- Employment termination costs....................... -- 454 803 -- Write-off of capital lease obligation.............. -- -- (1,677) -- Other expenses directly related to bankruptcy...... -- 1,137 (1,261) -- ------- -------- -------- --------- Net cash provided by operating activities........ 1,149 53,788 16,281 27,537 ------- -------- -------- --------- Cash flows from investing activities: Additions to property, plant and equipment........... (1,807) (8,029) (4,330) (20,873) Proceeds from sale of equipment...................... 2 10 239 137 Acquisition of The Wall, net of cash acquired........ (2,884) -- -- -- Other assets and liabilities, net.................... (234) 94 93 409 ------- -------- -------- --------- Net cash used in investing activities............ (4,923) (7,925) (3,998) (20,327) ------- -------- -------- --------- Cash flows from financing activities: Payment of financing fees............................ -- (819) (615) -- Proceeds from lines of credit and other short-term borrowings......................................... -- -- 25,000 195,500 Payments on lines of credit and other short-term borrowings......................................... -- -- (25,000) (174,000) Payments on long-term debt........................... -- -- (27) (2,560) ------- -------- -------- --------- Net cash (used in) provided by financing activities.................................... -- (819) (642) 18,940 ------- -------- -------- --------- Net (decrease) increase in cash and cash equivalents................................... (3,774) 45,044 11,641 26,150 Cash and cash equivalents at beginning of period....... 86,304 41,260 29,619 3,469 ------- -------- -------- --------- Cash and cash equivalents at end of period............. $82,530 $ 86,304 $ 41,260 $ 29,619 ======= ======== ======== =========
The accompanying notes are an integral part of these financial statements. F-12 84 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) AND CM HOLDINGS, INC. (PREDECESSOR COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS) 1. ORGANIZATION AND BUSINESS: CM Holdings, Inc. ("Predecessor Company") was incorporated on September 30, 1993, and acquired all of the outstanding common stock of Camelot Music, Inc. (the "Camelot Acquisition") on November 12, 1993. The Predecessor Company subsequently changed its name to Camelot Music Holdings, Inc. and together with Camelot Music, Inc. ("Camelot") emerged from bankruptcy on January 27, 1998 (see Notes 2 and 4). Camelot Music Holdings, Inc. and its subsidiaries are referred to herein as the "Successor Company". The Predecessor Company and the Successor Company are collectively referred to herein as the "Company". The Company is a mall-based specialty retailer of pre-recorded music, pre-recorded video cassettes and other entertainment products and related accessories and operates in thirty-seven states across the United States. The Company operates in a single industry segment, the operation of a chain of retail entertainment stores. At February 28, 1998, the Company operated four hundred fifty-five stores nationwide under the "Camelot Music" and "The Wall" names. 2. STATUS OF REORGANIZATION UNDER CHAPTER 11: On August 9, 1996 (the "petition date"), CM Holdings, Inc. and Camelot filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code ("Chapter 11" or the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). The Chapter 11 proceedings were jointly administered, with the Predecessor Company managing the business in the ordinary course as debtors-in-possession subject to the control and supervision of the Bankruptcy Court. Under Chapter 11 proceedings, litigation and actions by creditors to collect certain claims in existence at the petition date ("prepetition") are stayed, absent specific Bankruptcy Court authorization to pay such claims. The Predecessor Company believes that appropriate provisions were made in the accompanying financial statements for the prepetition claims that could be estimated at the date of those financial statements. Such claims are reflected in the March 1, 1997 consolidated balance sheet as "liabilities subject to compromise" (See Note 12). Claims collateralized by the Predecessor Company's assets (secured claims) were stayed, although holders of such claims had the right to move the Bankruptcy Court for relief from the stay. Secured claims were collateralized by a pledge of stock of Camelot as well as certain non-store properties. Under the Bankruptcy Code, a creditor's claim was treated as secured only to the extent of the value of such creditor's collateral, and the balance of such creditor's claim was treated as unsecured. The Predecessor Company received approval from the Bankruptcy Court to pay or otherwise honor employee wages and benefits and certain other prepetition obligations necessary for the continuing existence of the Predecessor Company prior to a plan of reorganization. Generally, unsecured debt did not accrue interest after the petition date. In addition, the Predecessor Company had determined that there was insufficient collateral to cover the interest portion of scheduled payments on most prepetition debt obligations. Therefore, the Predecessor Company discontinued accruing interest on those obligations. Contractual interest on those obligations amounted to $58,157 for the period March 2, 1997 to January 31, 1998 and $41,329 for the 52 week period ended March 1, 1997, which was $57,936 and $23,911, respectively, in excess of reported interest expense. Refer to Note 11 for a discussion of the financing arrangements entered into subsequent to the Chapter 11 filings. As debtor-in-possession, the Predecessor Company had the right, subject to Bankruptcy Court approval and certain other limitations, to assume or reject certain executory contracts, including unexpired leases. In this context, "assumption" meant that the Predecessor Company agreed to perform its obligations and cure certain existing defaults under the contract or lease, and "rejection" meant that the Predecessor Company was relieved F-13 85 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) AND CM HOLDINGS, INC. (PREDECESSOR COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (IN THOUSANDS OF DOLLARS) 2. STATUS OF REORGANIZATION UNDER CHAPTER 11 -- CONTINUED: from its obligations to perform further on the contract or lease and was subject only to a claim for damages for the breach thereof. Any claim for damages resulting from the rejection of an executory contract or an unexpired lease was treated as a general unsecured claim in the Chapter 11 proceedings. The Predecessor Company reviewed its executory contracts and rejected 95 leases. An estimate of the allowed claims related to the rejected leases of $14,349 was provided for and included in liabilities subject to compromise. An official committee of unsecured creditors (the "Committee") was formed to act in the Chapter 11 proceedings. The Committee had the right to review and object to certain business transactions. Pursuant to the order of the Bankruptcy Court, the Committee retained counsel and other professionals at the expense of the Predecessor Company. On December 12, 1997, the Bankruptcy Court entered an order confirming the Predecessor Company's Joint Plan of Reorganization (the "Plan") which was submitted by the Predecessor Company on October 1, 1997, amended on November 7, 1997, and became effective January 27, 1998. Pursuant to the Plan, administrative and priority claims of $5,632 will be fully paid in cash. The remaining prepetition claims were settled principally with the issuance of equity in the reorganized company (Successor Company) to the claimholders. The stockholders in the Predecessor Company received no recovery nor were they issued any shares in the Successor Company under the Plan. Under the Plan, approximately 10,166,162 common shares in the Successor Company are to be issued to the claim holders. None of the claimholders receiving shares of the Successor Company were pre-confirmation shareholders of the Predecessor Company. The Successor Company expects to register the common shares with the filing of a Form S-1 with the Securities and Exchange Commission (see Note 21). As of January 31, 1998, in accordance with the American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code", the Predecessor Company adopted "fresh-start reporting" and reflected the effects of such adoption in its consolidated financial statements for the eleven months then ended (see Note 4). 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The significant accounting policies used in the preparation of the consolidated financial statements are as follows: A. FINANCIAL REPORTING FOR BANKRUPTCY PROCEEDINGS: During the period August 9, 1996 to January 31, 1998, the Company has accounted for all transactions related to the Chapter 11 proceedings in accordance with SOP 90-7 for entities reporting during reorganization proceedings before and after filing of a reorganization plan; as appropriate. Accordingly, liabilities subject to compromise under the Chapter 11 proceedings have been segregated on the consolidated balance sheet and were recorded at the amounts that have been or are expected to be allowed on known claims rather than estimates of consideration those claims may receive in a plan of reorganization. In addition, the consolidated statements of operations and cash flows separately disclose expenses and cash transactions, respectively, related to the Chapter 11 proceedings. On January 31, 1998, the Company accounted for all transactions related to entities emerging from Chapter 11 reorganization set forth in SOP 90-7 ("fresh-start reporting" -- see Note 4). B. PRINCIPLES OF CONSOLIDATION: The accompanying consolidated Predecessor Company financial statements include the accounts of CM Holdings, Inc. and its wholly owned subsidiary Camelot and its inactive subsidiaries -- G.M.G. Advertising, Inc. and Grapevine Records and Tapes, Inc. The accompanying F-14 86 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) AND CM HOLDINGS, INC. (PREDECESSOR COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (IN THOUSANDS OF DOLLARS) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED: consolidated financial statements of the Successor Company include the accounts of Camelot Music Holdings, Inc., and its wholly owned subsidiary Camelot and its recently formed subsidiaries -- Camelot Midwest Region, Inc.; Camelot Northeast Region, Inc.; Camelot Southeast Region, Inc.; Camelot Western Region, Inc.; Camelot Distribution Co., Inc.; and its inactive subsidiaries G.M.G. Advertising, Inc. and Grapevine Records and Tapes, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation. C. FISCAL PERIODS: The Company's fiscal year ends on the Saturday closest to February 28. Any fiscal years or period ends designated in the consolidated financial statements and the related notes are by the calendar year in which the fiscal year commences. D. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. E. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS: During the period February 26, 1995 to January 31, l998, the Predecessor Company adopted the following accounting standards based on the effective date of those standards or as required by "fresh-start reporting": (1) Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"; (2) SFAS No. 123, "Accounting for Stock-Based Compensation"; (3) SFAS No. 128, "Earnings Per Share"; (4) SFAS No. 129, "Disclosure of Information about Capital Structure"; (5) SFAS No. 130, "Reporting Comprehensive Income"; (6) SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information"; (7) SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" and (8) SOP 98-5, "Accounting for the Costs of Start-Up Activities". The adoption of SFAS No. 123, SFAS No. 128, SFAS No. 129, SFAS No. 130 and SFAS No. 131 had no significant effects on the Company's consolidated financial statements. The effect of adopting SFAS No. 121 is discussed in Note 15 and the effects of adopting SOP 98-1 and SOP 98-5 are discussed in Note 4. F. CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents are stated at cost, which approximates market value. G. CONCENTRATION OF CREDIT RISKS: The Company maintains centralized cash management programs whereby excess cash balances are invested in short term funds and are considered cash equivalents. Certain cash balances are insured by the Federal Deposit Insurance Corporation up to $100. As of February 28, 1998 and March 1, 1997 uninsured bank cash balances were $80,648 and $40,835, respectively. H. CONCENTRATION OF BUSINESS RISKS: The Company purchases its pre-recorded music directly from a large number of suppliers, with approximately 77% of purchases, net of returns, being made from six suppliers. Prior to the bankruptcy proceedings, the Company had not experienced difficulty in obtaining satisfactory sources of supply. In connection with its emergence from bankruptcy, the Company obtained commitments to reinstate customary trade terms and management believes that it will retain access to F-15 87 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) AND CM HOLDINGS, INC. (PREDECESSOR COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (IN THOUSANDS OF DOLLARS) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED: adequate sources of supply. However, a loss of a major supplier could cause a possible loss of sales, which would have an adverse affect on consolidated operating results and result in a decrease in vendor support for the Company's advertising programs. I. INVENTORIES AND RETURN COSTS: Inventories are valued at the lower of cost or market. Cost is determined principally by the average cost method. Inventories consist primarily of resaleable prerecorded music, video cassettes, video games and other related products. Vendors typically offer incentives of approximately 1% upon the purchase of product. The Company is entitled to return product purchases from these vendors. The vendors often reduce the return credit with a product return charge ranging from 0% to 20% of the original product purchase price depending on the type of product being returned. The Company records the product return charges in cost of sales. J. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated at cost. Significant additions and improvements are capitalized while expenditures for maintenance and repairs are charged to operations as incurred. The cost of assets retired or otherwise disposed of and the related accumulated depreciation are eliminated from the accounts in the year of disposal. Gains and losses resulting from disposals are included in operations. In accordance with "fresh-start reporting", the pre-effective date accumulated depreciation and amortization has been eliminated, and a new depreciation and amortization base has been established equal to the fair value of the existing property, plant and equipment. Depreciation is computed using the straight-line method based on the following ranges of estimated useful lives: Buildings and improvements.................. 10-40 years Leasehold improvements...................... Shorter of life of lease or 7 years Furniture, fixtures and equipment........... 5-7 years
Effective January 31, 1998, the direct costs of computer software developed or obtained for internal use are capitalized and amortized over the estimated useful life on a straight-line basis. All other related costs are expensed as incurred. K. GOODWILL: Goodwill in the Predecessor Company's consolidated financial statements represented primarily the adjusted amount of the cost of acquisition in excess of fair value of the Camelot Acquisition and was amortized using the straight-line method over a 40 year period until March 2, l996. The remaining amount was being amortized using the straight-line method over a 22 year period. In connection with the emergence from Chapter 11 and in accordance with SOP 90-7, the remaining Predecessor Company goodwill was written off at January 31, 1998. The Successor Company goodwill represents the adjusted amount of the cost of acquisition in excess of fair value of The Wall acquisition (see Note 7) and is being amortized using the straight-line method over a 30 year period. L. INTANGIBLE ASSETS AND FAVORABLE (UNFAVORABLE) LEASE VALUES: Financing fees are amortized on a straight-line basis over the terms of the related financings, which vary with the terms of the related agreements ranging from one to four years. As a result of the Chapter 11 proceedings, the net book value of the financing fees related to prepetition financing was written off during the 52 week period ended March 1, l997. Favorable lease values and non-compete agreements acquired by the Predecessor Company in connection with store acquisitions were being amortized using the straight-line method over the lives of the F-16 88 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) AND CM HOLDINGS, INC. (PREDECESSOR COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (IN THOUSANDS OF DOLLARS) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED: related agreements. Primarily as a result of store closings, the net book value of these assets was written off during the 52 week period ended March 1, 1997. Favorable (unfavorable) lease values of the Successor Company established in "fresh-start reporting" and acquired in connection with The Wall store acquisitions are being amortized to rent expense using the effective interest method over the lives of the related lease agreements. The trade name of the Successor Company acquired in The Wall acquisition is being amortized on a straight-line basis over two years. M. FAIR VALUE OF LONG-LIVED ASSETS: The Company records impairment losses on long-lived assets used in operations, and the related goodwill, when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets in accordance with SFAS No. 121. N. FAIR VALUE OF FINANCIAL INSTRUMENTS: It was not practicable to estimate the fair value of the Predecessor Company's prepetition debt obligations as the Predecessor Company was in Chapter 11 proceedings. The ultimate plan of reorganization could have significantly impacted the estimated fair value of those obligations. Financial instruments of the Successor Company consist of a revolving credit facility (including letters of credit) which is carried at an amount which approximates fair value (see Note 11). O. ADVERTISING COSTS: Advertising costs are expensed during the period incurred. The amount charged to advertising expense during the period February 1, 1998 to February 28, 1998, the period March 2, 1997 to January 31, 1998, the 52 week period ended March 1, 1997 and the 53 week period ended March 2, 1996 was $167, $5,810, $6,128 and $6,458, respectively. P. STORE OPENING AND OTHER START-UP COSTS: The expenses associated with the opening of new stores and other start-up costs are charged to expense as incurred. Q. EARNINGS (LOSS) PER SHARE: In February l997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share," which is effective for the Successor Company for Fiscal 1997. This standard requires the Successor Company to disclose basic earnings per share and diluted earnings per share. Basic earnings per share is calculated by dividing net income (loss) by the weighted average shares outstanding. Diluted earnings per share is calculated by dividing net income (loss), by the sum of the weighted average shares and additional common shares that would have been outstanding if the dilutive potential common shares had been issued for the Successor Company's common stock options from the Successor Company's Stock Option Plan. As required by SFAS No. 128 all outstanding common stock options which have a dilutive effect are considered outstanding even though their exercise may be contingent upon vesting. For the period February 1, 1998 to February 28, 1998 all common shares issuable under the Successor Company's Stock Option Plan were antidilutive. R. INCOME TAXES: The Company uses the liability method of accounting for income taxes. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in the period that includes the enactment date. S. STOCK-BASED COMPENSATION: The Company follows Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for F-17 89 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) AND CM HOLDINGS, INC. (PREDECESSOR COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (IN THOUSANDS OF DOLLARS) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED: its employee stock options. Under APB No. 25, because the exercise price of employee stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recorded. The Company adopted the disclosure-only provisions of SFAS No. 123 for options issued to employees and directors. T. DIVIDEND POLICY: The Company has never declared or paid cash dividends on its common stock. The Successor Company currently intends to retain any earnings for use in its business and therefore does not anticipate paying any dividends in the foreseeable future. In addition, the Successor Company's revolving credit facility limits its ability to pay dividends under certain circumstances. Any future determination as to the payment of cash dividends will depend on a number of factors, including future earnings, capital requirements, the financial condition and prospects of the Successor Company and any restrictions under credit agreements existing from time to time. U. RECLASSIFICATIONS: Certain amounts in the Predecessor Company's Consolidated Financial Statements have been reclassified to conform to the Successor Company's Consolidated Financial Statements. 4. FRESH-START REPORTING: The AICPA has issued Statement of Position ("SOP") 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code". Pursuant to the guidance provided by SOP 90-7, the Predecessor Company adopted "fresh-start reporting" for its consolidated financial statements effective as of January 31, 1998, the last day of the Predecessor Company's fiscal month end. Under fresh-start reporting, the reorganization value of the Company has been allocated to the emerging Company's assets on the basis of the purchase method of accounting. Deferred income taxes were reported in conformity with the liability method of accounting for income taxes and no pre-confirmation net operating loss carryforwards were available at February 1, 1998. All of the reorganization value was attributable to specific tangible assets of the emerging entity and no amount has been recorded as intangible assets or as "Reorganization Value in Excess of Amounts Allocable to Identifiable Assets" in the accompanying consolidated balance sheet as of January 31, 1998. The fresh-start reporting entity value was determined to be $194,368 (net of $5,632 of administrative and priority claims payments). This value which results in a per share common stock value of eighteen dollars and seventy five cents was determined by the Company with the assistance of its special financial advisor during the Chapter 11 reorganization. The significant factors used in the determination of this value were a four year analysis of the Company's forecasted cash flows discounted at 14.0% to a present value and certain additional financial analyses and forecasts prepared by management. Under fresh-start reporting, the final consolidated balance sheet of the Predecessor Company as of January 31, 1998, becomes the opening consolidated balance sheet of the Successor Company. Since fresh-start reporting has been reflected in the accompanying consolidated balance sheet as of January 31, 1998, the consolidated balance sheet as of that date is not comparable to any such statement as of any prior date or for any prior period. The adjustments to reflect the consummation of the Plan, including the subsequent gain on debt discharge of prepetition liabilities and the adjustment to record assets and liabilities at their fair values have been reflected in the accompanying consolidated financial statements as of January 31, 1998. Accordingly, a black line is shown to separate the February 28, 1998 consolidated balance sheet and the consolidated statement of operations and cash flows for the period February 1, 1998 to February 28, 1998 from the prior years since they are not prepared on a comparable basis. F-18 90 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) AND CM HOLDINGS, INC. (PREDECESSOR COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (IN THOUSANDS OF DOLLARS) 4. FRESH-START REPORTING -- CONTINUED: The effect of the Plan on the Company's Consolidated Balance Sheet as of January 31, 1998 is as follows:
ADJUSTMENTS TO RECORD THE PLAN ---------------------------------------- PRE-FRESH FRESH-START START ------------------------- FRESH-START BALANCE SHEET FAIR VALUE BALANCE SHEET JANUARY 31, DEBT ACCOUNTING ADJUSTMENTS JANUARY 31, 1998 DISCHARGE(a) Changes(b) (c)(d) 1998 ------------- ------------ ----------- ----------- ------------- ASSETS Current assets: Cash and cash equivalents............... $ 87,842 $ (1,538) $ -- $ -- $ 86,304 Accounts receivable..................... 2,401 297 -- -- 2,698 Inventories............................. 107,774 -- -- 1,007 108,781 Deferred income taxes................... -- -- -- 6,334 6,334 Other current assets.................... 2,207 -- -- -- 2,207 -------- --------- -------- -------- -------- Total current assets.............. 200,224 (1,241) -- 7,341 206,324 -------- --------- -------- -------- -------- Property, plant and equipment. net........ 46,062 -- -- (21,662) 24,400 -------- --------- -------- -------- -------- Other non-current assets: Goodwill, net........................... 39,348 -- -- (39,348) -- Intangible assets, net.................. 813 -- (78) -- 735 Favorable lease values, net............. -- -- -- 9,256 9,256 Deferred income taxes................... -- -- -- 18,886 18,886 Other assets............................ 718 -- -- -- 718 -------- --------- -------- -------- -------- Total other non-current assets.... 40,879 -- (78) (11,206) 29,595 -------- --------- -------- -------- -------- Total assets...................... $287,165 $ (1,241) $ (78) $(25,527) $260,319 ======== ========= ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable, trade................. $ 33,522 $ -- $ -- $ -- $ 33,522 Accrued expenses and other liabilities........................... 21,836 3,322 -- (1,374) 23,784 -------- --------- -------- -------- -------- Total current liabilities......... 55,358 3,322 -- (1,374) 57,306 -------- --------- -------- -------- -------- Long-term liabilities: Revolving credit agreement.............. -- -- -- -- -- Unfavorable lease values, net........... -- -- -- 7,100 7,100 Other long-term liabilities............. 6,229 772 -- (5,456) 1,545 -------- --------- -------- -------- -------- Total long-term liabilities....... 6,229 772 -- 1,644 8,645 -------- --------- -------- -------- -------- Liabilities subject to compromise......... 428,614 (428,614) -- -- -- Commitments and contingencies............. -- -- -- -- -- -------- --------- -------- -------- -------- Total liabilities................. 490,201 (424,520) -- 270 65,951 -------- --------- -------- -------- -------- Stockholders' equity (deficit): Common stock............................ 10 102 -- (10) 102 Additional paid-in capital.............. 79,990 194,266 -- (79,990) 194,266 Retained earnings (accumulated deficit).............................. (283,036) 228,911 (78) 54,203 -- -------- --------- -------- -------- -------- Total stockholders equity (deficit)....................... (203,036) 423,279 (78) (25,797) 194,368 -------- --------- -------- -------- -------- Total liabilities and stockholders' equity (deficit)....................... $287,165 $ (1,241) $ (78) $(25,527) $260,319 ======== ========= ======== ======== ========
- --------------- (a) To record the settlement of liabilities subject to settlement under reorganization proceeding and the payment of administrative expenses in connection with the Plan. (b) To record the effects of adopting SOP 98-1 ($0) and SOP 98-5 ($78) as of the Plan's effective date. (c) To record the adjustments to state assets and liabilities at fair value and to eliminate the deficit in accumulated deficit against additional paid-in capital. (d) The fair value adjustments are subject to the resolution of the contingency with the Internal Revenue Service discussed in Note 18. F-19 91 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) AND CM HOLDINGS, INC. (PREDECESSOR COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (IN THOUSANDS OF DOLLARS) 4. FRESH-START REPORTING -- CONTINUED: The following unaudited Consolidated Pro Forma Statement of Operations reflects the financial results of the Company as if the Plan and change in accounting principles had been effective March 1, 1997:
COMBINED 52 WEEK PERIOD ENDED FEBRUARY 28, 1998 --------------------------------------------------------------------------- Adjustments(2) ------------------------------- AS REPORTED(1) STORE CLOSINGS(a) OTHER Pro Forma(2) --------------- ------------------ --------- ------------- Net sales......................... $400,403 $(4,195) $ -- $396,208 Costs of sales.................... 260,771 (2,740) (1,150)(b) 256,881 -------- ------- --------- -------- Gross profit.................... 139,632 (1,455) 1,150 139,327 Selling, general and administrative expenses......... 108,793 (1,123) 544(c) 108,214 Depreciation and amortization..... 21,011 (377) (14,197)(d) 6,437 Special items..................... (4,443) -- -- (4,443) -------- ------- --------- -------- Income (loss) before other income (expenses), net, reorganization income, income taxes and extraordinary item.............. 14,271 45 14,803 29,119 -------- ------- --------- -------- Other income (expenses), net: Interest income................. 328 -- 2,311(g) 2,639 Interest expense................ (233) -- 55(e) (178) Amortization of financing fees......................... (441) -- 218(f) (223) Other........................... 223 -- -- 223 -------- ------- --------- -------- Total other income (expenses), net....... (123) -- 2,584 2,461 -------- ------- --------- -------- Income (loss) before reorganization income, income taxes and extraordinary item.... 14,148 45 17,387 31,580 Reorganization income............. 26,501 -- (26,501)(g)(h) -- -------- ------- --------- -------- Income (loss) before income taxes and extraordinary item.......... 40,649 45 (9,114) 31,580 (Provision) benefit for income taxes........................... (404) -- (11,912)(i) (12,316) -------- ------- --------- -------- Income (loss) before extraordinary item............................ 40,245 45 (21,026) 19,264 Extraordinary item, net of tax.... 228,911 -- (228,911)(j) -- -------- ------- --------- -------- Net income (loss)................. $269,156 $ 45 $(249,937) $ 19,264 ======== ======= ========= ========
- --------------- See accompanying unaudited consolidated pro forma notes on the next page. F-20 92 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) AND CM HOLDINGS, INC. (PREDECESSOR COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (IN THOUSANDS OF DOLLARS) 4. FRESH-START REPORTING -- CONTINUED: (1) As reported amounts are the summation of the Predecessor Company for the period March 2, 1997 to January 31, 1998 and the Successor Company for the period February 1, 1998 to February 28, 1998. (2) The pro forma amounts are based on certain assumptions and estimates. The pro forma results do not necessarily represent results which would have taken place on the basis assumed above, nor are they indicative of the results of future "fresh-start" operations. The pro forma adjustments are also subject to the resolution of the contingency with the Internal Revenue Service discussed in Note 18. (a) To eliminate operating results of ten stores closed in conjunction with the Plan. (b) During the reorganization period certain trade vendors denied the Company the right to take prompt payment discounts. The amounts and period of denial varied by vendor. The adjustment of $(1,150) reinstates cash discounts to normal and customary trade payment terms. (c) To adjust selling, general and administrative expenses for the following: (1) record the effects of fair value adjustments for favorable and unfavorable lease value amortization of $578; (2) record the effects of fair value adjustments for average rent expense of $1,011; and (3) record the effects of capitalizing internal use software costs (SOP 98-1) of $(1,045). (d) To reduce depreciation and amortization for the following: (1) eliminate Predecessor Company goodwill amortization of $(1,840); (2) record the effects of amortizing capitalized internal software costs (SOP 98-1) of $105; (3) eliminate Predecessor Company depreciation expense of ($18,644); and (4) record depreciation expense of $6,182 for the adjusted fixed asset values based on historical lives and half-year convention. (e) To eliminate historical commitment fee expense of $(221) and record new commitment fee expense of $166 based on the terms of the Amended Credit Facility of .375%. (f) To adjust amortization of deferred financing fees for the Amended Credit Facility by $(218). (g) To reclass interest income from reorganization income. (h) To eliminate reorganization income (including interest income of $2,311 included therein) which will not be incurred subsequent to the effective date of the Plan. (i) To reverse income tax effect of fresh-start reporting adjustments and record the income tax effect of pro forma adjustments for items that are deductible for income tax purposes, using an assumed income tax rate of 39%. (j) To eliminate gain on discharge of debt pursuant to the Plan. F-21 93 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) AND CM HOLDINGS, INC. (PREDECESSOR COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (IN THOUSANDS OF DOLLARS) 5. REORGANIZATION INCOME (EXPENSES): The net reorganization income (expenses) incurred as a result of the Chapter 11 filings and subsequent reorganization efforts have been segregated from ordinary operations in the Consolidated Statements of Operations:
PREDECESSOR COMPANY ----------------------- PERIOD 52 WEEK MARCH 2, PERIOD 1997 TO ENDED JANUARY 31, MARCH 1, 1998 1997 ----------- -------- Net adjustment to fair values............................... $(25,527) $ -- Adjustments to claims (including $1,017 of post March 1, 1997 net activity)........................................ 57,511 -- Restructuring costs......................................... (1,548) (11,869) Bankruptcy related expenses................................. (6,246) (4,866) Financing fees.............................................. -- (15,953) Interest income............................................. 2,311 843 -------- -------- $ 26,501 $(31,845) ======== ========
Net adjustments to fair values reflect the net change to state assets and liabilities at fair value. Adjustments to claims represent prepetition claims that were either discharged or received no amount of recovery. Restructuring costs include costs and expenses from closing of facilities, consolidation of operations, and certain expenses related to the rejection of executory contracts as well as gains and losses from the disposition of related assets. Bankruptcy related expenses relate to professional fees and other expenses related to the bankruptcy proceedings. Financing fees consist of the write-off of the unamortized portion of deferred financing fees relating to collateralized debt as of the petition date. Interest income is attributable to the accumulation of cash and short-term investments subsequent to the petition date. 6. EXTRAORDINARY ITEM: The Plan resulted in the discharge of $428,614 of prepetition claims and the recognition of $297 in prepetition vendor receivables against/due to the Predecessor Company during Chapter 11 through the distribution of $5,632 in cash and the issuance of 10,166,162 shares of new common stock to creditors. The value of cash and securities distributed less the vendor receivables was $228,911 less than the allowed claims, and the resultant gain was recorded as an extraordinary item, net of related tax effects of $0. 7. ACQUISITION: Effective February 28, 1998, the Company acquired certain assets and assumed certain liabilities and operating lease commitments of The Wall Music, Inc. ("The Wall") pursuant to an Asset Purchase Agreement ("Purchase Agreement") dated December 10, 1997 which closed on March 2, 1998. The Wall is a mall-based music store chain that operated one hundred fifty stores in the Mid-Atlantic region of the United States. The Company acquired all of these stores of which eleven stores will be closed as part of the Company's acquisition F-22 94 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) AND CM HOLDINGS, INC. (PREDECESSOR COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (IN THOUSANDS OF DOLLARS) 7. ACQUISITION -- CONTINUED: strategy. The Company has accrued $410 in exit costs related to these closings. The purchase of The Wall was funded by the Company's cash and cash equivalents. The acquisition has been accounted for as a purchase, and included a cash payment of $72,351, the assumption of liabilities aggregating $14,723, and acquisition costs of $2,300. Accordingly, the assets and liabilities of the acquired business are included in the consolidated balance sheet at February 28, 1998 and no results of operations are included in the consolidated statement of operations. The purchase price is subject to final adjustment based on the resolution of certain contingencies related to merchandise inventory return reserves and finalization of acquisition costs. The Company does not believe the final purchase price will differ significantly from the preliminary purchase price recorded at February 28, 1998. The excess of the purchase price over the fair values of the net assets acquired (goodwill) of $26,950 will be amortized on a straight-line basis over 30 years. The following summarized unaudited pro forma financial information assumes the acquisition of The Wall had occurred as of March 2, 1997 and March 3, 1996:
PRO FORMA COMBINED 52 PRO FORMA WEEK PERIOD 52 WEEK ENDED PERIOD ENDED FEBRUARY 28, MARCH 1, 1997 1998 (PREDECESSOR) ------------ ------------- Net sales.................................................. $558,315 $541,040 ======== ======== Net income (loss).......................................... $282,050 $(57,564) ======== ========
Pro forma adjustments for the combined 52 week period ended February 28, 1998 were applied to the summation of the as reported amounts of the Predecessor Company for the period March 2, 1997 to January 31, 1998 and the Successor Company for the period February 1, 1998 to February 28, 1998. The pro forma amounts are based upon certain assumptions and estimates, and do not reflect any benefits from economies which might be achieved from combined operations. The pro forma results do not necessarily represent results which would have taken place on the basis assumed above, nor are they indicative of the results of future combined operations. F-23 95 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) AND CM HOLDINGS, INC. (PREDECESSOR COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (IN THOUSANDS OF DOLLARS) 8. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment consisted of the following:
SUCCESSOR PREDECESSOR COMPANY COMPANY ------------ ----------- FEBRUARY 28, MARCH 1, 1998 1997 ------------ ----------- Land and buildings.......................................... $ 5,470 $ 12,365 Leasehold improvements...................................... 12,245 31,643 Office furniture and fixtures............................... 535 1,899 Store furniture and fixtures................................ 13,123 41,175 Machinery and equipment..................................... 5,003 13,139 Remodeling-in-progress...................................... 4,371 1,499 ------- -------- 40,747 101,720 Less accumulated depreciation and amortization.............. (527) (44,982) ------- -------- Total............................................. $40,220 $ 56,738 ======= ========
9. INTANGIBLE ASSETS: Intangible assets consisted of the following:
SUCCESSOR PREDECESSOR COMPANY COMPANY ------------ ----------- FEBRUARY 28, MARCH 1, 1998 1997 ------------ ----------- Financing fees.............................................. $1,434 $ 615 Trade name.................................................. 760 -- ------ ------ 2,194 615 Less accumulated amortization............................... (707) (265) ------ ------ Total............................................. $1,487 $ 350 ====== ======
F-24 96 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) AND CM HOLDINGS, INC. (PREDECESSOR COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (IN THOUSANDS OF DOLLARS) 10. ACCRUED EXPENSES AND OTHER LIABILITIES: Accrued expenses and other liabilities consisted of the following:
SUCCESSOR PREDECESSOR COMPANY COMPANY ------------ ----------- FEBRUARY 28, MARCH 1, 1998 1997 ------------ ----------- Payroll and related costs................................... $ 8,256 $ 6,775 Taxes other than income..................................... 3,266 3,892 Gift certificate liability.................................. 5,391 2,456 Payable for acquisition, including expenses (see Notes 7 and 20)....................................................... 71,614 -- Customer product guarantee program.......................... 3,275 -- Customer loyalty program liability.......................... 744 6,101 Reorganization liabilities.................................. 4,532 1,273 Other....................................................... 4,561 2,839 -------- ------- Total............................................. $101,639 $23,336 ======== =======
11. FINANCING ARRANGEMENTS: Predecessor Company: As a result of Chapter 11 proceedings, all remaining indebtedness of the Predecessor Company as of the petition date became immediately due and payable in accordance with the terms of the instruments governing such indebtedness. While the Chapter 11 proceedings were pending, the Predecessor Company was prohibited from making any payments of obligations owing as of the petition date, except as permitted by the Bankruptcy Court and contractual terms of debt obligations were suspended subject to settlement. Furthermore, the Predecessor Company was not able to borrow additional funds under any of its prepetition credit arrangements. Borrowings outstanding at March 1, 1997 of $285,800, and related accrued interest of $9,817, were classified as liabilities subject to compromise because the principal balance was under secured. The Predecessor Company obtained debtor-in-possession financing with a syndicate of financial institutions whereby a maximum of $35,000 revolving credit facility ("DIP Facility"), which included a letter of credit sub- facility of $10,000, was available to fund working capital, issue letters of credit and make other payments during the Chapter 11 proceedings. The DIP Facility was available through the earlier of February 9, 1998 or the effective date of the Plan. The maximum amount available under the DIP Facility was subject to a borrowing base limitation equal to 35% of eligible inventory (as defined) during the peak period (as defined) and 30% of eligible inventory during the non-peak period, plus cash and investments held at the Predecessor Company's cash management bank less the Predecessor Company's cash collateral. Borrowings under the DIP Facility bore interest, at the Predecessor Company's option, at the Base Rate (defined as the higher of the Prime Rate or the Base CD Rate plus 1% or the Federal Funds Effective Rate plus 1/2%) plus 1% (9.25% at March 1, 1997). Interest on Base Rate loans was payable monthly in arrears. The Predecessor Company paid a commitment fee of 1/2% on the average daily unused portion of the DIP Facility. The Predecessor Company had no outstanding borrowings against the DIP Facility at March 1, 1997. At March 1, 1997, the Predecessor Company had $3,270 of letters of credit outstanding. F-25 97 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) AND CM HOLDINGS, INC. (PREDECESSOR COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (IN THOUSANDS OF DOLLARS) 11. FINANCING ARRANGEMENTS -- CONTINUED: The weighted average interest rate on these borrowings was 9.84% for the 53 week period ended March 2, 1996. The Predecessor Company's various prepetition loan agreements had covenants which, among other things, limited the payment of dividends and capital expenditures, specified levels of consolidated net worth and minimum consolidated adjusted operating profit as well as maintenance of specified ratios including interest coverage and current ratios. However, as a result of the automatic stay resulting from the Chapter 11 proceedings, the Predecessor Company's lenders could not enforce any rights, exercise any remedies or realize on any claims in the event that the Predecessor Company failed to comply with any of the covenants contained in the various prepetition loan agreements. The Predecessor Company was subject to various financial and other covenants under the terms of the DIP Facility including, among other things, minimum EBITDA (as defined in the DIP Facility) and limitations on indebtedness, investments, payments of indebtedness and capital expenditures. The Company was in compliance with the DIP Facility covenants at March 1, 1997 or obtained appropriate waivers. Successor Company: The Successor Company entered into a Revolving Credit Agreement dated as of January 27, 1998. The facility provides for loans of up to $50,000 during the peak period (October through December) and up to $35,000 during the non-peak period (including in each case up to $5,000 of letters of credit). In no case can the amount of loans exceed the borrowing base, as defined. The borrowing base means, during the peak period, 35% of eligible inventory and during the non-peak period, 30% of eligible inventory. The Successor Company had no borrowings under the facility during the period January 27, 1998 to February 28, 1998 and had $35,000 of availability at February 28, 1998. The facility terminates on January 27, 2001. The Successor Company's obligations are guaranteed by Camelot Music Holdings, Inc. ("CMHI") and by all of Camelot's subsidiaries and are collateralized by substantially all of Camelot's assets. CMHI has pledged to the lenders its capital stock of Camelot and Camelot has pledged to the lenders the capital stock of its subsidiaries. Loans bear interest, at the option of the Successor Company, at either (a) the Eurodollar Rate (as defined) plus 1.75% or (b) the greater of (i) the bank's Prime Rate, (ii) the Base CD Rate (as defined) plus 1%, or (iii) the Federal Funds Effective Rate (as defined) plus 1/2 of 1%. The Successor Company also pays an annual commitment fee of 3/8 of 1% on the available commitment. The Successor Company is required to use any excess proceeds from asset sales of more than $750 to reduce the commitments under the facility. In addition, the Successor Company is required for 45 consecutive days during each year to reduce the principal amount of all outstanding loans to zero. The Revolving Credit Agreement contains certain customary negative covenants which under certain circumstances, limit the Successor Company's ability to incur additional indebtedness, pay dividends, make capital expenditures and engage in certain extraordinary corporate transactions. The Revolving Credit Agreement also requires the Successor Company to maintain minimum consolidated EBITDA (as defined) levels. The Successor Company was in compliance with these covenants at February 28, 1998. As of June 3, 1998, the Successor Company received commitment letters from its lenders to modify the Revolving Credit Agreement to include; among other things, a term loan provision (see Note 21). F-26 98 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) AND CM HOLDINGS, INC. (PREDECESSOR COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (IN THOUSANDS OF DOLLARS) 11. FINANCING ARRANGEMENTS -- CONTINUED: Long-term debt, in accordance with its contracted terms, consisted of the following:
SUCCESSOR PREDECESSOR COMPANY COMPANY --------- ----------- FEBRUARY 28, MARCH 1, 1998 1997 -------- -------- Revolving Credit Agreement.................................. $ -- $ -- Senior Credit Facility: Tranche A Term Loan....................................... -- 57,000 Tranche B Term Loan....................................... -- 78,000 Tranche C Term Loan....................................... -- 60,000 Revolving Credit Commitment............................... -- 90,800 Subordinated Debentures..................................... -- 55,748 Senior Debentures........................................... -- 55,212 --------- --------- Total............................................. -- 396,760 --------- --------- Less long-term debt classified as current -- -- Less amounts included as liabilities subject to compromise........................................... -- (396,760) --------- --------- $ -- $ -- ========= =========
The Predecessor Company accrued interest on its unsecured and under secured obligations through the petition date; however, due to the uncertainties relating to a final plan of reorganization, the Predecessor Company ceased accruing interest on such obligations effective on the petition date (see Note 2). 12. LIABILITIES SUBJECT TO COMPROMISE: Liabilities subject to compromise consisted of the following:
PREDECESSOR COMPANY ------------- MARCH 1, 1997 ------------- Bank debt and related interest.............................. $295,617 Subordinated debentures and related interest of $2,741...... 58,489 Senior debentures and related interest of $2,439............ 57,651 Trade claims................................................ 54,675 Lease claims................................................ 14,349 Priority tax claims......................................... 1,219 Other claims................................................ 2,811 -------- Total............................................. $484,811 ========
F-27 99 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) AND CM HOLDINGS, INC. (PREDECESSOR COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (IN THOUSANDS OF DOLLARS) 12. LIABILITIES SUBJECT TO COMPROMISE -- CONTINUED: Liabilities subject to compromise under the Chapter 11 proceedings included substantially all current and long-term debt and trade and other payables as of the petition date. As discussed in Note 2, payment of these liabilities, including the maturity of debt obligations, was stayed while the Predecessor Company operated as a debtor-in-possession. As part of the Chapter 11 proceedings, the Predecessor Company notified all known or potential claimants for the purpose of identifying all prepetition claims against the Company. The Bankruptcy Court entered an order setting January 30, 1997 as the bar date (the "Bar Date") for submission of proofs of claim in the Chapter 11 proceedings. With certain exceptions, a creditor who failed to submit on or before the Bar Date a proof of claim in respect of a claim against the Predecessor Company is forever barred from asserting such claim against the Predecessor Company. On December 12, 1997, as described in Notes 2, 4 and 5, the Predecessor Company's Plan was confirmed whereby substantially all claims arising in connection with the Chapter 11 proceedings have been resolved. Accordingly, management believes that the amount of liabilities subject to compromise as reported are fairly stated. 13. STOCKHOLDERS' EQUITY (DEFICIT): The following is a summary of the capitalization of the Predecessor Company at March 1, 1997: Class A Stock:............................ 910,000 shares authorized; 850,000 shares issued and outstanding Class C Stock:............................ 557,000 shares authorized; 143,750 shares issued and outstanding Class D Voting Stock:..................... 6,250 shares authorized; 6,250 shares issued and outstanding Class E Stock:............................ 375,010 shares authorized; no shares issued or outstanding Common Stock:............................. 1,848,260 shares authorized; no shares issued or outstanding
The Class A Stock, Class C Stock, Class D Voting Stock and Common Stock had one cent par values per share. The Class E Stock had a one dollar par value per share. The transfer of any shares of stock were restricted and voting rights, liquidation rights and dividend rights were as specified in the Predecessor Company's Certificate of Designation. On December 12, 1997, the Company's Plan was confirmed in Bankruptcy Court whereby the reorganized company emerged and issued approximately 10,166,162 common shares of stock to the various claim holders pursuant to the terms of the Plan. The stockholders in the Predecessor Company received no recovery nor were they issued any shares in the Successor Company under the Plan. None of the claim holders receiving shares of the Successor Company were pre-confirmation shareholders of the Predecessor Company. The capitalization of the Successor Company at February 28, 1998 consists of 30,000,000 shares of authorized one cent par value voting common stock of which 9,835,559 shares were issued and outstanding at F-28 100 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) AND CM HOLDINGS, INC. (PREDECESSOR COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (IN THOUSANDS OF DOLLARS) 13. STOCKHOLDERS' EQUITY (DEFICIT) -- CONTINUED: February 28, 1998 and 340,603 shares will be issued pursuant to the Plan and in lieu of payment of $188 in administrative expenses. 14. STOCK OPTION PLAN AND PURCHASE AGREEMENTS: The Predecessor Company had established a Management Stock Incentive Plan for certain key employees and a Stock Purchase Agreement with certain key employee shareholders. No compensation expense was recognized based on the terms of these agreements and the agreements were terminated as of the effective date of the Plan with none of the key employees receiving any shares in the Successor Company as a result of these agreements. Effective January 27, 1998, the Successor Company established the Camelot Music Holdings, Inc. 1998 Stock Option Plan (the "Stock Option Plan"). The Stock Option Plan provides for the granting of either incentive stock options or nonqualified stock options to purchase shares of the Company's common stock to officers, directors and key employees responsible for the direction and management of the Company. Vesting of the options was over a four year period with a maximum term of ten years. Based on the terms of the Stock Option Plan vesting has been accelerated based on the market performance of the Company's common stock whereby 50% of the options vested on March 13, 1998 and the remaining vest on January 28, 2000. None of the options were exercisable at February 28, 1998. At February 28, 1998, 825,094 shares of common stock were reserved for future issuance under the Stock Option Plan based on a requirement that 7.5% of total outstanding shares on a diluted basis be reserved for the Stock Option Plan. Information relating to stock options is as follows:
OPTION PRICE TOTAL NUMBER OF PER SHARE EXERCISE SHARES AVERAGE* PRICE --------- ------------ -------- Shares under option at January 27, 1998.......... -- $ -- $ -- Granted.......................................... 687,000 20.75 14,255 Exercised........................................ -- -- -- Forfeited........................................ -- -- -- ------- ------ --------- Shares under option February 28, 1998............ 687,000 $20.75 $ 14,255 ======= ====== =========
- --------------- * Per share data not in thousands of dollars All outstanding options are qualified options. No compensation expense related to stock option grants was recorded for the period January 28, 1998 to February 28, 1998 as the option exercise prices were above the fair value on the date of grant. Pro forma information regarding net income and net income per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of F-29 101 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) AND CM HOLDINGS, INC. (PREDECESSOR COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (IN THOUSANDS OF DOLLARS) 14. STOCK OPTION PLAN AND PURCHASE AGREEMENTS -- CONTINUED: that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: Risk-free interest rate..................................... 5.61% Dividend yield.............................................. 0% Volatility factor........................................... 55.33% Weighted average expected life.............................. 5 years
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the option's vesting period. The Company's pro forma net income and net income per share for the one month period ended February 28, 1998 were as follows: Net earnings -- as reported................................. $581 Net earnings -- pro forma................................... $445 Basic and diluted earnings per share*....................... $0.04
- --------------- * Per share amounts not in thousands of dollars On June 4, 1998, the Successor Company's Board of Directors approved a Director Stock Option Plan (see Note 21). 15. SPECIAL ITEMS: Special items consisted of the following:
SUCCESSOR COMPANY PREDECESSOR COMPANY ------------ ----------------------------------- PERIOD PERIOD 52 WEEK 53 WEEK FEBRUARY 1, MARCH 2, PERIOD PERIOD 1998 TO 1997 TO ENDED ENDED FEBRUARY 28, JANUARY 31, MARCH 1, MARCH 2, 1998 1998 1997 1996 ------------ ----------- -------- -------- Put agreements................................. $ -- $ -- $ -- $ 3,413 Write-down of long-lived assets................ -- 6,523 202,869 Restructuring charges.......................... -- -- -- 5,238 Reduction of customer loyalty program liability.................................... -- (4,443) -- -- ------- ------- ------ -------- Total................................ $ -- $(4,443) $6,523 $211,520 ======= ======= ====== ========
F-30 102 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) AND CM HOLDINGS, INC. (PREDECESSOR COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (IN THOUSANDS OF DOLLARS) 15. SPECIAL ITEMS -- CONTINUED: Put Agreements: Effective November 12, 1993 the Predecessor Company entered into Put Agreements ("Put") with four existing shareholders. The Put provided the Predecessor Company an option to sell 375,010 shares of its Class E preferred stock at an aggregate purchase price of $50,000. In consideration for the Put, the Predecessor Company paid fees of $3,413 to the four shareholders. The Put was exercisable upon the execution by the Predecessor Company of a purchase agreement to acquire a company in a business similar to Camelot. The Put, pursuant to its original terms, expired on December 31, 1995. Write-down of Long-Lived Assets: Management identified significant adverse changes in the Predecessor Company's business climate late in the third quarter of the 53 week period ended March 2, 1996 that persisted subsequent to year end. These changes were largely due to increasing competition in the Predecessor Company's marketplace, which led to operating results and forecasted future results that were less than previously planned. These factors led to the conclusion that there was a potential impairment in the recorded value of goodwill and certain property, plant and equipment. Management performed an analysis of the recoverability of its long-lived assets based upon a variety of valuation methods including discounted cash flow and earnings before interest, taxes and depreciation expense. In management's judgment, there was an impairment of certain of the Predecessor Company's property, plant and equipment and the carrying value of the Predecessor Company's goodwill was reduced resulting in an impairment loss of $202,869 which is included in the consolidated statement of operations for that period. As a result of the Predecessor Company's financial performance and the Chapter 11 proceedings, the Predecessor Company closed seventy-three locations during the 52 week period ended March 1, 1997. In addition, the Predecessor Company re-evaluated the carrying amount of its property, plant and equipment. Based on this evaluation, the Predecessor Company determined that property, plant and equipment with a carrying amount of $17,152 was impaired, resulting in a write-down of $6,523 to estimated fair value, which amount is included in the consolidated statement of operations for that period. Restructuring Charges: In response to an increasingly competitive retail environment, the Predecessor Company began a "reengineering" project during the 53 week period ended March 2, 1996 in order to lower costs through corporate overhead reductions and the identification of under performing stores. As part of this project, the Predecessor Company identified required changes in corporate and retail operations and, therefore, assessed the realizable value of certain assets and the cost of restructuring measures. As a result, restructuring charges of $5,238 were recorded in the consolidated statement of operations for that period. Customer Loyalty Program Liability: During the period March 2, 1997 to January 31, 1998, the Company discontinued its manual "Punch Card" version of its customer loyalty program and replaced it with a limited automated program targeted to its most frequent and highest spending customers. The reduction in the program resulted in the reversal of program reward redemption reserves aggregating $4,443 which was recorded in the consolidated statement of operations for that period. 16. LEASES: The Company leases its retail stores under noncancelable leases expiring in various years through fiscal 2007. Several of the leases are subject to renewal options under various terms and generally all the leases require the Company to pay real estate taxes and common area maintenance charges. F-31 103 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) AND CM HOLDINGS, INC. (PREDECESSOR COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (IN THOUSANDS OF DOLLARS) 16. LEASES -- CONTINUED: Minimum rental commitments are summarized as follows:
FISCAL YEARS ------------ 1998........................................................ $ 39,001 1999........................................................ 35,888 2000........................................................ 33,550 2001........................................................ 29,906 2002........................................................ 24,668 Thereafter.................................................. 43,509 -------- Total minimum payments............................ $206,522 ========
Rental expense totaled $2,236, $25,593, $29,361 and $33,404 for the period February 1, 1998 to February 28, 1998, the period March 2, 1997 to January 31, 1998, the 52 week period ended March 1, 1997 and the 53 week period ended March 2, 1996, respectively. Rental expense included contingent rentals of $157, $2,259, $2,187 and $2,813 for the respective periods. The contingent rentals are based on sales volume. 17. INCOME TAXES: The (provision) benefit for income taxes includes current and deferred income taxes as follows:
SUCCESSOR COMPANY -------------- PREDECESSOR COMPANY PERIOD ------------------------------------------------------ FEBRUARY 1, PERIOD 52 WEEK 53 WEEK 1998 TO MARCH 2, 1997 PERIOD ENDED PERIOD ENDED FEBRUARY 28, TO JANUARY 31, MARCH 1, MARCH 2, 1998 1998 1997 1996 -------------- --------------------- ------------ ------------- Current taxes: Federal........................ $ -- $ -- $ -- $(538) State and local................ -- (289) -- 162 ----- ----- ----- ----- Total.................. -- (289) -- (376) ----- ----- ----- ----- Deferred taxes: Federal........................ (97) -- -- -- State and local................ (18) -- -- (98) ----- ----- ----- ----- Total.................. (115) -- -- (98) ----- ----- ----- ----- Total (provision) benefit.............. $(115) $(289) $ -- $(474) ===== ===== ===== ===== Income tax (provision) benefit from continuing operations before extraordinary item...... $(115) -- -- $(474) Tax benefit of extraordinary item........................... -- -- -- -- ----- ----- ----- ----- Total............................ $(115) $(289) $ -- $(474) ===== ===== ===== =====
F-32 104 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) AND CM HOLDINGS, INC. (PREDECESSOR COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (IN THOUSANDS OF DOLLARS) 17. INCOME TAXES -- CONTINUED: The significant differences between the Federal U.S. statutory rate and the Company's effective tax rate are as follows:
SUCCESSOR COMPANY ------------ PREDECESSOR COMPANY PERIOD ---------------------------------------------- FEBRUARY 1, PERIOD 52 WEEK 53 WEEK 1998 TO MARCH 2, 1997 PERIOD ENDED PERIOD ENDED FEBRUARY 28, TO JANUARY 31, MARCH 1, MARCH 2, 1998 1998 1997 1996 ------------ -------------- ------------ ------------ Statutory tax rate...................... 35.0% 35.0% (35.0)% (35.0)% Goodwill amortization and Fiscal 1995 write-off............................. -- 2.0 1.1 26.7 Corporate owned life insurance.......... (0.4) (1.3) 4.9 -- State taxes, net of federal benefit..... 4.0 .9 -- -- Utilization of loss carryforwards....... -- (35.7) -- -- IRC section 108 ordering rules.......... (22.1) -- -- -- Valuation allowance -- due to uncertainty of utilization of net operating loss carryforwards.......... -- 29.0 8.4 Other adjustments, net.................. -- -- -- .1 ----- ----- ----- ----- Effective tax rate...................... 16.5% .9% 0.0% 0.2% ===== ===== ===== =====
At February 28, 1998 and March 1, 1997, the Company had total deferred tax assets of $26,344 and $55,989 and total deferred tax liabilities of $1,239 and $192, respectively. As part of the emergence from Chapter 11 proceedings, the Company believes that it is more likely than not that it will be able to use the deferred tax assets at February 28, 1998 in the future. Therefore, no valuation allowance has been established to offset these deferred tax assets. At March 1, 1997, the Company had net operating loss carryforwards of $76,000 for federal and state income tax purposes expiring in years 2010 through 2012. For financial reporting purposes, a full valuation allowance at March 1, 1997 was recognized to offset the net deferred tax assets as management determined that the assets may not be realized. At January 31, 1998, as part of the fresh-start reporting, a reduction in the deferred tax valuation allowance of $55,797 was recorded. A portion of this reduction related to the utilization of net operating loss carryforwards against the cancellation of indebtedness resulting from the emergence from Chapter 11 (see Note 2). Under the provision of the Internal Revenue Code ("IRC"), no provision for income taxes was recorded on the remaining gain on the cancellation of indebtedness. The remaining March 1, 1997 valuation allowance was reversed as a part of the Company's adoption of fresh-start reporting and is included in reorganization income (see Note 5). Deferred tax assets after fresh-start reporting at the emergence date were $25,220. F-33 105 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) AND CM HOLDINGS, INC. (PREDECESSOR COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (IN THOUSANDS OF DOLLARS) 17. INCOME TAXES -- CONTINUED: Significant components of the Company's deferred tax assets and liabilities are as follows:
SUCCESSOR PREDECESSOR COMPANY COMPANY ------------ ----------- FEBRUARY 28, MARCH 1, 1998 1997 ------------ ----------- Net current deferred income tax assets: Inventory reserves..................................... $ 1,817 $ 2,775 Reorganization expenses................................ 1,830 4,967 Other, net............................................. 2,910 3,986 ------- -------- 6,557 11,728 ------- -------- Net long-term deferred income tax assets: Depreciation differences............................... 16,138 4,361 Amortization of financing fees......................... -- 5,749 Net federal and state operating loss................... -- 28,306 Leases................................................. -- 2,265 Other, net............................................. 2,410 3,388 ------- -------- 18,548 44,069 ------- -------- Valuation allowance.................................... -- (55,797) ------- -------- Net deferred tax assets on the consolidated balance sheets............................................... $25,105 $ -- ======= ========
18. COMMITMENTS AND CONTINGENCIES: Claims and Legal Actions: The Company is a party to various claims, legal actions and complaints arising in the ordinary course of its business, including proposed pre-petition assessments by the Internal Revenue Service aggregating approximately $7,900 of which the Company has accrued $800. In the opinion of management, all such matters not accrued for are without merit or involve such amounts that unfavorable disposition will not have a material impact on the financial position, results of operations or cash flows of the Company. Self-Insurance Commitments: The Company is self-insured with respect to workers' compensation benefits within the State of Ohio and medical benefits for all of its employees. The Company maintains insurance coverage for workers' compensation claims in excess of $300 per incident and for annual medical claims in excess of $75 per employee. Management Consulting Agreement: The Company was party to a five year management consulting agreement with Investcorp S.A. ("Investcorp"). Fees under this agreement were $500 per year payable annually, in advance, with the first three years paid on November 12, 1993. The final two year payment was not paid to Investcorp as a result of the rejection of the contract under Chapter 11 proceedings. 19. ELECTIVE SAVINGS AND PLAN: The Company sponsors an Elective Savings 401(k) and Profit Sharing Plan (the "401(k) Plan"). The 401(k) Plan covers substantially all employees and provides for a 22.5% to 50% matching contribution of employee F-34 106 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) AND CM HOLDINGS, INC. (PREDECESSOR COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (IN THOUSANDS OF DOLLARS) 19. ELECTIVE SAVINGS AND PLAN -- CONTINUED: elective contributions up to a maximum of 10% of wages, not to exceed the statutory limit. Such matching contributions were approximately $56, $239, $309, and $266 for the period February 1, 1998 to February 28, 1998, the period March 2, 1997 to January 31, 1998, the 52 week period ended March 1, 1997 and the 53 week period ended March 2, 1996, respectively. The Company may, at the discretion of the Board of Directors, contribute additional funds to the Plan as deemed appropriate. No such contributions were made during the respective periods. 20. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
SUCCESSOR COMPANY ------------ PREDECESSOR COMPANY PERIOD ---------------------------------------------- FEBRUARY 1, PERIOD 52 WEEK 53 WEEK 1998 TO MARCH 2, 1997 PERIOD ENDED PERIOD ENDED FEBRUARY 28, TO JANUARY 31, MARCH 1, MARCH 2, 1998 1998 1997 1996 ------------ -------------- ------------ ------------ Supplemental disclosures of cash flow information: Cash paid (received) during the fiscal year for: Interest............................ $ 11 $ 152 $ 2,585 $32,136 Income taxes paid (refunded), net... 3 58 129 (3,221) Reorganization items................ -- 5,759 5,956 -- Non-cash reorganization activities: Reclassification of liabilities subject to compromise............. $ -- $ -- $477,153 $ -- Decrease in accounts payable, accrued expenses and other liabilities....................... -- -- (80,393) -- Reduction of debt................... -- -- (396,760) --
F-35 107 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) AND CM HOLDINGS, INC. (PREDECESSOR COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (IN THOUSANDS OF DOLLARS) 20. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -- CONTINUED:
SUCCESSOR COMPANY ----------------------------- PERIOD FEBRUARY 1, 1998 TO FEBRUARY 28, 1998 ----------------------------- FRESH-START ACQUISITION OF REPORTING THE WALL ----------- -------------- Supplemental disclosures of investing activities: Assets at fair value: Cash...................................................... $ 86,304 $ 153 Accounts receivable....................................... 2,698 1,550 Inventories............................................... 108,781 39,630 Prepaid expenses and other................................ 8,541 2,583 Property, plant and equipment............................. 24,400 14,541 Goodwill.................................................. -- 26,950 Other long-term assets.................................... 29,595 3,967 --------- ------- Total assets...................................... 260,319 89,374 --------- ------- Liabilities at fair value: Accounts payable.......................................... 33,522 -- Accrued expenses and other liabilities.................... 23,784 1,418 Other current liabilities................................. -- 6,633 Long-term liabilities..................................... 8,645 6,672 --------- ------- Total liabilities................................. 65,951 14,723 --------- ------- Common stock issued in exchange for debt discharged....... (194,368) -- Cash acquired............................................. -- (153) Payable for acquisition, including expenses............... -- 71,614 --------- ------- Cash paid, net of cash acquired........................... $ -- $ 2,884 ========= =======
21. SUBSEQUENT EVENTS: Plan of Merger: On June 3, 1998, the Successor Company entered into an agreement and plan of merger (the "Merger Agreement") with respect to the proposed acquisition of Spec's Music, Inc. ("Spec's"). Spec's is a Miami, Florida based music retailer, and operates forty-two stores in Florida and Puerto Rico. As of June 3, 1998, Spec's operated sixteen mall stores and twenty-six stores in shopping centers and free-standing locations. Spec's also owns three specialty Latin businesses, including a music distribution company and the Latin music record label "Hits Only" and its recording studio, and maintains an inventory of music produced by a majority of the independent Latin labels. The acquisition will be accounted for as a purchase, and will include a cash payment of approximately $26,000 (including repayment of assumed bank debt of approximately $7,000), the assumption of additional liabilities of approximately $13,000, and acquisition costs of approximately $2,000. The acquisition will be funded primarily by the proceeds of a new term loan and the balance funded by operating cash. Consummation of the acquisition is subject to certain conditions, including approval of the acquisition by Spec's public stockholders. The acquisition is anticipated to close in July 1998. Revolving Credit Agreement Amendment and Waiver: In early June 1998, the Successor Company received commitment letters from its lenders to modify its Revolving Credit Agreement (the "Amended Credit Facility"). The commitment includes the addition of a $25,000 term loan that will bear interest at the same rate as the F-36 108 CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY) AND CM HOLDINGS, INC. (PREDECESSOR COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (IN THOUSANDS OF DOLLARS) 21. SUBSEQUENT EVENTS -- CONTINUED: existing Revolving Credit Agreement. The proceeds of the term loan will be used to finance the acquisition of Spec's. Mandatory repayments of the term loan are $3,000 in Fiscal 1998, $8,000 in Fiscal 1999, $10,000 in Fiscal 2000, and $4,000 in Fiscal 2001. In addition, the modification also increased the eligible borrowing base to 60% of eligible inventory as well as modified the current capital expenditures limitation and waived certain covenants in order to permit the Spec's acquisition. The Successor Company will pay a fee of $125 for the commitment to modify the Revolving Credit Agreement. Outside Directors Stock Option Plan: On June 4, 1998, the Successor Company's Board of Directors approved the Outside Directors Stock Option Plan (the "Directors Plan"). Eligible participants include all non-employee directors. A total of 125,000 shares were reserved for future issuance under the Directors Plan. On June 4, 1998, each of the five outside directors received a grant of 2,500 stock options at an option price of twenty dollars and seventy-five cents per share. Vesting on the options is immediate upon grant. In addition, upon the effective date of the registration statement for the Company's initial public offerings each outside director will also receive a grant of 7,500 options at an option price equal to the fair market value of a share of common stock on the date of the contemplated public offering of the shares. These options have a three-year vesting schedule. The Company will recognize approximately $241 in compensation expense in connection with these option awards during the second quarter of Fiscal 1998. Initial Public Offerings: The Company announced its intention to register with the Securities and Exchange Commission for initial public offerings of common stock. The offerings will be made by institutional stockholders who received shares of common stock as part of the Company's emergence from Chapter 11. F-37 109 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholder The Wall Music. Inc.: We have audited the accompanying statements of operations, stockholder's equity and cash flows of The Wall Music, Inc. (the "Company"), for the year ended June 1, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the results of the Company's operations and cash flows for the year ended June 1, 1997 in conformity with generally accepted accounting principles. As discussed in Note 1 to the financial statements, the Company sold substantially all of its tangible assets and transferred certain liabilities effective February 28, 1998. Deloitte & Touche LLP Atlanta, Georgia August 21, 1997 (February 28, 1998 as to Note 1) F-38 110 THE WALL MUSIC, INC. STATEMENTS OF OPERATIONS (IN THOUSANDS)
NINE MONTHS ENDED ------------------------ YEAR ENDED FEBRUARY 28, MARCH 1, JUNE 1, 1998 1997 1997 ------------ -------- ---------- (UNAUDITED) NET SALES................................................ $141,314 $130,338 $161,236 COST AND EXPENSES: Cost of sales.......................................... 85,701 80,955 99,429 Selling, general, and administrative expenses.......... 41,565 40,758 53,698 Depreciation and amortization.......................... 4,666 6,138 8,197 Writedown of long-lived assets......................... 23,159 27,323 -------- -------- -------- INCOME (LOSS) BEFORE TAXES............................... 9,382 (20,672) (27,411) INCOME TAX BENEFIT (EXPENSE)............................. (3,177) 2,767 3,738 -------- -------- -------- NET INCOME (LOSS)........................................ $ 6,205 $(17,905) $(23,673) ======== ======== ========
See notes to financial statements. F-39 111 THE WALL MUSIC, INC. STATEMENTS OF STOCKHOLDER'S EQUITY FOR THE YEAR ENDED JUNE 1, 1997 AND THE NINE MONTHS ENDED FEBRUARY 28, 1998 (UNAUDITED) (IN THOUSANDS, EXCEPT SHARES OUTSTANDING)
PREFERRED STOCK COMMON STOCK -------------------- -------------------- ADDITIONAL SHARES SHARES PAID-IN ACCUMULATED OUTSTANDING AMOUNT OUTSTANDING AMOUNT CAPITAL DEFICIT ----------- ------ ----------- ------ ---------- ----------- BALANCE -- June 2, 1996....... 749 $749 100 $ -- $110,656 $(23,303) Conversion of stock........... (749) (749) 400 -- 749 -- Net loss...................... -- -- -- -- -- (23,673) ----- ---- --- ----- -------- -------- BALANCE -- June 1, 1997....... -- $ -- 500 $ -- $111,405 $(46,976) ----- ---- --- ----- -------- -------- Net income (unaudited)........ -- -- -- -- -- 6,205 ----- ---- --- ----- -------- -------- BALANCE -- February 28, 1997.. -- $ -- 500 $ -- $111,405 $(40,771) ===== ==== === ===== ======== ========
See notes to financial statements. F-40 112 THE WALL MUSIC, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED ------------------------ YEAR ENDED FEBRUARY 28, MARCH 1, JUNE 1, 1998 1997 1997 ------------ -------- ---------- (UNAUDITED) OPERATING ACTIVITIES: Net income (loss)........................................ $ 6,205 $(17,905) $(23,673) Adjustments to reconcile net income (loss) from operating activities to net cash provided by (used in) operating activities: Depreciation, amortization and writedown of long-lived assets.............................................. 4,666 29,297 35,520 Deferred income taxes.................................. 209 (2,819) (3,758) Gain (loss) on disposition of property and equipment... 81 (163) (132) Increase (decrease) in cash flow resulting from changes in assets and liabilities: Accounts receivable................................. 45 (135) (60) Inventories......................................... (3,091) (6,724) 696 Due from parent company............................. (10,285) 6,019 1,874 Other current assets................................ (2,179) 1,513 2,049 Accounts payable, trade............................. 2,613 (3,359) (5,833) Accrued expenses.................................... 5,979 (1,504) (1,275) ------- -------- -------- Net cash provided by (used in) operating activities........................................ 4,243 4,220 5,408 INVESTING ACTIVITIES: Additions to property and equipment...................... (2,061) (4,642) (5,825) Deferred transaction costs............................... (3,350) -- -- Proceeds from sale of property and equipment............. 417 38 38 ------- -------- -------- Net cash used in investing activities............... (4,994) (4,604) (5,787) NET DECREASE IN CASH AND CASH EQUIVALENTS................ (751) (384) (379) CASH AND CASH EQUIVALENTS Beginning of period.................................... 1,782 2,161 2,161 ------- -------- -------- End of period.......................................... $ 1,031 $ 1,777 $ 1,782 ======= ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -- Cash paid for income taxes............................. $ 29 $ 86 $ 115 ======= ======== ======== SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES-- Conversion of preferred shares to common shares........ $ -- $ 749 $ 749 ======= ======== ========
See notes to financial statements. F-41 113 THE WALL MUSIC, INC. NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 1, 1997 AND FOR THE NINE MONTHS ENDED FEBRUARY 28, 1998 (UNAUDITED) AND MARCH 1, 1997 (UNAUDITED) 1. DESCRIPTION OF BUSINESS AND SUBSEQUENT EVENT The Wall Music, Inc. (the "Company") is a wholly owned subsidiary of W H Smith Group Holdings (USA), Inc. (the "Parent"). The Parent is a wholly owned subsidiary of W H Smith Group plc, a publicly-held United Kingdom corporation. Prior to the sale of certain assets and transfer of certain liabilities on February 28, 1998, the Company was a specialty music retailer operating in ten states in the Northeastern and Mid-Atlantic regions of the United States. The Company sold compact discs, cassettes, pre-recorded video cassettes, and other entertainment products and related accessories. Pursuant to an Asset Purchase Agreement dated December 10, 1997 (the "Purchase Agreement"), the Parent sold certain assets and transferred certain liabilities of the Company to Camelot Music, Inc. ("Camelot") effective February 28, 1998. In connection with the acquisition, Camelot assumed all of the Company's store leases in effect on February 28, 1998. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation -- These financial statements have been prepared from the separate books and records of the Company and represent the results of operations, changes in stockholders', and cash flows of the Company immediately prior to the acquisition by Camelot of substantially all tangible assets and certain liabilities of the Company. The financial statements of the Company for the nine months ended February 28, 1998 and March 1, 1997 are unaudited and, in the opinion of management, include all adjustments consisting solely of normal recurring adjustments necessary to fairly state the Company's results of operations, changes in stockholder's equity, and cash flows for the periods presented. The results of operations for the nine months ended February 28, 1998 and March 1, 1997 are not necessarily indicative of the results to be expected for the full year. The Company had certain transactions with its Parent (see Note 7). Fiscal Year -- The Company's fiscal year is comprised of the 52- or 53-week period ending on the Sunday closest to May 31. The year ended June 1, 1997 ("fiscal 1997") contained 52 weeks. Cash and Cash Equivalents -- For the purpose of reporting cash flows, cash and cash equivalents include cash on hand and cash invested in highly liquid investments with a purchased maturity of three months or less. Inventories -- Inventories are valued at the lower of average cost or market. Preopening Costs -- Costs associated with opening new stores are expensed when incurred. Property and Equipment -- Property and equipment is stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the terms of the leases, including likely renewal options, or ten years. Goodwill -- Excess of cost over net assets acquired is amortized over various periods ranging from 25 to 40 years. Favorable Lease Values -- Intangible assets related to leases are amortized over the terms of the associated leases. Income Taxes -- The Company was a member of a consolidated group for federal income tax filing purposes. The Company's Parent allocated income tax expense or benefit to each of its subsidiaries based on each F-42 114 THE WALL MUSIC, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) subsidiary's pretax income or loss. If the Company had computed income taxes on a separate return basis, income tax expense for the year ended June 1, 1997 and for the nine months ended February 28, 1998 and March 1, 1997 would have been approximately zero. (See also Note 5.) Impairment of Long-Lived Assets -- During the year ended June 1, 1997, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of." SFAS 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. IMPAIRMENT OF LONG-LIVED ASSETS During fiscal 1997, the Company evaluated the recoverability of long-lived assets on a store-by-store basis. For each operating unit determined to be impaired, the Company recognized an impairment loss equal to the difference between the carrying value and the fair value of the operating unit's assets. Fair value, on an individual operating-unit basis, was estimated to be the present value of expected future cash flows, as determined by management. As a result of this evaluation, the Company wrote-down intangible assets by $17,475,000 and property and equipment by $9,849,000 in Fiscal 1997. 4. LEASE OBLIGATIONS The Company has operating leases that relate primarily to its retail stores. Lease terms generally range from 3 to 20 years with renewal options. Certain store leases provide for additional contingent rentals based on a percentage of sales in excess of a base amount. Certain other leases provide for scheduled rent increases over the term of the lease; rent expense for such leases is recognized in equal annual amounts over the term of each such lease. Total rent expense for the year ended June 1, 1997 (including contingent rentals of $104,000) was $17,592,000. Future minimum lease payments as of June 1, 1997 are as follows (in thousands):
OPERATING FISCAL YEAR LEASES ----------- --------- 1998........................................................ $16,904 1999........................................................ 15,826 2000........................................................ 14,097 2001........................................................ 13,139 2002........................................................ 11,740 Thereafter.................................................. 25,489 ------- $97,195 =======
F-43 115 THE WALL MUSIC, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 5. INCOME TAXES The components of income tax benefit (expense) for the year ended June 1, 1997 follow (in thousands): Current: Federal................................................... $ 122 State..................................................... (142) ------ (20) ------ Deferred: Federal................................................... 6,539 State..................................................... 1,403 ------ 7,942 ------ Change in valuation allowance............................. (4,184) ------ Total income tax benefit.......................... $3,738 ======
The income tax benefit computed using the federal statutory rate is reconciled to the reported income tax benefit as follows for the year ended June 1, 1997: Computed tax benefit at federal statutory rate.............. 34.0% State taxes, net............................................ 8.2 Nondeductible amortization.................................. (13.3) Change in valuation allowance............................... (15.3) ----- 13.6% =====
In fiscal 1997, the Company determined that it was unlikely to realize the benefit of deferred state income tax assets. Accordingly, the Company established a reserve for the full amount of such deferred taxes. 6. PENSION AND RETIREMENT PLANS Employees were eligible to participate in the W H Smith, Inc. Savings and Retirement Plan that qualified as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. The plan covered substantially all employees. After one year of continuous service, the Company matched 100% of employee contributions up to 3% of each employee's salary. The Company recorded expense in fiscal 1997 related to this plan of $220,000. In addition, the Company participated in an unfunded Supplemental Executive Retirement Plan ("SERP") which provided supplemental pension benefits to key executives. Expense for this plan was $75,000 for the year ended June 1, 1997. 7. RELATED PARTY TRANSACTIONS The Company regularly received and remitted working capital to the Parent based on cash flow required for or generated from operations. The Company supplied inventory and administrative services for airport music stores operated by its sister company W H Smith, Inc. ("Smith"). During fiscal 1997, the Company provided Smith $1,650,000 in inventory (at average cost) and charged Smith $76,000 for related administrative costs. The Company participated in group insurance programs managed by the Parent. The Parent charged the Company for its insurance premiums and for its self-insured medical and workers compensation expense. Such charges aggregated $1,206,000 for the year ended June 1, 1997. The Company also recorded a management fee representing the allocated costs of certain corporate services provided by the Parent. Such expenses totaled $250,000 during fiscal 1997. F-44 116 A map of the United States depicting locations of Camelot Music and The Wall stores as of June 1, 1998, text stating "Customer Satisfaction Through Broad Product Selection and Service," and the Camelot Music and The Wall logos. 117 - ------------------------------------------------------ - ------------------------------------------------------ NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY THE COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 Risk Factors.......................... 10 Price Range of Common Stock........... 17 Dividend Policy....................... 17 Capitalization........................ 18 Dilution.............................. 19 Unaudited Pro Forma Condensed Consolidated Financial Data......... 20 Selected Consolidated Financial Data................................ 24 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 26 Business.............................. 38 Management............................ 49 Certain Transactions.................. 54 Principal and Selling Stockholders.... 56 Description of Capital Stock.......... 57 Shares Eligible For Future Sale....... 59 Description of Certain Indebtedness... 62 Certain United States Federal Tax Consequences for Non-United States Holders............................. 64 Underwriting.......................... 66 Legal Matters......................... 68 Experts............................... 69 Available Information................. 69 Index to Consolidated Financial Statements and Notes Thereto........ F-1
UNTIL , ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ SHARES [LOGO] CAMELOT MUSIC HOLDINGS, INC. COMMON STOCK ------------------------- PROSPECTUS ------------------------- MERRILL LYNCH & CO. MORGAN STANLEY DEAN WITTER MCDONALD & COMPANY SECURITIES, INC. , 1998 - ------------------------------------------------------ - ------------------------------------------------------ 118 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH JURISDICTION. [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED AUGUST 11, 1998 PROSPECTUS SHARES CAMELOT MUSIC HOLDINGS, INC. COMMON STOCK ------------------------ All of the shares of Common Stock of Camelot Music Holdings, Inc. (together with its subsidiaries, "Camelot" or the "Company") offered hereby are being sold by certain stockholders (the "Selling Stockholders") of the Company. See "Principal and Selling Stockholders." The Selling Stockholders acquired their shares upon the Company's emergence from bankruptcy pursuant to Section 1145(a) of the United States Bankruptcy Code or in open market transactions thereafter. The Company is not selling shares of Common Stock in the Offerings and will not receive any proceeds from the sale of any shares of Common Stock offered hereby. Of the shares of Common Stock offered hereby, shares are being offered for sale initially outside the United States and Canada by the International Managers and shares are being offered for sale initially in a concurrent offering in the United States and Canada by the U.S. Underwriters. The initial public offering price and the underwriting discount per share will be identical for both Offerings. See "Underwriting." Prior to the Offerings, there has been a limited public market for the Common Stock. It is currently estimated that the initial public offering price will be between $ and $ per share. The initial public offering price does not necessarily bear any direct relationship to the market prices of the Common Stock as reported on the OTC Bulletin Board prior to the Offerings. The closing bid price of the Common Stock on August 10, 1998 was $37 per share. For a discussion relating to factors to be considered in determining the initial public offering price, see "Underwriting." The Company has applied for quotation of the Common Stock on the Nasdaq National Market System under the symbol "CMLT." SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) SELLING STOCKHOLDERS(2) - -------------------------------------------------------------------------------------------------------------------- Per Share........................... $ $ $ - -------------------------------------------------------------------------------------------------------------------- Total(3)............................ $ $ $ - -------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have agreed to indemnify the several Underwriters against certain liabilities, including certain liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) The Company has agreed to pay expenses of the Offerings estimated at $ . (3) The Selling Stockholders have granted the International Managers and the U.S. Underwriters options to purchase up to an additional shares and shares of Common Stock, respectively, in each case exercisable within 30 days after the date hereof, solely to cover over-allotments, if any. If such options are exercised in full, the total Price to Public, Underwriting Discount and Proceeds to Selling Stockholders will be $ , $ and $ , respectively. See "Underwriting." ------------------------ The shares of Common Stock are offered by the several Underwriters, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of certain legal matters by counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the shares of Common Stock will be made in New York, New York on or about , 1998. ------------------------ MERRILL LYNCH INTERNATIONAL MORGAN STANLEY DEAN WITTER MCDONALD & COMPANY SECURITIES, INC. ------------------------ The date of this Prospectus is , 1998. 119 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] UNDERWRITING Merrill Lynch International, Morgan Stanley & Co. International Limited and McDonald & Company Securities, Inc. are acting as lead managers (the "Lead Managers") for each of the International Managers named below (the "International Managers"). Subject to the terms and conditions set forth in an international purchase agreement (the "International Purchase Agreement") among the Company, CMI, the Selling Stockholders and the International Managers, and concurrently with the sale of shares of Common Stock to the U.S. Underwriters (as defined below), the Selling Stockholders have agreed to sell to the International Managers, and each of the International Managers severally and not jointly has agreed to purchase from the Selling Stockholders, the number of shares of Common Stock set forth opposite its name below.
NUMBER OF INTERNATIONAL MANAGER SHARES --------------------- ----------- Merrill Lynch International................................. Morgan Stanley & Co. International Limited.................. McDonald & Company Securities, Inc.......................... Total............................................. ===========
The Company, CMI and the Selling Stockholders have also entered into a U.S. purchase agreement (the "U.S. Purchase Agreement") with certain underwriters in the United States and Canada (the "U.S. Underwriters" and together with the International Managers, the "Underwriters") for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Morgan Stanley & Co. Incorporated and McDonald & Company Securities, Inc. are acting as representatives (the "U.S. Representatives"). Subject to the terms and conditions set forth in the U.S. Purchase Agreement, and concurrently with the sale of shares of Common Stock to the International Managers pursuant to the International Purchase Agreement, the Selling Stockholders have agreed to sell to the U.S. Underwriters, and the U.S. Underwriters severally have agreed to purchase from the Selling Stockholders, an aggregate of shares of Common Stock. The initial public offering price per share and the total underwriting discount per share of Common Stock are identical under the International Purchase Agreement and the U.S. Purchase Agreement. In the International Purchase Agreement and the U.S. Purchase Agreement, the several International Managers and the several U.S. Underwriters, respectively, have agreed, subject to the terms and conditions set forth therein, to purchase all of the shares of Common Stock being sold pursuant to each such agreement if any of the shares of Common Stock being sold pursuant to such agreement are purchased. Under certain circumstances, under the International Purchase Agreement and the U.S. Purchase Agreement, the commitments of non-defaulting Underwriters may be increased. The closings with respect to the sale of shares of Common Stock to be purchased by the International Managers and the U.S. Underwriters are conditioned upon one another. The Lead Managers have advised the Company and the Selling Stockholders that the International Managers propose initially to offer the shares of Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus, and to certain dealers at such price less a concession not in excess of $ per share of Common Stock. The International Managers may allow, and such dealers may reallow, a discount not in excess of $ per share of Common Stock on sales to certain other dealers. After the initial public offering, the public offering price, concession and discount may be changed. The Selling Stockholders have granted options to the International Managers, exercisable for 30 days after the date of this Prospectus, to purchase up to an aggregate of additional shares of Common Stock at the initial public offering price set forth on the cover page of this Prospectus, less the underwriting discount. The International Managers may exercise these options solely to cover over-allotments, if any, made on the sale of the Common Stock offered hereby. To the extent that the International Managers exercise these options, each International Manager will be obligated, subject to certain conditions, to purchase a number of additional shares of Common Stock proportionate to such International Manager's initial amount reflected in the foregoing table. The Selling Stockholders also have granted options to the U.S. Underwriters, exercisable for 30 days after the 66 120 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] date of this Prospectus, to purchase up to an aggregate of additional shares of Common Stock to cover over-allotments, if any, on terms similar to those granted to the International Managers. At the request of the Company, the Underwriters have reserved for sale, at the initial public offering price, up to of the shares offered to be sold to certain employees of the Company and vendors and service providers having business relationships with the Company. The number of shares of Common Stock available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares which are not orally confirmed for purchase within one day of the pricing of the Offerings will be offered by the Underwriters to the general public on the same terms as the other shares offered hereby. The Company, its directors and executive officers, member of management, the Selling Stockholders and certain holders of Common Stock have agreed, subject to certain exceptions, not to directly or indirectly (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of or otherwise dispose of or transfer any shares of Common Stock or securities convertible into or exchangeable or exercisable for Common Stock, whether now owned or thereafter acquired by the person executing the agreement or with respect to which the person executing the agreement thereafter acquires the power of disposition, or file a registration statement under the Securities Act with respect to the foregoing or (ii) enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of the Common Stock whether any such swap or transaction is to be settled by delivery of Common Stock or other securities, in cash or otherwise, without the prior written consent of Merrill Lynch on behalf of the Underwriters for a period of 180 days after the date of this Prospectus. See "Shares Eligible for Future Sale." The International Managers and the U.S. Underwriters have entered into an intersyndicate agreement (the "Intersyndicate Agreement") that provides for the coordination of their activities. Pursuant to the Intersyndicate Agreement, the International Managers and the U.S. Underwriters are permitted to sell shares of Common Stock to each other for purposes of resale at the initial public offering price, less an amount not greater than the selling concession. Under the terms of the Intersyndicate Agreement, the U.S. Underwriters and any dealer to whom they sell shares of Common Stock will not offer to sell or sell shares of Common Stock to persons who are non-U.S. or non-Canadian persons or to persons they believe intend to resell to persons who are non-U.S. or non-Canadian persons, and the International Managers and any dealer to whom they sell shares of Common Stock will not offer to sell or sell shares of Common Stock to U.S. persons or to Canadian persons or to persons they believe intend to resell to U.S. or Canadian persons, except in the case of transactions pursuant to the Intersyndicate Agreement. Prior to the Offerings, there has been a limited public market for the Common Stock of the Company. The initial public offering price will be determined through negotiations among the Selling Stockholders and the U.S. Representatives and the Lead Managers. The factors considered in determining the initial public offering price, in addition to prevailing market conditions, are price earnings ratios of publicly traded companies that the U.S. Representatives believe to be comparable to the Company, certain financial information of the Company, the history of, and the prospects for, the Company and the industry in which it competes, and an assessment of the Company's management, its past and present operations, the prospects for, and timing of, future revenues of the Company, the present state of the Company's development, and the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to the Company. There can be no assurance that an active trading market will develop for the Common Stock or that the Common Stock will trade in the public market subsequent to the Offerings at or above the initial public offering price. The Common Stock is also currently traded on the OTC Bulletin Board. The Company has applied for quotation of the Common Stock on the Nasdaq National Market System under the symbol "CMLT." Because Merrill Lynch may be deemed to be an affiliate of the Company, the Offerings will be conducted in accordance with Conduct Rule 2720 of the National Association of Securities Dealers, Inc., which requires that the public offering price of an equity security be no higher than the price recommended by a Qualified Independent Underwriter which has participated in the preparation of the Registration Statement and performed its usual standard of due diligence with respect thereto. McDonald & Company Securities, Inc. has agreed to act as Qualified Independent Underwriter with respect to the Offerings, and the public offering price of the Common Stock will be no higher than that recommended by McDonald & Company Securities, Inc. 67 121 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] The Underwriters do not intend to confirm sales of the Common Stock offered hereby to any accounts over which they exercise discretionary authority. The Company and the Selling Stockholders have agreed to indemnify the International Managers and the U.S. Underwriters against certain liabilities, including certain liabilities under the Securities Act, or to contribute to payments the U.S. Underwriters and the International Managers may be required to make in respect thereof. Until the distribution of the Common Stock is completed, rules of the Securities and Exchange Commission may limit the ability of the Underwriters and certain selling group members to bid for and purchase the Common Stock. As an exception to these rules, the U.S. Representatives are permitted to engage in certain transactions that stabilize the price of the Common Stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Common Stock. If the Underwriters create a short position in the Common Stock in connection with the Offerings, i.e., if they sell more shares of Common Stock than are set forth on the cover page of this Prospectus, the U.S. Representatives may reduce that short position by purchasing Common Stock in the open market. The U.S. Representatives may also elect to reduce any short position by exercising all or part of the over-allotment option described above. The U.S. Representatives may also impose a penalty bid on certain Underwriters and selling group members. This means that if the U.S. Representatives purchase shares of Common Stock in the open market to reduce the Underwriters' short position or to stabilize the price of the Common Stock, they may reclaim the amount of the selling concession from the Underwriters and selling group members who sold those shares as part of the Offerings. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of the Common Stock to the extent that it discourages resales of the Common Stock. Neither the Company nor any of the Underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Common Stock. In addition, neither the Company nor any of the Underwriters makes any representation that the U.S. Representatives will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. Each International Manager has agreed that (i) it has not offered or sold and, prior to the expiration of the period of six months from the Closing Date, will not offer or sell any shares of Common Stock to persons in the United Kingdom, except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which do not constitute an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995; (ii) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 with respect to anything done by it in relation to the Common Stock in, from or otherwise involving the United Kingdom; and (iii) it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the issuance of Common Stock to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or is a person to whom such document may otherwise lawfully be issued or passed on. No action has been or will be taken in any jurisdiction (except in the United States) that would permit a public offering of the shares of Common Stock, or the possession, circulation or distribution of this Prospectus or any other material relating to the Company, the Selling Stockholders or shares of Common Stock in any jurisdiction where action for that purpose is required. Accordingly, the shares of Common Stock may not be offered or sold, directly or indirectly, and neither this Prospectus nor any other offering material or advertisements in connection with the shares of Common Stock may be distributed or published, in or from any country or jurisdiction except in compliance with any applicable rules and regulations of any such country or jurisdiction. 68 122 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] Purchasers of the shares offered hereby may be required to pay stamp taxes and other charges in accordance with the laws and practices of the country of purchase in addition to the offering price set forth on the cover page hereof. Merrill Lynch, a co-manager of the Offerings, is also a Selling Stockholder and will receive a portion of the proceeds of the Offerings. Morgan Stanley & Co. Incorporated, a co-manager of the Offerings, is under common ownership with Van Kampen-Merritt Prime Rate Income Trust, which is the largest shareholder of the Company. LEGAL MATTERS Certain legal matters with respect to the validity of the Common Stock offered hereby will be passed upon for the Company by Calfee, Halter & Griswold LLP, Cleveland, Ohio. Calfee, Halter & Griswold LLP provides services to McDonald & Company Securities, Inc. on a regular basis. Certain legal matters relating to the Offerings will be passed upon for the Underwriters by Fried, Frank, Harris, Shriver & Jacobson (a partnership including professional corporations), New York, New York. EXPERTS The Consolidated Financial Statements of Camelot Music Holdings, Inc. ("Successor Company") as of February 28, 1998 and for the period February 1, 1998 to February 28, 1998 ("Successor period") and of CM Holdings, Inc. ("Predecessor Company") as of March 1, 1997 and for the period March 2, 1997 to January 31, 1998, the 52 week period ended March 1, 1997 and the 53 week period ended March 2, 1996 ("Predecessor periods"), appearing in this Prospectus, have been audited by PricewaterhouseCoopers LLP, independent accountants, as set forth in their report thereon appearing elsewhere in this Prospectus, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The financial statements of The Wall Music, Inc. for the year ended June 1, 1997 included in this Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein (which report expresses an unqualified opinion and includes an explanatory paragraph referring to the sale of substantially all of the tangible assets and the transfer of certain liabilities of The Wall Music, Inc. effective February 28, 1998), and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. AVAILABLE INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 (together with all amendments, schedules and exhibits thereto, the "Registration Statement") under the Securities Act with respect to the Common Stock offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement, certain portions of which are omitted as permitted by the rules and regulations of the Commission. For further information pertaining to the Company and the Common Stock offered hereby, reference is made to the Registration Statement, including the exhibits thereto and the financial statements, notes and schedules filed as a part thereof. Statements made in this Prospectus regarding the contents of any contract or other document referred to herein or therein are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement or such other document, each such statement being qualified in all respects by such reference. Upon completion of the Offerings, the Company will be subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and, in accordance therewith, will file reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information, as well as the Registration Statement and the exhibits and schedules thereto, may be inspected, without charge, at the public reference facility maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C., 20549 and at the Commission's regional offices located at Seven World Trade Center, Suite 1300, New York, NY 10048 and Northwestern Atrium Center, 500 West Madison Street, Room 1400, Chicago, IL 60661-2511. Copies of such material may also be obtained from the Public Reference Section of the 69 123 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such materials can also be inspected at the offices of the Nasdaq National Market System at 1735 K Street, N.W., Washington, D.C. 20006 or on the Commission's site on the Internet at http://www.sec.gov. The Company intends to furnish its stockholders with annual reports containing audited financial statements for each fiscal year and interim reports for each of the first three quarters of its fiscal year containing unaudited interim financial information. 70 124 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] - ------------------------------------------------------ - ------------------------------------------------------ NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY THE COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. IN THIS PROSPECTUS, REFERENCES TO "DOLLARS" AND "$" ARE TO UNITED STATES DOLLARS. ------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 Risk Factors.......................... 10 Price Range of Common Stock........... 17 Dividend Policy....................... 17 Capitalization........................ 18 Dilution.............................. 19 Unaudited Pro Forma Condensed Consolidated Financial Data......... 20 Selected Consolidated Financial Data................................ 24 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 26 Business.............................. 38 Management............................ 49 Certain Transactions.................. 54 Principal and Selling Stockholders.... 56 Description of Capital Stock.......... 57 Shares Eligible For Future Sale....... 59 Description of Certain Indebtedness... 62 Certain United States Federal Tax Consequences for Non-United States Holders............................. 64 Underwriting.......................... 66 Legal Matters......................... 69 Experts............................... 69 Available Information................. 69 Index to Consolidated Financial Statements and Notes Thereto........ F-1
UNTIL , ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ SHARES [LOGO] CAMELOT MUSIC HOLDINGS, INC. COMMON STOCK ------------------------- PROSPECTUS ------------------------- MERRILL LYNCH INTERNATIONAL MORGAN STANLEY DEAN WITTER MCDONALD & COMPANY SECURITIES, INC. , 1998 - ------------------------------------------------------ - ------------------------------------------------------ 125 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following is a list of the estimated expenses to be incurred by the Company in connection with the distribution of the shares of Common Stock being registered hereby. Except for the Securities and Exchange Commission Registration Fee, the National Association of Securities Dealers, Inc. Filing Fee and the Nasdaq National Market Listing Fee, all amounts are estimates. Securities and Exchange Commission Registration Fee......... $51,725 National Association of Securities Dealers, Inc. Filing Fee....................................................... 15,500 Nasdaq National Market Listing Fee.......................... * Printing and Engraving Costs................................ * Accounting Fees and Expenses................................ * Legal Fees and Expenses (excluding Blue Sky)................ * Blue Sky Fees and Expenses.................................. * Transfer Agent and Registrar Fees........................... * Miscellaneous............................................... * ------- Total............................................. $ * =======
- --------------- * To be provided by amendment ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the DGCL permits the Company to indemnify its directors, officers, employees and agents (each an "Insider") against liability for each such Insider's acts taken in his or her capacity as an Insider in a civil action, suit or proceeding if such actions were taken in good faith and in a manner which the Insider believed to be in or not opposed to the best interests of the Company, and in a criminal action, suit or proceeding, if the Insider had no reasonable cause to believe his or her conduct was unlawful, including under certain circumstances, suits by or in the right of the Company for any expenses, including attorneys' fees, and for any liabilities which the Insider may have incurred in consequence of such action, suit or proceeding under conditions stated in said Section 145; provided that the Company may modify the extent of such indemnification by individual contracts with its directors and executive officers. The Company's Second Amended and Restated Certificate of Incorporation (the "Certificate") provides that, to the fullest extent permitted by the DGCL, the Company will indemnify all present or former directors or officers (and their respective heirs, executors or administrators) of the Company from any pending, threatened or completed action, suit or proceeding (brought in the right of the Company or otherwise), by reason of the fact that such person is or was serving as an officer or director of the Company, or at the request of the Company as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, for and against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person (or such heirs, executors or administrators) in connection with such action, suit or proceeding, including appeals. As permitted by Section 102(b)(7) of the DGCL, the Certificate provides that a director of the Company will not be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of a director's duty of loyalty to a company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL, as amended, which concerns unlawful payments of dividends, stock purchases or redemptions, or (iv) for any transaction from which the director derived an improper personal benefit. II-1 126 The Certificate permits the Company to secure insurance on behalf of any director, officer, employee or other agent for any liability arising out of his or her actions in such capacity, regardless of whether the Company would have the power to indemnify such person against such liability under the DGCL. The Company's directors and officers are covered under a liability insurance policy. Such policy affords the Company's directors and officers with insurance coverage for losses arising from claims based on breaches of duty, negligence, error and other wrongful acts. The Company has also entered into indemnity agreements pursuant to which it has agreed, among other things, to indemnify its Directors for settlements in derivative actions. The Registrant has entered into indemnity agreements (the "Indemnity Agreements") with the current Directors and executive officers of the Registrant and expects to enter into similar agreements with any Director or executive officer elected or appointed in the future at the time of their election or appointment. Pursuant to the Indemnity Agreements, the Registrant will indemnify a Director or executive officer of the Registrant (the "Indemnitee") if the Indemnitee is a party to or otherwise involved in any legal proceeding by reason of the fact that the Indemnitee is or was a Director or executive officer of the Registrant, or is or was serving at the request of the Registrant in certain capacities with another entity, against all expenses, judgments, settlements, fines and penalties, actually and reasonably incurred by the Indemnitee in connection with the defense or settlement of such proceeding. Indemnity is only available if the Indemnitee acted in good faith and in a manner which he reasonably believed to be in, or not opposed to, the best interests of the Registrant. The same coverage is provided whether or not the suit or proceeding is a derivative action. Derivative actions may be defined as actions brought by one or more shareholders of a corporation to enforce a corporate right or to prevent or remedy a wrong to the corporation in cases where the corporation, because it is controlled by the wrongdoers or for other reasons, fails or refuses to take appropriate action for its own protection. The Indemnity Agreements mandate advancement of expenses to the Indemnitee if the Indemnitee provides the Registrant with a written promise to repay the advanced amounts in the event that it is determined that the conduct of the Indemnitee has not met the applicable standard of conduct. In addition, the Indemnity Agreements provide various procedures and presumptions in favor of the Indemnitee's right to receive indemnification under the Indemnity Agreement. A copy of the form of Indemnity Agreement is included herein as Exhibit 10.11. Under the Plan of Reorganization, all obligations of the Company to indemnify or to pay contribution or reimbursement to individuals who served as directors or officers of the Company at any time during the bankruptcy proceedings were expressly assumed and affirmed by the Company. All other indemnity, contribution or reimbursement obligations of the Company were rejected and terminated under the Plan of Reorganization. Reference is made to Section 6 of the Purchase Agreement filed as Exhibit 1.1 to this Registration Statement for information concerning the indemnity arrangements between the Company and the Underwriters. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. No securities of the Company which were not registered under the Act have been issued or sold by the Company within the past three years except as follows: As of January 27, 1998, pursuant to the Plan of Reorganization, the Company issued 9,835,559 shares of Common Stock to various claimholders in the bankruptcy case in satisfaction of substantially all of its pre-petition debt and other liabilities. As of May 5, 1998, an additional 328,873 shares of Common Stock were issued pursuant to the Plan of Reorganization. A total of 10,164,432 shares of Common Stock have been issued by the Company pursuant to the exemption from the registration requirements of the Act provided by Section 1145(a)(1) of the Bankruptcy Code. On May 5, 1998 the Company issued an additional 10,000 shares of Common Stock pursuant to an order of the Bankruptcy Court to certain persons who made a significant contribution to the bankruptcy case. On June 29, 1998, a former employee exercised options to purchase 1,500 shares of Common Stock and these 1,500 shares of Common Stock were issued by the Company pursuant to an exemption from the registration requirements of the Act provided by Rule 701 of the Act. II-2 127 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits: See Exhibit Index at page E-1 of this Registration Statement. (b) Financial Statement Schedules:
DESCRIPTION PAGE NO. ----------- -------- Schedule II -- Valuation and Qualifying Accounts II-12
ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Purchase Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Act may be permitted to Directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a Director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such Director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For the purpose of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For purposes of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide public offering thereof. II-3 128 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cleveland, State of Ohio, on August 11, 1998. CAMELOT MUSIC HOLDINGS, INC. By: /s/ JAMES E. BONK ------------------------------------ James E. Bonk, Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to the Registration Statement has been signed by the following persons in the capacities indicated on August 11, 1998.
SIGNATURE TITLE --------- ----- /s/ JAMES E. BONK Chairman, President and Chief Executive Officer - ---------------------------------------- and Director (Principal Executive Officer) James E. Bonk LEE ANN THORN* Treasurer and Chief Financial Officer - ---------------------------------------- (Principal Financial and Accounting Officer) Lee Ann Thorn JACK K. ROGERS* Executive Vice President, Chief Operating Officer, Secretary - ---------------------------------------- and Director Jack K. Rogers GEORGE R. ZOFFINGER* Director - ---------------------------------------- George R. Zoffinger STEPHEN H. BAUM* Director - ---------------------------------------- Stephen H. Baum HERBERT J. MARKS* Director - ---------------------------------------- Herbert J. Marks MICHAEL B. SOLOW* Director - ---------------------------------------- Michael B. Solow MARC L. LUZZATTO* Director - ---------------------------------------- Marc L. Luzzatto
- --------------- * The undersigned, by signing his name hereto, does sign this Amendment No. 1 to this Registration Statement on behalf of the above Directors and Officers of Camelot Music Holdings, Inc. pursuant to a Power of Attorney executed on behalf of each such Director and Officer and which has been filed with the Securities and Exchange Commission. By: /s/ JAMES E. BONK ------------------------------------ James E. Bonk, As Attorney-In-Fact II-4 129 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ------- ----------- 1.1 Form of U.S. Purchase Agreement 1.2 Intersyndicate Agreement 2.1 Second Amended Joint Plan of Reorganization dated November 7, 1997, which is incorporated by reference to Exhibit 2.1 to the Company's Form 10 as filed on February 13, 1998 (File No. 0-23807) 2.2 Asset Purchase Agreement by and among Camelot Music, Inc., The Wall Music, Inc. and WH Smith Group Holdings (USA), Inc. dated as of December 10, 1997, which is incorporated by reference to Exhibit 2.2 to the Company's Form 10 as filed on February 13, 1998 (File No. 0-23807) 2.3 Assignment of The Wall Purchase Agreement, which is incorporated by reference to Exhibit 2.3 to the Company's Form 10 as filed on February 13, 1998 (File No. 0-23807) 2.4 Agreement and Plan of Merger among Camelot Music Holdings, Inc., SM Acquisition, Inc. and Spec's Music, Inc., dated as of June 3, 1998 3.1 Second Amended and Restated Certificate of Incorporation of the Registrant, which is incorporated by reference to Exhibit 3.1 to the Company's Form 10 as filed on February 13, 1998 (File No. 0-23807) 3.3 Amended and Restated By-Laws of the Registrant, which is incorporated by reference to Exhibit 3.2 to the Company's Form 10 as filed on February 13, 1998 (File No. 0-23807) 4.1 Specimen certificate for the Registrant's Common Stock which is incorporated by reference to Exhibit 4.1 to the Company's Form 10 as filed on February 13, 1998 (File No. 0-23807) 5.1 Opinion of Calfee, Halter & Griswold LLP as to the validity of the shares of Common Stock** 10.1 Revolving Credit Agreement, dated as of January 27, 1998, among Camelot Music, Inc., the several lenders named therein and The Chase Manhattan Bank, as agent for the lenders, which is incorporated by reference to Exhibit 10.1 to the Company's Form 10 as filed on February 13, 1998 (File No. 0-23807) 10.2 Registration Rights Agreement, dated as of January 27, 1998, by and among the Registrant and the security holders named therein, which is incorporated by reference to Exhibit 10.2 to the Company's Form 10 as filed on February 13, 1998 (File No. 0-23807) 10.3 Second Amended and Restated Employment Agreement, dated as of January 1, 1998, between Camelot Music, Inc. and James E. Bonk, which is incorporated by reference to Exhibit 10.3 to the Company's Form 10 as filed on February 13, 1998 (File No. 0-23807)* 10.4 Camelot Music Holdings, Inc. 1998 Stock Option Plan, which is incorporated by reference to Exhibit 10.4 to the Company's Form 10 as filed on February 13, 1998 (File No. 0-23807) 10.5 Form of Stock Option Agreement*+ 10.6 Amended and Restated Severance and Bonus Management Incentive Agreement, dated as of October 11, 1996, between Camelot Music, Inc. and Jack K. Rogers*+ 10.7 Amended and Restated Severance and Bonus Management Incentive Agreement, dated as of October 11, 1996, between Camelot Music, Inc. and Lewis S. Garrett*+ 10.8 Amended and Restated Severance and Bonus Management Incentive Agreement, dated as of October 21, 1996, between Camelot Music, Inc. and Charles Marsh*+ 10.9 Amended and Restated Severance and Bonus Management Incentive Agreement, dated as of October 11, 1996, between Camelot Music, Inc. and Charles R. Rinehimer III*+ 10.10 Amended and Restated Severance and Bonus Management Incentive Agreement, dated as of October 11, 1996, between Camelot Music, Inc. and Lee Ann Thorn*+ 10.11 Form of Indemnity Agreement+ 10.12 Camelot Music Holdings, Inc. 1998 Stock Option Plan, which is incorporated by reference to Exhibit 10.4 to the Company's Form 10 as filed on February 13, 1998 (File No. 0-23807)
II-9 130
EXHIBIT NO. DESCRIPTION - ------- ----------- 10.13 Camelot Music Holdings, Inc. 1998 Outside Directors Stock Option Plan 10.14 Amendment No. 1 to the Revolving Credit Agreement 10.15 Form of Customary Trade Terms Commitment and Option Exercise Notice+ 10.16 Amended and Restated Severance and Bonus Management Incentive Agreement, dated as of October 11, 1996, between Camelot Music, Inc. and Roger D. Marks*+ 10.17 Amended and Restated Severance and Bonus Management Incentive Agreement, dated as of October 17, 1996, between Camelot Music, Inc. and William H. Scott*+ 10.18 Employment and Severance Agreement between Camelot Music, Inc. and Larry K. Mundorf* 10.19 Indemnity Agreement between Camelot Music Holdings, Inc. and Stephen H. Baum, dated June 4, 1998* 10.20 Indemnity Agreement between Camelot Music Holdings, Inc. and George R. Zoffinger, dated June 4, 1998* 10.21 Indemnity Agreement between Camelot Music Holdings, Inc. and Michael B. Solow, dated June 4, 1998* 10.22 Indemnity Agreement between Camelot Music Holdings, Inc. and Marc L. Luzzatto, dated June 4, 1998* 10.23 Indemnity Agreement between Camelot Music Holdings, Inc. and Herbert J. Marks, dated June 4, 1998* 10.24 Indemnity Agreement between Camelot Music Holdings, Inc. and James E. Bonk, dated June 4, 1998* 10.25 Indemnity Agreement between Camelot Music Holdings, Inc. and Jack K. Rogers, dated June 4, 1998* 10.26 Indemnity Agreement between Camelot Music Holdings, Inc. and Lee Ann Thorn, dated June 4, 1998* 10.27 Indemnity Agreement between Camelot Music Holdings, Inc. and Charles R. Rinehimer III, dated June 4, 1998* 10.28 Indemnity Agreement between Camelot Music Holdings, Inc. and Lewis S. Garrett, dated June 4, 1998* 10.29 Indemnity Agreement between Camelot Music Holdings, Inc. and Larry K. Mundorf, dated June 4, 1998* 10.30 Camelot Music Holdings, Inc. 1998 Deferred Compensation Plan* 10.31 Form of Stock Option Agreement for 1998 Outside Directors Stock Option Plan* 21.1 Subsidiaries of the Registrant which is incorporated by reference to Exhibit 21.1 to the Company's Form 10 as filed on February 13, 1998 (File No. 0-23807) 23.1 Consent of PricewaterhouseCoopers LLP 23.2 Consent of Deloitte & Touche LLP 23.3 Consent of Calfee, Halter & Griswold LLP (included in Exhibit 5.1 of this Registration Statement)** 24.1 Power of Attorney and related certified resolution 27.1 Financial Data Schedule of the Predecessor+ 27.2 Financial Data Schedule of the Company
- --------------- * Management compensatory plan or arrangement. + Filed as an exhibit to the Company's Form S-1 on June 15, 1998. ** To be filed by amendment. II-10 131 REPORT OF INDEPENDENT ACCOUNTANTS In connection with our audits of the consolidated financial statements of Camelot Music Holdings, Inc. ("Successor Company") as of February 28, 1998 and for the period February 1, 1998 to February 28, 1998 and of CM Holdings, Inc. ("Predecessor Company") as of March 1, 1997 and for the period March 2, 1997 to January 31, 1998, the 52 week period ended March 1, 1997 and the 53 week period ended March 2, 1996, which financial statements are included in the Prospectus, we have also audited the financial statement schedule listed in Item 16 herein. In our opinion, this financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Cleveland, Ohio June 10, 1998 II-11 132 CAMELOT MUSIC HOLDINGS, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS OF DOLLARS)
- ----------------------------------------------------------------------------------------------------- COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ----------------------------------------------------------------------------------------------------- ADDITIONS ----------------------- BALANCE BALANCE CHARGED TO CHARGED TO DEDUCTIONS AT END AT BEGINNING COSTS AND OTHER FROM OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RESERVES PERIOD - ----------------------------------------------------------------------------------------------------- PREDECESSOR COMPANY: Inventory Reserves: Year Ended March 2, 1996........... $ 3,883 $ 1,790 $ -- $ -- $ 5,673 Year Ended March 1, 1997........... 5,673 3,992 -- 2,533(1) 7,132 Eleven Months Ended January 31, 1998............................ 7,132 3,361 -- 10,493(2) -- Valuation Allowance on deferred tax assets: Year Ended March 2, 1996........... 25,309 12,030 -- -- 37,339 Year Ended March 1, 1997........... 37,339 18,458 -- -- 55,797 Eleven Months Ended January 31, 1998............................ 55,797 -- -- 55,797(3) -- SUCCESSOR COMPANY: Inventory Reserves: One Month Ended February 28, 1998............................ $ -- $ 235 $ -- $ -- $ 235 Valuation Allowance on deferred tax assets: One Month Ended February 28, 1998............................ -- -- -- -- --
- --------------- (1) The deduction in reserves of $2,533 relates to the disposal of related inventory. (2) $5,351 of the deduction relates to "fresh-start reporting" adjustments in the eleven months ended January 31, 1998 and the remaining balance of $5,142 relates to the disposal of related inventory. (3) The deduction in the eleven months ended January 31, 1998 occurred in conjunction with the "fresh-start reporting" adjustments. II-12 EX-1.1 2 EXHIBIT 1.1 1 Exhibit 1.1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 7/16/98 CAMELOT MUSIC HOLDINGS, INC. (a Delaware corporation) __________ Shares of Common Stock U.S. PURCHASE AGREEMENT ----------------------- Dated: August , 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2
TABLE OF CONTENTS PAGE ---- U.S. PURCHASE AGREEMENT...........................................................................................1 SECTION 1. REPRESENTATIONS AND WARRANTIES..............................................................4 (a) Representations and Warranties by the Company and CMI..................................................4 (i) COMPLIANCE WITH REGISTRATION REQUIREMENTS.....................................................4 (ii) INDEPENDENT ACCOUNTANTS.......................................................................5 (iii) FINANCIAL STATEMENTS..........................................................................5 (iv) NO MATERIAL ADVERSE CHANGE IN BUSINESS........................................................6 (v) GOOD STANDING OF THE COMPANY..................................................................6 (vi) GOOD STANDING OF SUBSIDIARIES.................................................................6 (vii) CAPITALIZATION................................................................................6 (viii) AUTHORIZATION OF AGREEMENTS...................................................................7 (ix) DESCRIPTION OF SECURITIES.....................................................................7 (x) ABSENCE OF DEFAULTS AND CONFLICTS.............................................................7 (xi) ABSENCE OF LABOR DISPUTES.....................................................................8 (xii) ABSENCE OF PROCEEDINGS........................................................................8 (xiii) ACCURACY OF EXHIBITS..........................................................................8 (xiv) POSSESSION OF INTELLECTUAL PROPERTY...........................................................8 (xv) ABSENCE OF FURTHER REQUIREMENTS...............................................................9 (xvi) POSSESSION OF LICENSES AND PERMITS............................................................9 (xvii) TITLE TO PROPERTY............................................................................10 (xviii) INVESTMENT COMPANY ACT.......................................................................10 (xix) ENVIRONMENTAL LAWS...........................................................................10 (xx) REGISTRATION RIGHTS..........................................................................11 (xxi) STABILIZATION OR MANIPULATION................................................................11 (xxii) ACCOUNTING CONTROLS..........................................................................11 (xxiii) TAX RETURNS..................................................................................11 (xxiv) YEAR 2000....................................................................................11 (b) Representations and Warranties by the Selling Shareholders............................................12 (i) ACCURATE DISCLOSURE..........................................................................12 (ii) AUTHORIZATION OF AGREEMENTS..................................................................12 (iii) GOOD AND MARKETABLE TITLE....................................................................12 (iv) DUE EXECUTION OF AGREEMENTS..................................................................13 (v) ABSENCE OF MANIPULATION......................................................................13 (vi) ABSENCE OF FURTHER REQUIREMENTS..............................................................13 (vii) RESTRICTION ON SALE OF SECURITIES............................................................14 (viii) CERTIFICATES SUITABLE FOR TRANSFER...........................................................14 (ix) NO ASSOCIATION WITH NASD.....................................................................14 (x) POWER AND AUTHORITY..........................................................................14 (c) Officer's Certificates................................................................................14
-i- 3 (c) Officer's Certificates................................................................................14 SECTION 2. SALE AND DELIVERY TO U.S. UNDERWRITERS; CLOSING..............................................15 (a) Initial Securities....................................................................................15 (b) Option Securities.....................................................................................15 (c) Payment...............................................................................................15 (d) Denominations; Registration...........................................................................16 (e) Appointment of Qualified Independent Underwriter......................................................16 SECTION 3. COVENANTS OF THE COMPANY.....................................................................17 (a) Compliance with Securities Regulations and Commission Requests........................................17 (b) Filing of Amendments..................................................................................17 (c) Delivery of Registration Statements...................................................................17 (d) Delivery of Prospectuses..............................................................................18 (e) Continued Compliance with Securities Laws.............................................................18 (f) Blue Sky Qualifications...............................................................................18 (g) Rule 158..............................................................................................19 (h) Listing...............................................................................................19 (i) Restriction on Sale of Securities.....................................................................19 (j) Reporting Requirements................................................................................19 (k) Compliance with NASD Rules............................................................................19 SECTION 4. PAYMENT OF EXPENSES..........................................................................20 (a) Expenses..............................................................................................20 (b) Expenses of the Selling Shareholders..................................................................20 (c) Termination of Agreement..............................................................................21 (d) Allocation of Expenses................................................................................21 SECTION 5. CONDITIONS OF U.S. UNDERWRITERS' OBLIGATIONS.................................................21 (a) Effectiveness of Registration Statement...............................................................21 (b) Opinion of Counsel for Company........................................................................21 (c) Opinion of Counsel for the Selling Shareholders.......................................................22 (d) Opinion of Counsel for U.S. Underwriters..............................................................22 (e) Officers' Certificate.................................................................................22 (f) Certificate of Selling Shareholders...................................................................23 (g) Accountants' Comfort Letters..........................................................................23 (h) Bring-down Comfort Letters............................................................................23 (i) Approval of Listing...................................................................................23 (j) No Objection..........................................................................................23 (k) Lock-up Agreements....................................................................................23 (l) Purchase of Initial International Securities..........................................................23 (m) Other Agreements......................................................................................23 (n) Conditions to Purchase of U.S. Option Securities......................................................24 (o) Additional Documents..................................................................................25 (p) Termination of Agreement..............................................................................25 SECTION 6. INDEMNIFICATION..............................................................................25
-ii- 4 (a) Indemnification of U.S. Underwriters..................................................................25 (b) Indemnification of Company, Directors and Officers and Selling Shareholders...........................27 (c) Actions against Parties; Notification.................................................................28 (d) Settlement without Consent if Failure to Reimburse....................................................29 (e) Indemnification for Reserved Securities...............................................................29 (f) Other Agreements with Respect to Indemnification......................................................29 SECTION 7. CONTRIBUTION.................................................................................29 SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY...............................31 SECTION 9. TERMINATION OF AGREEMENT.....................................................................31 (a) Termination; General..................................................................................31 (b) Liabilities...........................................................................................31 SECTION 10. DEFAULT BY ONE OR MORE OF THE U.S. UNDERWRITERS..............................................31 SECTION 11. DEFAULT BY ONE OR MORE OF THE SELLING SHAREHOLDERS...........................................32 SECTION 12. NOTICES......................................................................................33 SECTION 13. PARTIES......................................................................................33 SECTION 14. GOVERNING LAW AND TIME.......................................................................33 SECTION 15. EFFECT OF HEADINGS...........................................................................33
SCHEDULES Schedule A List of Underwriters.......................................................Sch A-1 Schedule B List of Selling Shareholders...............................................Sch B-1 Schedule C Pricing Information........................................................Sch C-1 Schedule D List of Persons Subject to Lock-up.........................................Sch D-1 EXHIBITS Exhibit A-1 Form of Opinion of Calfee, Halter & Griswold LLP...............................A-1 Exhibit A-2 Form of Opinion of Obermayer Rebmann Maxwell & Hippel..........................A-6 Exhibit B-1 Form of Opinion of Simpson Thacher & Barlett...................................B-1 Exhibit B-2 Form of Opinion for the Selling Shareholders...................................B-4 Exhibit C Form of Lock-Up Letter.........................................................C-1 Exhibit D-1 Form of Comfort Letter of Coopers & Lybrand L.L.P..............................D-1 Exhibit D-2 Form of Comfort Letter of Deloitte & Touche LLP................................D-4
-iii- 5 CAMELOT MUSIC HOLDINGS, INC. (a Delaware corporation) __________ Shares of Common Stock (Par Value $.01 Per Share) U.S. PURCHASE AGREEMENT ----------------------- August , 1998 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated Morgan Stanley & Co. Incorporated McDonald & Company Securities, Inc. as U.S. Representatives of the several U.S. Underwriters c/o Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated North Tower World Financial Center New York, New York 10281-1209 Ladies and Gentlemen: Camelot Music Holdings, Inc., a Delaware corporation (the "Company"), Camelot Music, Inc., a Pennsylvania corporation ("CMI"), and the persons listed in Schedule B hereto (the "Selling Shareholders"), confirm their respective agreements with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and each of the other U.S. Underwriters named in Schedule A hereto (collectively, the "U.S. Underwriters," which term shall also include any underwriter substituted as hereinafter provided in Section 10 hereof), for whom Merrill Lynch, Morgan Stanley & Co. Incorporated and McDonald & Company Securities, Inc. are acting as representatives (in such capacity, the "U.S. Representatives"), with respect to (i) the sale by the Selling Shareholders, acting severally and not jointly, and the purchase by the U.S. Underwriters, acting severally and not jointly, of the respective numbers of shares of Common Stock, par value $.01 per share, of the Company ("Common Stock") set forth in Schedules A and B hereto, and (ii) the grant by the Selling Shareholders to the U.S. -1- 6 Underwriters, acting severally and not jointly, of the option described in Section 2(b) hereof to purchase all or any part of __________ additional shares of Common Stock to cover over-allotments, if any. The aforesaid __________ shares of Common Stock (the "Initial U.S. Securities") to be purchased by the U.S. Underwriters and all or any part of the __________ shares of Common Stock subject to the option described in Section 2(b) hereof (the "U.S. Option Securities") are hereinafter called, collectively, the "U.S. Securities." It is understood that the Company, CMI and the Selling Shareholders are concurrently entering into an agreement dated the date hereof (the "International Purchase Agreement") providing for the offering by the Selling Shareholders of an aggregate of __________ shares of Common Stock (the "Initial International Securities") through arrangements with certain underwriters outside the United States and Canada (the "International Managers") for which Merrill Lynch International, Morgan Stanley & Co. International Limited and McDonald & Company Securities, Inc. are acting as lead managers (the "Lead Managers") and the grant by the Selling Shareholders to the International Managers, acting severally and not jointly, of an option to purchase all or any part of the International Managers' pro rata portion of up to __________ additional shares of Common Stock solely to cover over-allotments, if any (the "International Option Securities" and, together with the U.S. Option Securities, the "Option Securities"). The Initial International Securities and the International Option Securities are hereinafter called the "International Securities." It is understood that the Selling Shareholders are not obligated to sell and the U.S. Underwriters are not obligated to purchase any Initial U.S. Securities unless all of the Initial International Securities are contemporaneously purchased by the International Managers. The U.S. Underwriters and the International Managers are hereinafter collectively called the "Underwriters," the Initial U.S. Securities and the Initial International Securities are hereinafter collectively called the "Initial Securities," and the U.S. Securities and the International Securities are hereinafter collectively called the "Securities." The Underwriters will concurrently enter into an Intersyndicate Agreement of even date herewith (the "Intersyndicate Agreement") providing for the coordination of certain transactions among the Underwriters under the direction of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (in such capacity, the "Global Coordinator"). The Company and the Selling Shareholders understand that the U.S. Underwriters propose to make a public offering of the U.S. Securities as soon as the U.S. Representatives deem advisable after this Agreement has been executed and delivered. The Company, the Selling Shareholders and the U.S. Underwriters agree that up to _______ shares of the Initial U.S. Securities to be purchased by the U.S. Underwriters (the "Reserved Securities") shall be reserved for sale by the U.S. Underwriters to certain eligible employees and other persons, as part of the distribution of the Securities by the U.S. Underwriters, subject to the terms of this Agreement, the applicable rules, regulations and -2- 7 interpretations of the National Association of Securities Dealers, Inc. and all other applicable laws, rules and regulations. To the extent that such Reserved Securities are not orally confirmed for purchase by such eligible employees and other persons by the end of the first business day after the date of this Agreement, such Reserved Securities may be offered to the public as part of the public offering contemplated hereby. The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (No. 333-56811) covering the registration of the Securities under the Securities Act of 1933, as amended (the "1933 Act"), including the related preliminary prospectus or prospectuses. Promptly after execution and delivery of this Agreement, the Company will either (i) prepare and file a prospectus in accordance with the provisions of Rule 430A ("Rule 430A") of the rules and regulations of the Commission under the 1933 Act (the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a "Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). Two forms of prospectus are to be used in connection with the offering and sale of the Securities: one relating to the U.S. Securities (the "Form of U.S. Prospectus") and one relating to the International Securities (the "Form of International Prospectus"). The Form of U.S. Prospectus is identical to the Form of International Prospectus, except for the front cover pages, the back cover pages and the information under the caption "Underwriting." The information included in any such prospectus or in any such Term Sheet, as the case may be, that was omitted from such registration statement at the time it became effective but that is deemed to be part of such registration statement at the time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is referred to as "Rule 434 Information." Each Form of U.S. Prospectus and Form of International Prospectus used before such registration statement became effective, and any prospectus that omitted, as applicable, the Rule 430A Information or the Rule 434 Information, that was used after such effectiveness and prior to the execution and delivery of this Agreement, is herein called a "preliminary prospectus." Such registration statement, including the exhibits thereto and schedules thereto at the time it became effective and including the Rule 430A Information and the Rule 434 Information, as applicable, is herein called the "Registration Statement." Any registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b) Registration Statement," and after such filing the term "Registration Statement" shall include the Rule 462(b) Registration Statement. The final Form of U.S. Prospectus and the final Form of International Prospectus in the forms first furnished to the Underwriters for use in connection with the offering of the Securities are herein called the "U.S. Prospectus" and the "International Prospectus," respectively, and collectively, the "Prospectuses." If Rule 434 is relied on, the terms "U.S. Prospectus" and "International Prospectus" shall refer to the preliminary U.S. Prospectus dated July _____, 1998 and the preliminary International Prospectus dated July ______, 1998, respectively, each together with the applicable Term Sheet, and all references in this Agreement to the date of such Prospectuses shall mean the date of the applicable Term Sheet. For purposes of this Agreement, -3- 8 all references to the Registration Statement, any preliminary prospectus, the U.S. Prospectus, the International Prospectus or any Term Sheet or any amendment or supplement to any of the foregoing shall be deemed to include the copy filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval system ("EDGAR"). SECTION 1. REPRESENTATIONS AND WARRANTIES. (a) Representations and Warranties by the Company and CMI. The Company and CMI, jointly and severally, represent and warrant to each U.S. Underwriter as of the date hereof, as of the Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery (if any) referred to in Section 2(b) hereof, and agree with each U.S. Underwriter, as follows: (i) COMPLIANCE WITH REGISTRATION REQUIREMENTS. Each of the Registration Statement and any Rule 462(b) Registration Statement has become effective under the 1933 Act and no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or, to the knowledge of the Company, are contemplated by the Commission, and any request on the part of the Commission for additional information has been complied with. At the respective times the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendments thereto became effective and at the Closing Time (and, if any U.S. Option Securities are purchased, at the Date of Delivery), the Registration Statement, the Rule 462(b) Registration Statement and any amendments and supplements thereto complied and will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Prospectuses, any preliminary prospectuses and any supplement thereto or prospectus wrapper prepared in connection therewith, at their respective times of issuance and at the Closing Time, complied and will comply in all material respects with any applicable laws or regulations of foreign jurisdictions in which the Prospectuses and such preliminary prospectuses, as amended or supplemented, if applicable, are distributed in connection with the offer and sale of Reserved Securities. Neither of the Prospectuses nor any amendments or supplements thereto (including any prospectus wrapper), at the time the Prospectuses or any amendments or supplements thereto were issued and at the Closing Time (and, if any U.S. Option Securities are purchased, at the Date of Delivery), included or will include an untrue statement of a material fact or omitted or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If Rule 434 is used, the Company will comply with the requirements of Rule 434 and the Prospectuses shall not be "materially different," as such term is used in Rule 434, from the prospectuses included in the Registration Statement at the time it became effective. The -4- 9 representations and warranties in this subsection shall not apply to statements in or omissions from the Registration Statement or the Prospectuses made in reliance upon and in conformity with information furnished to the Company in writing by any Underwriter through the U.S. Representatives or the Lead Managers expressly for use in the Registration Statement or the Prospectuses. Each preliminary prospectus and the prospectuses filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so filed in all material respects with the 1933 Act Regulations and each preliminary prospectus and the Prospectuses delivered to the Underwriters for use in connection with this offering was identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (ii) INDEPENDENT ACCOUNTANTS. the accountants who certified the financial statements and supporting schedules included in the Registration Statement are independent public accountants as required by the 1933 Act and the 1933 Act Regulations. (iii) FINANCIAL STATEMENTS. The financial statements included in the Registration Statement and the Prospectuses, together with the related schedules and notes, present fairly the financial position of the Company and its consolidated subsidiaries and of the Company's predecessors and their consolidated subsidiaries at the dates indicated and the statement of operations, stockholders' equity and cash flows of the Company and its consolidated subsidiaries and of the Company's predecessors and their consolidated subsidiaries for the periods specified; said financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods involved (except as otherwise noted therein). The financial statements included in the Registration Statement and the Prospectuses, together with the related schedules and notes, present fairly the financial position of The Wall Music, Inc. at the dates indicated and the statement of operations, stockholders' equity and cash flows of The Wall Music, Inc. for the periods specified; said financial statements have been prepared in conformity with GAAP applied on a consistent basis throughout the periods involved. The supporting schedules included in the Registration Statement present fairly in accordance with GAAP the information required to be stated therein. The selected financial data and the summary financial information included in the Prospectuses present fairly the information shown therein and have been compiled on a basis consistent with that of the audited financial statements included in the Registration Statement. The pro forma financial statements and the related notes thereto included in the Registration Statement and the Prospectuses present fairly the information shown therein, have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements and have been properly compiled on the bases described therein, and the assumptions used in the preparation thereof are -5- 10 reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein. (iv) NO MATERIAL ADVERSE CHANGE IN BUSINESS. Since the respective dates as of which information is given in the Registration Statement and the Prospectuses, except as otherwise stated therein, (A) there has been no material adverse change in the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business (a "Material Adverse Effect"), (B) there have been no transactions entered into by the Company or any of its subsidiaries, other than those in the ordinary course of business, which are material with respect to the Company and its subsidiaries considered as one enterprise, and (C) there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock. (v) GOOD STANDING OF THE COMPANY. The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and to enter into and perform its obligations under this Agreement; and the Company is duly qualified as foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. (vi) GOOD STANDING OF SUBSIDIARIES. Each subsidiary of the Company (each a "Subsidiary" and, collectively, the "Subsidiaries") has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect; except as otherwise disclosed in the Registration Statement, all of the issued and outstanding capital stock of each such Subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; none of the outstanding shares of capital stock of any Subsidiary was issued in violation of the preemptive or similar rights of any securityholder of such Subsidiary. The only subsidiaries of the Company are the subsidiaries listed on Exhibit 21 to the Registration Statement. -6- 11 (vii) CAPITALIZATION. The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectuses under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to reservations, agreements or employee benefit plans referred to in the Prospectuses or pursuant to the exercise of convertible securities or options referred to in the Prospectuses). The shares of issued and outstanding capital stock of the Company, including the Securities to be purchased by the U.S. Underwriters and the International Managers from the Selling Shareholders, have been duly authorized and validly issued and are fully paid and non-assessable; none of the outstanding shares of capital stock of the Company, including the Securities to be purchased by the U.S. Underwriters from the Selling Shareholders, was issued in violation of the preemptive or other similar rights of any securityholder of the Company. (viii) AUTHORIZATION OF AGREEMENTS. This Agreement and the International Purchase Agreement have been duly authorized, executed and delivered by the Company and CMI. The Merger Agreement, dated as of June 3, 1998, between the Company and Spec's Music, Inc. (the "Merger Agreement") has been authorized, executed and delivered by the Company and constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject, as to enforceability, to bankruptcy, insolvency, moratorium, stay and other laws affecting creditors rights generally and to general principles of equity. The First Amendment and Waiver dated as of June 12, 1998 to the New Working Capital Facility, dated as of January 27, 1998, among CMI, as Borrower, The Lenders Party thereto and The Chase Manhattan Bank, as Agent (the "Credit Facility Amendment"), has been authorized, executed and delivered by the Company and constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject, as to enforceability, to bankruptcy, insolvency, moratorium, stay and other laws affecting creditors rights generally and to general principles of equity. (ix) DESCRIPTION OF SECURITIES. The Common Stock conforms to all statements relating thereto contained in the Prospectuses and such description conforms to the rights set forth in the instruments defining the same; no holder of the Securities will be subject to personal liability solely by reason of being such a holder; and the issuance of the Securities is not subject to the preemptive or other similar rights of any securityholder of the Company. (x) ABSENCE OF DEFAULTS AND CONFLICTS. Neither the Company nor any of its subsidiaries is in violation of its charter or by-laws or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any subsidiary is subject (collectively, "Agreements and Instruments") except for such defaults that would not result in a Material Adverse Effect; and the -7- 12 execution, delivery and performance of this Agreement, the International Purchase Agreement, the Merger Agreement and the Credit Facility Amendment and the consummation of the transactions contemplated in this Agreement, the International Purchase Agreement, the Merger Agreement and the Credit Facility Amendment and in the Registration Statement and compliance by the Company and CMI, as the case may be, with their obligations under this Agreement, the International Purchase Agreement, the Merger Agreement and the Credit Facility Amendment have been duly authorized by all necessary corporate action and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any subsidiary pursuant to, the Agreements and Instruments, nor will such action result in any violation of the provisions of the charter or by-laws of the Company or any subsidiary or any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any subsidiary or any of their assets, properties or operations. As used herein, a "Repayment Event" means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or any subsidiary. (xi) ABSENCE OF LABOR DISPUTES. No labor dispute with the employees of the Company or any subsidiary exists or, to the knowledge of the Company or CMI, is imminent, and neither the Company nor CMI is aware of any existing or imminent labor disturbance by the employees of any of its or any subsidiary's principal suppliers, vendors, customers or contractors, which, in either case, may reasonably be expected to result in a Material Adverse Effect. (xii) ABSENCE OF PROCEEDINGS. There is no action, suit, proceeding, inquiry or investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company or CMI, threatened, against or affecting the Company or any subsidiary, which is required to be disclosed in the Registration Statement (other than as disclosed therein), or, except as disclosed in the Registration Statement, which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the consummation of the transactions contemplated in this Agreement and the International Purchase Agreement or the performance by the Company and CMI of their obligations hereunder or thereunder; the aggregate of all pending legal or governmental proceedings to which the Company or any subsidiary is a party or of which any of their respective property or assets is the subject which are not described in the Registration Statement, including ordinary routine litigation incidental to the business, could not reasonably be expected to result in a Material Adverse Effect. -8- 13 (xiii) ACCURACY OF EXHIBITS. There are no contracts or documents which are required to be described in the Registration Statement or the Prospectuses or to be filed as exhibits thereto which have not been so described and filed as required. (xiv) POSSESSION OF INTELLECTUAL PROPERTY. The Company and its subsidiaries own or possess, or can acquire on reasonable terms, adequate patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names or other intellectual property (collectively, "Intellectual Property") necessary to carry on the business now operated by them, and neither the Company nor any of its subsidiaries has received any notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interest of the Company or any of its subsidiaries therein, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, singly or in the aggregate, would result in a Material Adverse Effect. (xv) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency is necessary or required for the performance by the Company or CMI of their obligations hereunder, in connection with the offering, issuance or sale of the Securities under this Agreement and the International Purchase Agreement or the consummation of the transactions contemplated by this Agreement, the International Purchase Agreement, the Merger Agreement and the Credit Facility Amendment, except (i) such as have been already obtained under the 1933 Act or the 1933 Act Regulations or as may be required under state securities or blue sky laws, (ii) such as have been obtained under the Securities Exchange Act of 1934 (the "1934 Act") or the rules and regulations of the Commission under the 1934 Act and (iii) such as have been obtained under the laws and regulations of jurisdictions outside the United States in which the Reserved Securities are offered. (xvi) POSSESSION OF LICENSES AND PERMITS. The Company and its subsidiaries possess such permits, licenses, approvals, consents and other authorizations (collectively, "Governmental Licenses") issued by the appropriate federal, state, local or foreign regulatory agencies or bodies necessary to conduct the business now operated by them; except for such Governmental Licenses the failure of which to obtain would not, singly or in the aggregate, have a Material Adverse Effect; the Company and its subsidiaries are in compliance with the terms and conditions of all such Governmental Licenses, except where the failure so to comply would not, singly or in the aggregate, have a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except when the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not have a Material Adverse -9- 14 Effect; and neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect. (xvii) TITLE TO PROPERTY. The Company and its subsidiaries have good and marketable title to all real property owned by the Company and its subsidiaries and good title to all other properties owned by them, in each case, free and clear of all mortgages, pledges, liens, security interests, claims, restrictions or encumbrances of any kind except such as (a) are described in the Prospectuses or (b) do not, singly or in the aggregate, materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or any of its subsidiaries; and all of the leases and subleases material to the business of the Company and its subsidiaries, considered as one enterprise, and under which the Company or any of its subsidiaries holds properties described in the Prospectuses, are in full force and effect, and neither the Company nor any subsidiary has any notice of any claim of any sort that has been asserted by anyone adverse to the rights of the Company or any subsidiary under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company or such subsidiary to the continued possession of the leased or subleased premises under any such lease or sublease, except for such claims as would not, singly or in the aggregate, have a Material Adverse Effect. (xviii) INVESTMENT COMPANY ACT. Neither the Company nor CMI is or upon the issuance and sale of the Securities as herein contemplated will be, an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended (the "1940 Act"). (xix) ENVIRONMENTAL LAWS. Except as described in the Registration Statement and except as would not, singly or in the aggregate, result in a Material Adverse Effect, (A) neither the Company nor any of its subsidiaries is in violation of any federal, state, local or foreign statute, law, rule, regulation, ordinance, code, policy or rule of common law or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent, decree or judgment, relating to pollution or protection of human health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products (collectively, "Hazardous Materials") or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials (collectively, "Environmental Laws"), (B) the Company and its subsidiaries have all permits, licenses, authorizations and approvals required under any applicable Environmental Laws and are each in compliance with their requirements, (C) there are no pending or threatened administrative, regulatory or judicial actions, suits, demands, -10- 15 demand letters, claims, liens, notices of noncompliance or violation, investigation or proceedings relating to any Environmental Law against the Company or any of its subsidiaries and (D) there are no events, facts or circumstances that might reasonably be expected to form the basis of any liability or obligation of the Company or any of its subsidiaries, including, without limitation, any order, decree, plan or agreement requiring clean-up or remediation, or any action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company or any of its subsidiaries relating to any Hazardous Materials or any Environmental Laws. (xx) REGISTRATION RIGHTS. Except as described in the Prospectus, there are no persons with registration rights or other similar rights to have any securities registered pursuant to the Registration Statement or otherwise registered by the Company under the 1933 Act other than persons who have waived such rights. (xxi) STABILIZATION OR MANIPULATION. Neither the Company, CMI nor any of their officers, directors or controlling persons has taken, directly or indirectly, any action designed to cause or to result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale of the Securities. (xxii) ACCOUNTING CONTROLS. The Company and its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurances that (A) transactions are executed in accordance with management's general or specific authorization; (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain accountability for assets; (C) access to assets is permitted only in accordance with management's general or specific authorization; and (D) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (xxiii) TAX RETURNS. The Company and its subsidiaries have filed all federal, state, local and foreign tax returns that are required to have been filed by them pursuant to applicable foreign, federal, state, local or other law or have duly requested extensions thereof, except insofar as the failure to file such returns or request such extensions would not reasonably be expected to result in a Material Adverse Effect, and has paid all taxes due pursuant to such returns or pursuant to any assessment received by the Company and its Subsidiaries, except for such taxes or assessments, if any, as are being contested in good faith and as to which adequate reserves have been provided. The charges, accruals and reserves on the books of the Company in respect of any income and corporation tax liability of the Company and each subsidiary for any years not finally determined are adequate to meet any assessments or re-assessments for additional income tax for any years not finally determined, except to the extent of any inadequacy that would not reasonably be expected to result in a Material Adverse Effect. -11- 16 (xxiv) YEAR 2000. All disclosure regarding year 2000 compliance that is required to be described under the 1933 Act and 1933 Regulations (including disclosures required by Staff Legal Bulletin No. 5) has been included in the Prospectus. Neither the Company nor any of its subsidiaries will incur significant operating expenses or costs to ensure that its information systems will be year 2000 compliant, other than as disclosed in the Prospectus. (b) Representations and Warranties by the Selling Shareholders. Each Selling Shareholder, severally and not jointly, represents and warrants to each U.S. Underwriter as of the date hereof, as of the Closing Time, and, if the Selling Shareholder is selling Option Securities on a Date of Delivery, as of each such Date of Delivery, and agrees with each U.S. Underwriter, as follows: (i) ACCURATE DISCLOSURE. The Selling Shareholder has reviewed and is familiar with the Registration Statement and the Prospectuses and neither of the Prospectuses nor any amendments or supplements thereto (including any prospectus wrapper) includes any untrue statement of a material fact with respect to such Selling Shareholder or omits to state a material fact with respect to such Selling Shareholder necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; such Selling Shareholder is not prompted to sell the Securities to be sold by such Selling Shareholder hereunder by any information concerning the Company or any subsidiary of the Company which is not set forth in the Prospectuses. (ii) AUTHORIZATION OF AGREEMENTS. Such Selling Shareholder has the full right, power and authority to enter into this Agreement, the International Purchase Agreement and the Power of Attorney and Custody Agreement and to sell, transfer and deliver the Securities to be sold by such Selling Shareholder hereunder. The execution and delivery of this Agreement, the International Purchase Agreement and the Power of Attorney and Custody Agreement and the sale and delivery of the Securities to be sold by such Selling Shareholder and the consummation of the transactions contemplated herein and compliance by such Selling Shareholder with its obligations hereunder have been duly authorized by such Selling Shareholder and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default under, or result in the creation or imposition of any tax, lien, charge or encumbrance upon the Securities to be sold by such Selling Shareholder or any property or assets of such Selling Shareholder pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, license, lease or other agreement or instrument to which such Selling Shareholder is a party or by which such Selling Shareholder may be bound, or to which any of the property or assets of such Selling Shareholder is subject, nor will such action result in any violation of the provisions of the charter or by-laws or other organizational instrument of such Selling Shareholder, if applicable, or any -12- 17 applicable treaty, law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over such Selling Shareholder or any of its properties. (iii) GOOD AND MARKETABLE TITLE. Such Selling Shareholder has and will at the Closing Time and, if any Option Securities are purchased, on the Date of Delivery have good and marketable title to the Securities to be sold by such Selling Shareholder hereunder, free and clear of any security interest, mortgage, pledge, lien, charge, claim, equity or encumbrance of any kind, other than pursuant to this Agreement and the International Purchase Agreement; and upon delivery of such Securities and payment of the purchase price therefor as herein contemplated, assuming each Underwriter has no notice of any adverse claim, each of the Underwriters will receive good and marketable title to the Securities purchased by it from such Selling Shareholder, free and clear of any security interest, mortgage, pledge, lien, charge, claim, equity or encumbrance of any kind. (iv) DUE EXECUTION OF AGREEMENTS. Such Selling Shareholder has duly executed and delivered, in the form heretofore furnished to the U.S. Representatives, the Power of Attorney and Custody Agreement (collectively, the "Power of Attorney and Custody Agreement") with the attorneys-in-fact named therein (the "Attorney-in-Fact") and The Bank of New York, as custodian (the "Custodian); the Custodian is authorized by such Selling Shareholder to deliver the Securities to be sold by such Selling Shareholder hereunder and to accept payment therefor; and the Attorney-in-Fact is authorized to execute and deliver this Agreement and the certificate referred to in Section 5(f) or that may be required pursuant to Sections 5(n) and 5(o) on behalf of such Selling Shareholder, to sell, assign and transfer to the U.S. Underwriters the Securities to be sold by such Selling Shareholder hereunder, to determine the purchase price to be paid by the U.S. Underwriters to such Selling Shareholder, as provided in Section 2(a) hereof, to authorize the delivery of the Securities to be sold by such Selling Shareholder hereunder, to accept payment therefor, and otherwise to act on behalf of such Selling Shareholder in connection with this Agreement. This Agreement and the International Purchase Agreement have been duly executed and delivered by or on behalf of such Selling Shareholder. (v) ABSENCE OF MANIPULATION. Such Selling Shareholder has not taken, and will not take, directly or indirectly, any action which is designed to or which has constituted or which might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities. (vi) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or consent, approval, authorization, order, registration, qualification or decree of, any court or governmental -13- 18 authority or agency, domestic or foreign, is necessary or required for the performance by each Selling Shareholder of its obligations hereunder or in the International Purchase Agreement or the Power of Attorney and Custody Agreement, or in connection with the sale and delivery of the Securities hereunder or the consummation of the transactions contemplated by this Agreement and the International Purchase Agreement except (i) such as may have previously been made or obtained or as may be required under the 1933 Act or the 1933 Act Regulations or under state securities laws and (ii) such as have been obtained under the laws and regulations of jurisdictions outside the United States in which the Reserved Securities are offered. (vii) RESTRICTION ON SALE OF SECURITIES. During a period of 180 days from the date of the Prospectuses, such Selling Shareholder will not, without the prior written consent of Merrill Lynch, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any share of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or file any registration statement under the 1933 Act with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to the Securities to the extent they are sold hereunder. (viii) CERTIFICATES SUITABLE FOR TRANSFER. Certificates for all of the Securities to be sold by such Selling Shareholder pursuant to this Agreement and the International Purchase Agreement, in suitable form for transfer by delivery or accompanied by duly executed instruments of transfer or assignment in blank with signatures guaranteed, have been placed in custody with the Custodian with irrevocable conditional instructions to deliver such Securities to the U.S. Underwriters pursuant to this Agreement and to the International Managers pursuant to the International Purchase Agreement. (ix) NO ASSOCIATION WITH NASD. Neither such Selling Shareholder nor any of his/her/its affiliates (within the meaning of NASD Conduct Rule 2720(b)(1)(a)) directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, or is an associated person (within the meaning of Article I, Section 1(q) of the By-laws of the National Association of Securities Dealers, Inc.) of, any member firm of the National Association of Securities Dealers, Inc., other than as described on an appendix to the Power of Attorney and Custody Agreement to which such Selling Shareholder is a party. -14- 19 (x) POWER AND AUTHORITY. If such Selling Shareholder is a corporation, partnership or trust, such Selling Shareholder has been duly organized or incorporated and is validly existing as a corporation, partnership or limited partnership in good standing under the laws of its jurisdiction of incorporation or organization, as applicable. (c) Officer's Certificates. Any certificate signed by any officer of the Company, CMI or any of their respective subsidiaries delivered to the Global Coordinator, the U.S. Representatives or to counsel for the U.S. Underwriters shall be deemed a representation and warranty by the Company and CMI to each U.S. Underwriter as to the matters covered thereby; and any certificate signed by or on behalf of any Selling Shareholder as such and delivered to the U.S. Representatives or to counsel for the U.S. Underwriters, pursuant to the terms of this Agreement, shall be deemed a representation and warranty by such Selling Shareholder to the U.S. Underwriters as to the matters covered thereby. SECTION 2. SALE AND DELIVERY TO U.S. UNDERWRITERS; CLOSING. (a) Initial Securities. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, each Selling Shareholder, severally and not jointly, agree to sell to each U.S. Underwriter, severally and not jointly, and each U.S. Underwriter, severally and not jointly, agrees to purchase from each Selling Shareholder, at the price per share set forth in Schedule C, that proportion of the number of Initial U.S. Securities set forth in Schedule B opposite the name of such Selling Shareholder, as the case may be, which the number of Initial U.S. Securities set forth in Schedule A opposite the name of such U.S. Underwriter, plus any additional number of Initial U.S. Securities which such U.S. Underwriter may become obligated to purchase pursuant to the provisions of Section 10 hereof, bears to the total number of Initial U.S. Securities, subject, in each case, to such adjustments among the U.S. Underwriters as the Global Coordinator in its sole discretion shall make to eliminate any sales or purchases of fractional securities. (b) Option Securities. In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Selling Shareholders hereby grant an option to the U.S. Underwriters, severally and not jointly, to purchase up to an additional __________ shares of Common Stock, as set forth in Schedule B, at the price per share set forth in Schedule C, less an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial U.S. Securities but not payable on the U.S. Option Securities. The option hereby granted will expire 30 days after the date hereof and may be exercised in whole or in part from time to time on one or more occasions only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Initial U.S. Securities upon notice by the Global Coordinator to the Selling Shareholders setting forth the number of U.S. Option Securities as to which the several U.S. Underwriters are then exercising the option and the time and date of payment and delivery for such U.S. Option Securities. Any such time and date of delivery for the U.S. Option Securities (a "Date of Delivery") shall be determined by the Global Coordinator, but shall not be -15- 20 later than seven full business days after the exercise of said option, nor in any event prior to the Closing Time, as hereinafter defined. If the option is exercised as to all or any portion of the U.S. Option Securities, each of the U.S. Underwriters, acting severally and not jointly, will purchase that proportion of the total number of U.S. Option Securities then being purchased which the number of Initial U.S. Securities set forth in Schedule A opposite the name of such U.S. Underwriter bears to the total number of Initial U.S. Securities, subject in each case to such adjustments as the Global Coordinator in its discretion shall make to eliminate any sales or purchases of fractional shares. (c) Payment. Payment of the purchase price for, and delivery of certificates for, the Initial Securities shall be made at the offices of Fried, Frank, Harris, Shriver & Jacobson, One New York Plaza, New York, New York 10004, or at such other place as shall be agreed upon by the Global Coordinator and the Company and the Selling Shareholders, at 9:00 A.M. (Eastern time) on the third (fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on any given day) business day after the date hereof (unless postponed in accordance with the provisions of Section 10), or such other time not later than ten business days after such date as shall be agreed upon by the Global Coordinator, the Company and the Attorney-in-Fact on behalf of the Selling Shareholders (such time and date of payment and delivery being herein called "Closing Time"). In addition, in the event that any or all of the U.S. Option Securities are purchased by the U.S. Underwriters, payment of the purchase price for, and delivery of certificates for, such U.S. Option Securities shall be made at the above-mentioned offices, or at such other place as shall be agreed upon by the Global Coordinator and the Company and the Attorney-in-Fact on behalf of the Selling Shareholders, on each Date of Delivery as specified in the notice from the Global Coordinator to the Company and the Attorney-in-Fact on behalf of the Selling Shareholders. Payment shall be made to the Selling Shareholders by wire transfer of immediately available funds to bank accounts designated by the Custodian pursuant to each Selling Shareholder's Power of Attorney and Custody Agreement, against delivery to the U.S. Representatives for the respective accounts of the U.S. Underwriters of certificates for the U.S. Securities to be purchased by them. It is understood that each U.S. Underwriter has authorized the U.S. Representatives, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the Initial U.S. Securities and the U.S. Option Securities, if any, which it has agreed to purchase. Merrill Lynch, individually and not as representative of the U.S. Underwriters, may (but shall not be obligated to) make payment of the purchase price for the Initial U.S. Securities or the U.S. Option Securities, if any, to be purchased by any U.S. Underwriter whose funds have not been received by the Closing Time or the relevant Date of Delivery, as the case may be, but such payment shall not relieve such U.S. Underwriter from its obligations hereunder. (d) Denominations; Registration. Certificates for the Initial U.S. Securities and the U.S. Option Securities, if any, shall be in such denominations and registered in such names as the U.S. Representatives may request in writing at least one full business day before the Closing -16- 21 Time or the relevant Date of Delivery, as the case may be. The certificates for the Initial U.S. Securities and the U.S. Option Securities, if any, will be made available for examination and packaging by the U.S. Representatives in The City of New York not later than 10:00 A.M. (Eastern time) on the business day prior to the Closing Time or the relevant Date of Delivery, as the case may be. (e) Appointment of Qualified Independent Underwriter. The Company and the Selling Shareholders hereby confirm their engagement of McDonald & Company Securities, Inc. as, and McDonald & Company Securities, Inc. hereby confirms its agreement with the Company and the Selling Shareholders to render services as, a "qualified independent underwriter" within the meaning of Rule 2720 of the Conduct Rules of the National Association of Securities Dealers, Inc. with respect to the offering and sale of the Securities. McDonald & Company Securities, Inc., solely in its capacity as qualified independent underwriter and not otherwise, is referred to herein as the "Independent Underwriter." SECTION 3. COVENANTS OF THE COMPANY. The Company covenants with each U.S. Underwriter as follows: (a) Compliance with Securities Regulations and Commission Requests. The Company, subject to Section 3(b), will comply with the requirements of Rule 430A or Rule 434, as applicable, and will notify the Global Coordinator immediately, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective, or any supplement to the Prospectuses or any amended Prospectuses shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectuses or for additional information, and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes. The Company will promptly effect the filings necessary pursuant to Rule 424(b) and will take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company will make every reasonable effort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible moment. (b) Filing of Amendments. The Company will give the Global Coordinator notice of its intention to file or prepare any amendment to the Registration Statement (including any filing under Rule 462(b)), any Term Sheet or any amendment, supplement or revision to either the prospectus included in the Registration Statement at the time it became effective or to the Prospectuses, will furnish the Global Coordinator with copies -17- 22 of any such documents a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file or use any such document to which the Global Coordinator or counsel for the U.S. Underwriters shall object. (c) Delivery of Registration Statements. The Company has furnished or will deliver to the U.S. Representatives and counsel for the U.S. Underwriters, without charge, signed copies of the Registration Statement as originally filed and of each amendment thereto (including exhibits filed therewith or incorporated by reference therein) and signed copies of all consents and certificates of experts, and will also deliver to the U.S. Representatives, without charge, a conformed copy of the Registration Statement as originally filed and of each amendment thereto (without exhibits) for each of the U.S. Underwriters. The copies of the Registration Statement and each amendment thereto furnished to the U.S. Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (d) Delivery of Prospectuses. The Company has delivered to each U.S. Underwriter, without charge, as many copies of each preliminary prospectus as such U.S. Underwriter reasonably requested, and the Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Company will furnish to each U.S. Underwriter, without charge, during the period when the U.S. Prospectus is required to be delivered under the 1933 Act or the 1934 Act, such number of copies of the U.S. Prospectus (as amended or supplemented) as such U.S. Underwriter may reasonably request. The U.S. Prospectus and any amendments or supplements thereto furnished to the U.S. Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (e) Continued Compliance with Securities Laws. The Company will comply with the 1933 Act and the 1933 Act Regulations so as to permit the completion of the distribution of the Securities as contemplated in this Agreement, the International Purchase Agreement and in the Prospectuses. If at any time when a prospectus is required by the 1933 Act to be delivered in connection with sales of the Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the U.S. Underwriters or for the Company, to amend the Registration Statement or amend or supplement any Prospectus in order that the Prospectuses will not include any untrue statements of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, or if it shall be necessary, in the opinion of such counsel, at any such time to amend the Registration Statement or amend or supplement any Prospectus in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and file with the Commission, subject to Section 3(b), such amendment or -18- 23 supplement as may be necessary to correct such statement or omission or to make the Registration Statement or the Prospectuses comply with such requirements, and the Company will furnish to the U.S. Underwriters such number of copies of such amendment or supplement as the U.S. Underwriters may reasonably request. (f) Blue Sky Qualifications. The Company will use its best efforts, in cooperation with the U.S. Underwriters, to qualify the Securities for offering and sale under the applicable securities laws of such states and other jurisdictions (domestic or foreign) as the Global Coordinator may designate and to maintain such qualifications in effect for a period of not less than one year from the later of the effective date of the Registration Statement and any Rule 462(b) Registration Statement; provided, however, that neither the Company nor any of the Selling Shareholders shall be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. In each jurisdiction in which the Securities have been so qualified, the Company will file such statements and reports as may be required by the laws of such jurisdiction to continue such qualification in effect for a period of not less than one year from the effective date of the Registration Statement and any Rule 462(b) Registration Statement. (g) Rule 158. The Company will timely file such reports pursuant to the 1934 Act as are necessary in order to make generally available to its securityholders as soon as practicable an earnings statement for the purposes of, and to provide the benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act. (h) Listing. The Company will use its best efforts to effect the quotation of the Common Stock (including the Securities) on the Nasdaq National Market. (i) Restriction on Sale of Securities. During a period of 180 days from the date of the Prospectuses, the Company will not, without the prior written consent of the Global Coordinator, (i) directly or indirectly, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any share of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or file any registration statement under the 1933 Act with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the Securities to be sold hereunder or under the International Purchase Agreement, (B) any shares of Common Stock issued by the Company upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof and referred to in -19- 24 the Prospectuses, (C) any shares of Common Stock issued or options to purchase Common Stock granted pursuant to existing employee benefit plans of the Company referred to in the Prospectuses or (D) any shares of Common Stock issued pursuant to any non-employee director stock plan or dividend reinvestment plan, or to any registration statement under the 1933 Act filed with respect to shares of Common Stock issued or to be issued in any such transactions. (j) Reporting Requirements. The Company, during the period when the Prospectuses are required to be delivered under the 1933 Act or the 1934 Act, will file all documents required to be filed with the Commission pursuant to the 1934 Act within the time periods required by the 1934 Act and the rules and regulations of the Commission thereunder. (k) Compliance with NASD Rules. The Company hereby agrees that it will ensure that the Reserved Securities will be restricted as required by the National Association of Securities Dealers, Inc. (the "NASD") or the NASD rules from sale, transfer, assignment, pledge or hypothecation for a period of three months following the date of this Agreement. The Underwriters will notify the Company as to which persons will need to be so restricted. At the request of the Underwriters, the Company will direct the transfer agent to place a stop transfer restriction upon such securities for such period of time. Should the Company release, or seek to release, from such restrictions any of the Reserved Securities, the Company agrees to reimburse the Underwriters for any reasonable expenses (including, without limitation, legal expenses) they incur in connection with such release. SECTION 4. PAYMENT OF EXPENSES. (a) Expenses. The Company and CMI will pay or cause to be paid all expenses incident to the performance of their obligations under this Agreement, including (i) the preparation, printing and filing of the Registration Statement (including financial statements and exhibits) as originally filed and of each amendment thereto, (ii) the preparation, printing and delivery to the Underwriters of this Agreement, any Agreement among Underwriters and such other documents as may be required in connection with the offering, purchase, sale, issuance or delivery of the Securities, (iii) the preparation, issuance and delivery of the certificates for the Securities to the Underwriters, including any stock or other transfer taxes and any stamp or other duties payable upon the sale, issuance or delivery of the Securities to the Underwriters and the transfer of the Securities between the U.S. Underwriters and the International Managers, (iv) the fees and disbursements of the Company's counsel, accountants and other advisors, (v) the qualification of the Securities under securities laws in accordance with the provisions of Section 3(f) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection therewith and in connection with the preparation of the Blue Sky Survey and any supplement thereto, (vi) the printing and delivery to the Underwriters of copies of each preliminary prospectus, any Term Sheets and of the Prospectuses and any amendments or supplements thereto, (vii) the preparation, printing and delivery to the Underwriters of copies of the Blue Sky Survey and any -20- 25 supplement thereto, (viii) the fees and expenses of any transfer agent or registrar for the Securities, (ix) the filing fees incident to, and the reasonable fees and disbursements of counsel to the Underwriters in connection with, the review by the NASD of the terms of the sale of the Securities, (x) the fees and expenses incurred in connection with the quotation of the Securities on the Nasdaq National Market, (xi) all costs and expenses of the Underwriters, including the fees and disbursements of counsel for the Underwriters, in connection with matters related to the Reserved Securities which are designated by the Company for sale to employees and others having a business relationship with the Company and (xii) the fees and expenses of the Independent Underwriter incurred in its capacity as the "qualified independent underwriter" with respect to the transactions contemplated hereby. In connection with any roadshow, the Company and the Underwriters will each bear 50% of the cost of an airplane. (b) Expenses of the Selling Shareholders. The Selling Shareholders, jointly and severally, will pay all expenses incident to the performance of their respective obligations under, and the consummation of the transactions contemplated by this Agreement, including (i) any stamp duties, capital duties and stock transfer taxes, if any, payable upon the sale of the Securities to the Underwriters, and their transfer between the Underwriters pursuant to an agreement between such Underwriters, and (ii) the fees and disbursements of their respective counsel and accountants, provided that the Company shall pay the reasonable fees and disbursements of one single counsel for the Selling Shareholders. (c) Termination of Agreement. If this Agreement is terminated by the U.S. Representatives in accordance with the provisions of Section 5, Section 9(a)(i) or Section 11 hereof, the Company and CMI shall reimburse the U.S. Underwriters for all of their out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the U.S. Underwriters; provided that these expenses shall be reimbursed by (i) the Selling Shareholders if the Agreement is terminated due to failure to comply with Sections 5(c) and 5(f) hereof and (ii) the defaulting Selling Shareholder if this Agreement is terminated pursuant to Section 11 hereof. (d) Allocation of Expenses. The provisions of this Section shall not affect any agreement that the Company, CMI and the Selling Shareholders may make for the sharing of such costs and expenses. SECTION 5. CONDITIONS OF U.S. UNDERWRITERS' OBLIGATIONS. The obligations of the several U.S. Underwriters hereunder are subject to the accuracy of the representations and warranties of the Company, CMI and the Selling Shareholders contained in Section 1 hereof or in certificates of any officer of the Company or any subsidiary of the Company or on behalf of any Selling Shareholder, to the performance by the Company and CMI of their respective covenants and other obligations hereunder, and to the following further conditions: (a) Effectiveness of Registration Statement. The Registration Statement, including any Rule 462(b) Registration Statement, has become effective and at Closing Time no stop order suspending the effectiveness of the Registration Statement shall have -21- 26 been issued under the 1933 Act or proceedings therefor initiated or threatened by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel to the U.S. Underwriters. A prospectus containing the Rule 430A Information shall have been filed with the Commission in accordance with Rule 424(b) (or a post-effective amendment providing such information shall have been filed and declared effective in accordance with the requirements of Rule 430A) or, if the Company has elected to rely upon Rule 434, a Term Sheet shall have been filed with the Commission in accordance with Rule 424(b). (b) Opinion of Counsel for Company. At Closing Time, the U.S. Representatives shall have received the favorable opinions, dated as of Closing Time, of Calfee, Halter & Griswold L.L.P., counsel for the Company, and Obermayer Rebmann Maxwell & Hippel LLP, Pennsylvania counsel for CMI, in form and substance satisfactory to counsel for the U.S. Underwriters, together with signed or reproduced copies of such letter for each of the other U.S. Underwriters, to the effect set forth in Exhibits A-1 and A-2 hereto, respectively, and to such further effect as counsel to the U.S. Underwriters may reasonably request. (c) Opinion of Counsel for the Selling Shareholders. At Closing Time, the U.S. Representatives shall have received the favorable opinions, dated as of Closing Time, of Simpson Thacher & Bartlett, counsel for the Selling Shareholders and of other counsel for the Selling Shareholders as counsel for the U.S. Underwriters may deem necessary, in form and substance satisfactory to counsel for the U.S. Underwriters, together with signed or reproduced copies of such letter for each of the other U.S. Underwriters to the effect set forth in Exhibit B-1 and B-2 hereto, respectively, and to such further effect as counsel to the U.S. Underwriters may reasonably request. (d) Opinion of Counsel for U.S. Underwriters. At Closing Time, the U.S. Representatives shall have received the favorable opinion, dated as of Closing Time, of Fried, Frank, Harris, Shriver & Jacobson, counsel for the U.S. Underwriters, together with signed or reproduced copies of such letter for each of the other U.S. Underwriters with respect to certain matters set forth in clauses (i), (ii), (iv), (v) (solely as to preemptive or other similar rights arising by operation of law or under the charter or by-laws of the Company), (vii), (ix), (x), (xii) and (xiv) (solely as to the information in the Prospectuses under "Description of Capital Stock") and the penultimate paragraph of Exhibit A-1 hereto and with respect to the matters set forth in opinions (1) and (2) of Exhibit B-1 hereto. In giving such opinion such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of New York and the federal law of the United States and the General Corporation Law of the State of Delaware, upon the opinions of counsel satisfactory to the U.S. Representatives. Such counsel may also state that, insofar as such opinion involves factual matters, they have -22- 27 relied, to the extent they deem proper, upon certificates of officers of the Company and its subsidiaries and of the Selling Shareholders and certificates of public officials. (e) Officers' Certificate. At Closing Time, there shall not have been, since the date hereof or since the respective dates as of which information is given in the Prospectuses, any material adverse change in the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, and the U.S. Representatives shall have received a certificate of the Chief Executive Officer or President of each of the Company and CMI and of the chief financial or chief accounting officer of each of the Company and CMI, dated as of Closing Time, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties in Section 1(a) hereof are true and correct with the same force and effect as though expressly made at and as of Closing Time, (iii) the Company and CMI, as the case may be, has complied with all agreements and satisfied all conditions on their part to be performed or satisfied at or prior to Closing Time, and (iv) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or are contemplated by the Commission. (f) Certificate of Selling Shareholders. At Closing Time, the U.S. Representatives shall have received a certificate of the Attorney-in-Fact on behalf of each Selling Shareholder, dated as of Closing Time, to the effect that (i) the representations and warranties of each Selling Shareholder contained in Section 1(b) hereof are true and correct in all respects with the same force and effect as though expressly made at and as of Closing Time and (ii) each Selling Shareholder has complied with all agreements and all conditions on its part to be performed under this Agreement at or prior to Closing Time. (g) Accountants' Comfort Letters. At the time of the execution of this Agreement, the U.S. Representatives shall have received from Coopers & Lybrand L.L.P. a letter in the form of Exhibit D-1 hereto and from Deloitte & Touche, LLP a letter in the form of Exhibits D-2 hereto dated such date, in form and substance satisfactory to the U.S. Representatives, together with signed or reproduced copies of such letter for each of the other U.S. Underwriters containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectuses. (h) Bring-down Comfort Letters. At Closing Time, the U.S. Representatives shall have received from Coopers & Lybrand L.L.P. and Deloitte & Touche LLP letters, dated as of Closing Time, to the effect that they reaffirm the statements made in the letters furnished pursuant to subsection (g) of this Section, except that the specified date referred to shall be a date not more than three business days prior to Closing Time. -23- 28 (i) Approval of Listing. At Closing Time, the Securities shall have been approved for quotation on the Nasdaq National Market, subject only to official notice of issuance. (j) No Objection. The NASD shall have confirmed that it has not raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements. (k) Lock-up Agreements. At the date of this Agreement, the U.S. Representatives shall have received an agreement substantially in the form of Exhibit C hereto signed by the persons listed on Schedule D hereto. (l) Purchase of Initial International Securities. Contemporaneously with the purchase by the U.S. Underwriters of the Initial U.S. Securities under this Agreement, the International Managers shall have purchased the Initial International Securities under the International Purchase Agreement. (m) Other Agreements. Prior to the Closing Time, (i) the U.S. Representatives shall have received copies of a Custody Agreement and Power of Attorney executed by each of the Selling Shareholders and (ii) the Credit Facility Amendment shall remain in full force and effect. (n) Conditions to Purchase of U.S. Option Securities. In the event that the U.S. Underwriters exercise their option provided in Section 2(b) hereof to purchase all or any portion of the U.S. Option Securities, the representations and warranties of the Company, CMI and the Selling Shareholders contained herein and the statements in any certificates furnished by the Company or any subsidiary of the Company and the Selling Shareholders hereunder shall be true and correct as of each Date of Delivery and, at the relevant Date of Delivery, the U.S. Representatives shall have received: (i) OFFICERS' CERTIFICATE. A certificate, dated such Date of Delivery, of the Chief Executive Officer or President of each of the Company and CMI and of the chief financial or chief accounting officer of each of the Company and CMI confirming that the certificate delivered at the Closing Time pursuant to Section 5(e) hereof remains true and correct as of such Date of Delivery. (ii) CERTIFICATE OF SELLING SHAREHOLDERS. A certificate, dated such Date of Delivery, of an Attorney-in-Fact on behalf of each Selling Shareholder confirming that the certificate delivered at Closing Time pursuant to Section 5(f) remains true and correct as of such Date of Delivery. (iii) OPINION OF COUNSEL FOR COMPANY. The favorable opinions of Calfee, Halter & Griswold, L.L.P., counsel for the Company, and Obermayer -24- 29 Rebmann Maxwell & Hippel LLP, Pennsylvania counsel for CMI, in form and substance satisfactory to counsel for the U.S. Underwriters, dated such Date of Delivery, relating to the U.S. Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinions required by Section 5(b) hereof. (iv) OPINION OF COUNSEL FOR THE SELLING SHAREHOLDERS. The favorable opinions of Simpson Thacher & Bartlett, counsel for the Selling Shareholders, and of other counsel for the Selling Shareholders as counsel for the U.S. Underwriters may deem necessary, in form and substance satisfactory to counsel for the Underwriters, dated such Date of Delivery, relating to the U.S. Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(c) hereof. (v) OPINION OF COUNSEL FOR U.S. UNDERWRITERS. The favorable opinion of Fried, Frank, Harris, Shriver & Jacobson, counsel for the U.S. Underwriters, dated such Date of Delivery, relating to the U.S. Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(d) hereof. (vi) BRING-DOWN COMFORT LETTERS. Letters from Coopers & Lybrand L.L.P. and Deloitte & Touche LLP, in form and substance satisfactory to the U.S. Representatives and dated such Date of Delivery, substantially in the same form and substance as the letter furnished to the U.S. Representatives pursuant to Section 5(g) hereof, except that the "specified date" in the letter furnished pursuant to this paragraph shall be a date not more than five days prior to such Date of Delivery. (o) Additional Documents. At Closing Time and at each Date of Delivery, counsel for the U.S. Underwriters shall have been furnished with such documents and opinions as they may require for the purpose of enabling them to pass upon the issuance and sale of the Securities as herein contemplated, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company and the Selling Shareholders in connection with the issuance and sale of the Securities as herein contemplated shall be satisfactory in form and substance to the U.S. Representatives and counsel for the U.S. Underwriters. (p) Termination of Agreement. If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement, or, in the case of any condition to the purchase of U.S. Option Securities, on a Date of Delivery which is after the Closing Time, the obligations of the several U.S. Underwriters to purchase the relevant Option Securities, may be terminated by the U.S. Representatives -25- 30 by notice to the Company at any time at or prior to Closing Time or such Date of Delivery, as the case may be, and such termination shall be without liability of any party to any other party except as provided in Section 4 and except that Sections 1, 6, 7 and 8 shall survive any such termination and remain in full force and effect. SECTION 6. INDEMNIFICATION. (a)(1) Indemnification of U.S. Underwriters. (1) The Company and CMI, jointly and severally, agree to indemnify and hold harmless each U.S. Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act to the extent and in the manner set forth in clauses (i), (ii), (iii) and (iv) below and in Section 6(a)(2). In addition, each Selling Shareholder, severally and not jointly, agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any U.S. Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act to the extent and in the manner set forth in clauses (i), (iii) and (iv) below and in Section 6(a)(2): (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus or the Prospectuses (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of (A) the violation of any applicable laws or regulations of foreign jurisdictions where Reserved Securities have been offered and (B) any untrue statement or alleged untrue statement of a material fact included in the supplement or prospectus wrapper material distributed in connection with the reservation and sale of the Reserved Securities to eligible employees of the Company and other persons or the omission or alleged omission therefrom of a material fact necessary to make the statements therein, when considered in conjunction with the Prospectuses or preliminary prospectuses, not misleading; (iii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, or in connection with any violation of the nature referred to in Section 6(a)(1)(ii)(A) hereof, provided that (subject -26- 31 to Section 6(d) below) any such settlement is effected with the written consent of the Company and the Selling Shareholders; and (iv) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by Merrill Lynch), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission or in connection with any violation of the nature referred to in Section 6(a)(1)(ii)(A) hereof, to the extent that any such expense is not paid under (i), (ii), or (iii) above; PROVIDED, HOWEVER, that this indemnity agreement shall not (i) apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by any U.S. Underwriter through Merrill Lynch expressly for use in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the U.S. Prospectus (or any amendment or supplement thereto) or (ii) inure to the benefit of any U.S. Underwriter from whom the person asserting any loss, liability, claim, damage or expense purchased Securities, or any person controlling such U.S. Underwriter, if it shall be established that a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such U.S. Underwriter to such person, if required by law to have been so delivered, at or prior to the confirmation of the sale of such Securities to such person in any case where the Company complied with its obligations under Sections 3(a), 3(b) and 3(d), and if the Prospectus (as so amended or supplemented) would have cured any defect giving rise to such loss, liability, claim damage, or expense; PROVIDED, FURTHER, with respect to each Selling Shareholder, the indemnification provision in this paragraph (1) shall be only with respect to the information furnished in writing by or on behalf of such Selling Shareholder expressly for use in the Registration Statement (or any amendment thereto), including Rule 430A Information, if applicable, or any preliminary prospectus or the Prospectuses (or any amendment or supplement thereto) and each Selling Shareholder severally confirms, and each U.S. Underwriter agrees, that the information (other than the percentage of shares owned) pertaining to each Selling Shareholder under the caption "Principal and Selling Stockholders" in the U.S. Prospectus constitutes the only information furnished in writing by or on behalf of such Selling Shareholder expressly for use in the Registration Statement and U.S. Prospectus; PROVIDED, FURTHER, that the aggregate liability of any Selling Shareholder pursuant to this paragraph (1) shall be limited to the net proceeds (after deducting the underwriting discount but before deducting expenses) received by such Selling Shareholder from the Securities purchased by the Underwriters from such Selling Shareholder pursuant to this Agreement and the International Purchase Agreement. -27- 32 (2) In addition to and without limitation of the Company's, CMI's and each Selling Shareholder's obligation to indemnify McDonald & Company Securities, Inc. as an Underwriter, the Company, CMI and each Selling Shareholder also, severally and not jointly, agree to indemnify and hold harmless the Independent Underwriter and each person, if any, who controls the Independent Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, from and against any and all loss, liability, claim, damage and expense whatsoever, as incurred, as a result of the Independent Underwriter's participation as a "qualified independent underwriter" within the meaning of Rule 2720 of the Conduct Rules of the National Association of Securities Dealers, Inc. in connection with the offering of the U.S. Securities; PROVIDED, the aggregate liability of any Selling Shareholder pursuant to this paragraph (2) shall be limited to the net proceeds (after deducting the underwriting discount but before deducting expenses) received by such Selling Shareholder from the Shares purchased by the Underwriters from such selling Shareholder pursuant to this Agreement and the International Purchase Agreement. (b) Indemnification of Company, Directors and Officers and Selling Shareholders. Each U.S. Underwriter severally agrees to indemnify and hold harmless the Company, its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, and each Selling Shareholder and each person, if any, who controls any Selling Shareholder within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a)(1) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any U.S. preliminary prospectus or the U.S. Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such U.S. Underwriter through Merrill Lynch expressly for use in the Registration Statement (or any amendment thereto) or such U.S. preliminary prospectus or the U.S. Prospectus (or any amendment or supplement thereto). (c) Actions against Parties; Notification. Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. In the case of parties indemnified pursuant to Section 6(a)(1) above, counsel to the indemnified parties shall be selected by Merrill Lynch, and, in the case of parties indemnified pursuant to Section 6(b) above, counsel to the indemnified parties shall be selected by the Company and the Selling Shareholders. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the -28- 33 indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances; provided, that, if indemnity is sought pursuant to Section 6(a)(2), then, in addition to the fees and expenses of such counsel for the indemnified parties, the indemnifying party shall be liable for the reasonable fees and expenses of not more than one counsel (in addition to any local counsel) separate from its own counsel and that of the other indemnified parties for the Independent Underwriter in its capacity as a "qualified independent underwriter" and all persons, if any, who control the Independent Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of 1934 Act in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances if, in the reasonable judgment of the Independent Underwriter, there may exist a conflict of interest between the Independent Underwriter and the other indemnified parties. Any such separate counsel for the Independent Underwriter and such control persons of the Independent Underwriter shall be designated in writing by the Independent Underwriter. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 6 or Section 7 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (d) Settlement without Consent if Failure to Reimburse. If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 6(a)(1)(iii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. (e) Indemnification for Reserved Securities. In connection with the offer and sale of the Reserved Securities, the Company and CMI, jointly and severally, agree, promptly upon a request in writing, to indemnify and hold harmless the Underwriters from and against any and all losses, liabilities, claims, damages and expenses incurred by them as a result of the failure of eligible employees of the Company and its subsidiaries and other persons to pay for and accept delivery of Reserved Securities which, by the end of the first business day following the date of this Agreement, were subject to a properly confirmed agreement to purchase. -29- 34 (f) Other Agreements with Respect to Indemnification. The provisions of this Section shall not affect any agreement among the Company, CMI and the Selling Shareholders with respect to indemnification. SECTION 7. CONTRIBUTION. If the indemnification provided for in Section 6 hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company, CMI and the Selling Shareholders on the one hand and the U.S. Underwriters on the other hand from the offering of the U.S. Securities pursuant to this Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, CMI and the Selling Shareholders on the one hand and of the U.S. Underwriters on the other hand in connection with the statements or omissions, or in connection with any violation of the nature referred to in Section 6(a)(1)(ii)(A) hereof, which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company, CMI and the Selling Shareholders on the one hand and the U.S. Underwriters on the other hand in connection with the offering of the U.S. Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the U.S. Securities pursuant to this Agreement (before deducting expenses) received by the Company and the Selling Shareholders and the total underwriting discount received by the U.S. Underwriters, in each case as set forth on the cover of the U.S. Prospectus, or, if Rule 434 is used, the corresponding location on the Term Sheet, bear to the aggregate initial public offering price of the U.S. Securities as set forth on such cover. The relative fault of the Company, CMI and the Selling Shareholders on the one hand and the U.S. Underwriters on the other hand shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company, CMI or the Selling Shareholders or by the U.S. Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission or any violation of the nature referred to in Section 6(a)(1)(ii)(A) hereof. The Company, CMI, the Selling Shareholders and the U.S. Underwriters agree that McDonald & Company Securities, Inc. will not receive any additional benefits hereunder for serving as the Independent Underwriter in connection with the offering and sale of the Securities. The Company, CMI, the Selling Shareholders and the U.S. Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the U.S. Underwriters were treated as one entity for such purpose) or by -30- 35 any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 7 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this Section 7, no U.S. Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the U.S. Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such U.S. Underwriter has otherwise been required to pay by reason of any such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person, if any, who controls a U.S. Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such U.S. Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company or any Selling Shareholder within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company or such Selling Shareholder, as the case may be. The U.S. Underwriters' respective obligations to contribute pursuant to this Section 7 are several in proportion to the number of Initial U.S. Securities set forth opposite their respective names in Schedule A hereto and not joint. The provisions of this Section shall not affect any agreement among the Company, CMI and the Selling Shareholders with respect to contribution. SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY. All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Company, any of its subsidiaries or the Selling Shareholders submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any U.S. Underwriter or controlling person, or by or on behalf of the Company or the Selling Shareholders, and shall survive delivery of the Securities to the U.S. Underwriters. SECTION 9. TERMINATION OF AGREEMENT. (a) Termination; General. The U.S. Representatives may terminate this Agreement, by notice to the Company and the Attorney-in-Fact on behalf of the Selling Shareholders, at any time at or prior to Closing Time (i) if there has been, since the time of execution of this -31- 36 Agreement or since the respective dates as of which information is given in the U.S. Prospectus, any material adverse change in the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, or (ii) if there has occurred any material adverse change in the financial markets in the United States or the international financial markets, any outbreak of hostilities or escalation thereof or other calamity or crisis or any change or development involving a prospective change in national or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of the Global Coordinator, impracticable to market the Securities or to enforce contracts for the sale of the Securities, or (iii) if trading in any securities of the Company has been suspended or materially limited by the Commission or the New York Stock Exchange, or if trading generally on the American Stock Exchange or the New York Stock Exchange or in the Nasdaq National Market has been suspended or materially limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any of said exchanges or by such system or by order of the Commission, the National Association of Securities Dealers, Inc. or any other governmental authority, or (iv) if a banking moratorium has been declared by either Federal or New York authorities. (b) Liabilities. If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof, and provided further that Sections 1, 6, 7 and 8 shall survive such termination and remain in full force and effect. SECTION 10. DEFAULT BY ONE OR MORE OF THE U.S. UNDERWRITERS. If one or more of the U.S. Underwriters shall fail at Closing Time or a Date of Delivery to purchase the U.S. Securities which it or they are obligated to purchase under this Agreement (the "Defaulted Securities"), the Global Coordinator shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting U.S. Underwriters, or any other underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; if, however, the Global Coordinator shall not have completed such arrangements within such 24-hour period, then: (a) if the number of Defaulted Securities does not exceed 10% of the number of U.S. Securities to be purchased on such date, each of the non-defaulting U.S. Underwriters shall be obligated, severally and not jointly, to purchase the full amount thereof in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all non-defaulting U.S. Underwriters, or (b) if the number of Defaulted Securities exceeds 10% of the number of U.S. Securities to be purchased on such date, this Agreement or, with respect to any Date of Delivery which occurs after the Closing Time, the obligation of the U.S. Underwriters to purchase and of the Company to sell the Option Securities to be purchased and sold on -32- 37 such Date of Delivery shall terminate without liability on the part of any non-defaulting U.S. Underwriter. No action taken pursuant to this Section shall relieve any defaulting Underwriter from liability in respect of its default. In the event of any such default which does not result in a termination of this Agreement or, in the case of a Date of Delivery which is after the Closing Time, which does not result in a termination of the obligation of the U.S. Underwriters to purchase and the Company to sell the relevant U.S. Option Securities, as the case may be, either (i) the U.S. Representatives or (ii) the Company and the Attorney-in-Fact on behalf of the Selling Shareholders shall have the right to postpone Closing Time or the relevant Date of Delivery, as the case may be, for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectuses or in any other documents or arrangements. As used herein, the term "U.S. Underwriter" includes any person substituted for a U.S. Underwriter under this Section 10. SECTION 11. DEFAULT BY ONE OR MORE OF THE SELLING SHAREHOLDERS. If a Selling Shareholder shall fail at Closing Time or at a Date of Delivery to sell and deliver the number of Securities which such Selling Shareholder is obligated to sell hereunder, and the remaining Selling Shareholders do not exercise the right hereby granted to increase, pro rata or otherwise, the number of Securities to be sold by them hereunder to the total number to be sold by all Selling Shareholders as set forth in Schedule B hereto, then the Underwriters may, at the option of the U.S. Representatives, by notice from the U.S. Representatives to the Company and the Attorney-in-Fact on behalf of the non-defaulting Selling Shareholders, either (a) terminate this Agreement without any liability or fault of any non-defaulting party except that the provisions of Sections 1, 4, 6, 7 and 8 shall remain in full force and effect or (b) elect to purchase the Securities which the non-defaulting Selling Shareholders have agreed to sell hereunder. No action taken pursuant to this Section 11 shall relieve any Selling Shareholder so defaulting from liability, if any, in respect of such default. In the event of a default by any Selling Shareholder as referred to in this Section 11, the Global Coordinator, the Company and the non-defaulting Selling Shareholders shall have the right to postpone Closing Time or Date of Delivery for a period not exceeding seven days in order to effect any required change in the Registration Statement or Prospectuses or in any other documents or arrangements. SECTION 12. NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the U.S. Underwriters shall be directed to the U.S. Representatives at North Tower, World Financial Center, New York, New York 10281-1201, attention of Scott Lemone, with a copy to Fried, Frank, Harris, Shriver & Jacobson, One New York Plaza, New York, New York 10004, attention of Valerie Ford Jacob; and notices to the -33- 38 Company and CMI shall be directed to it at Camelot Music Holdings, Inc., 8000 Freedom Avenue N.W., North Canton, Ohio 44720-0169, attention of Jack K. Rogers, with a copy to Calfee, Halter & Griswold L.L.P., 1400 McDonald Investment Center, 800 Superior Avenue, Cleveland, Ohio 44114-2688, attention of Thomas F. McKee. Notices to the Selling Shareholders shall be directed to ___________________. SECTION 13. PARTIES. This Agreement shall each inure to the benefit of and be binding upon the U.S. Underwriters, the Company, CMI and the Selling Shareholders and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the U.S. Underwriters, the Company, CMI and the Selling Shareholders and their respective successors and the controlling persons and officers and directors referred to in Sections 6 and 7 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the U.S. Underwriters, the Company, CMI, the Selling Shareholders and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Securities from any U.S. Underwriter shall be deemed to be a successor by reason merely of such purchase. SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME. SECTION 15. EFFECT OF HEADINGS. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. -34- 39 If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company and the Attorney-in-Fact for the Selling Shareholders a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement among the U.S. Underwriters, the Company, CMI and the Selling Shareholders in accordance with its terms. Very truly yours, CAMELOT MUSIC HOLDINGS, INC. CAMELOT MUSIC, INC. By:_____________________________________ Title: THE SELLING SHAREHOLDERS NAMED IN SCHEDULE B HEREOF By:_____________________________________ Title: As Attorney-in-Fact acting on behalf of the Selling Shareholders named in Schedule B hereto -35- 40 CONFIRMED AND ACCEPTED, as of the date first above written: MERRILL LYNCH & CO. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED MORGAN STANLEY & CO. INCORPORATED MCDONALD & COMPANY SECURITIES, INC. By: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By _____________________ Authorized Signatory For themselves and as U.S. Representatives of the other U.S. Underwriters named in Schedule A hereto. -36- 41 SCHEDULE A
Number of Initial U.S. Name of U.S. Underwriter Securities ------------------------ ---------- Merrill Lynch, Pierce, Fenner & Smith Incorporated.................................................. Morgan Stanley & Co. Incorporated........................................ McDonald & Company Securities, Inc....................................... _________ Total.................................................................... =========
Sch A-1 42 SCHEDULE B
Maximum Number Number of Initial U.S. of U.S. Option Securities to be Sold Securities to Be Sold --------------------- --------------------- [Selling Shareholders] Total....................
Sch B - 1 43 SCHEDULE C CAMELOT MUSIC HOLDINGS, INC. __________ Shares of Common Stock (Par Value $.01 Per Share) 1. The initial public offering price per share for the Securities, determined as provided in said Section 2, shall be $__________. 2. The purchase price per share for the U.S. Securities to be paid by the several U.S. Underwriters shall be $__________, being an amount equal to the initial public offering price set forth above less $__________ per share; provided that the purchase price per share for any U.S. Option Securities purchased upon the exercise of the over-allotment option described in Section 2(b) shall be reduced by an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial U.S. Securities but not payable on the U.S. Option Securities. Sch C - 1 44 SCHEDULE D Van Kampen-Merritt Prime Rate Income Trust Fernwood Associates, L.P. Merrill Lynch, Pierce, Fenner & Smith Incorporated Oaktree Capital Management, LLC Daystar Partners LLC First Union National Bank Yale University James E. Bonk Jack K. Rogers William H. Scott Lee Ann Thorn Charles R. Rinehimer III Lewis S. Garrett Charles Marsh George R. Zoffinger Stephen H. Baum Roger D. Marks Herbert J. Marks Marc L. Luzzatto Michael B. Solow Larry K. Mundorf Kenneth B. Quick Bridget Y. Jones Susan M. Craven Douglas A. Holder David L. Sayre Michael J. Terlecky Vern V. Benke Michael P. Sheldon Gregory V. Bass Colin S. Harley Lee B. Negip Kenneth R. Chance Robert T. Roberts James R. Dismukes David F. Henry Elizabeth A. Palumbo John P. Daristotle Other Selling Shareholders Sch D - 1 45 Exhibit A-1 FORM OF OPINION OF CALFEE, HALTER & GRISWOLD TO BE DELIVERED PURSUANT TO SECTION 5(b) (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware. (ii) The Company has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and to enter into and perform its obligations under the U.S. Purchase Agreement, the International Purchase Agreement, the Merger Agreement and the Credit Facility Amendment. (iii) The Company is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which it owns or leases real property, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. (iv) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectuses under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to reservations, agreements or employee benefit plans referred to in the Prospectuses or pursuant to the exercise of convertible securities or options referred to in the Prospectuses); the shares of issued and outstanding capital stock of the Company, including the Securities to be purchased by the Underwriters from the Selling Shareholders, have been duly authorized and validly issued and are fully paid and non-assessable; and none of the outstanding shares of capital stock of the Company was issued in violation of statutory preemptive rights, preemptive rights under the Company's charter and by-laws or, to the best of our knowledge, other similar contractual rights of any securityholder of the Company by which the Company is bound. (v) The sale of the Securities by the Selling Shareholders is not subject to statutory preemptive rights, preemptive rights under the Company's charter and by-laws or, to the best of our knowledge, other similar contractual rights of any securityholder of the Company by which the Company is bound. No holder of the Securities is or will be subject to personal liability solely by reason of being such a holder. (vi) Each Subsidiary has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which it owns or leases real property, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect; except as otherwise disclosed in the Registration Statement, all of the issued and outstanding capital stock of each Subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and, to the best of our knowledge, is owned by the Company, directly A-1 46 or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity. (vii) The U.S. Purchase Agreement and the International Purchase Agreement have been duly authorized, executed and delivered by the Company and CMI. (viii) The Merger Agreement has been authorized, executed and delivered by the Company. The Credit Facility Amendment has been authorized, executed and delivered by the Company and constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject, as to enforceability, to bankruptcy, insolvency, moratorium, stay and other laws affecting creditors rights generally and to general principles of equity. (ix) The Registration Statement, including any Rule 462(b) Registration Statement, has been declared effective under the 1933 Act; any required filing of the Prospectuses pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); and, to the best of our knowledge, no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or threatened by the Commission. (x) The Registration Statement, including any Rule 462(b) Registration Statement, the Rule 430A Information and the Rule 434 Information, as applicable, the Prospectuses and each amendment or supplement to the Registration Statement and Prospectuses as of their respective effective or issue dates (other than the financial statements and supporting schedules included therein or omitted therefrom, as to which we need express no opinion) complied as to form in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations. (xi) If Rule 434 has been relied upon, the Prospectuses were not "materially different," as such term is used in Rule 434, from the prospectuses included in the Registration Statement at the time it became effective. (xii) The form of certificate used to evidence the Common Stock complies in all material respects with all applicable statutory requirements and with any applicable requirements of the charter and by-laws of the Company and the requirements of the Nasdaq National Market. (xiii) To the best of our knowledge, there is not pending or threatened any action, suit, proceeding, inquiry or investigation, to which the Company, CMI or any of their respective subsidiaries is a party, or to which the property of the Company, CMI or any of their respective subsidiaries is subject, before or brought by any federal or state court or governmental agency or body, which is required to be described in the Registration Statement pursuant to Item 103 of Regulation S-K promulgated under the 1933 Act, which is not described as required, or which might reasonably be expected to materially and adversely affect the consummation of the transactions contemplated in the U.S. Purchase Agreement, the International Purchase A-2 47 Agreement, the Merger Agreement and the Credit Facility Amendment or the performance by the Company or CMI of its obligations thereunder. (xiv) The information in the Prospectuses under "Risk Factors--Internal Revenue Service Claim," "Description of Capital Stock," "Description of Certain Indebtedness," "Shares Eligible for Future Sale," "Business--Properties," "Business--Legal Proceedings," and "Certain Federal Income Tax Considerations" and in the Registration Statement under Item 14, to the extent that it constitutes matters of law, summaries of legal matters, the Company's charter and by-laws or legal proceedings, or legal conclusions, has been reviewed by us and is correct in all material respects. (xv) To the best of our knowledge, there are no statutes or regulations that are required to be described in the Prospectuses that are not described as required. (xvi) All descriptions in the Registration Statement of contracts and other documents to which the Company or its subsidiaries are a party are accurate in all material respects; to the best of our knowledge, there are no franchises, contracts, indentures, mortgages, loan agreements, notes, leases or other instruments required to be described or referred to in the Registration Statement or to be filed as exhibits thereto other than those described or referred to therein or filed or incorporated by reference as exhibits thereto, and the descriptions thereof or references thereto are correct in all material respects. (xvii) To the best of our knowledge, neither the Company nor any subsidiary is in violation of its charter or by-laws and no default by the Company or any subsidiary exists in the due performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument that is described or referred to in the Registration Statement or the Prospectuses or filed or incorporated by reference as an exhibit to the Registration Statement. (xviii) No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any federal, Ohio or Delaware court or governmental authority or agency (other than under the 1933 Act and the 1933 Act Regulations, which have been obtained, or as may be required under the securities or blue sky laws of the various states, as to which we need express no opinion) is necessary or required in connection with the due authorization, execution and delivery of the U.S. Purchase Agreement, the International Purchase Agreement, the Merger Agreement and the Credit Facility Amendment or for the offering, issuance, sale or delivery of the Securities. (xix) The execution, delivery and performance of the U.S. Purchase Agreement, the International Purchase Agreement, the Merger Agreement and the Credit Facility Amendment and the consummation of the transactions contemplated in the U.S. Purchase Agreement, the International Purchase Agreement, the Merger Agreement and the Credit Facility Amendment and in the Registration Statement and compliance by the Company with its obligations under the U.S. Purchase Agreement, the International Purchase Agreement, the Merger Agreement and the Credit Facility Amendment do not and will not, whether with or without the giving of notice or lapse of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined in Section 1(a)(x) of the Purchase Agreements) under or result in the creation or A-3 48 imposition of any lien, charge or encumbrance upon any property or assets of the Company or any subsidiary pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or any other agreement or instrument, to which the Company or any subsidiary is a party or by which it or any of them may be bound or to which any of the property or assets of the Company or any subsidiary is subject and which is filed or incorporated by reference as an exhibit to the Registration Statement [or included on Exhibit A to this opinion], nor will such action result in any violation of the provisions of the charter or by-laws of the Company or any subsidiary, or any applicable federal, Ohio or Delaware law, statute, rule or regulation or, to the best of our knowledge, any judgment, order, writ or decree, of any federal or state government, government instrumentality or court having jurisdiction over the Company or any subsidiary or any of their respective properties, assets or operations. (xx) To the best of our knowledge, except as disclosed in the Registration Statement, there are no persons with registration rights or other similar rights to have any securities registered pursuant to the Registration Statement or otherwise registered by the Company under the 1933 Act which have not otherwise been waived in connection therewith. (xxi) Neither Company nor CMI is, or upon the issuance and sale of the Securities as contemplated by the U.S. Purchase Agreement and the International Purchase Agreement will be an "investment company," as such term is defined in the 1940 Act. Nothing has come to our attention that would lead us to believe that the Registration Statement or any amendment thereto, including the Rule 430A Information and Rule 434 Information (if applicable) (except for financial statements and schedules and other financial data included therein or omitted therefrom, as to which we need make no statement), at the time such Registration Statement or any such amendment became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectuses or any amendment or supplement thereto (except for financial statements and schedules and other financial data included therein or omitted therefrom, as to which we need make no statement), at the time the Prospectuses were issued, at the time any such amended or supplemented prospectus was issued or at the Closing Time, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. In rendering such opinion, such counsel may rely (A) as to matters involving the application of the laws of Pennsylvania, upon the opinion of Obermayer Rebmann Maxwell & Hippel LLP, special counsel to CMI (which opinion shall be dated and furnished to the Representatives at the Closing Time, shall be satisfactory in form and substance to counsel for the Underwriters and shall expressly state that Calfee, Halter & Griswold LLP may rely on such opinion as if it were addressed to them), provided that Calfee, Halter & Griswold LLP shall state in their opinion that they believe that they and the Underwriters are justified in relying upon such opinion and (B) as to matters of fact (but not as to legal conclusions), to the extent they deem proper, on certificates of responsible officers of the Company and public officials. Such counsel may limit such opinion to the federal laws of the United States and the laws of the States of Delaware and Ohio. Such opinion shall not state that it is to be governed or qualified by, or that it is otherwise subject to, any treatise, written policy or other document relating to legal opinions, including, without limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991). A-4 49 Exhibit A-2 FORM OF OPINION OF OBERMAYER REBMANN MAXWELL & HIPPEL LLP TO BE DELIVERED PURSUANT TO SECTION 5(b) (i) Camelot Music, Inc. ("CMI") has been duly incorporated and is validly existing as a corporation in good standing under the laws of Pennsylvania, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and to enter into and perform its obligations under the U.S. Purchase Agreement and the International Purchase Agreement and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a material adverse effect on the CMI's financial condition and results of operations. (ii) All of the issued and outstanding shares of capital stock of CMI have been duly authorized and validly issued and are fully paid and non-assessable and, to the best of our knowledge, is owned by Camelot Music Holdings, Inc., directly or indirectly, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity, and none of the outstanding shares of capital stock of CMI was issued in violation of the preemptive or similar rights of any securityholder of CMI. (iii) The U.S. Purchase Agreement and the International Purchase Agreement have been duly authorized, executed and delivered by CMI. (iv) The Credit Facility Amendment has been duly authorized, executed and delivered by CMI and constitutes the valid and binding obligation of CMI, enforceable against CMI in accordance with its terms. A-6 50 Exhibit B-1 FORM OF OPINION OF SIMPSON THACHER & BARTLETT TO BE DELIVERED PURSUANT TO SECTION 5(c) Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated Morgan Stanley & Co. Incorporated McDonald & Company Securities, Inc. as U.S. Representatives of the several U.S. Underwriters c/o Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated North Tower World Financial Center New York, New York 10281-1209 Merrill Lynch International Morgan Stanley & Co. International Limited McDonald & Company Securities, Inc. as Lead Managers for the several International Managers c/o Merrill Lynch International Ropemaker Place 25 Ropemaker Street London EC2Y 9LY England Ladies and Gentlemen: We have acted as counsel to certain selling stockholders (the "Selling Stockholders") of Camelot Music Holdings, Inc., a Delaware corporation (the "Company") named in Schedule B to each of the Underwriting Agreements (as defined below) in connection with the purchase by you from the Selling Stockholders of an aggregate of ________ shares of Common Stock, par value $.01 per share (the "Shares"), of the Company pursuant to the (i) the U.S. Purchase Agreement dated July __, 1998 (the "U.S. Purchase Agreement") among you, the Company and the Selling Stockholders and (ii) the International Purchase Agreement dated July ___, 1998 (the "International Purchase Agreement"; together with the U.S. Purchase Agreement, the "Underwriting Agreements") among you, the Company and the Selling Stockholders. B-1 51 We have examined each Underwriting Agreement and each Irrevocable Power of Attorney and Custody Agreement (collectively, the "Custody Agreements") between each of the Selling Stockholders, the Company, _________, as custodian (the "Custodian"), and the attorneys-in-fact named therein (each, an "Attorney-in-Fact"), relating to the Shares to be sold to you by such Selling Stockholders. In addition, we have examined, and have relied as to matters of fact upon, the documents delivered to you at the closing, and upon originals or copies, certified or otherwise identified to our satisfaction, of such corporate records, agreements, documents and other instruments and such certificates or comparable documents of public officials and of officers and representatives of the Company, and have made such other and further investigations, as we have deemed relevant and necessary as a basis for the opinions hereinafter set forth. In such examination, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies, and the authenticity of the originals of such latter documents. In addition, in connection with our opinion set forth in paragraph 1 below, we have assumed that the Underwriters do not have notice of any adverse claim (within the meaning of the Uniform Commercial Code as in effect in the State of New York) to the Shares. For purposes of this opinion we have assumed the following: 1. Each Selling Stockholder is the sole registered owner of Shares to be sold by such Selling Stockholder and has full corporate, partnership, or trust, as applicable, power, right and authority to sell such Shares; 2. Each Underwriting Agreement has been duly authorized by each Selling Stockholder and the Custody Agreement to be executed by each Selling Stockholder has been duly authorized, executed and delivered by or on behalf of such Selling Stockholder; 3. The sale of the Shares by each Selling Stockholder and the compliance by such Selling Stockholder with all of the provisions of the Underwriting Agreements will not breach or result in a default under any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which such Selling Stockholder is a party or by which such Selling Stockholder is bound or to which any of the property or assets of such Selling Stockholder is subject, nor will such action violate the Certificate of Incorporation, By-laws or other organizational documents of such Selling Stockholder or, except to the extent addressed in paragraph 3 below, any statute, law, rule or regulation, or any order issued pursuant to any statute, law, rule or regulation by any court or governmental agency or body or court having jurisdiction over such Selling Stockholder or any of its properties. Based upon the foregoing, and subject to the qualifications and limitations stated herein, we are of the opinion that: B-2 52 1. Upon registration of the Shares in the name of the Underwriters (or their nominee) and payment for the Shares in accordance with the Underwriting Agreement, the Underwriters will acquire all of the rights of each Selling Stockholder in the Shares and will also acquire their interest in such Shares free of any adverse claim. 2. Each Underwriting Agreement has been duly executed and delivered by or on behalf of each Selling Stockholder. 3. No consent, approval, authorization, order, registration or qualification of or with any Federal or New York governmental agency or body or any Delaware governmental agency or body acting pursuant to the Delaware General Corporation Law or, to our knowledge, any Federal or New York court or any Delaware court acting pursuant to the Delaware General Corporation Law is required for the issue and sale of the Shares by the Selling Stockholders and the compliance by the Selling Stockholders with all of the provisions of the Underwriting Agreements, except for the registration under the Act of the Shares, and such consents, approvals, authorizations, registrations or qualifications as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters. We are members of the Bar of the State of New York, and we do not express any opinion herein concerning any law other than the law of the State of New York, the Federal law of the United States and the Delaware General Corporation Law. This opinion letter is rendered to you in connection with the above described transactions. The opinion letter may not be relied upon by you for any other purpose, or relied upon by, or furnished to, any other person, firm or corporation without our prior written consent. Very truly yours, B-3 53 Exhibit B-2 FORM OF OPINION OF COUNSEL FOR EACH SELLING SHAREHOLDER TO BE DELIVERED PURSUANT TO SECTION 5(c) (i) No filing with, or consent, approval, authorization, license, order, registration, qualification or decree of, any court or governmental authority or agency, domestic or foreign (other than the issuance of the order of the Commission declaring the Registration Statement effective and such authorizations, approvals or consents as may be necessary under state securities laws, as to which we need express no opinion) is necessary or required to be obtained by any of the Selling Shareholders for the performance by any Selling Shareholder of its obligations under the U.S. Purchase Agreement, the International Purchase Agreement or in the Power of Attorney and Custody Agreement, or in connection with the offer, sale or delivery of the Securities. (ii) Each Power of Attorney and Custody Agreement has been duly executed and delivered by the respective Selling Shareholders named therein and constitutes the legal, valid and binding agreement of such Selling Shareholder. (iii) The U.S. Purchase Agreement and the International Purchase Agreement have been duly authorized, executed and delivered by or on behalf of each Selling Shareholder. (iv) The Attorney-in-Fact has been duly authorized by the Selling Shareholder(s) to deliver the Securities on behalf of the Selling Shareholder(s) in accordance with the terms of the U.S. Purchase Agreement and the International Purchase Agreement. (v) The execution, delivery and performance of the U.S. Purchase Agreement, the International Purchase Agreement and the Power of Attorney and Custody Agreement and the sale and delivery of the Securities and the consummation of the transactions contemplated in the U.S. Purchase Agreement, the International Purchase Agreement and in the Registration Statement and compliance by each Selling Shareholder with its obligations under the U.S. Purchase Agreement and the International Purchase Agreement have been duly authorized by all necessary action on the part of the Selling Shareholders and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default under or result in the creation or imposition of any tax, lien, charge or encumbrance upon the Securities or any property or assets of the Selling Shareholders pursuant to, any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, license, lease or other instrument or agreement to which any Selling Shareholder is a party or by which they may be bound, or to which any of the property or assets of any of the Selling Shareholders may be subject nor will such action result in any violation of the provisions of the charter or by-laws of the Selling Shareholders, if applicable, or any law, administrative regulation, judgment or order of any governmental agency or body or any administrative or court decree having jurisdiction over the Selling Shareholders or any of its properties. B-4 54 (vi) To the best of our knowledge, each Selling Shareholder has valid and marketable title to the Securities to be sold by such Selling Shareholder pursuant to the U.S. Purchase Agreement and the International Purchase Agreement, free and clear of any pledge, lien, security interest, charge, claim, equity or encumbrance of any kind, and has full right, power and authority to sell, transfer and deliver such Securities pursuant to the U.S. Purchase Agreement and the International Purchase Agreement. By delivery of a certificate or certificates therefor the Selling Shareholders will transfer to the Underwriters who have purchased such Securities pursuant to the U.S. Purchase Agreement and the International Purchase Agreement (without notice of any defect in the title of the Selling Shareholders and who are otherwise bona fide purchasers for purposes of the Uniform Commercial Code) valid and marketable title to such Securities, free and clear of any pledge, lien, security interest, charge, claim, equity or encumbrance of any kind. B-5 55 Exhibit C _____________, 1998 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated, MORGAN STANLEY & CO. INCORPORATED MCDONALD & COMPANY SECURITIES, INC. as U.S. Representatives of the several U.S. Underwriters to be named in the within-mentioned U.S. Purchase Agreement MERRILL LYNCH INTERNATIONAL MORGAN STANLEY & CO. INTERNATIONAL LIMITED MCDONALD & COMPANY SECURITIES, INC. as Lead Managers for the several International Managers to be named in the within-mentioned International Purchase Agreement c/o Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated North Tower World Financial Center New York, New York 10281-1209 Re: Proposed Public Offering by Camelot Music Holdings, Inc. --------------------------------------------------------- Dear Sirs: The undersigned, a stockholder of Camelot Music Holdings, Inc., a Delaware corporation (the "Company"), understands that Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Morgan Stanley & Co. Incorporated and McDonald & Company Securities, Inc. propose to enter into a U.S. Purchase Agreement (the "U.S. Purchase Agreement") with the Company, Camelot Music, Inc. ("CMI") and the Selling Shareholders identified in Schedule B thereto, and that Merrill Lynch International, Morgan Stanley & Co. International Limited and McDonald & Company Securities, Inc. propose to enter into an International Purchase Agreement (the "International Purchase Agreement") with the Company, CMI and the Selling Shareholders, providing for the public offering of shares (the "Securities") of the Company's common stock, par value $.01 per share (the "Common Stock"). In recognition of the benefit that such an offering will confer upon the undersigned as a stockholder of the Company, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned agrees with each U.S. Underwriter to be named C-1 56 in the U.S. Purchase Agreement and with each International Manager to be named in the International Purchase Agreement that, during a period of 180 days from the date of the U.S. Purchase Agreement and the International Purchase Agreement, the undersigned will not, without the prior written consent of Merrill Lynch, directly or indirectly, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any shares of the Company's Common Stock or any securities convertible into or exchangeable or exercisable for Common Stock, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition, or file any registration statement under the Securities Act of 1933, as amended, with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction is to be settled by delivery of Common Stock or other securities, in cash or otherwise. Nothing contained in this letter shall be construed to prohibit the undersigned, to the extent the undersigned is a natural person, from making a bona fide gift of any shares of the Company's Common Stock, provided that the transferee agrees in writing to be bound by the terms and conditions of this letter. This letter shall be binding on the undersigned and the heirs, legal representatives, successors and assigns of the undersigned. This letter shall be construed in accordance with the laws of the State of New York. Very truly yours, Signature: __________________________________ Print Name: __________________________________ C-2 57 Exhibit D-1 COOPERS & LYBRAND L.L.P. FORM OF ACCOUNTANTS' COMFORT LETTER PURSUANT TO SECTION 5(g) (i) We are independent public accountants with respect to the Company within the meaning of the 1933 Act and the applicable published 1933 Act Regulations. (ii) In our opinion, the audited financial statements and the related financial statement schedules included in the Registration Statement and the Prospectuses comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published rules and regulations thereunder. (iii) On the basis of procedures (but not an examination in accordance with generally accepted auditing standards) consisting of a reading of the unaudited interim consolidated financial statements of the Company for the three month period ended May ____, 1998 and May ____, 1997, included in the Registration Statement and the Prospectuses (collectively, the "Quarterly Financials"), a reading of the latest available unaudited interim consolidated financial statements of the Company, a reading of the minutes of all meetings of the stockholders and directors of the Company and its subsidiaries and the committees of the Company's Board of Directors and any subsidiary committees since February 28, 1998, inquiries of certain officials of the Company and its subsidiaries responsible for financial and accounting matters, a review of interim financial information in accordance with standards established by the American Institute of Certified Public Accountants in Statement on Auditing Standards No. 71, Interim Financial Information ("SAS 71"), with respect to the Quarterly Financials and such other inquiries and procedures as may be specified in such letter, nothing came to our attention that caused us to believe that: (1) the Quarterly Financials included in the Registration Statement and the Prospectuses do not comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the 1933 Act Regulations or any material modifications should be made to the Quarterly Financials included in the Registration Statement and the Prospectuses for them to be in conformity with generally accepted accounting principles; (2) at June _____, 1998 and at a specified date not more than five days prior to the date of this Agreement, there was any change in the total shareholder equity of the Company and its subsidiaries or any decrease in the working capital, total current assets, total assets or stockholders' equity of the Company and its subsidiaries or any increase in the total current liabilities or total liabilities of the Company and its subsidiaries, in each case as compared with amounts shown in D-1 58 the latest balance sheet included in the Registration Statement, except in each case for changes, decreases or increases that the Registration Statement discloses have occurred; or (3) for the period from May ___, 1998 to June ___, 1998 and for the period from May ____, 1998 to a specified date not more than five days prior to the date of this Agreement, there was any decrease in total net sales, operating income, income before reorganization expense and income taxes, income before income tax expense, in each case as compared with the comparable period in the preceding year, except in each case for any decreases that the Registration Statement discloses have occurred or may occur; (iv) Based upon the procedures set forth in clause (ii) above and a reading of the Selected Financial Data included in the Registration Statement and a reading of the financial statements from which such data were derived, nothing came to our attention that caused us to believe that the Selected Financial Data included in the Registration Statement do not comply as to form in all material respects with the disclosure requirements of Item 301 of Regulation S-K of the 1933 Act, that the amounts included in the Selected Financial Data are not in agreement with the corresponding amounts in the audited consolidated financial statements for the respective periods or that the financial statements not included in the Registration Statement from which certain of such data were derived are not in conformity with generally accepted accounting principles. (v) We have compared the information in the Registration Statement under selected captions with the disclosure requirements of Regulation S-K of the 1933 Act and on the basis of limited procedures specified herein nothing came to our attention that caused us to believe that this information does not comply as to form in all material respects with the disclosure requirements of Items 302, 402 and 503(d), respectively, of Regulation S-K. (vi) We are unable to and do not express any opinion on the Pro Forma Condensed Consolidated Statement of Income (the "Pro Forma Statement") included in the Registration Statement or on the pro forma adjustments applied to the historical amounts included in the Pro Forma Statement; however, for purposes of this letter we have: (1) read the Pro Forma Statement; (2) performed an audit of the Company's financial statements to which the pro forma adjustments were applied; (3) made inquiries of certain officials of the Company who have responsibility for financial and accounting matters about the basis for their determination of the pro forma adjustments and whether the Pro Forma Statement complies as to form in all material respects with the applicable accounting requirements of Rule 11-02 of Regulation S-X; and D-2 59 (4) proved the arithmetic accuracy of the application of the pro forma adjustments to the historical amounts in the Pro Forma Statement; and on the basis of such procedures and such other inquiries and procedures as specified herein, with respect to the fresh start adjustments, nothing came to our attention that caused us to believe that the Pro Forma Statement included in the Registration Statement does not comply as to form in all material respects with the applicable requirements of Rule 11-02 of Regulation S-X or that the pro forma adjustments have not been properly applied to the historical amounts in the compilation of those statements, and with respect to The Wall adjustments, certain officials of the Company and of The Wall who have responsibility for financial and accounting matters have informed us that all significant assumptions regarding the business combination have been reflected in the pro forma adjustments and the unaudited Pro Forma Statement complies as to form in all material respects with the applicable accounting requirements of Rule 11-02 of Regulation S-X. (vii) In addition to the procedures referred to in clause (ii) above, we have performed other procedures, not constituting an audit, with respect to certain amounts, percentages, numerical data and financial information appearing in the Registration Statement, which are specified herein, and have compared certain of such items with, and have found such items to be in agreement with, the accounting and financial records of the Company. D-3 60 Exhibit D-2 FORM OF COMFORT LETTER OF DELOITTE & TOUCHE LLP PURSUANT TO SECTION 5(f) (i) We are independent public accountants with respect to The Wall Music, Inc. within the meaning of the 1933 Act and the applicable published 1933 Act Regulations. (ii) In our opinion, the audited financial statements and the related financial statement schedules of The Wall Music, Inc. included in the Registration Statement and the Prospectuses comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published rules and regulations thereunder. (iii) With respect to the nine-month periods ended February 28, 1998 and March 1, 1997, we have: (1) Performed the procedures specified by the American Institute of Certified Public Accountants for a review of interim financial information as described in their Statement on Auditing Standards No. 71, Interim Financial Information ("SAS 71"), on the unaudited combined statements of operations of The Wall Music, Inc.; and (2) Inquired of certain officials of The Wall Music, Inc. who have responsibility for financial and accounting matters whether (A) the unaudited statements of income referred to in (iii)(1) above are in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements of The Wall Music, Inc. included in the Registration Statement, and (B) comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published rules and regulations thereunder. Those officials stated that the unaudited statements of income (a) are in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements of The Wall Music, Inc. included in the Registration Statement, and (b) comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published rules and regulations thereunder. (iv) On the basis of procedures described in paragraph (iii) above, nothing came to our attention that caused us to believe that: (1) Any material modifications should be made to the unaudited financial statements described in paragraph (iii)(1) above for them to be in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements of The Wall Music, Inc. included in the Registration Statement, and D-4 61 (2) the unaudited financial statements described in (iii)(1) above do not comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published rules and regulations thereunder. (v) With respect to the three-month periods ended June 1, 1998 and June 1, 1997, we have: (1) Performed the procedures specified by the American Institute of Certified Public Accountants for a review of interim financial information as described their Statement on Auditing Standards No. 71, Interim Financial Information ("SAS 71"), on the unaudited combined statements of operations of The Wall Music, Inc.; and (2) Inquired of certain officials of The Wall Music, Inc. who have responsibility for financial and accounting matters whether (A) the unaudited statements of income referred to in (v)(1) above are in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements of The Wall Music, Inc. included in the Registration Statement, and (B) comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published rules and regulations thereunder. Those officials stated that the unaudited statements of income (a) are in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements of The Wall Music, Inc. included in the Registration Statement, and (b) comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published rules and regulations thereunder. (vi) On the basis of procedures described in paragraph (v) above, nothing came to our attention that caused us to believe that: (1) Any material modifications should be made to the unaudited financial statements described in paragraph (v)(1) above for them to be in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements of The Wall Music, Inc. included in the Registration Statement, and (2) the unaudited financial statements described in (v)(1) above do not comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published rules and regulations thereunder. (vii) In addition, we have performed other procedures, not constituting an audit, with respect to certain amounts, percentages, numerical data and financial information appearing in the Registration Statement, which are specified herein, and have compared certain of such items with, and have found such items to be in agreement with, the accounting and financial records of The Wall Music, Inc. D-5 62 D-6 EX-1.2 3 EXHIBIT 1.2 1 Exhibit 1.2 DRAFT 5/15/98 ------------- ___________ Shares CAMELOT MUSIC HOLDINGS, INC. (a Delaware corporation) Common Stock (Par Value $.01 Per Share) INTERSYNDICATE AGREEMENT ------------------------ Agreement, dated July ______, 1998, among (A) Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Morgan Stanley & Co. Incorporated and McDonald & Company Securities, Inc. (together, the "U.S. Representatives") for the U.S. Underwriters (the "U.S. Underwriters") listed in Schedule A to the U.S. Purchase Agreement (the "U.S. Purchase Agreement"), dated July ______, 1998, among Camelot Music Holdings, Inc., a Delaware corporation (the "Company"), Camelot Music, Inc., a Pennsylvania corporation ("CMI"), the persons listed in Schedule B of the U.S. Purchase Agreement (the "Selling Shareholders") and the U.S. Underwriters, and (B) Merrill Lynch International ("MLI"), Morgan Stanley & Co. International Limited and McDonald & Company Securities, Inc. (collectively, the "Lead Managers") for the managers (the "Managers") listed in Schedule A to the International Purchase Agreement (the "International Purchase Agreement"), dated July ______, 1998, among the Company, CMI, the Selling Shareholders and the Managers. The U.S. Purchase Agreement and the International Purchase Agreement are together referred to herein as the "Purchase Agreements." Terms not defined herein are used as defined in the Purchase Agreements referred to above. The U.S. Underwriters, pursuant to the U.S. Purchase Agreement, have agreed to purchase the Initial U.S. Securities and have been granted an option by the Company and the Selling Shareholders to purchase the U.S. Underwriters' pro rata portion of the U.S. Option Securities to cover over-allotments, and the Managers, pursuant to the International Purchase Agreement, have agreed to purchase the Initial International Securities and have been granted an option by the Company and the Selling Shareholders to purchase the Managers' pro rata portion of the International Option Securities to cover over-allotments. In connection with the foregoing, the U.S. Underwriters and the Managers deem it necessary and advisable that certain of the activities of the U.S. Underwriters and the Managers be coordinated pursuant to this Agreement. 2 1. The U.S. Underwriters, acting through Merrill Lynch, and the Managers, acting through MLI, agree that they will consult each other as to the availability of the Initial U.S. Securities and the U.S. Option Securities (the Initial U.S. Securities and the U.S. Option Securities are collectively hereinafter called the "U.S. Securities") pursuant to the U.S. Purchase Agreement and as to the availability of the Initial International Securities and the International Option Securities (the Initial International Securities and the International Option Securities are collectively hereinafter called the "International Securities") pursuant to the International Purchase Agreement, in either case, from time to time until the termination of the selling restrictions applicable to the respective offerings by the U.S. Representatives and MLI. Based upon information received from the Managers and the U.S. Underwriters, respectively, MLI agrees to advise Merrill Lynch and Merrill Lynch agrees to advise MLI from time to time upon request during the consultation period contemplated above, of the respective number of International Securities purchased pursuant to the International Purchase Agreement and U.S. Securities purchased pursuant to the U.S. Purchase Agreement remaining unsold. From time to time as mutually agreed upon between MLI and Merrill Lynch, (a) MLI will sell for the account of one or more Managers to Merrill Lynch, for the account of one or more U.S. Underwriters, such number of International Securities purchased pursuant to the International Purchase Agreement and remaining unsold; and (b) Merrill Lynch will sell for the account of one or more U.S. Underwriters to MLI for the account of one or more Managers, such number of U.S. Securities purchased pursuant to the U.S. Purchase Agreement and remaining unsold. Unless otherwise determined by mutual agreement of Merrill Lynch and MLI, the price of any shares of Common Stock so purchased or sold shall be the initial public offering price less the selling concession in each case as set forth in the U.S. Prospectus. Settlement between Merrill Lynch and MLI with respect to any Common Stock transferred hereunder at least three business days prior to the Closing Time shall be made at Closing Time and, in the case of purchases and sales made thereafter, as promptly as practicable but in no event later than three business days after the transfer date. Certificates representing the Common Stock so purchased shall be delivered on or about the respective settlement dates. The liability for payment to the Company and the Selling Shareholders of the purchase price of the Common Stock being purchased by the U.S. Underwriters and the Managers under the Purchase Agreements shall not be affected by the provisions of this Agreement. Each U.S. Underwriter, acting through the U.S. Representatives, agrees that, except for purchases and sales pursuant to this Agreement and stabilization transactions contemplated hereunder conducted by it, it will offer, sell or deliver Common Stock, directly or indirectly, only to persons whom it believes may be a United States Person or a Canadian Person (as such terms are defined below) and persons - 2 - 3 whom it believes intend to reoffer, resell or deliver directly or indirectly the same to a United States Person or a Canadian Person, and any dealer to whom such U.S. Underwriter may sell Common Stock will agree that it will only offer, resell or deliver Common Stock directly or indirectly to persons whom such dealer believes may be a United States Person or a Canadian Person or at a reallowance only to other dealers who so agree. Each International Manager, acting through MLI, agrees that, except for purchases and sales pursuant to this Agreement and stabilization transactions contemplated hereunder, it will not offer, sell or deliver Common Stock, directly or indirectly, to any person whom it believes may be a United States Person or a Canadian Person or any person whom it believes may intend to reoffer, resell or deliver directly or indirectly the same to any United States Person or any Canadian Person, and any dealer, bank or broker to whom such International Manager may sell Common Stock will agree that it will not offer, resell or deliver any Common Stock directly or indirectly to any person whom such dealer, bank or broker believes may be a United States Person or a Canadian Person nor at a reallowance to other dealers, bankers or brokers who do not so agree. For purposes of this Agreement, "United States Person" shall mean any individual who is resident in the United States, or any corporation, pension, profit-sharing or other trust or entity organized under or governed by the laws of the United States or any political subdivision thereof (other than the foreign branch or office of any United States Person), and shall include any United States branch of a person other than a United States Person. "United States" shall mean the United States of America, its territories, its possessions and all areas subject to its jurisdiction. "Canadian Person" shall mean any individual who is resident in Canada, or any corporation, pension, profit-sharing or other trust or entity organized under or governed by the laws of Canada or any political subdivision thereof (other than the foreign branch or office of any Canadian Person), and shall include any Canadian branch or office of a person other than a Canadian Person. "Canada" shall mean Canada, its territories, its possessions and all areas subject to its jurisdiction. 2. All stabilization transactions shall be conducted at the direction and subject to the control of Merrill Lynch as hereinafter provided, so that stabilization activities worldwide shall be coordinated and conducted in compliance with any applicable laws and regulations. From time to time upon the request of MLI, Merrill Lynch will inform MLI of stabilization transactions effected pursuant to this Section. a. The Lead Managers undertake, and agree to cause all Managers to undertake, that in connection with the distribution of Common Stock they will comply: with the applicable rules and regulations of the United States National - 3 - 4 Association of Securities Dealers, Inc.; with the prohibitions against trading by persons interested in a distribution; and with the requirements for the filing of all notices and reports relating thereto set forth in Regulation M and Rule 17a-2 under the United States Securities Exchange Act of 1934 and the Agreement Among Managers entered into by the Managers (the "AAM"). The Lead Managers will cause each dealer which has agreed to participate or is participating in the distribution to give a similar undertaking. b. Merrill Lynch shall have sole responsibility with respect to any action which they may take to make over-allotments in arranging for sales of U.S. Option Securities and International Option Securities and shall have direction and control of any action taken for stabilizing the market price of the Common Stock, whether in the United States or on European stock exchanges or otherwise. All stabilization transactions by Merrill Lynch shall be for the respective accounts of the several U.S. Underwriters and Managers in the proportions set forth in Section 4 hereof. The net commitment for long or short accounts of the U.S. Underwriters or the Managers pursuant to such over allotment and stabilization transactions shall not exceed 20% of the number of U.S. Securities or International Securities, as the case may be, to be purchased by the U.S. Underwriters, or the Managers, respectively, as set forth in the U.S. Purchase Agreement or the International Purchase Agreement, respectively. The exercise by the U.S. Underwriters and the Managers of their respective options to purchase U.S. Option Securities and International Option Securities shall be at the direction of Merrill Lynch. 3. Merrill Lynch and MLI shall consult with each other as to the reservations for sale of the Common Stock made under the AAM, and upon reaching agreement with respect thereto, MLI shall reserve for sale and sell to the U.S. Underwriters, dealers, bankers, brokers and others indicated by Merrill Lynch, for the account of the respective Managers, International Securities to be purchased by such Managers, in the manner and at the price contemplated by Section 1 hereof. 4. Merrill Lynch and MLI shall agree as to the expenses which will constitute expenses of the underwriting and distribution of the Common Stock to the U.S. Underwriters and the Managers, which expenses, as well as any stabilizing profits or losses, shall be allocated among the U.S. Underwriters and the Managers in the same proportion as the number of U.S. Securities purchased under the U.S. Purchase Agreement, and the number of International Securities purchased under the International Purchase Agreement bear to the aggregate number of shares of Common Stock purchased under the Purchase Agreements. Except with respect to such common expenses, the Managers will pay the aggregate expenses incurred in connection with the purchase, carrying or sale of the International Securities purchased by the Managers from the Company and the Selling Shareholders and the U.S. Underwriters will pay the aggregate expenses incurred in connection with the purchase, carrying or sale of the - 4 - 5 U.S. Securities purchased by the U.S. Underwriters from the Company and the Selling Shareholders. 5. The U.S. Representatives and MLI agree that: a. if the Closing Time is not on the day provided in the Purchase Agreements, Merrill Lynch and MLI will mutually agree on a postponed date within the time permitted by the Purchase Agreements and the settlement dates herein provided shall be adjusted accordingly; b. changes in the offering price to the public or in the concession and reallowance to dealers, bankers or brokers will be made only after consultation, but in accordance with the direction of Merrill Lynch, during the consultation period specified in the first sentence of Section 1 hereof; c. Merrill Lynch and MLI will each keep the other fully informed of the progress of the offering and distribution of the Common Stock; d. MLI agrees that it will cause the termination of the AAM at such time as Merrill Lynch shall determine; and e. advertising with respect to the offering shall be as mutually agreed upon by Merrill Lynch and MLI. 6. This Agreement may be amended prior to the Closing Time by mutual written consent. 7. This Agreement may be signed in various counterparts, which together shall constitute one and the same instrument. 8. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SAID STATE. 9. The U.S. Underwriters and MLI hereby (a) submit to the jurisdiction of any New York State or Federal court sitting in the City of New York with respect to any actions and proceedings arising out of or relating to this Agreement, (b) agree that all claims with respect to such actions or proceedings may be heard and determined in such New York State or Federal court, (c) waive the defense of an inconvenient forum, (d) consent to the service of process upon it by mailing or delivering such service to it by registered mail addressed as specified pursuant to the U.S. Purchase Agreement and the International Purchase Agreement, as the case may be, and (e) agree that a final judgment in any such action or proceeding shall be - 5 - 6 conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. - 6 - 7 IN WITNESS WHEREOF, this Agreement has been executed as of the date and year first above written. Acting on behalf of themselves and the other U.S. Underwriters: Merrill Lynch, Pierce, Fenner & Smith Incorporated Morgan Stanley & Co. Incorporated McDonald & Company Securities, Inc. By: Merrill Lynch, Pierce, Fenner & Smith Incorporated By:___________________________________________ Acting on behalf of themselves and the other Managers: Merrill Lynch International Morgan Stanley & Co. International Limited McDonald & Company Securities, Inc. By: Merrill Lynch International By:___________________________________________ - 7 - EX-2.4 4 EXHIBIT 2.4 1 Exhibit 2.4 EXECUTION COPY -------------- AGREEMENT AND PLAN OF MERGER among CAMELOT MUSIC HOLDINGS, INC., SM ACQUISITION, INC. and SPEC's MUSIC, INC. Dated as of June 3, 1998 2
TABLE OF CONTENTS ARTICLE I THE MERGER.............................................................................................2 1.1 The Merger...........................................................................................2 1.2 Closing..............................................................................................2 1.3 Effective Time.......................................................................................2 1.4 Effects of the Merger................................................................................2 1.5 Articles of Incorporation; Bylaws....................................................................2 1.6 Directors............................................................................................3 1.7 Officers.............................................................................................3 ARTICLE II EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS.............................3 2.1 Effect on Capital Stock..............................................................................3 2.2 Stock Option Plans; Other Stock Options..............................................................4 2.3 Exchange of Certificates.............................................................................5 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY........................................................7 3.1 Organization, Standing and Corporate Power...........................................................7 3.2 Subsidiaries.........................................................................................7 3.3 Capital Structure....................................................................................8 3.4 Authority; Noncontravention; Consents and Approvals..................................................9 3.5 SEC Documents; Undisclosed Liabilities..............................................................10 3.6 Information Supplied................................................................................11 3.7 Absence of Certain Changes or Events................................................................11 3.8 Litigation; Labor Matters; Compliance with Laws.....................................................11 3.9 Employee Matters....................................................................................12 3.10 Taxes...............................................................................................15 3.11 Environmental matters...............................................................................16 3.12 Material Contracts..................................................................................18 3.13 Brokers; Legal Counsel..............................................................................19 3.14 Opinion of Financial Advisor........................................................................20 3.15 Board Recommendation................................................................................20 3.16 Required Company Vote...............................................................................20 3.17 State Takeover Statutes.............................................................................20 3.18 Intellectual Property; Software.....................................................................20 3.19 Related Party Transactions..........................................................................22 3.20 Permits.............................................................................................22 3.21 Insurance Policies..................................................................................23 3.22 Good Title to and Condition of Assets...............................................................23 3.23 Real Estate.........................................................................................24 3.24 Certain Business Practices..........................................................................26
i 3 3.25 Suppliers and Customers............................................................................26 3.26 Product Warranties.................................................................................26 3.27 Sole Representations...............................................................................26 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER AND MERGERCO.................................................26 4.1 Organization, Standing and Corporate Power..........................................................26 4.2 Subsidiaries........................................................................................27 4.3 Capital Structure...................................................................................27 4.4 Authority; Noncontravention; Consents and Approvals.................................................27 4.5 Brokers.............................................................................................28 4.6 Financing...........................................................................................28 4.7 Information Supplied................................................................................28 4.8 Absence of Certain Changes or Events................................................................28 4.9 Litigation; Labor Matters; Compliance with Laws.....................................................29 4.10 Sole Representations................................................................................29 ARTICLE V COVENANTS RELATING TO CONDUCT OF BUSINESS PRIOR TO MERGER.............................................29 5.1 Conduct of Business of the Company..................................................................29 5.2 Changes in Employment Arrangements..................................................................31 5.3 Severance...........................................................................................32 5.4 WARN................................................................................................32 ARTICLE VI ADDITIONAL AGREEMENTS................................................................................33 6.1 Preparation of Proxy Statement; Stockholders Meeting................................................33 6.2 Access to Information, Confidentiality..............................................................34 6.3 Reasonable Best Efforts.............................................................................34 6.4 Indemnification.....................................................................................36 6.5 Public Announcements................................................................................37 6.6 No Solicitation.....................................................................................37 6.7 Resignation of Directors............................................................................38 6.8 Employee Benefits...................................................................................39 6.9 Notification of Certain Matters....................................................................39 6.10 State Takeover Laws.................................................................................40 6.11 Physical Inventory..................................................................................40 6.12 Repayment of Indebtedness...........................................................................40 6.13 Severance...........................................................................................40 6.14 Access for Point of Sale Installation...............................................................40 ARTICLE VII CONDITIONS PRECEDENT.................................................................................41 7.1 Conditions to Each Party's Obligation...............................................................41 7.2 Conditions to Obligations of the Buyer and MergerCo.................................................41 7.3 Conditions to Obligation of the Company.............................................................43 ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER..................................................................44
ii 4 8.1 Termination.........................................................................................44 8.2 Effect of Termination...............................................................................45 8.3 Amendment...........................................................................................45 8.4 Extension; Waiver...................................................................................45 8.5 Procedure for Termination, Amendment, Extension or Waiver...........................................46 ARTICLE IX GENERAL PROVISIONS....................................................................................46 9.1 Nonsurvival of Representations and Warranties.......................................................46 9.2 Fees and Expenses...................................................................................46 9.3 Notices.............................................................................................47 9.4 Definitions.........................................................................................48 9.5 Interpretation......................................................................................49 9.6 Counterparts........................................................................................50 9.7 Entire Agreement; No Third-Party Beneficiaries......................................................50 9.8 Governing Law.......................................................................................50 9.9 Assignment..........................................................................................50 9.10 Enforcement.........................................................................................50
TABLE OF DEFINITIONS DEFINITION PAGE affiliate........................................................................................................48 Agreement.........................................................................................................1 Articles of Merger................................................................................................2 Benefit Plans....................................................................................................13 business day.....................................................................................................48 Buyer.............................................................................................................1 Camelot Music.....................................................................................................1 Camelot Southeast.................................................................................................1 Certificates......................................................................................................5 Closing...........................................................................................................2 Closing Date......................................................................................................2 COBRA............................................................................................................15 Code.............................................................................................................13 Common Stock......................................................................................................1 Company...........................................................................................................1 Company Intellectual Property....................................................................................20 Company Legal Counsel............................................................................................20 Company Stockholder Approval......................................................................................1 Consolidated Group...............................................................................................15 Consultant.......................................................................................................35 Consulting Agreement.............................................................................................35 Contracts........................................................................................................18 Costs............................................................................................................36
iii 5 D&O Policy.......................................................................................................36 Diligent Inquiry.................................................................................................17 Disclosure Schedule...............................................................................................7 Dissenting Shares.................................................................................................3 Effective Time....................................................................................................2 Environmental Claim..............................................................................................17 Environmental Laws...............................................................................................18 Environmental Permits............................................................................................18 ERISA............................................................................................................12 ERISA Affiliate..................................................................................................15 Exchange Act.....................................................................................................10 Exchange Agent....................................................................................................5 Exchange Fund.....................................................................................................6 Excluded Shares...................................................................................................3 FBCA..............................................................................................................2 Form 10..........................................................................................................28 GAAP.............................................................................................................10 Governmental Entity...............................................................................................9 Hazardous Materials..............................................................................................18 HSR Act..........................................................................................................10 Indemnified Parties..............................................................................................36 Intellectual Property............................................................................................20 Inventory........................................................................................................23 knowledge........................................................................................................48 Landlord.........................................................................................................35 Lease Amendment..................................................................................................35 Leasehold Premises...............................................................................................24 Leases...........................................................................................................24 Liens.............................................................................................................8 Material.........................................................................................................49 Material Adverse Change..........................................................................................49 Material Adverse Effect..........................................................................................49 Material Contract................................................................................................19 Material Contracts...............................................................................................19 Material Permits.................................................................................................22 Materially.......................................................................................................49 Merger............................................................................................................1 Merger Consideration..............................................................................................3 MergerCo..........................................................................................................1 NASDAQ...........................................................................................................35 Owned Properties.................................................................................................24 Permits..........................................................................................................18 Permitted Changes................................................................................................30 Permitted Encumbrances...........................................................................................25 person...........................................................................................................49
iv 6 Proceeding.......................................................................................................36 Proprietary Information..........................................................................................21 Proxy Statement..................................................................................................10 Recent SEC Documents.............................................................................................10 SEC..............................................................................................................49 SEC Documents....................................................................................................10 SEC Financial Statements.........................................................................................10 Section 6.8 Plans................................................................................................39 Securities Act....................................................................................................9 Selling Supplies.................................................................................................23 Software.........................................................................................................22 Spread............................................................................................................5 Stock Option Plans................................................................................................4 Stock Options.....................................................................................................4 Stockholders Meeting.............................................................................................33 Subsidiaries......................................................................................................7 subsidiary.......................................................................................................49 Surrender Agreement...............................................................................................4 Surviving Corporation.............................................................................................2 Tax Return.......................................................................................................16 Taxes............................................................................................................16 Termination Fee..................................................................................................46 Transaction Proposal.............................................................................................38 Voting Agreement..................................................................................................1 WARN.............................................................................................................32 Written..........................................................................................................16 Year End Balance Sheet...........................................................................................10
v 7 AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is entered into as of this 3rd day of June, 1998 by and among Camelot Music Holdings, Inc., a Delaware corporation (the "Buyer"), SM Acquisition, Inc., a Florida corporation and wholly owned indirect subsidiary of the Buyer ("MergerCo"), and Spec's Music, Inc., a Florida corporation (the "Company"). WHEREAS, MergerCo is a wholly owned direct subsidiary of Camelot Southeast Region, Inc., a Delaware corporation ("Camelot Southeast"), Camelot Southeast is a wholly owned direct subsidiary of Camelot Music, Inc., a Pennsylvania corporation ("Camelot Music"), and Camelot Music is a wholly owned direct subsidiary of the Buyer; WHEREAS, the respective Boards of Directors of the Company, the Buyer and MergerCo have determined that the merger of MergerCo with and into the Company (the "Merger"), upon the terms and subject to the conditions set forth in this Agreement, would be advisable and in the best interests of their respective companies and stockholders, and such Boards of Directors have approved the Merger, pursuant to which each share of common stock, par value $.01 per share, of the Company ("Common Stock") issued and outstanding immediately prior to the Effective Time (as defined in Section 1.3) will be converted into the right to receive cash, other than (a) shares of Common Stock owned, directly or indirectly, by the Buyer or any subsidiary (as defined in Section 9.4) of the Buyer and (b) Dissenting Shares (as defined in Section 2. l(d)); WHEREAS, the Merger and this Agreement require the affirmative vote of a majority of the issued and outstanding shares of Common Stock for the approval thereof (the "Company Stockholder Approval"); WHEREAS, simultaneously with the execution hereof, certain stockholders of the Company have executed and delivered to the Buyer and MergerCo a Voting Agreement of even date herewith (the "Voting Agreement") pursuant to which such stockholders have agreed to vote for the Merger and the adoption of this Agreement, and which Voting Agreement has been relied upon by the Buyer and MergerCo in their decision to execute this Agreement; and WHEREAS, the Buyer, MergerCo and the Company desire to make certain representations, warranties, covenants and agreements in connection with the Merger and also to prescribe various terms of and conditions to the Merger. NOW, THEREFORE, in consideration of the representations, warranties, covenants and agreements contained in this Agreement, the parties agree as follows: 1 8 ARTICLE I THE MERGER 1.1 THE MERGER. (a) Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with the Florida Business Corporation Act (the "FBCA"), MergerCo shall be merged with and into the Company at the Effective Time. At the Effective Time, the separate existence of MergerCo shall cease, and the Company shall thereafter continue as the surviving corporation (the "Surviving Corporation") and shall be a wholly owned indirect subsidiary of the Buyer. (b) At the Effective Time, the corporate existence of the Company, with all its rights, privileges, powers and franchises, shall continue unaffected and unimpaired by the Merger. 1.2 CLOSING. Unless this Agreement shall have been terminated and the transactions herein contemplated shall have been abandoned pursuant to Section 8.1 and subject to the satisfaction or waiver of the conditions set forth in Article VII, the closing of the Merger (the "Closing") shall take place at 10:00 a.m., local time, on the second business day after satisfaction or waiver of the conditions set forth in Article VII (the "Closing Date"), at the offices of Holland & Knight LLP, 701 Brickell Avenue, Miami, Florida 33131, unless another date, time or place is agreed to in writing by the parties hereto. 1.3 EFFECTIVE TIME. On the Closing Date, the parties shall cause articles of merger in substantially the form attached hereto as Exhibit A (the "Articles of Merger"), executed in accordance with the relevant provisions of the FBCA, to be delivered to the Department of State of the State of Florida for filing by the Department as provided in Sections 607.0125 and 607.1105 of the FBCA. Upon the completion of such filing, or at such other time as may be specified in such filing, the Merger shall become effective in accordance with the FBCA. The time and date on which the Merger becomes effective is herein referred to as the "Effective Time." 1.4 EFFECTS OF THE MERGER. The Merger shall have the effects specified in the FBCA. 1.5 ARTICLES OF INCORPORATION; BYLAWS. (a) At the Effective Time and without any further action on the part of the Company or MergerCo, the Articles of Incorporation of MergerCo, as in effect immediately prior to the Effective Time, shall be amended to change the name of the Surviving Corporation to "Spec's Music, Inc.", and, as so amended, until thereafter further amended as provided therein and under the FBCA, shall become the Articles of Incorporation of the Surviving Corporation. (b) At the Effective Time and without any further action on the part of the Company or MergerCo, the Bylaws of MergerCo, as in effect immediately prior to the Effective Time, shall become the Bylaws of the Surviving Corporation until thereafter amended or repealed in 2 9 accordance with their terms and the Articles of Incorporation of the Surviving Corporation and as provided under the FBCA. 1.6 DIRECTORS. The directors of MergerCo at the Effective Time shall, from and after the Effective Time, be the directors of the Surviving Corporation, until the earlier of their resignation or removal or until their respective successors are duly elected and qualified, as the case may be. 1.7 OFFICERS. The officers of MergerCo at the Effective Time shall, from and after the Effective Time, be the officers of the Surviving Corporation, until the earlier of their resignation or removal or until their respective successors are duly elected and qualified, as the case may be. ARTICLE II EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS 2.1 EFFECT ON CAPITAL STOCK. As of the Effective Time, by virtue of the Merger and without any action on the part of any holder of shares of Common Stock or shares of capital stock of MergerCo: (a) Common Stock of MergerCo. Each share of common stock of MergerCo issued and outstanding immediately prior to the Effective Time shall be converted into one share of the common stock, par value $.01 per share, of the Surviving Corporation. (b) Cancellation of Treasury Stock. Each share of Common Stock that is owned by the Company or by any wholly owned subsidiary of the Company shall automatically be canceled and retired and shall cease to exist, and no cash or other consideration shall be delivered or deliverable in exchange therefor. (c) Conversion of Common Stock. Except as otherwise provided herein and subject to Section 2.3, each issued and outstanding share of Common Stock, other than shares owned by the Buyer, MergerCo or any other direct or indirect subsidiary of the Buyer (collectively, the "Excluded Shares"), and other than Dissenting Shares (as defined in Section 2.1(d)) and treasury stock, shall be converted into the right to receive in cash from the Company following the Merger an amount equal to $3.30 (the "Merger Consideration"). Contextually, the term "Merger Consideration" shall mean the per share amount in reference to the consideration designated on a per share basis, and otherwise shall refer to the aggregate consideration represented by the per share amount multiplied by the total number of shares of Common Stock then outstanding, including Dissenting Shares. (d) Dissenting Shares. Notwithstanding anything in this Agreement to the contrary, shares of Common Stock issued and outstanding immediately prior to the Effective Time with respect to which the holder has and exercises the right to dissent from the Merger and demand payment for such shares in accordance with Section 607.1302 of the FBCA (or any successor provision) ("Dissenting Shares") shall not be converted into the right to receive the Merger 3 10 Consideration unless such holder fails to perfect or otherwise withdraws, forfeits or loses such holder's right to such dissent and demand, if any. Such holder of Dissenting Shares shall have the rights set forth in Sections 607.1301, 607.1302 and 607.1320 of the FBCA, subject to the failure to perfect, withdrawal, forfeiture or loss of such rights under such sections. If, after the Effective Time, such holder fails to perfect or withdraws, forfeits or loses any such right to dissent and demand payment with respect to any such shares of Common Stock, each such share shall be treated as a share that had been converted as of the Effective Time into the right to receive the Merger Consideration in accordance with this Section 2.1. The Company shall give prompt notice to MergerCo of any notices of election to dissent and demand payment received by the Company, and MergerCo shall have the right to participate in and, at MergerCo's reasonable discretion, to direct all communications, negotiations and proceedings with respect to such demands. At or before the Effective Time, the Company shall not, except with the prior written consent of MergerCo, make any payment with respect to, or settle or offer to settle, any such demands. (e) Cancellation and Retirement of Excluded Shares. Each Excluded Share issued and outstanding immediately prior to the Effective Time shall, by virtue of the Merger and without any action on the part of the holder thereof, cease to be outstanding, shall be canceled and retired without payment of any consideration therefor and shall cease to exist. (f) Cancellation and Retirement of Common Stock. As of the Effective Time, all shares of Common Stock (other than shares referred to in Section 2.1(b)) issued and outstanding immediately prior to the Effective Time, shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of a certificate representing any such shares of Common Stock shall, to the extent such certificate represents such shares, cease to have any rights with respect thereto, except the right to receive the Merger Consideration applicable thereto, upon surrender of such certificate in accordance with Section 2.3, and subject to Section 2.1(d). 2.2 STOCK OPTION PLANS; OTHER STOCK OPTIONS. (a) As soon as practicable following the date of this Agreement, the Board of Directors of the Company (or, if appropriate, any committee administering the Stock Option Plans (as defined below)) shall adopt such resolutions or take such other actions as may be required to cause all outstanding unexpired options to purchase shares of Common Stock ("Stock Options") that were granted under the Company's 1986 Incentive Stock Plan, as amended, 1993 Incentive Stock Plan, 1993 Non-Employee Directors Stock Option Plan and 1996 Non-Employee Directors Stock Option Plan (collectively, the "Stock Option Plans") to become fully vested and exercisable immediately prior to, but contingent upon, the Effective Time. Each Stock Option Plan shall be terminated, cancelled and discontinued effective at the Effective Time. (b) The Company shall use its best efforts to obtain prior to the Effective Time from each holder of any unexpired outstanding Stock Option (whether granted under a Stock Option Plan or otherwise) an agreement, in substantially the form attached hereto as Exhibit B (a "Surrender Agreement"), to surrender as of the Effective Time all Stock Options held by such 4 11 holder and outstanding immediately prior to the Effective Time, regardless of the exercise price thereof, in exchange for payment (subject to any applicable withholding taxes), with respect to each such Stock Option having an exercise price less than the per share Merger Consideration, in an amount (the "Spread") equal to the product of (i) the total number of shares of Common Stock subject to such Stock Option and (ii) the excess of the per share Merger Consideration over the exercise price per share of Common Stock subject to such Stock Option. Subject to the terms of the applicable Surrender Agreement, the Spread shall be payable in cash at the Effective Time to each Stock Option holder who has executed a Surrender Agreement covering all such holder's Stock Options and delivered such Surrender Agreement to MergerCo prior to the Effective Time. The Spread shall thereafter be payable in cash to any remaining holder of Stock Options upon execution of a Surrender Agreement and delivery thereof to the Company, provided, however, that this sentence shall not be deemed a waiver of any of the conditions to the obligations of the Buyer and MergerCo set forth in Section 7.2(i) hereof. (c) Except as otherwise agreed to in writing by the parties, the Stock Option Plans and any other plan, program or arrangement providing for the issuance or grant of any other interest in respect of the capital stock of the Company or any of its subsidiaries shall terminate as of the Effective Time, and the Company shall ensure that following the Effective Time no holder of a Stock Option nor any participant in any Stock Option Plan nor any holder of any other interest in respect of the capital stock of the Company or any of its subsidiaries shall have any right thereunder to acquire equity securities of the Company or its subsidiaries. (d) The Company hereby represents and warrants that upon taking of the actions specified above, immediately following the Effective Time, and after giving effect to the payments described in this Section 2.2, no holder of a Stock Option nor any participant in any Stock Option Plan nor the holder of any warrant or option to purchase Common Stock (including, without limitation, Barry J. Gibbons and Jeffrey J. Fletcher) shall have the right thereunder to acquire equity securities of the Company, any subsidiary of the Company or any other benefit. 2.3 EXCHANGE OF CERTIFICATES. (a) Exchange Agent. At or before the Effective Time, the Buyer shall deposit the aggregate Merger Consideration, or cause the aggregate Merger Consideration to be deposited, with The Bank of New York, which shall act as exchange agent (the "Exchange Agent") for the benefit of the holders of shares of Common Stock to be exchanged in accordance with this Article II. Within four business days after the Effective Time, the Exchange Agent shall mail to each record holder (other than holders of Excluded Shares), as of the Effective Time, of an outstanding certificate or certificates that immediately prior to the Effective Time represented shares of Common Stock (the "Certificates"), a letter of transmittal and instructions, in substantially the form attached hereto as Exhibit C, for use in effecting the surrender of the Certificates for payment. 5 12 (b) Exchange Procedures. (i) After the Effective Time, each holder of an outstanding Certificate or Certificates shall, upon surrender to the Exchange Agent of such Certificate or Certificates and acceptance thereof by the Exchange Agent, be entitled to receive, and the Buyer shall cause the Exchange Agent to promptly pay, the amount of cash into which such Certificate or Certificates shall have been converted pursuant to this Agreement. (ii) After the Effective Time, there shall be no further transfer on the records of the Company or its transfer agent of Certificates, and if Certificates are presented to the Company for transfer, they shall be canceled against delivery of cash. If cash is to be remitted to a person in a name other than that in which the Certificate surrendered for exchange is registered, it shall be a condition of such exchange that the Certificate so surrendered be properly endorsed, with signature guaranteed, or otherwise in proper form for transfer and that the person requesting such exchange pay to the Company or its transfer agent any transfer or other taxes required or establish to the reasonable satisfaction of the Company or its transfer agent that such tax has been paid or is not applicable. Until surrendered as contemplated by this Section 2.3(b), and subject to Section 2.1(d), each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive upon such surrender the Merger Consideration applicable thereto as contemplated by Section 2.1. No interest shall be paid or shall accrue on any cash payable as Merger Consideration or in lieu of any fractional shares of Common Stock. (iii) In the event that any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate to be lost, stolen or destroyed and, if required by the Buyer, the posting by such person of a bond in such amount as the Buyer may reasonably direct as indemnity against any claim that may be made against the Buyer, MergerCo or the Company with respect to such Certificate, or the provision of other reasonable assurances requested by the Buyer, the Exchange Agent shall issue in exchange for such lost, stolen or destroyed Certificate the Merger Consideration deliverable in respect thereof pursuant to this Agreement. (c) No Further Ownership Rights in Common Stock Exchanged for Cash. All cash paid upon the surrender for exchange of Certificates in accordance with the terms of this Article II shall be deemed to have been issued and paid in full satisfaction of all rights pertaining to the shares of Common Stock represented by such Certificates. (d) Termination of Exchange Fund. Any portion of the Merger Consideration deposited with the Exchange Agent pursuant to this Section 2.3 (the "Exchange Fund") that remains undistributed to the holders of the Certificates six months after the Effective Time shall be delivered to the Company, upon demand, and any holders of shares of Common Stock prior to the Effective Time who have not theretofore complied with this Article II shall thereafter look only to the Company and only as general creditors thereof for payment of their claim for cash, if any, to which such holders may be entitled. 6 13 (e) Merger Consideration for Dissenting Shares. Any portion of the aggregate Merger Consideration deposited with the Exchange Agent to pay for Dissenting Shares for which the right to dissent and demand payment pursuant to Sections 607.1302 and 607.1320 of the FBCA shall have been perfected shall be returned to the Surviving Corporation, upon demand. (f) No Liability. None of the Buyer, MergerCo, the Company or the Exchange Agent shall be liable to any person in respect of any cash from the Exchange Fund delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. If any Certificates have not been surrendered prior to the earlier of (i) three years after the Effective Time and (ii) immediately prior to such date on which any cash, if any, in respect of such Certificate would otherwise escheat to or become the property of any Governmental Entity (as defined in Section 3.4), any such cash, dividends or distributions in respect of such Certificate shall, to the extent permitted by applicable law, become the property of the Company, free and clear of all claims or interest of any person previously entitled thereto. (g) Investment of Exchange Fund. The Exchange Agent shall invest any cash included in the Exchange Fund as directed by the Company on a daily basis. Any interest and other income resulting from such investments shall be paid to the Company. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to the Buyer and MergerCo that: 3.1 Organization, Standing and Corporate Power. Each of the Company and each of its Subsidiaries (as defined in Section 3.2) is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated and has the requisite corporate power and authority to carry on its business as now being conducted. Each of the Company and each of its Subsidiaries is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification or licensing necessary, other than in such jurisdictions where the failure to be so qualified or licensed (individually or in the aggregate) would not have a Material Adverse Effect (as defined in Section 9.4) with respect to the Company. Attached as Section 3.1 of the disclosure schedule (the "Disclosure Schedule") delivered to MergerCo by the Company at the time of execution of this Agreement are complete and correct copies of the Articles of Incorporation and By-Laws of the Company, as in effect on the date of this Agreement. The Company has delivered to MergerCo complete and correct copies of the articles of incorporation and bylaws (or other comparable organizational documents) of each of its Subsidiaries, in each case as amended to the date of this Agreement. 3.2 Subsidiaries. The only direct or indirect subsidiaries of the Company are those listed in Section 3.2 of the Disclosure Schedule (the "Subsidiaries"). All the outstanding shares of capital stock of each such Subsidiary have been validly issued and are fully paid and nonassessable and are owned (of record and beneficially) by the Company, by another wholly 7 14 owned Subsidiary of the Company or by the Company and another such wholly owned Subsidiary, free and clear of all pledges, claims, liens, charges, encumbrances, mortgages, adverse claims, restrictions and security interests of any kind or nature whatsoever (collectively, "Liens"), except as set forth in Section 3.2 of the Disclosure Schedule. Except for the ownership interests set forth in Section 3.2 of the Disclosure Schedule, the Company does not own, directly or indirectly, any capital stock or other ownership interest in any corporation, partnership, business association, joint venture or other entity. 3.3 Capital Structure. The authorized capital stock of the Company consists of (i) 10,000,000 shares of Common Stock, par value $.01 per share, and (ii) 5,635 shares of preferred stock, par value $1.00 per share. Subject to any Permitted Changes (as defined in Section 5.1(d)) there are, as of the close of business on May 29, 1998: (i) 5,300,469 shares of Common Stock issued and outstanding; (ii) 8,239 shares of Common Stock held in the treasury of the Company; and (iii) 824,266 shares of Common Stock issuable upon exercise of outstanding Stock Options. Section 3.3 of the Disclosure Schedule sets forth the following information with respect to each unexpired outstanding Stock Option: (1) the number of shares of Common Stock for which such Stock Option is exercisable; (2) the holder of such Stock Option; (3) the exercise price; (4) the grant date; and (5) the expiration date. Except as set forth above or in Section 3.3 of the Disclosure Schedule, no shares of capital stock or other equity securities of the Company are issued, reserved for issuance or outstanding. All outstanding shares of capital stock of the Company are, and all shares that may be issued pursuant to the Stock Option Plans, including any increases pursuant to existing contractual obligations, and the other Stock Options will be, when issued, duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights. Except as set forth on Section 3.3 of the Disclosure Schedule, there are no outstanding bonds, debentures, notes or other indebtedness or other securities of the Company having the right to vote (or convertible into, or exchangeable for, securities having the right to vote) on any matters on which stockholders of the Company may vote. Except as set forth above or in Section 3.3 of the Disclosure Schedule, there are no outstanding securities, options, warrants, calls, rights, commitments, agreements, arrangements or undertakings of any kind to which the Company or any of its Subsidiaries is a party or by which any of them is bound obligating the Company or any of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock or other equity or voting securities of the Company or of any of its Subsidiaries or obligating the Company or any of its Subsidiaries to issue, grant, extend or enter into any such security, option, warrant, call, right, commitment, agreement, arrangement or undertaking. Except as disclosed in Section 3.3 of the Disclosure Schedule, (i) there are no outstanding contractual obligations, commitments, understandings or arrangements of the Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire or make any payment in respect of any shares of capital stock of the Company or any of its Subsidiaries and (ii) to the knowledge of the Company, there are no irrevocable proxies with respect to shares of capital stock of the Company or any subsidiary of the Company. Section 3.3 of the Disclosure Schedule sets forth the record and, to the knowledge of the Company, beneficial ownership of, and voting power in respect of, the capital stock of the Company held by the Company's directors, officers and stockholders owning 5% or more of the outstanding Common Stock. Except as set forth on Section 3.3 of the Disclosure Schedule, there are no agreements or arrangements pursuant to which the Company is or could be required to register 8 15 shares of Common Stock or other securities under the Securities Act of 1933, as amended (the "Securities Act") or other agreements or arrangements with, between or among any security holders of the Company with respect to securities of the Company. 3.4 Authority; Noncontravention; Consents and Approvals. The Company has the requisite corporate and other power and authority to enter into this Agreement and, subject to the Company Stockholder Approval with respect to the consummation of the Merger, to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby have been duly authorized by the Company's Board of Directors, which constitutes all necessary corporate action on the part of the Company, subject, in the case of the Merger, to the Company Stockholder Approval. This Agreement has been duly executed and delivered by the Company and, subject to the Company Stockholder Approval in the case of the Merger, constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms subject, as to enforceability, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general principles of equity. Except as disclosed in Section 3.4 of the Disclosure Schedule, the execution and delivery of this Agreement does not, and the consummation of the transactions contemplated by this Agreement and compliance with the provisions hereof will not, conflict with, or result in (a) any breach or violation of, or default (with or without notice or lapse of time, or both) under, or right of termination, cancellation, acceleration or "put", with respect to any obligation or (b) the loss of a benefit or other right or (c) the creation of any Lien upon any of the properties or assets of the Company or any of its Subsidiaries, under (i) the Articles of Incorporation or Bylaws of the Company or the comparable organizational documents of any of its Subsidiaries, (ii) any loan or credit agreement, note, note purchase agreement, bond, mortgage, indenture, Lease (as defined in Section 3.23) or other agreement, instrument, permit, concession, franchise or license applicable to the Company or any of its Subsidiaries or their respective properties or assets or (iii) subject to the governmental filings and other matters referred to in the following sentence, any judgment, order, decree, statute, law, ordinance, rule, regulation or arbitration award applicable to the Company or any of its Subsidiaries or their respective properties or assets, other than, in the case of clauses (i), (ii) and (iii), any such conflicts, breaches, violations, defaults, rights, losses or Liens that individually or in the aggregate would not have a Material Adverse Effect with respect to the Company or would not prevent, hinder or materially delay the ability of the Company and/or MergerCo to consummate the transactions contemplated by this Agreement if not cured or waived by the Closing Date. No consent, approval, order or authorization of, or registration, declaration or filing with, or notice to, any federal, state, territorial, commonwealth or local government or governmental authority or agency or any court, administrative agency or commission or other governmental authority or agency, domestic or foreign (a "Governmental Entity"), or any other person under any Lease, Contract (as defined in Section 3.12) or other instrument to which the Company or any Subsidiary is a party or to which any of its properties is subject, is required by or with respect to the Company or any of its Subsidiaries in connection with the execution and delivery of this Agreement by the Company or the consummation by the Company of the transactions contemplated hereby, except for (i) the filing of a pre-merger notification and report form by the Company under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the 9 16 "HSR Act"), (ii) the filing with the SEC of (x) a proxy statement relating to the Company Stockholder Approval (such proxy statement as amended or supplemented from time to time, the "Proxy Statement"), and (y) such reports under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as may be required in connection with this Agreement and the transactions contemplated by this Agreement, (iii) the filing of the Articles of Merger by the Department of State of the State of Florida and appropriate documents with the relevant authorities of other states in which the Company is qualified to do business, and (iv) such other consents, approvals, orders, authorizations, registrations, declarations, filings or notices as are set forth in Section 3.4 of the Disclosure Schedule. 3.5 SEC Documents; Undisclosed Liabilities. The Company has timely filed all required reports, schedules, forms, statements and other documents with the SEC since August 1, 1992 (collectively, and in each case including all exhibits and schedules thereto and documents incorporated by reference therein, as amended, the "SEC Documents"). As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Securities Act, or the Exchange Act, as the case may be, and the rules and regulations of the SEC promulgated thereunder applicable to such SEC Documents, and none of the SEC Documents (including any and all financial statements included therein) as of such dates contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Except to the extent revised or superseded by a subsequent filing with the SEC (a copy of which has been provided to MergerCo prior to the date of this Agreement), none of the SEC Documents filed by the Company since August 1, 1997 and prior to the date of this Agreement (the "Recent SEC Documents"), as of their respective dates, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The consolidated financial statements of the Company included in the SEC Documents (the "SEC Financial Statements"), as of their respective dates, complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, were prepared in accordance with generally accepted accounting principles ("GAAP") (except, in the case of unaudited consolidated quarterly statements, as permitted by Form 10-Q of the SEC) applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and fairly presented the consolidated financial position of the Company and its consolidated Subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case of unaudited quarterly statements, to normal year-end audit adjustments, none of which, individually or in the aggregate is material). Except as provided for in the balance sheet contained in the most recent audited financial statements of the Company included in the Recent SEC Documents (the "Year End Balance Sheet") or except as disclosed in Section 3.5 of the Disclosure Schedule, neither the Company nor any Subsidiary has any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) except (x) liabilities incurred in the ordinary and usual course of business and consistent with past practice, (y) liabilities specifically incurred in connection with the transactions contemplated by this Agreement (including, without limitation, liabilities to 10 17 the holders of Dissenting Shares), and (z) other liabilities which do not exceed $250,000 in the aggregate, exclusive of obligations under Section 9.2 hereof. 3.6 Information Supplied. None of the information supplied or to be supplied by the Company for inclusion or incorporation by reference in the Proxy Statement will, at the date it is first mailed to the Company's stockholders or at the time of the Stockholders Meeting (as defined in Section 6.1), contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading, except that no representation or warranty is made by the Company with respect to the information supplied by MergerCo or any affiliate of MergerCo specifically for inclusion in the Proxy Statement. The Proxy Statement will comply as to form in all material respects with the requirements of the Exchange Act and the rules and regulations promulgated thereunder. 3.7 Absence of Certain Changes or Events. Except as disclosed in the Recent SEC Documents or on Section 3.7 of the Disclosure Schedule, since the date of the Year End Balance Sheet, the Company has conducted its business only in the ordinary course consistent with past practice and there is not and has not been: (a) any Material Adverse Change with respect to the Company; (b) any condition, event or occurrence which, either individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect or give rise to a Material Adverse Change with respect to the Company; (c) any event that, if it had taken place following the execution of this Agreement, would not have been permitted by Section 5.1 without the prior consent of MergerCo; (d) to the Company's knowledge, any theft with respect to the Company or its Subsidiaries, other than shrinkage of Inventory (as defined in Section 3.22) occurring in the ordinary course of business at a rate consistent with the Company's experience in the previous 24 months; or (e) any condition, event or occurrence that would reasonably be expected to prevent, hinder or delay the ability of the Company to consummate the transactions contemplated by this Agreement. 3.8 Litigation; Labor Matters; Compliance with Laws. (a) Except as set forth in Section 3.8 of the Disclosure Schedule or as disclosed in the Recent SEC Documents, there is (i) no suit, action or proceeding or investigation pending of which the Company has notice or knowledge and, (ii) to the knowledge of the Company, no suit, action or proceeding or investigation threatened against the Company, any of its Subsidiaries, their business or properties that, either individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect with respect to the Company or prevent, hinder or delay the ability of the Company to consummate the transactions contemplated by this Agreement nor is there any judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator outstanding against the Company, any of its Subsidiaries, their business or properties having, or which in the future could have, any such effect. (b) Except as disclosed in Section 3.8 of the Disclosure Schedule, (i) neither the Company nor any of its Subsidiaries is a party to, or bound by, any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor 11 18 organization; (ii) neither the Company nor any of its Subsidiaries is the subject of any proceeding, of which the Company has notice or knowledge, asserting that it or any Subsidiary has committed an unfair labor practice or seeking to compel it to bargain with any labor organization as to wages or conditions of employment; (iii) there is no strike, work stoppage or other labor dispute involving the Company or any of its Subsidiaries pending or, to its knowledge, threatened; (iv) each of the Company and its Subsidiaries is in compliance with all federal, state or other applicable laws, domestic or foreign, including the laws of Puerto Rico, respecting employment and employment practices, terms and conditions of employment and wages and hours, except for violations or failures so to comply, if any, that, either individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect with respect to the Company; and (v) except with respect to liabilities incurred at the written request of the Buyer, neither the Company nor any of its Subsidiaries is liable for any severance pay, change-of-control payments, or other payments to any employee or former employee, or any other person, arising from the termination of employment, or as a result of or in connection with the transactions contemplated hereunder, or other change in the legal relationship with such person, or otherwise arising, under any benefit or severance policy, practice, agreement, plan, or program of the Company or any Subsidiary, nor will the Company or any Subsidiary have any such liability that exists or arises, or may be deemed to exist or arise, under any applicable law or otherwise, as a result of or in connection with the transactions contemplated hereunder or as a result of the termination by the Company or any Subsidiary of any persons employed by the Company or any of its Subsidiaries at or prior to the Effective Time. (c) The ownership and leasing of the assets of and the conduct of the business of the Company and each of its Subsidiaries have not been in violation of and comply with all statutes, laws, regulations, ordinances, rules, judgments, orders, decrees or arbitration awards applicable thereto (including, without limitation, statutes, laws, regulations and rules relating to immigration, employment, labor relations and export controls), except for violations or failures so to comply, if any, that, either individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect with respect to the Company. 3.9 Employee Matters. (a) Set forth in Section 3.9 of the Disclosure Schedule is an accurate and complete list showing the names of all persons employed by the Company or any Subsidiary who received more than $50,000 in cash compensation in 1997 or who are expected to receive more than $50,000 in cash compensation in 1998 (including, without limitation, salary, commission and bonus). Such list sets forth the present salary or hourly wage, 1997 cash compensation (including, without limitation, salary, commission and bonus) and fringe benefits, of each such person. (b) Section 3.9 of the Disclosure Schedule contains a true and complete list of each "employee benefit plan" (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) and all other employee benefit plans, contracts, agreements, practices, policies or arrangements, written or, to the Company's knowledge, oral and whether or not subject to ERISA, which the Company, or any ERISA Affiliate (as defined 12 19 below) sponsors, maintains, contributes to, is a party to or otherwise has or could have any obligation under, with respect to any current or former officer, director, employee, leased employee or independent contractor of the Company or its ERISA Affiliates, as of the Closing Date. Employee benefit plans and all other employee benefit plans, contracts, agreements, practices, policies or arrangements, written or oral, are collectively referenced by the term "Benefit Plans." Without limiting the generality of the foregoing, the term Benefit Plans includes all employment, noncompetition, management, agency, severance, incentive, bonus, retention bonus, change-in-control, fringe benefit plans or consulting arrangements and other similar plans; all stock option, stock ownership, stock bonus, incentive stock option, stock purchase plans and other similar plans, policies, or arrangements; all deferred compensation, profit sharing, gain sharing, retirement, pension and other similar plans; medical plans, retiree medical plans, cafeteria plans, disability insurance plans, life insurance plans, dependent care assistance plans, educational assistance plans, group legal services plans and other similar plans. With respect to the Benefit Plans, except as requested in writing by an officer of the Buyer after the date of this Agreement or as set forth in Section 3.9 of the Disclosure Schedule: (i) none of the Benefit Plans is a "multiemployer plan" within the meaning of ERISA nor has the Company ever maintained, contributed to, or been obligated to contribute to such a Plan; (ii) none of the Benefit Plans promises or provides retiree medical or life insurance benefits to any person; (iii) none of the Benefit Plans or any other agreement with any employee of the Company or its Subsidiaries provides for payment of a benefit, the increase of a benefit amount, the payment of a contingent benefit, or the acceleration of the payment or vesting of a benefit by reason of the execution of this Agreement or the consummation of the transactions contemplated by this Agreement; (iv) each Benefit Plan that is an "employee pension benefit plan" (within the meaning of Section 3(2) of ERISA), except for plans relating to deferred compensation which are exempt under sections 201, 301 and 401 of ERISA, has received a favorable determination letter from the Internal Revenue Service that it is so qualified under section 401(a) of the Internal Revenue Code of 1986, as amended ("Code"), each Benefit Plan subject to Section 1065 of the Puerto Rican Tax Act is qualified under such section, and no event has occurred that will or could give rise to disqualification or loss of tax exempt status of any such Benefit Plan or trust; (v) each Benefit Plan has been operated in all respects in accordance with its terms and the requirements of all applicable laws and regulations except where the failure to do so would not have a Material Adverse Effect with respect to the Company, the Company and each ERISA Affiliate have performed all of their material obligations that have become due under all Benefit Plans including the reporting and disclosure requirements of ERISA, and all premiums due and payable to the Pension Benefit Guaranty Corporation have been paid in full; 13 20 (vi) neither the Company nor any ERISA Affiliate has liability under Title IV of ERISA in connection with the termination of, or withdrawal from, any Benefit Plan; (vii) the Company has provided to the Buyer or MergerCo (x) true and complete copies of all Benefit Plans, (y) the most recent annual actuarial valuation, if any, prepared for each Benefit Plan, and (z) the most recent annual report (Form 5500), if any, required under ERISA with respect to each Benefit Plan; (viii) no payment that is owed or may become due to any director, officer, employee, or agent of the Company will be non-deductible to the Company or subject to tax under Section 280G or Section 4999 of the Code, respectively, nor will the Company be required to "gross up" or otherwise compensate any such person because of the imposition of any excise tax on a payment to such person; (ix) as of the date hereof, subject to the requirements of Section 412 of the Code or Section 302 of ERISA, no Pension Plan has incurred an accumulated funding deficiency nor has any sponsor of such a Pension Plan obtained a funding waiver (as such terms are defined in such applicable sections and any regulations thereunder) with respect thereto; (x) neither the Company nor any ERISA Affiliate has engaged in, and neither the Company nor any Affiliate knows of any other person who or which has engaged in, any "prohibited transaction" (within the meaning of Section 406 of ERISA or Section 4975 of the Code, excluding any transactions which are exempt under Section 408 of ERISA or Section 4975 of the Code) with respect to any Benefit Plan, which could reasonably be expected to have a Material Adverse Effect with respect to the Company or to subject the Buyer or MergerCo to any material liability, and no event has occurred that will or could subject any Benefit Plan to tax under Section 511 of the Code; (xi) no reportable event (as defined in ERISA and the regulations thereunder, but excluding any such event for which the 30 day notice requirement has been waived) has occurred or is continuing with respect to any Benefit Plan; (xii) there are no actions, suits or claims pending (other than routine claims for benefits) of which the Company has notice or knowledge, or, to the knowledge of the Company, any actions, suits or claims (other than routine claims for benefits) which can reasonably be expected to be asserted, against the Company with respect to any Benefit Plan or other plan or arrangement, or against any such Benefit Plan or other plan or the assets thereof; (xiii) the Company and each ERISA Affiliate is, and at all relevant times has been, in compliance with the provisions of COBRA (as defined below); (xiv) except as contemplated in Sections 6.8 and 6.13 of this Agreement, the Company has not taken any action or made any statement, promise or representation to, or agreement with, any of its employees, officers or directors that after the Closing the Buyer 14 21 will continue or establish any Benefit Plan or other plan or arrangement or provide any particular benefits or compensation to employees; (xv) all insurance premiums relating to any Benefit Plan that are due and payable as of the date of this Agreement have been paid, no insurance policy or other insured funding medium through which benefits are provided under any Benefit Plan is subject to any retroactive rate adjustment, loss sharing arrangement, the payment of additional premiums, or other actual or contingent liability with respect to any periods prior to the date of this Agreement, and, to the knowledge of the Company, no insurance company that provides an insurance or annuity policy or other insured funding medium is insolvent or has been taken over by any governmental agency that regulates insurance companies; (xvi) the Company has the right to amend or terminate, without the consent of any other person, any Benefit Plan which it maintains and each Benefit Plan can be amended or terminated after the Closing without any additional contribution to the Benefit Plan or the payment of any additional compensation or amount, additional vesting, or the acceleration of any benefits, except as proscribed by applicable laws or regulations; (xvii) the Company has never maintained nor ever contributed to a "defined benefit pension plan" as defined in Section 3(35) of ERISA; and (xviii) each "welfare benefit plan" (as defined in Section 3(1) of ERISA) intended to meet the requirements for tax favored treatment under Subchapter B of Chapter 1 of the Code meets such requirements and no welfare benefit plan provides or has provided a "disqualified benefit" (as such term is defined in Section 4976(b) of the Code). For purposes of this Agreement, "ERISA Affiliate" shall mean any corporation, trade or business which controls, is controlled by, or is under common control with, the Company within the meaning of Sections 414(b), 414(c), 414(m) or 414(o) of the Code or Section 4001(a)(14) of ERISA and "COBRA" shall mean Part 6 of Subtitle B of Title I of ERISA and Section 4980B(f) of the Code. 3.10 Taxes. Except as disclosed in Section 3.10 of the Disclosure Schedule, the Company and each of its Subsidiaries, and any consolidated, combined, unitary or aggregate group for Tax purposes of which the Company or any of its Subsidiaries is or has been a member (a "Consolidated Group") has timely filed (within permitted extension periods, if applicable) all Tax Returns required to be filed by it, has paid all Taxes shown thereon to be due and has provided adequate reserves in its financial statements for any Taxes that have not been paid, whether or not shown as being due on any Tax Returns. Except as disclosed in Section 3.10 of the Disclosure Schedule, (i) no claim for Taxes that are due and payable has become a Lien against the property of the Company or any of its Subsidiaries or is being asserted against the Company or any of its Subsidiaries; (ii) no audit of any Tax Return of the Company or any of its Subsidiaries is being conducted by a Tax authority; (iii) no extension of the statute of limitations on the assessment of any Taxes has been granted by the Company or any of its Subsidiaries and is currently in effect and there are no agreements for the extension or waiver of the time for assessment of any non-income Taxes relating to the Company or its Subsidiaries and neither the 15 22 Company nor any Subsidiary has been requested to enter into any such agreement or waiver; (iv) all Taxes that the Company or any Subsidiary is (or was) required by law to withhold or collect have been duly withheld or collected, and have been timely paid over to the proper authorities to the extent due and payable; (v) there is no tax sharing arrangement that will require any payment by the Company or any of its Subsidiaries after the date of this Agreement; and (vi) neither the Company nor any member of the Consolidated Group (1) has filed a consent pursuant to Section 341(f) of the Code or agreed to have Section 341(f)(2) apply to any disposition of a subsection (f) asset (as such term is defined in Section 341(f) of the Code) owned by a member of the Consolidated Group, (2) has agreed, or is required, to make any adjustment under Section 481(a) of the Code by reason of a change in accounting method or otherwise that will affect the liability of the Consolidated Group for Taxes, (3) has made an election, or is required, to treat any asset of the Consolidated Group as owned by another person pursuant to the provisions of former Section 168(f)(8) of the Code, (4) has participated in an international boycott as defined in Section 999 of the Code, (5) is now or has ever been a "foreign person" within the meaning of Section 1445(b)(2) of the Code, (6) is now or ever been a United States real property holding corporation within the meaning of Section 897(c)(1)(A)(ii) of the Code, or (7) has made any of the foregoing elections or is required to apply any of the foregoing rules under any comparable state or local tax provision. The Company has delivered or otherwise made available to MergerCo true and complete copies of all Tax Returns filed by the Company or any Subsidiary in the past three years. As used herein, "Taxes" shall mean all taxes of any kind, including, without limitation, those on or measured by or referred to as income, gross receipts, sales, use, ad valorem, franchise, profits, license, withholding, back-up withholding, payroll, employment, excise, severance, stamp, occupation, premium, value added, property or windfall profits taxes, customs, duties or similar fees, assessments or charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts imposed by any Governmental Entity. As used herein, "Tax Return" shall mean any return, report or statement required to be filed with any Governmental Entity with respect to Taxes. Except as set forth on Schedule 3.10, there are no written or, to its knowledge, oral proposed assessments of Taxes against the Company or any of its Subsidiaries or written or, to its knowledge, oral proposed adjustments to any Tax Return filed, pending against the Company or any of its Subsidiaries, or written or, to its knowledge, oral proposed adjustments to the manner in which any Tax of the Company or any of its Subsidiaries is determined. For purposes of this Section 3.10, "written" means the Company or any Subsidiary has received notice in writing of such assessment or adjustments or has knowledge of such notice. 3.11 Environmental Matters. Except as disclosed in Section 3.11 of the Disclosure Schedule, which discloses items of non-compliance that could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect with respect to the Company: (a) The Company and its Subsidiaries hold and formerly held, and are, and have been, in material compliance with, all Environmental Permits, and the Company and its Subsidiaries are, and have been, otherwise in material compliance with all applicable Environmental Laws; 16 23 (b) None of the Company or its Subsidiaries has received any Environmental Claim, and none of the Company or its Subsidiaries has knowledge, after Diligent Inquiry, of any threatened Environmental Claim or of any circumstances, conditions or events that could reasonably be expected to give rise to an Environmental Claim, against the Company or any of its Subsidiaries; (c) To the knowledge of the Company, after Diligent Inquiry, there are no (i) underground storage tanks, (ii) polychlorinated biphenyls, (iii) asbestos or asbestos-containing materials, (iv) urea-formaldehyde insulation, (v) sumps, (vi) surface impoundments, (vii) landfills, (viii) sewers or septic systems or (ix) Hazardous Materials present at any facility currently owned, leased, operated or otherwise used or, to the knowledge of the Company, formerly owned, leased, operated or otherwise used, by the Company or any of its Subsidiaries that could reasonably be expected to give rise to liability of the Company or any of its Subsidiaries under any Environmental Laws; (d) No modification, revocation, reissuance, alteration, transfer, or amendment of the Environmental Permits, or any review by, or approval of, any third party of the Environmental Permits is required in connection with the execution or delivery of this Agreement or the consummation of the transactions contemplated hereby or the continuation of the business of the Company or its Subsidiaries following such consummation; (e) To the knowledge of the Company, after Diligent Inquiry, Hazardous Materials have not been generated, transported, treated, stored, disposed of, released or threatened to be released at, on, from or under any of the properties or facilities currently owned, leased or otherwise used or, to the knowledge of the Company, formerly owned, leased, operated or otherwise used, including without limitation for receipt of the Company's wastes, by the Company or any of its Subsidiaries, in violation of or in a manner or to a location that could give rise to liability under any Environmental Laws; (f) The Company and its Subsidiaries have not assumed, contractually or by operation of law, any liabilities or obligations under any Environmental Laws that, based on facts and circumstances of which the Company has knowledge, might reasonably be expected to have a Material Adverse Effect with respect to the Company. (g) For purposes of this Agreement, the following terms shall have the following meanings: "Diligent Inquiry" means inquiry of (i) the employees of the Company and each Subsidiary in charge of environmental matters and (ii) such other individuals or entities whom the officers of the Company reasonably expect, upon exercise of the degree of diligence that would have been exercised by a reasonable person in such position, to have knowledge of material environmental matters affecting the Company or any Subsidiary. "Environmental Claim" means any written or oral notice, claim, demand, action, complaint, proceeding, request for information or other communication by any person alleging liability or potential liability (including without limitation liability or potential liability 17 24 for investigatory costs, cleanup costs, governmental response costs, natural resource damages, property damage, personal injury, fines or penalties) arising out of, relating to, based on or resulting from (i) the presence, discharge, emission, release or threatened release of any Hazardous Materials at any location, currently owned, leased, operated or otherwise used, or, to the knowledge of the Company, formerly owned, leased, operated or otherwise used, by the Company or any of its Subsidiaries or (ii) circumstances forming the basis of any violation or alleged violation of any Environmental Law or Environmental Permit or (iii) otherwise relating to obligations or liabilities under any Environmental Laws. "Environmental Permits" means all Permits required under Environmental Laws. "Environmental Laws" means all applicable domestic and foreign federal, state and local statutes, rules, regulations, ordinances, orders, decrees and common law relating in any manner to contamination, pollution or protection of human health or the environment, including without limitation the Comprehensive Environmental Response, Compensation and Liability Act, the Solid Waste Disposal Act, the Clean Air Act, the Clean Water Act, the Toxic Substances Control Act, the Occupational Safety and Health Act, the Emergency Planning and Community-Right-to-Know Act, and the Safe Drinking Water Act, all as amended, and similar state and local laws. "Hazardous Materials" means all hazardous or toxic substances, wastes, materials or chemicals, petroleum (including crude oil or any fraction thereof) and petroleum products, asbestos and asbestos-containing materials, pollutants, contaminants and all other materials, substances and forces, including but not limited to electromagnetic fields, regulated pursuant to, or that could form the basis of liability under, any Environmental Law. "Permits" means all permits, licenses, registrations, permissions, certificates and other authorizations, approvals and consents issued or granted by any Governmental Entity and obtained by the Company or any of its Subsidiaries or otherwise required in connection with the conduct or operation of the Company's or any Subsidiary's business or facilities or the ownership, lease or possession by the Company or any Subsidiary of any real, personal or intangible property. 3.12 Material Contracts. Except as set forth in Section 3.12 of the Disclosure Schedule or in another Section of the Disclosure Schedule and other than employee compensation (except for written employment agreements) in the ordinary course of business consistent with past practice, neither the Company nor any Subsidiary is a party to or bound by (a) any agreement (including, but not limited to, employment, advertising, distribution and licensing agreements), contract, commitment, arrangement, lease (including with respect to real and personal property), policy, indenture, mortgage, or other instrument (collectively, "Contracts") that involves the performance of services or the delivery of goods and/or materials by or to it in an amount or value in excess of $50,000, (b) any Contract not in the ordinary course of business relating to expenditures or liabilities in excess of $25,000, (c) any Contract relating to capital expenditures in excess of $25,000 in the aggregate, (d) any Contract relating to indebtedness, liability for borrowed money or the deferred purchase price of property (excluding trade payables in the ordinary course of business), (e) any loan or advance to (other than 18 25 advances to employees in the ordinary course of business in amounts of $1,000 or less to any individual and $10,000 or less in the aggregate), or investment in, any person, any Contract relating to the making of any such loan, advance or investment or any Contract involving a sharing of profits, (f) any guarantee or other contingent liability in respect of any indebtedness or obligation of any person, (g) any management service, consulting or any other similar type of Contract, (h) any Contract limiting the ability of the Company or any Subsidiary to engage in any line of business or to compete with any person, (i) any warranty, guaranty or other similar undertaking with respect to a contractual performance extended by the Company or any Subsidiary, (j) any Contract whereby the Company or any Subsidiary shares services with any third party, (k) any capital lease or lease of personal property, (l) any Contract that is or was required to be filed as an exhibit to the SEC Documents or (m) any amendment, modification or supplement in respect of any of the foregoing ((a)-(m), collectively, the "Material Contracts," provided that the term "Material Contract" shall not be deemed to include any Contract under which the Company and each Subsidiary have both no obligation to perform in the future and no right to the benefits of the future performance of any other person). Except as otherwise set forth in Section 3.12 of the Disclosure Schedule, each Material Contract is valid and binding and in full force and effect in accordance with its terms and there exists no default, breach or event of default thereunder or event, occurrence, condition or act (including the consummation of the transactions contemplated hereby) on the part of the Company, any Subsidiary or, to the knowledge of the Company, any other person that, with the giving of notice, the lapse of time or the happening of any other event or condition, would become a default, breach or event of default thereunder. The Company or its Subsidiaries have duly performed their respective obligations under each Material Contract in all material respects to the extent such obligations have occurred. The Company has provided or made available to MergerCo true and complete copies of each Material Contract. Except as set forth in Section 3.12 of the Disclosure Schedule, no Material Contract relating to borrowed money indebtedness imposes on the Company or any Subsidiary any penalty, fee or service charge in connection with the prepayment, repayment or early payment of any indebtedness thereunder. Other than as disclosed in the most recent balance sheet of the Company included in the SEC Documents or as set forth in Section 3.12 of the Disclosure Schedule, no indebtedness for borrowed money of the Company or its Subsidiaries contains any restriction upon the incurrence of indebtedness for borrowed money by the Company or any of its Subsidiaries or restricts the ability of the Company or any of its Subsidiaries to grant any Liens on its properties or assets. 3.13 Brokers; Legal Counsel. (a) No broker, investment banker, financial advisor or other person, other than PaineWebber Incorporated, the fees and expenses of which will be paid by the Company (pursuant to a fee agreement, a copy of which has been provided to MergerCo), is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company. The aggregate fees payable to PaineWebber Incorporated pursuant to such arrangement shall not exceed $250,000 (plus reasonable expenses). 19 26 (b) No legal counsel, other than Holland & Knight LLP, Broad and Cassel and such other legal counsel as the Company may engage from time to time in good faith ("Company Legal Counsel"), the fees and expenses of which will be paid by the Company (pursuant to one or more fee agreements, copies of which have been provided to MergerCo), is entitled to any legal fees and expenses, whether contingent or otherwise, in connection with the transaction contemplated by this Agreement based upon arrangements made by or on behalf of the Company. 3.14 Opinion of Financial Advisor. The Board of Directors of the Company has received the opinion of PaineWebber Incorporated dated the date hereof, that as of such date "the Merger Consideration to be received in the Merger is fair from a financial point of view, to the holders of Common Stock," a signed copy of which opinion has been delivered to the Company. The opinion of the PaineWebber Incorporated is subject to various conditions and assumptions contained therein. 3.15 Board Recommendation. The Board of Directors of the Company, at a meeting duly called and held, has unanimously (a) determined that the Merger and the other transactions contemplated by this Agreement, taken together, are fair to, and in the best interests of, the Company and the holders of the Common Stock, (b) authorized and approved this Agreement, the Merger and the other transactions contemplated hereby, and (c) resolved to recommend that the holders of shares of Common Stock approve this Agreement, the Merger and the other transactions contemplated hereby. 3.16 Required Company Vote. The Company Stockholder Approval, being the affirmative vote of a majority of the issued and outstanding shares of the Common Stock, is the only vote of the holders of any class or series of the Company's securities necessary to approve this Agreement, the Merger and the other transactions contemplated hereby. 3.17 State Takeover Statutes. No state "fair price," "moratorium," "control share acquisition" or other similar takeover statute or regulation of Florida (and, to the knowledge of the Company after due inquiry, of Puerto Rico) applies or purports to apply to the Company or any of its Subsidiaries, or to this Agreement, the Merger, or any of the other transactions contemplated hereby, except any such statutes or regulations that are no longer applicable in any respect upon the execution of this Agreement. Neither the Company nor any of its Subsidiaries has any rights plan or agreement, preferred stock or similar arrangement that has, or could have, any of the aforementioned consequences in respect of the transactions contemplated hereby. 3.18 Intellectual Property; Software. (a) Except as set forth in Section 3.18 of the Disclosure Schedule, all trademarks, service marks, trade names, logos and other designations of goods or services, copyrights, registrations for any of the foregoing, patents, and applications for registration or issuance of or any of the foregoing (collectively, "Intellectual Property") in which the Company or any of its Subsidiaries has any ownership interest or right, whether direct, indirect, contractual or otherwise ("Company Intellectual Property"), and all information relating to the business of the Company or its Subsidiaries, including but not limited to information relating to products, services, 20 27 strategies, pricing, customers, representatives, suppliers, distributors, technology, finances, employee compensation, computer software and hardware, inventions, developments, or trade secrets, in which the Company or any of its Subsidiaries has any ownership interest or right, whether direct, indirect, contractual or otherwise, or which is in the possession of the Company or its Subsidiaries or used in connection with or required for the Company's business or any Subsidiary's business, to the extent such information is not intended to be disseminated to the public or is otherwise not generally known to competitors of the Company or its Subsidiaries (collectively "Proprietary Information") is owned by or licensed to the Company or its Subsidiaries, free and clear of all Liens. Except as set forth in Section 3.18 of the Disclosure Schedule, the Company and its subsidiaries have the right to use and transfer all Company Intellectual Property and Proprietary Information without the consent of or any payment to any other person. The Company Intellectual Property, Proprietary Information and intellectual property rights expressly or impliedly licensed to the Company and its Subsidiaries by suppliers and other parties are sufficient, to the Company's knowledge, for the conduct of the business of the Company and its Subsidiaries as now operated. (b) Section 3.18 of the Disclosure Schedule sets forth a complete and accurate list of all Company Intellectual Property (including any Intellectual Property subject to any license or other agreement to which the Company is a party), and a complete and accurate list of all licenses and contracts relating to Intellectual Property or Proprietary Information to which the Company or any of its Subsidiaries is a party or by which the Company, any of its Subsidiaries or any of their assets is bound. Except as set forth in Section 3.18 of the Disclosure Schedule, (i) all of the Company Intellectual Property listed in Section 3.18 of the Disclosure Schedule has been duly registered or issued by or filed with the appropriate domestic or foreign Governmental Entity; (ii) all payments and actions required to apply for, obtain, maintain and renew such Company Intellectual Property in accordance with all applicable laws and regulations of the appropriate Governmental Entity have been duly and promptly made and taken; (iii) all Company Intellectual Property issued by any Governmental Entity and registrations of Company Intellectual Property remain in full force and effect, and all applications for registration or issuance of Company Intellectual Property are pending; and (iv) the Company has not received notice of any event, inquiry, investigation or proceeding threatening the validity or enforceability of any such Company Intellectual Property. (c) Except as set forth in Section 3.18 of the Disclosure Schedule, (i) no other person has an interest in or right or license to use, or the right to license any other person to use, any of the Company Intellectual Property or Proprietary Information, (ii) there are no claims or demands of any other person pertaining to Company Intellectual Property or Proprietary Information; (iii) no proceedings have been instituted or are pending (with notice served on the Company) or, to the knowledge of the Company, threatened that challenge the Company's or any Subsidiary's rights in or to Company Intellectual Property or Proprietary Information; and (iv) to the knowledge of the Company, none of the Company Intellectual Property or Proprietary Information is subject to any outstanding order, decree, ruling, charge, injunction, judgment or stipulation or is being infringed, misappropriated or misused by another person. 21 28 (d) Neither the activities of, actions of or services performed by the Company or its Subsidiaries nor, to the knowledge or the Company, the goods or services currently manufactured, used, sold or otherwise transferred by the Company or its Subsidiaries, infringe any intellectual property right of any other person. Except as set forth in Section 3.18 of the Disclosure Schedule, (i) no action, suit or proceeding is pending (with notice served on the Company) or, to the knowledge of the Company, threatened that accuses the Company or any Subsidiary of misappropriating proprietary information or otherwise infringing the intellectual property rights of any other person; and (ii) the Company has not received, and is not aware of, any allegation, charge or claim that any products, processes, activities or apparatus manufactured, sold, owned or used by the Company or its Subsidiaries infringe any Intellectual Property of any other party or entity, or any allegation, charge or claim that the Company or its Subsidiaries have misappropriated or misused any Proprietary Information of any other person. (e) Except as set forth in Section 3.18 of the Disclosure Schedule, all computer programs and software currently being used in the business of the Company and its Subsidiaries (the "Software") is owned by the Company and its Subsidiaries or held under valid license agreements. Neither the Company nor any Subsidiary has licensed anyone to use any of the Software and the Company has no knowledge of any infringing use of the Software or claim of infringing use. The Software is sufficient for the conduct of the business of the Company and its Subsidiaries as now operated. 3.19 Related Party Transactions. Except as set forth in Section 3.19 of the Disclosure Schedule hereto, no director, officer, partner, employee, "affiliate" or "associate" (as such terms are defined in Rule 12b-2 under the Exchange Act) of the Company or any of its Subsidiaries (a) has borrowed any monies from or has outstanding any indebtedness or other similar obligations to the Company or any of its Subsidiaries; (b) to the knowledge of the Company, owns any direct or indirect interest of any kind in, or is a director, officer, employee, partner, affiliate or associate of, or consultant or lender to, or borrower from, or has the right to participate in the management, operations or profits of, any person or entity that is (i) a competitor, supplier, customer, distributor, lessor, tenant, creditor or debtor of the Company or any of its Subsidiaries, (ii) engaged in a business related to the business of the Company or any of its Subsidiaries, or (iii) participating in any transaction to which the Company or any of its Subsidiaries is a party; or (c) is otherwise a party to any contract, arrangement or understanding with the Company or any of its Subsidiaries. Section 3.20 Permits. The Company and its Subsidiaries have all Permits (as defined in Section 3.11), except for those Permits the failure of which to have would not, individually or in the aggregate, have a Material Adverse Effect with respect to the Company ("Material Permits"). Schedule 3.20 of the Disclosure Schedule contains a complete list of the Material Permits, indicating which Material Permits require the consent or approval of any third party as a result of the transactions contemplated by this Agreement. All of the Permits are in full force and effect. No outstanding written notice or, to the knowledge of the Company, oral notice of cancellation or termination has been delivered to the Company or any Subsidiary in connection with any such Permit nor has any such cancellation or termination been threatened. No application, action or 22 29 proceeding for the modification of any such Permits is pending or, to the knowledge of the Company, threatened that may result in the revocation of such Permit. Section 3.21 Insurance Policies. Schedule 3.21 of the Disclosure Schedule contains a list of all policies of property, fire and casualty, product liability, workers compensation and other forms of insurance owned or held by the Company or its Subsidiaries, together with a list of all outstanding material claims against any insurer and the amount of the annual premium payable with respect to each such policy. Each such policy is in full force and effect. All premiums with respect to the insurance policies listed on Schedule 3.21 that are due and payable prior to the Effective Time have been paid or will be paid prior to the Effective Time, and no notice of cancellation or termination has been received by the Company with respect to any such policy. Except as set forth in Section 3.21 of the Disclosure Schedule, to the Company's knowledge, there are no pending claims against such insurance by the Company or any Subsidiary as to which the insurers have denied coverage or otherwise reserved rights and no issuer of such insurance has filed for protection under applicable insolvency laws or is otherwise in the process of liquidating or has been liquidated. To the Company's knowledge, neither the Company nor any Subsidiary has been refused any insurance with respect to its assets or operations during the past five years. Except as set forth in Section 3.21 of the Disclosure Schedule, as of the date of this Agreement, since the last renewal date of any insurance policy, there has not been any increase in the premiums payable pursuant to such policy in an amount in excess of 10%. Section 3.22 Good Title to and Condition of Assets. (a) The Company and each Subsidiary has good and marketable title to all of its properties and assets, whether real, personal or mixed, tangible or intangible, wherever located, free and clear of any Liens other than Permitted Encumbrances (as defined in Section 3.23). (b) Subject to the expiration of useful lives, all machinery, equipment, tools, supplies, leasehold improvements, furniture and fixtures of the Company and its Subsidiaries currently in use or necessary for its business are in good operating condition, normal wear and tear and ordinary repair requirements excepted. (c) Except for items that are in the possession or control of suppliers, (i) the Company's and each Subsidiary's inventory located in their stores, returns warehouse, distribution center or in transit or otherwise (the "Inventory") and (ii) the supplies bought for use in the Company's or any Subsidiary's stores in connection with the operation of their business in the ordinary course, including, but not limited to, printed material, security tags and shopping bags ("Selling Supplies"), are in the physical possession of the Company or a Subsidiary, in transit to or from suppliers of the Company or a Subsidiary or in transit to the Company's or Subsidiary's stores. Except for products that are returned or determined to be defective or obsolete in the ordinary course of business as to which appropriate reserves have been established, the Inventory and Selling Supplies consist of items that are in good and merchantable condition and are of a quality presently usable, salable and rentable consistent with past practice in the ordinary course of business. Except as set forth in Section 3.22 of the 23 30 Disclosure Schedule, all of the Inventory and Selling Supplies is owned by the Company or a Subsidiary and none of the Inventory or Selling Supplies is held or sold on consignment. (d) Except as set forth in Section 3.22 of the Disclosure Schedule with respect to particular suppliers, the Company and its Subsidiaries have the right to return to their suppliers for refund or credit in accordance with standard practice in the industry any compact discs, audio tapes, phonograph records or videocassettes held for sale and constituting Inventory. Section 3.23 Real Estate. (a) Except as set forth in Section 3.23 of the Disclosure Schedule, neither the Company nor any Subsidiary owns any real property or any interest therein (the "Owned Properties"). (b) Neither the Company nor any Subsidiary holds any leasehold interest in any real property except as set forth in Section 3.23 of the Disclosure Schedule (the "Leasehold Premises"). Section 3.23 of the Disclosure Schedule lists each of the leases and subleases with respect to the Leasehold Premises or other real property to which the Company or any Subsidiary is a party ("Leases"), and with respect to each Lease sets forth the term thereof, the base rent payable with respect thereto, any security deposit relating thereto, the termination date thereof and whether the Company or a Subsidiary has subleased any part of the leasehold interest thereunder or assigned such Lease. The Company and each Subsidiary are parties to no leases or subleases of real property other than the Leases. The Company has heretofore delivered or made available to the Buyer and MergerCo true and complete copies of all such Leases including all amendments, modifications and waivers with respect thereto. Except as otherwise set forth in Section 3.23 of the Disclosure Schedule: each Lease is in full force and effect; all rents and additional rents due to date on each Lease have been paid; neither the Company nor any Subsidiary has received any notice that it is in default under any Lease and, to the knowledge of the Company, neither the Company nor any Subsidiary is in default under any Lease; to the knowledge of the Company, no landlord is in default of any of its obligations under any Lease; and, to the knowledge of the Company, there exists no event, occurrence, condition or act (including the consummation of the transactions contemplated by this Agreement) that, with the giving of notice, the lapse of time or the happening of any further event or condition, would become a default by the Company or any Subsidiary under any Lease. Except as set forth in Section 3.23 of the Disclosure Schedule, the Company or a Subsidiary is currently the lessee under each of the Leases and may exercise all rights of a lessee under each of the Leases. Each Lease under which the Company or a Subsidiary was not the original lessee was validly assigned to the Company or such Subsidiary and any party that has a right of consent to such assignment and of which the Company has knowledge after due review of the applicable Lease has consented to such assignment and any other party having a right of consent to such assignment has either consented to such assignment or has taken no action inconsistent with the granting of such consent. (c) Except as set forth in Section 3.23 of the Disclosure Schedule, the Company and its Subsidiaries own the Owned Properties and have 24 31 valid leasehold interests in the Leasehold Premises, free and clear of any Liens, covenants and easements or title defects of any nature whatsoever, except for (i) liens for taxes, and assessments and other governmental charges in the nature of taxes, not yet due and payable; (ii) liens in respect of taxes, assessments and other governmental charges being contested in good faith as disclosed in Section 3.23 of the Disclosure Schedule; (iii) mechanics', carriers', workmen's, repairmen's and other like liens arising or incurred in the ordinary course of business as to which any related liability or obligation is reflected in the Year End Balance Sheet or is otherwise disclosed on the Disclosure Schedule; (iv) inchoate statutory liens that apply generally in favor of commercial landlords; (v) liens arising from actions or inactions of the landlords of the Leasehold Premises; and (vi) such imperfections of title, easements, covenants, rights-of-way, restrictions and encumbrances and zoning, building and other similar restrictions, if any, as do not interfere with the present use of such properties or otherwise impair business operations, as used or conducted on the date hereof (such exceptions referred to in clauses (i) through (vi) above being collectively referred to herein as "Permitted Encumbrances"). (d) Except as set forth in Section 3.23 of the Disclosure Schedule, the portions of the buildings located on the Leasehold Premises that are used in the Company's or any Subsidiary's business and the buildings located on the Owned Properties are each in good repair and condition, normal wear and tear excepted, and are in the aggregate sufficient to satisfy the Company's and its Subsidiaries' business activities as conducted thereat. (e) Each of the Leasehold Premises and Owned Properties: (i) has direct access to public roads or access to public roads by means of an access easement (which access easement is perpetual, in the case of each of the Owned Properties, and for at least the remaining term of the Lease and any renewal periods, in the case of each of the Leasehold Premises), such access being sufficient to satisfy the current normal day-to-day transportation requirements of the Company's and its Subsidiaries' businesses as presently conducted at such parcel; and (ii) is served by all utilities in such quantities as are sufficient to satisfy the current business activities as conducted at such parcel. (f) Except as set forth in Section 3.23 of the Disclosure Schedule, neither the Company nor any Subsidiary has received notice of (i) any condemnation proceeding with respect to any portion of the Leasehold Premises or Owned Properties or any access thereto or that any such proceeding is contemplated by any Governmental Entity; or (ii) any special assessment which may affect any of the Leasehold Premises or Owned Properties, or that any such special assessment is contemplated by any Governmental Entity. (g) Other than the Leasehold Premises and the Owned Properties, no owned or leased real property is used in connection with the Business. (h) Except as set forth in Section 3.23 of the Disclosure Schedule, neither the Company nor any Subsidiary owns or holds, or is obligated under or a party to, any option, right of first refusal or other contractual right to purchase, acquire, sell, lease or dispose of the Owned Properties or Leasehold Premises or any portion thereof or interest therein or in any other real property, including, without limitation, under any Lease. 25 32 Section 3.24 Certain Business Practices. Neither the Company, any of its Subsidiaries, nor to the Company's knowledge any directors, officers, agents or employees of the Company or any of its Subsidiaries in their capacities as such (a) has used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to political activity; (b) has made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns or violated any provision of the Foreign Corrupt Practices Act of 1977, as amended; (c) has made any other payment prohibited by applicable law; or (d) except as set forth in Section 3.24 of the Disclosure Schedule, in the case of the Company, any of its Subsidiaries or any of its or their officers or any employee listed in Section 3.9 of the Disclosure Schedule in response to Section 3.9(a) hereof, is a party to or bound by any noncompetition or similar agreement or obligation with any third party, which restricts its or his or her business practices or ability to conduct any business in any geographic area. Section 3.25 Suppliers and Customers. As of the date hereof, the Company has received no written or, to its knowledge, oral notice from any significant supplier to or customer of the Company's or any Subsidiary's business indicating such supplier's or customer's intention to materially and adversely alter its existing business relationship with the Company or any Subsidiary. Section 3.26 Product Warranties. Section 3.26 of the Disclosure Schedule sets forth complete and accurate copies of the written, and descriptions of all oral, product warranties and guaranties by the Company or any of its Subsidiaries currently in effect. None of the salesmen, employees, distributors or agents of the Company or any of its Subsidiaries is authorized to undertake obligations to any customer or to other third parties in excess of such warranties or guaranties and, to the knowledge of the Company, there have not been any material deviations from such warranties and guaranties. Section 3.27 Sole Representations. The representations and warranties contained in this Agreement are the sole representations and warranties that the Company is making in connection with the transactions contemplated herein. Except as set forth in the Disclosure Schedule, any matter that is set forth in any Section of this Agreement or the Disclosure Schedule shall be deemed to be set forth in all Sections of the Disclosure Schedule to which it may be applicable. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER AND MERGERCO Each of Buyer and MergerCo hereby represents and warrants to the Company that: 4.1 Organization, Standing and Corporate Power. Buyer and MergerCo are corporations duly organized, validly incorporated and in good standing in the States of Delaware and Florida, respectively, and each has the requisite corporate power and authority to carry on its business as now being conducted. Each of Buyer and MergerCo is duly qualified or licensed to 26 33 do business and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification or licensing necessary. 4.2 Subsidiaries. MergerCo has no direct or indirect subsidiaries. As of the date of this Agreement, neither the Buyer nor any subsidiary of the Buyer owns, directly or indirectly, any shares of Common Stock. 4.3 Capital Structure. The authorized capital stock of MergerCo consists of 1,000 shares of common stock, par value $.01 per share, 100 shares of which have been validly issued and are fully paid and nonassessable. 4.4 Authority; Noncontravention; Consents and Approvals. Each of Buyer and MergerCo has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated by this Agreement. The execution and delivery of this Agreement by each of Buyer and MergerCo and the consummation by each of Buyer and MergerCo of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate action on the part of each of Buyer and MergerCo. This Agreement has been duly executed and delivered by and constitutes a valid and binding obligation of each of Buyer and MergerCo, enforceable against each of them in accordance with its terms subject, as to enforceability, to bankruptcy, insolvency, reorganization and other laws of general application relating to or affecting creditors' rights and to general principles of equity. Except as disclosed on Section 4.4 of the Disclosure Schedule, the execution and delivery of this Agreement does not, and the consummation of the transactions contemplated by this Agreement and compliance with the provisions of this Agreement will not, conflict with, or result in (a) any breach or violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration or "put" with respect to any obligation or (b) the loss of a benefit, or other right or the creation of any Lien upon any of the properties or assets of either Buyer or MergerCo, under (i) the certificate of incorporation or bylaws of either the Buyer or MergerCo, (ii) any loan or credit agreement, note, bond, mortgage, indenture, lease or other agreement, instrument, permit, concession, franchise or license applicable to either the Buyer or MergerCo or its properties or assets or (iii) subject to the governmental filings and other matters referred to in the following sentence, any judgment, order, decree, statute, law, ordinance, rule, regulation or arbitration award applicable to either the Buyer or MergerCo or its properties or assets, other than, in the case of clauses (ii) and (iii), any such conflicts, breaches, violations, defaults, rights, losses or Liens that individually or in the aggregate could not have a Material Adverse Effect with respect to the Buyer or MergerCo or could not prevent, hinder or materially delay the ability of MergerCo to consummate the transactions contemplated by this Agreement. No consent, approval, order or authorization of, or registration, declaration or filing with, or notice to, any Governmental Entity or any other person under any agreement, indenture or other instrument to which the Buyer or MergerCo is a party or to which any of its properties is subject, is required by or with respect to either the Buyer or MergerCo in connection with the execution and delivery of this Agreement by either the Buyer or MergerCo or the consummation by the Buyer and MergerCo of any of the transactions contemplated by this Agreement, except for (i) the filing of a pre-merger notification and report form under the HSR Act, (ii) the filing with the SEC of (y) the Proxy Statement and (z) such reports under the Exchange Act as may be required 27 34 in connection with this Agreement and the transactions contemplated hereby, (iii) the filing of the Articles of Merger by the Department of State of the State of Florida and appropriate documents with the relevant authorities of other states in which the Company is qualified to do business and (iv) such other consents, approvals, orders, authorizations, registrations, declarations, filings or notices (y) as may be required under the "takeover" or "blue sky" laws of various states and (z) as are set forth in Section 4.4 of the Disclosure Schedule. 4.5 Brokers. No broker, investment banker, financial advisor or other person, other than Policano & Manzo, L.L.C., the fees and expenses of which will be paid by the Buyer or MergerCo, is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or an behalf of MergerCo to its affiliates. 4.6 Financing. As of the date of this Agreement, the Buyer and MergerCo have, and at all times through the Effective Time, Buyer and MergerCo will have, available all the funds necessary to perform their respective obligations under this Agreement, including without limitation payment in full for all shares of Common Stock outstanding at the Effective Time, the payment of all amounts payable under Section 2.2, and the payment of all fees and expenses payable by the Buyer and Merger Co. The Buyer and MergerCo have provided to the Company a letter from Camelot Music's lender, dated as of May 29, 1998, indicating the amount, as of such date, of available funds under Camelot Music's credit facility, including for purposes of financing the transactions contemplated by this Agreement. The Buyer has been informed by Camelot Music's lender that the lender is prepared to consent, subject to definitive documentation, to the transactions contemplated by this Agreement. The Buyer and MergerCo agree not take any action, and the Buyer agrees to cause its subsidiaries not to take any action, that would impair the availability at any time through the Effective Time of the amount of funds necessary to perform their respective obligations under this Agreement. 4.7 Information Supplied. None of the information supplied or to be supplied by MergerCo or its affiliates in writing specifically for inclusion or incorporation by reference in the Proxy Statement will, at the time the Proxy Statement is first mailed to the Company's stockholders or at the time of the Stockholders Meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. 4.8 Absence of Certain Changes or Events. Except as disclosed in the Buyer's Registration Statement on Form 10 filed by the Buyer with the SEC as of February 13, 1998 (the "Form 10"), since January 27, 1998 there is not and has not been: (i) any Material Adverse Change with respect to the Buyer; (ii) any condition, event or occurrence which, either individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect or give rise to a Material Adverse Change with respect to the Buyer; or (iii) any condition, event or occurrence that would reasonably be expected to prevent, hinder or delay the ability of the Buyer to consummate the transactions contemplated by this Agreement. 28 35 4.9 Litigation; Compliance with Laws. (a) Except as disclosed in the Form 10, there is (i) no suit, action or proceeding or investigation pending of which the Buyer has notice or knowledge and, (ii) to the knowledge of the Buyer, no suit, action or proceeding or investigation threatened against the Buyer, any of its subsidiaries, their business or properties that, either individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect with respect to the Buyer or prevent, hinder or delay the ability of the Buyer to consummate the transactions contemplated by this Agreement nor is there any judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator outstanding against the Buyer, any of its subsidiaries, their business or properties having, or which in the future could have, any such effect. (b) The conduct of the business of the Buyer and each of its subsidiaries has not been in violation of and complies with all statutes, laws, regulations, ordinances, rules, judgments, orders, decrees or arbitration awards applicable thereto, except for violations or failures so to comply, if any, that, either individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect with respect to the Buyer. 4.10 Sole Representations. The representations and warranties contained in this Agreement are the sole representations and warranties that the Buyer and MergerCo are making in connection with the transactions contemplated herein. Except as set forth in the Disclosure Schedule, any matter that is set forth in any Section of this Agreement or the Disclosure Schedule shall be deemed to be set forth in all Sections of the Disclosure Schedule to which it may be applicable. ARTICLE V COVENANTS RELATING TO CONDUCT OF BUSINESS PRIOR TO MERGER 5.1 CONDUCT OF BUSINESS OF THE COMPANY. Except as provided in this Agreement or as set forth in Section 5.1 of the Disclosure Schedule (without reference to any matters deemed to be set forth therein under Sections 3.27 or 4.10 of this Agreement) or with the written consent of MergerCo, which consent shall not be unreasonably withheld, during the period from the date of this Agreement to the Effective Time (except as otherwise specifically required by the terms of this Agreement), the Company shall, and shall cause its Subsidiaries to, act and carry on their respective businesses in the usual, regular and ordinary course of business consistent with past practice (including, without limitation, in connection with the collection of accounts receivable and the incurrence and payment of accounts payable, and with pricing and marketing practices and the maintenance of Inventory levels) and use its and their respective reasonable best efforts to preserve intact their current business organizations, keep available the services of their current officers and employees and preserve their relationships with landlords, customers, suppliers, licensors, licensees, advertisers, distributors, lenders and others having business dealings with them and to preserve goodwill. Without limiting the generality of the foregoing, during the period from the date of this Agreement to the Effective Time, the Company shall not, and shall not permit any of its Subsidiaries to, without the prior written consent of MergerCo (which shall not be unreasonably withheld) or except as provided in this Agreement or as set forth in Section 29 36 5.1 of the Disclosure Schedule (without reference to any matters deemed to be set forth therein under Sections 3.27 or 4.10 of this Agreement): (a) declare, set aside or pay any dividends on, or make any other distributions in respect of, any of its capital stock, other than dividends and distributions by a direct or indirect wholly owned subsidiary of the Company to its parent in accordance with applicable law; (b) split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock; (c) purchase, redeem or otherwise acquire any shares of capital stock of the Company or any of its Subsidiaries or any other securities thereof or any rights, warrants or options to acquire any such shares or other securities, except for the acquisition of shares of Common Stock from holders of Stock Options in full or partial payment of the exercise price payable by such holders upon exercise of Stock Options outstanding on the date of this Agreement; (d) authorize for issuance, issue, grant, deliver, sell, pledge or otherwise encumber any shares of its capital stock or the capital stock of any of its Subsidiaries, any other voting securities or any securities convertible into, or any rights, warrants or options to acquire, any such shares, voting securities or convertible securities or any other securities or equity equivalents (including without limitation stock appreciation rights and Stock Options) (other than the issuance of Common Stock upon the exercise of Stock Options outstanding on the date of this Agreement and in accordance with their present terms (such issuances, together with the acquisitions of shares of Common Stock permitted under clause (c) above, being referred to herein as "Permitted Changes")); (e) in the case of the Company, amend its Articles of Incorporation, By-Laws or other comparable charter or organizational documents; (f) acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial portion of the stock or assets of, or by any other manner, any business or any corporation, partnership, joint venture, association or other business organization or division thereof material to the Company; (g) sell, lease, license, mortgage or otherwise encumber or subject to any Lien or otherwise dispose of any of its properties or assets, except for sales of inventory or the use of supplies, in either case in the ordinary course of business consistent with past practice; (h) incur any indebtedness for borrowed money or guarantee any such indebtedness of another person, issue or sell any debt securities or warrants or other rights to acquire any debt securities of the Company or any of its Subsidiaries, guarantee any debt securities of another person, enter into any "keep well" or other agreement to maintain any financial statement condition of another person or enter into any arrangement having the economic effect of any of the foregoing, except for short-term borrowings and for lease obligations, in each case incurred in the ordinary course of business consistent with past practice; 30 37 (i) make any loans, advances or capital contributions to, or investments in, any other person, other than to the Company or any direct or indirect wholly owned subsidiary of the Company; (j) pay, discharge or satisfy any claims (including claims of stockholders), liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), except for the payment, discharge or satisfaction of (i) liabilities or obligations in the ordinary course of business consistent with past practice or in accordance with their terms as in effect on the date hereof or (ii) claims settled or compromised to the extent permitted by Section 5.1(p), or waive, write-off, release, grant, or transfer any rights of material value or modify or change in any material respect any existing license, lease, Permit, contract or other document, other than in the ordinary course of business consistent with past practice; (k) adopt a plan of complete or partial liquidation or resolutions providing for or authorizing such a liquidation or a dissolution, merger, consolidation, restructuring, recapitalization or reorganization; (l) enter into any collective bargaining agreement; (m) amend, negotiate the terms of, enter into or renew any lease of real property, including any Lease, or fail to renew in a timely fashion any Lease or other lease of real property to which the Company or any Subsidiary is a party, except after consulting with and in cooperation with the Buyer and on such terms as the Buyer has approved, which approval shall not be unreasonably withheld; (n) enter into any new Material Contract or, except in the ordinary course of business consistent with past practice, any other Contract; (o) change any material accounting principle used by it, except to the extent required by GAAP; (p) settle or compromise any litigation (whether or not commenced prior to the date of this Agreement) other than settlements or compromises of litigation where the amount paid (after giving effect to insurance proceeds actually received) in settlement or compromise is not material to the Company; (q) make any capital expenditures outside the ordinary course of business consistent with past practice; (r) delay or postpone the payment of accounts payable or any other liabilities outside the ordinary course of business consistent with past practice; or (s) authorize any of, or commit or agree to take any of, the foregoing actions. 5.2 CHANGES IN EMPLOYMENT ARRANGEMENTS. Neither the Company nor any of its Subsidiaries shall adopt or amend (except as may be required by law) any bonus, profit sharing, 31 38 compensation, stock option, pension, retirement, deferred compensation, employment or other employee benefit plan, agreement, trust, fund or other arrangement (including any Benefit Plan or Stock Option Plan) for the benefit or welfare of any employee, director, independent contractor or former director, independent contractor or employee (other than increases for individuals other than officers and directors in the ordinary course of business consistent with past practice) or increase the compensation or fringe benefits of any director, employee, independent contractor or former director, independent contractor or employee (other than increases for individuals other than officers and directors in the ordinary course of business consistent with past practice) or pay any benefit not required by any existing plan, arrangement or agreement. 5.3 SEVERANCE. Except as requested in writing by the Buyer or MergerCo or as disclosed in Sections 3.8 or 3.9 of the Disclosure Schedule (without reference to any matters deemed to be disclosed therein under Sections 3.27 or 4.10 of this Agreement), neither the Company nor any of its Subsidiaries shall grant any new or modified severance, change-of-control or termination arrangement or increase or accelerate any benefits payable under its severance, change-of-control or termination pay policies in effect on the date hereof. 5.4 WARN. (a) Neither the Company nor any of its Subsidiaries shall effectuate a "plant closing" or "mass layoff," as those terms are defined in the Worker Adjustment and Retraining Notification Act of 1988 or similar state law ("WARN"), affecting in whole or in part any site of employment, facility, operating unit or employee of the Company or any Subsidiary, without the prior written consent of MergerCo or the Buyer in advance and without complying with the notice requirements and other provisions of WARN. (b) Between the date hereof and the Closing Date, the Company, within five business days of receipt of a written request from the Buyer, shall provide required notice of the planned discontinuation of operations (a "plant closing" for purposes of WARN and the Regulations promulgated thereunder), subject to the occurrence of the Merger, of the Company's headquarters and/or distribution center, both located in Miami, Florida, as specified in the written request from the Buyer, effective as of the time specified in the written request from the Buyer. The Buyer shall deliver to the Company a form of such notice within one business day after such written request and shall cooperate with the Company in preparing such notice. The Company shall provide such notice, as required by WARN, to the following: (i) each local AND international representative(s) of affected employees or, if there is no such representative at that time, to each affected employee; and (ii) the State Dislocated Worker Unit (designated or created under Title III of the Job Training Partnership Act); and (iii) the chief elected official of the unit of local government within which such closing/layoff is to occur. 32 39 Notwithstanding any other provision of this Section 5.4(b), the parties agree that the Company shall not be required to provide the notice described in this Section 5.4(b) before June 11, 1998. The parties acknowledge that the Company's failure to provide the notice described in this Section 5.4(b) would materially adversely affect the ability of the Buyer and the Company to consummate the transactions contemplated hereby. ARTICLE VI ADDITIONAL AGREEMENTS 6.1 PREPARATION OF PROXY STATEMENT; STOCKHOLDERS MEETING. (a) As promptly as practicable following the date of this Agreement, the Company shall prepare and file with the SEC the Proxy Statement. The Company shall use its best efforts to cause the Proxy Statement to be mailed to the Company's stockholders as promptly as practicable after clearance thereof with the SEC. If, at any time prior to the Stockholders Meeting, any event, with respect to the Company, its Subsidiaries, directors, officers, and/or the Merger or the other transactions contemplated hereby, shall occur, that is required to be described in the Proxy Statement, the Company shall so describe such event and, to the extent required by applicable law, shall cause it to be disseminated to the Company's stockholders. (b) The Company shall immediately notify MergerCo and its affiliates of (i) the receipt of any comments from the SEC regarding the Proxy Statement and (ii) the approval of the Proxy Statement by the SEC. MergerCo shall be given a reasonable opportunity to review and comment on all filings with the SEC and all mailings to the Company's stockholders in connection with the Merger prior to the filing or mailing thereof, and the Company shall , subject to the advice of counsel, use its best efforts to reflect all such reasonable comments. (c) The Company shall, as promptly as practicable following the date of this Agreement and in consultation with MergerCo, duly call, give notice of, convene and hold a meeting of its stockholders (the "Stockholders Meeting") for the purpose of approving this Agreement and the transactions contemplated by this Agreement. The Company shall, through its Board of Directors, recommend to its stockholders approval of the foregoing matters and seek to obtain all votes and approvals thereof by the stockholders (which undertaking shall not require the Company to engage an outside proxy solicitor), as set forth in Section 3.15; PROVIDED, HOWEVER; that the obligations contained herein shall be subject to the provisions of Section 6.6 of this Agreement. Subject to the foregoing, such recommendation, together with a copy of the opinion referred to in Section 3.14, shall be included in the Proxy Statement. The Company shall use its best efforts to hold such meeting as soon as practicable after the date hereof. (d) The Company shall cause its transfer agent to make stock transfer records relating to the Company available to the extent reasonably necessary to effectuate the intent of this Agreement. 33 40 6.2 ACCESS TO INFORMATION; CONFIDENTIALITY. (a) The Company shall, and shall cause its Subsidiaries, officers, employees, counsel, financial advisors and other representatives to, afford to MergerCo, its representatives and its potential financing sources reasonable access during normal business hours, in a manner initially coordinated with Donald A. Molta and/or Ann S. Lieff, and thereafter coordinated with those persons designated by the chief executive officer of the Company, during the period prior to the Effective Time to its properties, books, contracts, commitments, personnel and records (including, without limitation, to the extent available, the work papers of the Company's independent public accountants) and, during such period, the Company shall, and shall cause its Subsidiaries, officers, employees and representatives to, furnish promptly to MergerCo (i) a copy of each report, schedule, registration statement and other document filed by it during such period pursuant to the requirements of federal or state securities laws and (ii) all other information concerning its business, properties, financial condition, operations and personnel as MergerCo may from time to time reasonably request. (b) The Company shall, and shall cause its Subsidiaries and its and their officers, employees, counsel, financial advisors and other representatives to, afford to Buyer and MergerCo and their authorized representatives (including counsel, environmental and other consultants) full access during normal business hours to all properties or facilities currently owned, leased or otherwise used by the Company or any of its Subsidiaries, their respective personnel, operations and records as may be necessary to facilitate the consummation of the transactions contemplated herein, including access to perform engineering, environmental and workplace surveys and such other physical inspections as Buyer and MergerCo may reasonably require, including, without limitation, environmental assessments, air, water or soil testing or sampling and compliance audits. In furtherance of this Section 6.2(b), the Company shall provide Buyer and MergerCo access to all environmental reports and/or data in its possession or control (including reports and/or data maintained or retained by its environmental consultants), which reports are relevant to the matters set forth in Section 3.11. (c) Except as required by law, each of the Company, the Buyer and MergerCo shall hold, and shall cause its respective directors, officers, employees, accountants, counsel, financial advisors and other representatives and affiliates to hold, any nonpublic information in confidence to the extent required by and in accordance with that certain Confidentiality Agreement, dated February 16, 1998, by and between the Company and the Buyer, as amended by that certain letter agreement dated April 6, 1998 between the Company and the Buyer. 6.3 REASONABLE BEST EFFORTS. (a) Upon the terms and subject to the conditions set forth in this Agreement, each of the parties agrees to use its reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective, in the most expeditious manner practicable, the Merger and the other transactions contemplated by this Agreement. The Buyer, MergerCo and the Company shall use their reasonable best efforts and cooperate with one 34 41 another (i) in promptly determining whether any filings are required to be made or consents, approvals, waivers, licenses, Permits or authorizations are required to be obtained (or, which if not obtained, would result in a breach or violation, or an event of default, termination or acceleration of any agreement or any put right under any agreement) under any applicable law or regulation or from any governmental authorities or third parties, including parties to leases, loan agreements or other debt instruments, in connection with the transactions contemplated by this Agreement, including the Merger, and (ii) in promptly making any such filings, in furnishing information required in connection therewith and in timely seeking to obtain any such consents, approvals, permits or authorizations. Notwithstanding the foregoing, or any other covenant herein contained, in connection with the receipt of any necessary approvals under the HSR Act, neither the Company nor any of its Subsidiaries shall be entitled to divest or hold separate or otherwise take or commit to take any action that limits the Company's freedom of action with respect to, or its ability to retain, the business of the Company or any of its Subsidiaries or any material portions thereof or any of the businesses, product lines, properties or assets of the Company or any of its Subsidiaries, without MergerCo's prior written consent. (b) The Company shall make, subject to the condition that the transactions contemplated herein actually occur, any undertakings (including undertakings to make divestitures, provided, in any case, that such divestitures need not themselves be effective or made until after the transactions contemplated hereby actually occur) required in order to comply with the antitrust requirements or laws of any Governmental Entity, including the HSR Act, in connection with the transactions contemplated by this Agreement; provided that no such divestiture or undertaking shall be made unless acceptable to MergerCo. (c) Each of the parties agrees to cooperate with each other in taking, or causing to be taken, all actions necessary to delist the Common Stock from The NASDAQ SmallCap Stock Market ("NASDAQ"), provided that, subject to NASDAQ rules and regulations, such delisting shall not be effective until after the Effective Time. The parties also acknowledge that it is MergerCo's intent that Common Stock following the Merger will not be quoted on NASDAQ or listed on any national securities exchange. (d) Each of the parties agrees to cooperate with each other in connection with the Company's negotiation of the terms of, entering into and renewal of any lease of real property, in accordance with Section 5.1(m). (e) The Company shall use its reasonable best efforts to enter into a lease amendment at or prior to the Closing, in substantially the form attached hereto as Exhibit D, with the landlord (the "Landlord") under that certain Lease Agreement, dated March 1, 1996, by and between the Martin W. Spector Irrevocable Trust and the Company (such amendment, the "Lease Amendment"). (f) The Buyer shall use its reasonable best efforts to enter into at the Closing a consulting and noncompetition agreement with Ann S. Lieff (the "Consultant"), in substantially the form attached hereto as Exhibit E (such agreement, the "Consulting Agreement"). 35 42 6.4 INDEMNIFICATION. (a) For six years after the Effective Time, the Company and the Buyer shall indemnify and hold harmless all present and former directors and officers of the Company and its Subsidiaries ("Indemnified Parties") against all costs, expenses, judgments, fines, penalties, losses, claims, damages or liabilities, amounts paid in settlement with the approval of the indemnifying party (which approval shall not be unreasonably withheld) and reasonable attorneys' fees (collectively, "Costs") incurred in connection with any threatened, pending or completed claim, action, suit, proceeding or investigation, whether civil, criminal, administrative, investigative, governmental or regulatory, or whether involving an alternative dispute resolution proceeding, or any appeal from any of the foregoing proceedings (collectively, a "Proceeding") arising out of or pertaining to matters existing or occurring at or prior to the Effective Time, whether threatened, asserted or claimed prior to, at or after the Effective Time, in each of the above cases to the fullest extent permitted by their respective articles of incorporation or bylaws and to the fullest extent permitted by applicable law to the extent such Costs have not been paid by insurance. (b) For six years after the Effective Time, the Company and the Buyer shall pay expenses incurred by any Indemnified Party with respect to any Proceeding for which indemnification is available under this Section 6.4, as they are incurred, in advance of the final disposition of any such Proceeding to the fullest extent permitted by their respective articles of incorporation or bylaws and to the fullest extent permitted by the FBCA or other applicable law upon receipt of an undertaking to repay as contemplated by the FBCA. Without limiting the foregoing, if any Proceeding for which indemnification is available under this Section 6.4 is brought against any Indemnified Party after the Effective Time (i) the Indemnified Parties may retain counsel satisfactory to them and the Buyer; (ii) the Company and the Buyer shall promptly pay all reasonable fees and expenses of such counsel for the Indemnified Parties as statements therefor are received; and (iii) the Company and the Buyer shall use all reasonable efforts to assist in the vigorous defense of any such matter; provided, however, that neither the Company nor the Buyer shall be liable for any settlement of any Proceeding effected without their written consent, which consent shall not be unreasonably withheld. The Indemnified Parties as a group shall retain only one law firm to represent them with respect to each Proceeding unless there is, under applicable standards of professional conduct, a conflict on any issue between the positions of any two or more Indemnified Parties, in which case the Indemnified Parties may retain more than one law firm. (c) For six years after the Effective Time, the Company shall maintain, at no cost to the individual insureds thereunder, its current directors' and officers' liability insurance policy (or a policy providing substantially similar coverage) ("D&O Policy") to the extent that it provides coverage for events or acts occurring prior to the Effective Time for all persons who are past, present or future duly elected or appointed directors or officers of the Company on the date of this Agreement; provided that the Company shall not be required to spend as an aggregate premium for such D&O Policy more than 175% of the annual premium for the Company's D&O Policy in effect as of the date of this Agreement; and provided further that the Company shall nevertheless be obligated to provide insurance with such policy limit as may be obtained for such 36 43 maximum aggregate premium. The failure of the Company to maintain the D&O Policy contemplated by this Section 6.4(c) for any reason shall not relieve the Company or the Buyer of any other obligation under this Section 6.4. (d) The provisions of this Section 6.4 are intended to be for the benefit of, and shall be enforceable by, each Indemnified Party and his or her heirs and representatives. 6.5 PUBLIC ANNOUNCEMENTS. Neither MergerCo or the Buyer, on the one hand, nor the Company, on the other hand, shall issue any press release or public statement with respect to the transactions contemplated by this Agreement, including the Merger, without the other party's prior consent, except as may be required by applicable law, court process or by obligations pursuant to any listing agreement with NASDAQ. In addition to the foregoing, MergerCo and the Company shall consult with each other before issuing, and provide each other the opportunity to review and comment upon, any such press release or other public statements with respect to such transactions. The parties agree that the initial press release or releases to be issued with respect to the transactions contemplated by this Agreement shall be in substantially the form attached hereto as Exhibit F. 6.6 NO SOLICITATION. From and after the date hereof until the termination of this Agreement neither the Company or any of its Subsidiaries, nor any of their respective officers, directors, employees, agents or affiliates (including, without limitation, any investment banker, attorney or accountant retained by the Company or any of its affiliates) shall directly or indirectly initiate, solicit or knowingly encourage (including by way of furnishing non-public information or assistance), or take any other action to facilitate knowingly, any inquiries or the making of any proposal that constitutes, or may reasonably be expected to lead to any Transaction Proposal (as defined below), or enter into or maintain or continue discussions or negotiate with any person or entity in furtherance of any such inquiries or to obtain a Transaction Proposal or agree to or endorse any Transaction Proposal or authorize or permit any of its officers, directors or employees or any of its Subsidiaries or any investment banker, financial advisor, attorney, accountant or other representative retained by it or any of its Subsidiaries to take any such action, provided, however, that nothing contained in this Agreement shall prohibit the Company from (i) furnishing information to or otherwise responding to any person or entity that makes an unsolicited, bona fide Transaction Proposal, if, in the written opinion of outside counsel to the Company, after consulting with outside counsel to the Buyer and MergerCo, such action is required for the Board of Directors of the Company to comply with its fiduciary duties under applicable law, (ii) failing to make or withdrawing or modifying its recommendation referred to in Section 3.15 if there exists a Transaction Proposal and in the written opinion of outside counsel to the Company, after consulting with outside counsel to the Buyer and MergerCo, such action is required for the Board of Directors of the Company to comply with its fiduciary duties under applicable law in connection with such Transaction Proposal or (iii) making to the Company's stockholders any recommendation and related filing with the SEC as required by Rules 14e-2 and 14d-9 under the Exchange Act, with respect to any tender offer, or taking any other legally required action with respect to such tender offer (including, without limitation, the making of public disclosures as may be necessary or reasonably advisable under applicable securities laws) if in the written opinion of outside counsel to the Company, after consulting with 37 44 outside counsel to the Buyer and MergerCo, such action is required for the Board of Directors of the Company to comply with its fiduciary duties under applicable law; and PROVIDED FURTHER, HOWEVER, that, in the event of an exercise of the Company's or its Board of Director's rights under clauses (i), (ii) or (iii) above and subject to compliance with the next three sentences hereof, notwithstanding anything contained in this Agreement to the contrary, such exercise of rights shall not constitute a breach of this Agreement by the Company. The Company shall promptly advise MergerCo orally and in writing of any request for nonpublic information from, or discussions or negotiations with, any person or entity or of any Transaction Proposal known to it, the material terms and conditions of such request or Transaction Proposal, and the identity of the person or entity making such request or Transaction Proposal. The Company shall promptly inform MergerCo of any material change in the details (including amendments or proposed amendments) of any such request for nonpublic information, the contents of any discussions or negotiations or any material change in such Transaction Proposal. Neither the Board of Directors of the Company nor any committee thereof shall take any action pursuant to clauses (ii) or (iii) above until a time that is after the later of (x) the fourth business day following MergerCo's receipt of written notice advising MergerCo that the Board of Directors of the Company has received a Transaction Proposal, specifying the material terms of such Transaction Proposal and identifying the person making such Transaction Proposal and (y) in the event of any amendment to the price or any material term of a Transaction Proposal, two business days following MergerCo's receipt of written notice containing the material terms of such amendment, including any change in price (it being understood that each such further amendment to the price or any material terms of a Transaction Proposal shall necessitate an additional written notice to MergerCo and an additional two business day period prior to which the Company can take any action set forth in clauses (ii) or (iii) above). For purposes of this Agreement, "Transaction Proposal" shall mean any of the following (other than the transactions between the Company and MergerCo contemplated by this Agreement) involving the Company or any of its Subsidiaries: (i) any merger, consolidation, share exchange, recapitalization, business combination, or other similar transaction; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition of 10% or more of the assets of the Company and its Subsidiaries, taken as a whole, in a single transaction or series of related transactions (unless consented to by MergerCo, which consent shall not be unreasonably withheld); (iii) any tender offer or exchange offer for, or the acquisition (or right to acquire) of "beneficial ownership" by any person, "group" or entity (as such terms are defined under Section 13(d) of the Exchange Act) of 10% or more of the outstanding shares of Common Stock or the filing of a registration statement under the Securities Act in connection therewith; or (iv) any public announcement of a proposal, plan or intention to do any of the foregoing or any agreement to engage in any of the foregoing. 6.7 RESIGNATION OF DIRECTORS. Prior to the Effective Time, the Company shall deliver to MergerCo evidence satisfactory to MergerCo of the resignation of all directors of the Company, effective at the Effective Time. 38 45 6.8 EMPLOYEE BENEFITS. The Buyer agrees that, for a period of twelve (12) months following the Effective Time, the Surviving Corporation shall maintain employee benefit plans and arrangements (directly or in conjunction with the Buyer) that, in the aggregate, will provide a level of benefits to continuing employees of the Company and its Subsidiaries substantially comparable in the aggregate to those provided under the Benefit Plans set forth in Section 6.8 (without reference to any matters deemed to be set forth therein under Sections 3.27 or 4.10 of this Agreement) of the Disclosure Schedule ("Section 6.8 Plans") as in effect immediately prior to the Effective Time (other than discretionary benefits); provided, however, that the Buyer may cause modifications to be made to the employee benefit plans and arrangements to the extent necessary to comply with applicable law or to reflect widespread adjustments in benefits (or costs thereof) provided to employees under compensation and benefit plans of the Buyer and its subsidiaries. In addition, the Buyer may change, substitute or terminate insurance companies, third party administrators, or other providers of benefits or services associated with the employee benefit plans and may offer a benefit plan or arrangement which it sponsors in place of a benefit plan or arrangement which is set forth in Section 6.8 of the Disclosure Schedule (without reference to any matters deemed to be set forth therein under Sections 3.27 or 4.10 of this Agreement) including the offering of its cafeteria plan in place of the cafeteria plan set forth in Section 6.8 of the Disclosure Schedule. No specific compensation or benefit plans, however, need be provided. For purposes of determining eligibility and vesting with respect to all Section 6.8 Plans (except with respect to any defined benefit plans), the Buyer shall use the employee's hire date with the Company or Subsidiary or such other date as has been previously determined by the Company or Subsidiary for credit for prior employment with any ERISA Affiliate of the Company. Employee benefit plans that provide medical, dental, or life insurance benefits after the Effective Time to any individual who is an active employee of the Company or any of its Subsidiaries as of the Effective Time or a dependent of such an employee shall, with respect to such individuals, waive any waiting periods, any pre-existing conditions, and any actively-at-work exclusions to the extent so waived under present policy and shall provide that any expenses incurred on or before the Effective Time by such individuals shall be taken into account under such plans for purposes of satisfying applicable deductible, coinsurance, and maximum out-of-pocket provisions to the extent taken into account under present policy. Nothing in this Section 6.8 shall prohibit the Company from terminating the employment of any employee at any time with or without cause (subject to, and in accordance with the terms of any existing employment agreements), or shall be construed or applied to restrict the ability of the Buyer or Surviving Corporation and its Subsidiaries to establish such types and levels of compensation and benefits as they determine to be appropriate. 6.9 NOTIFICATION OF CERTAIN MATTERS. The Company shall give prompt notice to the Buyer and MergerCo and the Buyer and MergerCo shall give prompt notice to the Company of: (i) the occurrence or non-occurrence of any event, the occurrence or non-occurrence of which does or would be likely to cause (A) any representation or warranty contained in this Agreement to be untrue or inaccurate in any material respect, or (B) any covenant, condition or agreement contained in this Agreement not to be complied with or satisfied; and (ii) any failure of the 39 46 Company on the one hand, or the Buyer or MergerCo on the other hand, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by the respective party hereunder; provided, however, that the delivery of any notice pursuant to this Section 6.9 shall not limit or otherwise affect the remedies available hereunder to the party receiving such notice. 6.10 STATE TAKEOVER LAWS. If any "fair price," "control share acquisition" or other takeover statute or other similar statute or regulation shall become applicable to the transactions contemplated hereby, including the Merger, the Company and the Buyer, and their respective Boards of Directors, shall use their reasonable best efforts to grant such approvals and to take such other actions as are necessary so that the transactions contemplated hereby may be consummated as promptly as practicable on the terms contemplated hereby and shall otherwise use their reasonable best efforts to eliminate the effects of any such statute or regulation on the transactions contemplated hereby. 6.11 PHYSICAL INVENTORY. The Company shall cooperate with the Buyer, at the Buyer's written request, in arranging and scheduling, prior to the Closing Date, for a nationally recognized inventory service (or such other person as reasonably requested by the Buyer) to perform one or more physical counts of the Inventory after the Closing Date at the locations and times requested by the Buyer. 6.12 REPAYMENT OF INDEBTEDNESS. The Buyer agrees to cause the outstanding indebtedness of the Company to (a) General Electric Capital Corporation under the Credit Agreement, dated as of May 22, 1996, between the Company and General Electric Capital Corporation, as modified by the First Modification of Credit Agreement, dated October 3, 1997, and (b) to Music Funding I, LLC under the Credit Agreement, dated as of October 3, 1997, between the Company and Music Funding I, LLC, to be repaid at the Effective Time, conditioned upon the occurrence of the Effective Time and the satisfaction or waiver on or prior to the Closing Date of the conditions set forth in Sections 7.1 and 7.2. 6.13 SEVERANCE. The Company, the Buyer and MergerCo agree that in the event any headquarters or distribution center employees of the Company are terminated by the Surviving Corporation without cause within 12 months following the Effective Time, severance payments shall be made to such employees in accordance with the severance policy of the Company outlined in the severance policy term sheet and attachment exchanged between the Buyer and the Company and dated June 3, 1998, as subsequently formalized in accordance with this Section 6.13. Within 10 business days of the date of this Agreement, the Company, the Buyer and MergerCo shall formalize such severance policy on substantially the terms contained in such term sheet and attachment. The Buyer and MergerCo agree to comply with such policy, including with the payment of the severance and transition payments described in such policy. 6.14 ACCESS FOR POINT OF SALE INSTALLATION. Commencing on the date 30 calendar days prior to the anticipated Closing Date, the Company shall, and shall cause its Subsidiaries and its and their officers, employees and other representatives to, afford to the Buyer and its authorized representatives and employees (including information systems consultants and engineers) full 40 47 access during normal business hours to all properties or facilities currently owned, leased or otherwise used by the Company or any of its Subsidiaries in the retail sale or rental of Inventory as may be necessary to facilitate the Buyer's installation of cables and other hardware necessary for the introduction and support of the Buyer's point of sale systems. The parties agree that (a) such access shall not unreasonably interfere with the Company's regular conduct of its business at such properties and facilities, (b) such installation shall be at the Buyer's cost and (c) promptly after the termination of this Agreement in accordance with its terms, the Buyer shall cause such properties and facilities to be restored to substantially the same physical state in which they would have been absent such installation. ARTICLE VII CONDITIONS PRECEDENT 7.1 CONDITIONS TO EACH PARTY'S OBLIGATION. The respective obligation of each party to effect the Merger is subject to the satisfaction or waiver on or prior to the Closing Date of the following conditions: (a) Company Stockholder Approval. The Company Stockholder Approval shall have been obtained. (b) HSR Act. The waiting period (and any extension thereof) applicable to the Merger under the HSR Act shall have been terminated or shall have expired. (c) No Injunctions or Restraints. No temporary restraining order, preliminary or permanent injunction or other order issued by any Governmental Entity or other legal restraint or prohibition shall be in effect preventing or prohibiting the consummation of the Merger or the other transactions contemplated by this Agreement; provided, however, that the parties hereto shall, subject to the last sentence of Section 6.3(a) hereof, use their best efforts to have any such injunction, order, restraint or prohibition vacated. 7.2 CONDITIONS TO OBLIGATIONS OF THE BUYER AND MERGERCO. The obligations of the Buyer and MergerCo to effect the Merger are further subject to the satisfaction or waiver on or prior to the Closing Date of the following conditions: (a) Representations and Warranties. Each of the representations and warranties of the Company and its Subsidiaries contained in this Agreement shall have been true and correct in all material respects when made and, except to the extent such representations and warranties speak to an earlier date, shall be true and correct in all material respects at and as of the Effective Time, as if made at and as of such time, in each case except as contemplated or permitted by this Agreement. (b) Performance of Obligations of the Company. The Company shall have performed and fulfilled each of its obligations, covenants and agreements under this Agreement, including but not limited to its obligations pursuant to Section 6.6 hereof, except for such failures to perform or fulfill as have not had and would not, either individually or in the aggregate, have a 41 48 Material Adverse Effect with respect to the Company or materially adversely affect the ability of the Company to consummate the transactions contemplated hereby. (c) Consents, etc. MergerCo shall have received evidence, in form and substance reasonably satisfactory to it, that the Permits, consents, approvals, authorizations, qualifications and orders of Governmental Entities and all other third parties identified in Section 3.4 and Section 7.2(c) of the Disclosure Schedule have been obtained. (d) No Litigation. There shall not be instituted, pending or threatened by any Governmental Entity any suit, action or proceeding (or by any other person any suit, action or proceeding that has a reasonable likelihood of success in the good faith opinion of the Buyer) (i) challenging or seeking to restrain or prohibit the consummation of the Merger or any of the other transactions contemplated by this Agreement or, in the good faith opinion of the Buyer, materially and adversely affecting the contemplated economic or business benefits of the transactions contemplated hereby, (ii) seeking to prohibit or limit the ownership or operation by the Company, any Subsidiary, the Buyer or any of the Buyer's subsidiaries of a material portion of the business or assets of the Company and its Subsidiaries or the Buyer and its subsidiaries, taken as a whole, or to compel the Company or the Buyer to dispose of or hold separate any material portion of the business or assets of the Company and its Subsidiaries or the Buyer and its subsidiaries, taken as a whole, in each case as a result of the Merger or any of the other transactions contemplated by this Agreement, (iii) seeking to impose limitations on the ability of the Buyer or MergerCo to acquire or hold, or exercise full rights of ownership of, any shares of Common Stock, including, without limitation, the right to vote such shares of Common Stock on all matters properly presented to the stockholders of the Company or (iv) seeking to prohibit the Buyer or any of its subsidiaries from effectively controlling in any respect any material portion of the business or operations of the Company or its Subsidiaries. (e) No Material Adverse Change. There shall not have occurred any Material Adverse Change with respect to the Company since January 31, 1998. (f) Absence of Certain Rules and Orders. There shall not be any statute, rule, regulation, judgment, order or injunction enacted, entered, enforced, promulgated or deemed applicable to the Merger by any Governmental Entity that would result in any of the consequences referred to in clauses (i) through (iv) of Section 7.2(d). (g) Consulting Agreement. The Company and the Consultant shall have entered into the Consulting Agreement. (h) Lease Amendment. The Company and the Landlord shall have entered into the Lease Amendment. (i) Surrender Agreements. Each holder of any unexpired outstanding Stock Option (whether granted under a Stock Option Plan or otherwise) shall have executed a Surrender Agreement and delivered such Surrender Agreement to MergerCo. 42 49 (j) Dissenter Claims. The Company shall not have received notice of election to dissent and demand payment from the holders of more than 10% of the issued and outstanding shares of the Common Stock in connection with the Merger. (k) Opinion of Counsel. The Company's legal counsel shall have delivered to the Buyer and MergerCo a written opinion of counsel with respect to (i) the effectiveness of the Merger, (ii) the due incorporation, valid existence and good standing of the Company and its Subsidiaries, (iii) the validity, binding effect and enforceability of this Agreement, the Consulting Agreement and the Surrender Agreements, and (iv) such other matters as MergerCo may reasonably request. (l) Company Certificate. The Company shall have delivered to the Buyer and MergerCo a certificate, dated as of the Closing Date and signed on its behalf by its Chief Executive Officer and its Chief Financial Officer, as to the satisfaction by it of the conditions set forth in subsections 7.2(a), 7.2(b), 7.2(d), 7.2(e) and 7.2(j). 7.3 CONDITIONS TO OBLIGATION OF THE COMPANY. The obligation of the Company to effect the Merger is further subject to the satisfaction or waiver on or prior to the Closing Date of the following conditions: (a) Representations and Warranties. Each of the representations and warranties of the Buyer and MergerCo contained in this Agreement shall have been true and correct in all material respects when made and, except to the extent such representations and warranties speak to an earlier date, shall be true and correct in all material respects at and as of the Effective Time, as if made at and as of such time, in each case except as contemplated or permitted by this Agreement. (b) Performance of Obligations of the Buyer and MergerCo. The Buyer and MergerCo shall have performed and fulfilled each of their respective obligations, covenants and agreements under this Agreement, except for such failures to perform or fulfill as have not and would not, either individually or in the aggregate, have a Material Adverse Effect with respect to the Buyer or materially adversely affect the ability of the Buyer or MergerCo to consummate the transactions contemplated hereby. (c) No Litigation. There shall not be instituted, pending or threatened by any Governmental Entity any suit, action or proceeding (or by any other person any suit, action or proceeding that has a reasonable likelihood of success in the good faith opinion of the Company) challenging or seeking to restrain or prohibit the consummation of the Merger or any of the other transactions contemplated by this Agreement. (d) Opinion of Counsel. The Buyer's and MergerCo's legal counsel shall have delivered to the Company a written opinion of counsel with respect to (i) the validity, binding effect and enforceability of this Agreement and (ii) such other matters as the Company may reasonably request. 43 50 (e) Buyer and MergerCo Certificate. The Buyer and MergerCo shall have delivered to the Company certificates, dated as of the Closing Date and signed on their behalf by their respective Chief Executive Officers and Chief Financial Officers, as to the satisfaction by them of the conditions set forth in subsections 7.3(a), 7.3(b) and 7.3(c). ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER 8.1 TERMINATION. This Agreement may be terminated and abandoned at any time prior to the Effective Time, whether before or after approval of matters presented in connection with the Merger by the stockholders of the Company: (a) by mutual written consent of MergerCo and the Company; or (b) by either MergerCo or the Company if any Governmental Entity shall have issued an order, decree or ruling or taken any other action permanently enjoining, restraining or otherwise prohibiting, or if there shall be in effect any other legal restraint or prohibition preventing or prohibiting, the consummation of the Merger and such order, decree, ruling or other action shall have become final and nonappealable (other than due to the failure of the party seeking to terminate this Agreement to perform its obligations under this Agreement required to be performed at or prior to the Effective Time); or (c) by either MergerCo or the Company if the Merger shall not have been consummated on or before October 15, 1998 (other than due to the failure of the party seeking to terminate this Agreement to perform its obligations under this Agreement required to be performed at or prior to the Effective Time); or (d) by either MergerCo or the Company, if any required approval of the stockholders of the Company shall not have been obtained by reason of the failure to obtain the required vote upon a vote held at a duly held meeting of stockholders or at any adjournment thereof; provided, however, that unless MergerCo shall otherwise notify the Company within two weeks after such failure to obtain the required vote, this Agreement shall be deemed to have been terminated by MergerCo upon the expiration of such two-week period; or (e) by MergerCo, if the Board of Directors of the Company or any committee thereof shall have (i) withdrawn, modified or amended in any respect adverse to the Buyer or MergerCo its approval or recommendation of the Merger, (ii) failed as soon as practicable to mail the Proxy Statement to its stockholders or failed to include in such statement such recommendation, (iii) recommended or approved any Transaction Proposal from a person other than the Buyer, MergerCo or any of their respective affiliates, (iv) failed to publicly announce, within 10 business days after the occurrence of any publicly announced Transaction Proposal from a person other than the Buyer, its opposition to such Transaction Proposal, or amended, modified, or withdrawn its opposition to any Transaction Proposal in any manner adverse to the Buyer or MergerCo; or (v) resolved to do any of the foregoing; or 44 51 (f) by MergerCo, (i) if the Company shall enter into any agreement with a third party with respect to a Transaction Proposal or (ii) if a person, group or entity has acquired after the date hereof 20% or more of the issued and outstanding shares of Common Stock; or (g) by the Company upon its entering into a binding agreement with a third party with respect to a Transaction Proposal, provided that it has complied with all provisions of this Agreement, including the notice provisions herein, and that it pays the Termination Fee as provided by and defined in Section 9.2; or (h) by MergerCo in the event of a material breach or failure to perform in any material respect by the Company of any representation, warranty, covenant or other agreement contained in this Agreement that cannot be or has not been cured within 20 days after the giving of written notice to the Company; or (i) by the Company in the event of a material breach or failure to perform in any material respect by MergerCo or the Buyer of any representation, warranty, covenant or other agreement contained in this Agreement that cannot be or has not been cured within 20 days after the giving of written notice to MergerCo or Buyer. 8.2 EFFECT OF TERMINATION. In the event of termination of this Agreement by either the Company or MergerCo as provided in Section 8.1, this Agreement shall forthwith become void and have no effect, without any liability or obligation on the part of the Buyer, MergerCo or the Company, other than under the provisions of Section 3.13, Section 4.5, Section 6.2(c), Section 6.14(c), this Section 8.2, Section 9.2 and Section 9.7. Nothing contained in this Section 8.2 shall relieve any party of any breach of the representations, warranties, covenants or agreements set forth in this Agreement. 8.3 AMENDMENT. This Agreement way be amended by the parties at any time before or after any required approval of matters presented in connection with the Merger by the stockholders of the Company; provided, however, that after any such approval, there shall be made no amendment that by law requires further approval by such stockholders without the further approval of such stockholders. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties. 8.4 EXTENSION; WAIVER. At any time prior to the Effective Time, the parties may (a) extend the time for the performance of any of the obligations or other acts of the other parties, (b) waive any inaccuracies in the representations and warranties contained in this Agreement or in any document delivered pursuant to this Agreement or (c) subject to the proviso of Section 8.3, waive compliance with any of the agreements or conditions contained in this Agreement. Any agreement on the part of a party to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. The failure of any party to this Agreement to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of such rights. 45 52 8.5 PROCEDURE FOR TERMINATION, AMENDMENT, EXTENSION OR WAIVER. A termination of this Agreement pursuant to Section 8.1, an amendment of this Agreement pursuant to Section 8.3 or an extension or waiver pursuant to Section 8.4 shall, in order to be effective, require in the case of MergerCo or the Company, action by its Board of Directors or the duly authorized designee of its Board of Directors. ARTICLE IX GENERAL PROVISIONS 9.1 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the representations and warranties in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Effective Time and all such representations and warranties shall be extinguished on consummation of the Merger and none of the Company, the Buyer and MergerCo nor any officer, director or employee or shareholder thereof shall be under any liability whatsoever with respect to any such representation or warranty after such time. This Section 9.1 shall not limit any covenant or agreement of the parties that by its terms contemplates performance after the Effective Time. 9.2 FEES AND EXPENSES. (a) If any person (other than MergerCo or any of its affiliates) shall have made, proposed, communicated or disclosed a Transaction Proposal in a manner that is or otherwise becomes public and this Agreement is terminated, after such Transaction Proposal shall have been made, proposed, communicated or disclosed to the Company, pursuant to any of the following provisions: (i) by the Company pursuant to Section 8.1(g); (ii) by MergerCo pursuant to Section 8.1(e) or (f)(i); or (iii) by MergerCo pursuant to Section 8.1(h) due to a breach of or failure to perform a covenant or agreement, if the breach or failure to perform that forms the basis of the termination under Section 8.1(h) was caused or effected by any action, or any omission where this Agreement would require action, of the Company or its Subsidiaries or their agents, affiliates or representatives in connection with such Transaction Proposal; then the Company shall, within five business days after such termination of this Agreement, pay MergerCo a fee of $2,000,000 in cash (the "Termination Fee"), which amount shall be payable in same day funds. No termination of this Agreement at a time when a fee is reasonably expected to be payable pursuant to this Section 9.2(a) shall be effective until such fee is paid. The Company acknowledges and agrees that a termination of this Agreement under any of the circumstances referred to in the first sentence of this paragraph would cause the Buyer and 46 53 MergerCo to suffer direct and substantial damages, which damages cannot be determined with reasonable certainty. To compensate the Buyer and MergerCo for such damages, the Company shall pay MergerCo the Termination Fee, in the manner referred to above, as liquidated damages. It is specifically agreed that the amount to be paid pursuant to this Section 9.2(a) represents liquidated damages and not a penalty. (b) Except as provided otherwise in paragraph (a) above, all costs and expenses incurred in connection with this Agreement, and the transactions contemplated hereby shall be paid by the party incurring such expenses, except that the Company shall pay all costs and expenses (i) in connection with printing and mailing the Proxy Statement as well as all SEC filing fees relating to the transactions contemplated herein and (ii) of obtaining any consents of any third party, provided that the Buyer shall reimburse the Company in the amount of such costs and expenses if this Agreement is terminated as a result of the Buyer's or MergerCo's material breach of this Agreement. The parties agree that the Buyer shall pay the filing fee required for the filing of the pre-merger notification and report under the HSR Act and the fees of the Exchange Agent incurred prior to the Effective Time. 9.3 NOTICES. All notices, requests, claims, demands and other communications under this Agreement shall be in writing and shall be deemed to have been effectively given when delivered personally, when dispatched by electronic facsimile transmission (with receipt thereof electronically confirmed) or one day after having been sent by overnight courier to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to MergerCo or the Buyer, to Camelot Music Holdings, Inc. 8000 Freedom Avenue, N.W. North Canton, Ohio 44720 Facsimile: 330-494-8535 Attn: Mr. James E. Bonk President and Chief Executive Officer with a copy to: Calfee, Halter & Griswold LLP 1400 McDonald Investment Center 800 Superior Avenue Cleveland, Ohio 44114 Facsimile: 216-241-0816 Attn: Thomas F. McKee, Esq. 47 54 (b) if to the Company, to Spec's Music, Inc. 1666 N.W. 82d Avenue Miami, Florida 33126 Facsimile: 305-592-9343 Attn: Ms. Ann S. Lieff President and Chief Executive Officer with a copy to: Holland & Knight LLP 701 Brickell Avenue Miami, Florida 33131 Facsimile: 305-789-7799 Attn: Bruce Jay Colan, Esq. 9.4 DEFINITIONS. For purposes of this Agreement: (a) an "affiliate" of any person means another person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such first person; (b) "business day" shall have the meaning assigned such term in Rule 14d-1(e)(6) under the Exchange Act; (c) "knowledge", with respect to the Company, means (i) the actual knowledge of the following officers and employees (as well as any of their successors) of the Company and its Subsidiaries: Ann S. Lieff, Rosalind S. Zacks and Donald A. Molta, with respect to all matters, and, without duplication, Beth Fath, with respect to purchasing, marketing and merchandising matters, Patricia Walker, with respect to human resources, employee benefits and labor matters, and Melvin Noreiga, with respect to all matters relating to the Company's Subsidiary D S Latino, Inc., or any of the foregoing (with respect to a matter within such individual's designated area of knowledge), (ii) the constructive knowledge of any facts or events of which such officers and employees, or any of them (with respect to a matter within such individual's designated area of knowledge), should have been aware had such officers or employees, or any of them, exercised the degree of diligence that would have been exercised by a reasonable person in such position, and (iii) for purposes of this definition, any such officer or employee (with respect to a matter within such individual's designated area of knowledge) having knowledge of any occurrence, nonoccurrence, existence or nonexistence of material facts, circumstances or events that have significance under any law, standard, requirement or agreement shall be deemed to have actual knowledge of such significance; 48 55 (d) "Material Adverse Change" or "Material Adverse Effect" means, when used in connection with the Company, any change or effect that either individually or in the aggregate with all other such changes or effects is materially adverse to the business, financial condition, prospects or results of operations of the Company and its Subsidiaries taken as a whole, and the terms "material" and "materially" shall have correlative meanings; provided, however, that no Material Adverse Change or Material Adverse Effect shall be deemed to have occurred as a result solely of any one or more of (i) those matters described in a separate writing dated the date of this Agreement and specifically referencing this Section delivered by the Company to the Buyer, (ii) general conditions affecting generally the industry in which the Company competes and general market conditions in the United States, or (iii) changes after the date hereof in the relationship between the Company and any customer or supplier, so long as any such change is not attributable to or does not arise from a breach by the Company of any of its representations, warranties or covenants contained in this Agreement; (e) "Material Adverse Change" or "Material Adverse Effect" means, when used in connection with the Buyer, any change or effect that either individually or in the aggregate with all other such changes or effects is materially adverse to the business, financial condition, prospects or results of operations of the Buyer and its subsidiaries taken as a whole, and the terms "material" and "materially" shall have correlative meanings; provided, however, that no Material Adverse Change or Material Adverse Effect shall be deemed to have occurred as a result solely of any one or more of (i) those matters described in a separate writing dated the date of this Agreement and specifically referencing this Section delivered by the Buyer to the Company, (ii) general conditions affecting generally the industry in which the Buyer competes and general market conditions in the United States, or (iii) changes after the date hereof in the relationship between the Buyer and any customer or supplier, so long as any such change is not attributable to or does not arise from a breach by the Buyer of any of its representations, warranties or covenants contained in this Agreement; (f) "person" means an individual, corporation, partnership, joint venture, association, trust, unincorporated organization or other entity; (g) "SEC" means the United States Securities and Exchange Commission; and (h) a "subsidiary" of any person means another person, an amount of the voting securities, other voting ownership or voting partnership interests of which is sufficient to elect at least a majority of its Board of Directors (or other governing body) or, if there are no such voting interests, 50% or more of the equity interests of which is owned directly or indirectly by such first person. 9.5 INTERPRETATION. When a reference is made in this Agreement to a Section, Exhibit or Schedule, such reference shall be to a Section of, or an Exhibit or Schedule to, this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation". 49 56 9.6 COUNTERPARTS. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties. 9.7 ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARIES. This Agreement and the other agreements referred to herein constitute the entire agreement, and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter of this Agreement. This Agreement, other than Sections 6.4, 6.8 and 6.13 is not intended to confer upon any person other than the parties any rights or remedies. 9.8 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL SUBSTANTIVE LAWS OF THE STATE OF FLORIDA, REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICTS OF LAWS. 9.9 ASSIGNMENT. Neither this Agreement nor any of the rights, interests or obligations under this Agreement shall be assigned, in whole or in part, by operation of law or otherwise, by any of the parties without the prior written consent of the other parties; provided, however, that the Buyer or MergerCo may, without the Company's prior written consent, assign their respective rights under this Agreement to any financial institution that requires such assignment in connection with such financial institution's agreement to provide financing to either the Buyer or MergerCo; provided, further, that this provision does not create a financing contingency that may relieve the Buyer or MergerCo of their obligations under this Agreement. Subject to the preceding sentence, this Agreement shall be binding upon, inure to the benefit of, and be enforceable by, the parties and their respective successors and assigns. 9.10 ENFORCEMENT. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement, in addition to any other remedy at law or in equity to which the parties may be entitled. [Remainder of Page Intentionally Left Blank] 50 57 IN WITNESS WHEREOF, the Buyer, MergerCo and the Company have caused this Agreement to be signed by their respective officers thereunto duly authorized, all as of the date first written above. SM ACQUISITION, INC. By: /s/ James E. Bonk -------------------------------------------- Name: James E. Bonk Title: President and Chief Executive Officer SPEC'S MUSIC, INC. By: /s/ Ann S. Lieff -------------------------------------------- Name: Ann S. Lieff Title: President and Chief Executive Officer CAMELOT MUSIC HOLDINGS, INC. By: /s/ James E. Bonk -------------------------------------------- Name: James E. Bonk Title: President and Chief Executive Officer 51 EX-10.13 5 EXHIBIT 10.13 1 Exhibit 10.13 1998 OUTSIDE DIRECTORS' STOCK OPTION PLAN Camelot Music Holdings, Inc. (the "Company") hereby adopts this stock option plan (the "Plan") for eligible Directors of the Company pursuant to the following terms and provisions: 1. PURPOSE OF THE PLAN. The purpose of the Plan is to provide additional incentives to those Directors of the Company who are not officers or employees of the Company or any of its subsidiaries or affiliates (the "Outside Directors") by encouraging them to acquire a new or an additional share ownership in the Company, thus increasing their proprietary interest in the Company's business and providing them with an increased personal interest in the Company's continued success and progress. These objectives will be promoted through the grant of options to acquire the Company's Common Stock, par value $.01 per share (the "Common Stock"), pursuant to the terms of the Plan. Only Outside Directors are eligible for and shall receive options under this Plan. 2. EFFECTIVE DATE OF THE PLAN. The Plan is effective as of June 4, 1998, the date the Plan was adopted by the Board of Directors of the Company (the "Board of Directors" or the "Board"). 3. SHARES SUBJECT TO THE PLAN. (a) Subject to adjustment as provided in this Section 3, the aggregate number of shares of Common Stock for which options may be granted under the Plan is One Hundred Twenty-Five Thousand (125,000) shares of Common Stock or any security into which such shares of Common Stock may be changed by reason of any transaction or event of the type referred to in Section 3(c) of the Plan. Either treasury shares or shares of initial issuance, or both, as the Board of Directors shall from time to time determine, may be issued. (b) The number of shares available in Section 3(a) shall be increased to account for shares relating to awards that expire or are terminated or forfeited. (c) In the event that subsequent to June 4, 1998, the Common Stock should, as a result of a stock split, stock dividend, combination or exchange of shares, exchange for other securities, reclassification, reorganization, redesignation, merger, consolidation, recapitalization or other such change, be increased or decreased or changed into or exchanged for a different number or kind of shares of stock or other securities of the Company or of another corporation, then (i) there shall automatically be substituted for each share of Common Stock subject to an unexercised option (in whole or in part) granted under the Plan, each share of Common Stock available for additional grants of options under the Plan and each share of Common Stock to be granted to each eligible Outside Director pursuant to Section 4 hereof, the number and kind of shares of stock or other securities into which each outstanding share of Common Stock shall be changed or for which each such share of Common Stock shall be exchanged, (ii) the option price per share of Common Stock or unit of securities subject to an unexercised option (in whole or in part) shall be increased or decreased proportionately so that the aggregate purchase price for the 2 securities subject to the option shall remain the same as immediately prior to such event and (iii) the Board shall make such other adjustments as may be appropriate and equitable to prevent enlargement or dilution of option rights. Any such adjustment shall provide for the elimination of fractional shares. The number of shares automatically granted in accordance with Sections 4(a)(ii), 4(a)(iii) and 4(a)(iv) hereof shall not be adjusted pursuant to this Section 3(c) to increase the number of shares of Common Stock to be granted to an eligible Outside Director to reflect any stock dividend occurring on or prior to the date on which the offerings described in the Company's Registration Statement on Form S-1 (No. 333-56811) (the "Registration Statement") are consummated (the "IPO Date"). 4. GRANT OF OPTIONS. (a) AUTOMATIC GRANTS. Subject to the terms of the Plan each eligible Outside Director shall be granted a non-qualified stock option for the number of shares of Common Stock set forth in this Section 4(a): (i) a one-time grant of Two Thousand Five Hundred (2,500) shares of Common Stock on the date of the adoption of the Plan by the Board of Directors, provided that the Outside Director is an Outside Director on that date, subject to the option price and vesting conditions as set forth in paragraphs (b) and (d) below; (ii) a one-time grant of Seven Thousand Five Hundred (7,500) shares of Common Stock on the IPO Date, provided that the Outside Director is an Outside Director on the IPO Date, subject to the option price and vesting conditions as set forth in paragraphs (b) and (d) below; (iii) a one-time grant of Ten Thousand (10,000) shares of Common Stock on the date that an individual is first elected an Outside Director, which date is after the IPO Date, subject to the option price and vesting conditions as set forth in paragraphs (b) and (d) below; and (iv) an annual grant of One Thousand Five Hundred (1,500) shares of Common Stock each year on the date immediately after the date of the annual meeting of stockholders of the Company commencing with the annual meeting of stockholders of the Company held in 1999 to each individual who is an Outside Director on such date subject to the option price and vesting conditions set forth in paragraphs (b) and (d) below. All such grants shall occur automatically without any further action by the Board of Directors. Options granted under the Plan shall be subject to the further terms and provisions of an Option Agreement, the execution of which by each Outside Director shall be a condition to the receipt of an option. 2 3 (b) OPTION PRICE. The price at which each share of Common Stock may be purchased pursuant to an option granted above is set forth in this Section 4(b): (i) with respect to the options granted pursuant to subparagraph (i) of paragraph (a) above, Twenty and Three-Fourths Dollars ($20.75) per share of Common Stock; (ii) with respect to the options granted pursuant to subparagraph (ii) of paragraph (a) above, the price per share of Common Stock at which the Offerings described in the Registration Statement are consummated; and (iii) with respect to the options granted pursuant to subparagraphs (iii) or (iv) of paragraph (a) above, the fair market value for each such share as of the date on which the option is granted (the "Date of Grant"). Anything contained in this paragraph (b) to the contrary notwithstanding, in the event that the number of shares of Common Stock subject to any option is adjusted pursuant to Section 3, a corresponding adjustment shall be made in the price at which the shares of Common Stock subject to such option may thereafter be purchased. (c) DURATION OF OPTIONS. Unless otherwise terminated as provided herein, each option granted under the Plan shall expire and all rights to purchase shares of Common Stock pursuant thereto shall cease on the tenth anniversary of the Date of Grant of such option date (the "Expiration Date"). (d) VESTING OF OPTIONS. Each option granted under the Plan shall become fully vested and exercisable as follows: (i) with respect to the options granted pursuant to subparagraph (i) of paragraph (a) above, on the Date of Grant; (ii) with respect to the options granted pursuant to subparagraphs (ii) and (iii) of paragraph (a) above, one-third of the Common Shares shall be fully vested and exercisable on the first anniversary of the Date of Grant, one-third of the Common Shares shall be fully vested and exercisable on the second anniversary of the Date of Grant and one-third of the Common Shares shall be fully vested and exercisable on the third anniversary of the Date of Grant; and (iii) with respect to the options granted pursuant to subparagraph (iv) of paragraph (a) above, on the first anniversary of the Date of Grant. 3 4 5. OPTION PROVISIONS. (a) LIMITATION ON EXERCISE AND TRANSFER OF OPTIONS. Except as otherwise provided in this Section 5, only the Outside Director to whom an option is granted is permitted to exercise it. No option granted hereunder shall be transferable otherwise than by the Last Will and Testament of the Outside Director to whom it is granted or, if the Outside Director dies intestate, by the applicable laws of descent and distribution. No option granted hereunder may be pledged or hypothecated, nor shall any such option be subject to execution, attachment or similar process. (b) EXERCISE OF OPTION. Each option granted hereunder may be exercised in whole or in part (to the maximum extent then exercisable) from time to time during the option period after the option or a portion of the option becomes vested under paragraph (d) of Section 4 above, but this right of exercise shall be limited to whole shares. Options shall be exercised by the holder or his or her duly appointed guardian or other legal representative (i) giving written notice to the Secretary of the Company at its principal business office, by certified mail, return receipt requested, of his or her intention to exercise the same and the number of shares with respect to which the Option is being exercised (the "Notice of Exercise of Option") accompanied by full payment of the purchase price in cash and (ii) making appropriate arrangements with the Company with respect to income tax withholding. Such Notice of Exercise of Option shall be deemed delivered upon deposit into the mails. (c) TERMINATION OF OUTSIDE DIRECTORSHIP. If the holder of an option under the Plan ceases to be an Outside Director of the Company, his or her option shall terminate three (3) months after the effective date of termination of his or her directorship and neither he or she nor any other person shall have any right after such date to exercise all or any part of such option. If the termination of the directorship is due to death, then the option may be exercised within three (3) months after the holder's death by the option holder's estate or by the person designated in such holder's Last Will and Testament or to whom transferred by the applicable laws of descent and distribution (the "Personal Representative"). Notwithstanding the foregoing, in no event shall any option be exercisable after the expiration of the option period and not to any greater extent than the option holder would have been entitled to exercise the option at the time of death. (d) ACCELERATION OF EXERCISE OF OPTIONS IN CERTAIN EVENTS. Notwithstanding anything in the foregoing to the contrary, in the event of a "change in control" the eligible Outside Director shall have the immediate right and option (notwithstanding the provisions of Section 4) to exercise the option with respect to all shares of Common Stock covered by the option, which exercise, if made, shall be irrevocable. The term "change in control" means the time at which any of the following events shall have occurred: (i) the first purchase of shares pursuant to a tender offer or exchange (other than a tender offer or exchange by the Company) for all or part of the Company's shares of any class of common stock or any securities convertible into such common stock; (ii) the receipt by the Company of a Schedule 13D or other advice indicating that a person is the "beneficial owner" (as that term is defined in Rule 13d-3 or any successor rule or regulation promulgated under the Securities Exchange Act of 1934) of twenty percent (20%) or more of the Company's shares of capital stock calculated as provided in paragraph (d) of said Rule 13d-3; (iii) the date of approval by stockholders of the Company of an agreement providing 4 5 for any consolidation or merger of the Company in which the Company will not be the continuing or surviving corporation or pursuant to which shares of capital stock, of any class or any securities convertible into such capital stock, of the Company would be converted into cash, securities, or other property, other than a merger of the Company in which the holders of shares of all classes of the Company's capital stock immediately prior to the merger would have the same proportion of ownership of common stock of the surviving corporation immediately after the merger; (iv) the date of the approval by stockholders of the Company of any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of the Company; or (v) the adoption of any plan or proposal for the liquidation (but not a partial liquidation) or dissolution of the Company. 6. INVESTMENT REPRESENTATION; APPROVALS AND LISTING. The options to be granted hereunder shall be further conditioned upon receipt of the following investment representation from the Outside Director: "I further agree that any shares of Common Stock of Camelot Music Holdings, Inc. which I may acquire by virtue of this option shall be acquired for investment purposes only and not with a view to distribution or resale; provided, however, that this restriction shall become inoperative in the event the said shares of Common Stock subject to this option shall be registered under the Securities Act of 1933, as amended, or in the event Camelot Music Holdings, Inc. is otherwise satisfied that the offer or sale of the shares of Common Stock subject to this option may be lawfully made without registration of the said shares of Common Stock under the Securities Act of 1933, as amended." The Company shall not be required to issue any certificate or certificates for shares of Common Stock upon the exercise of an option granted under the Plan prior to (i) the obtaining of any approval from any governmental agency which the Company shall, in its sole discretion, determine to be necessary or advisable, (ii) the admission of such shares of Common Stock to listing on any national securities exchange on which the Common Stock may be listed, (iii) the completion of any registration or other qualification of the shares of Common Stock under any state or federal law or ruling or regulations of any governmental body which the Company shall, in its sole discretion, determine to be necessary or advisable or the determination by the Company, in its sole discretion, that any registration or other qualification of the shares of Common Stock is not necessary or advisable and (iv) the obtaining of an investment representation from the Outside Director in the form stated above or in such other form as the Company, in its sole discretion, shall determine to be adequate. 7. GENERAL PROVISIONS. For all purposes of this Plan the fair market value of a share of Common Stock shall be determined as follows: (i) so long as the Common Stock of the Company is listed upon an established stock exchange or the NASDAQ National Market System such fair market value shall be determined to be the highest closing price of a share of such Common Stock on such stock exchange or the NASDAQ National Market System on the day the 5 6 option is granted or if no sale of such Common Stock shall have been made on any stock exchange on that day, then on the next preceding day on which there was a sale of such Common Stock; (ii) during any period of time as such Common Stock is not listed upon an established stock exchange, the fair market value per share shall be the mean between dealer "Bid" and "Ask" prices of such Common Stock in the over-the-counter bulletin board on the day the option is granted, as reported by the National Association of Securities Dealers, Inc.; or (iii) if clause (i) and (ii) do not apply, the fair market value of the Common Stock as determined by the Board. The liability of the Company under the Plan and any distribution of Common Stock made hereunder is limited to the obligations set forth herein with respect to such distribution and no term or provision of the Plan shall be construed to impose any liability on the Company in favor of any person with respect to any loss, cost or expense which the person may incur in connection with or arising out of any transaction in connection with the Plan, including, but not limited to, any liability to any federal, state, or local tax authority and/or any securities regulatory authority. Nothing in the Plan or in any option agreement shall confer upon any option holder any right to continue as an Outside Director of the Company, or to be entitled to any remuneration or benefits not set forth in the Plan or such option. Nothing contained in the Plan or in any option agreement shall be construed as entitling any option holder to any rights of a stockholder as a result of the grant of an option until such time as shares of Common Stock are actually issued to such holder pursuant to the exercise of his or her option. The Plan may be assumed by the successors and assigns of the Company. The Plan shall not be amended more than once every six (6) months, other than to comport with changes in the Internal Revenue Code, the Employee Retirement Income Security Act, or the rules thereunder. The cash proceeds received by the Company from the issuance of Common Stock pursuant to the Plan will be used for general corporate purposes or in such other manner as the Board of Directors deems appropriate. The expense of administering the Plan shall be borne by the Company. The captions and section numbers appearing in the Plan are inserted only as a matter of convenience. They do not define, limit, construe or describe the scope or intent of the provisions of the Plan. 8. TERMINATION OF THE PLAN. The Plan shall terminate on June 4, 2008 and thereafter no options shall be granted hereunder. All options outstanding at the time of termination of the Plan shall continue in full force and effect in accordance with and subject to their terms and the terms and conditions of the Plan. 6 7 9. TAXES. Appropriate provisions shall be made for all taxes required to be withheld and/or paid in connection with the options or the exercise thereof, and the transfer of shares of Common Stock pursuant thereto, under the applicable laws or other regulations of any governmental authority, whether federal, state, or local and whether domestic or foreign. 10. GOVERNING LAW. The Plan shall be governed by and construed in accordance with the laws of the State of Ohio and any applicable federal law. 11. VENUE. The venue of any claim brought hereunder by an eligible Outside Director shall be North Canton, Ohio. 12. CHANGES IN GOVERNING RULES AND REGULATIONS. All references herein to the Internal Revenue Code, or sections thereof, or to rules and regulations of the Department of Treasury or of the Securities and Exchange Commission, shall mean and include the Code sections thereof and such rules and regulations as are now in effect or as they may be subsequently amended, modified, substituted or superseded. IN WITNESS WHEREOF, CAMELOT MUSIC HOLDINGS, INC., by its appropriate officers duly authorized, has executed this instrument as of the fourth day of June, 1998. CAMELOT MUSIC HOLDINGS, INC. By: -------------------------------- And: -------------------------------- 7 EX-10.14 6 EXHIBIT 10.14 1 Exhibit 10.14 FIRST AMENDMENT AND WAIVER FIRST AMENDMENT AND WAIVER, dated as of June 12, 1998 (this "AMENDMENT"), to the Revolving Credit Agreement dated as of January 27, 1998 (as heretofore amended, supplemented or otherwise modified, the "CREDIT AGREEMENT"), among Camelot Music, Inc., a Pennsylvania corporation (the "BORROWER"), the several lenders from time to time parties to the Credit Agreement (the "LENDERS") and The Chase Manhattan Bank, a New York banking corporation, as agent for the Lenders (in such capacity, the "AGENT"). WITNESSETH: ----------- WHEREAS, the Borrower, the Lenders and the Agent are parties to the Credit Agreement; WHEREAS, the Borrower has advised the Agent and the Lenders that Camelot Southeast Region, Inc., a wholly-owned Subsidiary of the Borrower ("CAMELOT SOUTHEAST"), has formed a new wholly-owned Subsidiary, SM Acquisition, Inc., a Florida corporation (the "NEW SUBSIDIARY"), to acquire all of the Capital Stock of (a) Spec's Music, Inc., a Florida corporation ("SPEC'S"), (b) DS Latino Inc., a Florida corporation and wholly-owned Subsidiary of Spec's ("DS LATINO"), and (c) Sobe Music Fest, Inc., a Florida corporation which is currently inactive, has no assets and is a wholly-owned Subsidiary of Spec's ("SOBE MUSIC"), for an aggregate cash purchase price of approximately $28,000,000 (including certain Indebtedness of Spec's to be repaid in connection with such acquisition), in accordance with the terms of an Agreement and Plan of Merger dated as of June 3, 1998 (as amended, the "SPEC'S MERGER AGREEMENT"), among Camelot Music Holdings, Inc. ("HOLDINGS"), the New Subsidiary and Spec's; WHEREAS, pursuant to the Spec's Merger Agreement, Spec's will be the surviving corporation of a merger with the New Subsidiary, Spec's will become a wholly-owned Subsidiary of Camelot Southeast and DS Latino and Sobe Music will remain wholly-owned Subsidiaries of Spec's (the "SPEC'S TRANSACTION"), and the Borrower has requested that the Lenders waive the applicable provisions of the Credit Agreement to permit the consummation of the Spec's Transaction; WHEREAS, in order to finance the Spec's Transaction, the Borrower has requested that the Lenders agree to amend the Credit Agreement to, among other things, provide a $25,000,000 term loan facility under the Credit Agreement; WHEREAS, pursuant to subsection 6.7 of the Credit Agreement, in connection with the formation of the New Subsidiary and the consummation of the Spec's Transaction (a) Camelot Southeast would be obligated to pledge all of the Capital Stock of the New 2 2 Subsidiary (Spec's after giving effect to the Spec's Transaction) to secure Camelot Southeast's obligations to the Agent and the Lenders under the Subsidiaries Guarantee and the other Loan Documents to which Camelot Southeast is a party and (b) the New Subsidiary (Spec's after giving effect to the Spec's Transaction), DS Latino and Sobe Music would each become a Loan Party obligated to (i) guarantee repayment of the Loans and all of the Borrower's other obligations under the Credit Agreement and the other Loan Documents, (ii) grant a security interest in substantially all of its personal property (including, in the case of Spec's, all of the Capital Stock of DS Latino and Sobe Music) to secure its obligations to the Agent and the Lenders under its guarantee and the other Loan Documents to which it is a party and (iii) to the extent the New Subsidiary (Spec's after giving effect to the Spec's Transaction), DS Latino or Sobe Music has any interest in real property with a fair market value greater than $500,000, grant a mortgage in such real property to secure such obligations under its guarantee and the other Loan Documents to which it is a party; WHEREAS, the Borrower has advised the Agent and the Lenders that Spec's intends to sell certain real property currently owned by Spec's located at West Hillsborough Boulevard, Tampa, Florida 33615 and Collins Avenue, Miami Beach, Florida 33139 (collectively, the "SPEC'S PROPERTY"), and the Borrower has requested that the Lenders waive compliance with subsection 6.7 of the Credit Agreement so as not to require the execution and delivery of a mortgage with respect to the Spec's Property; WHEREAS, the Borrower has also requested that the Lenders agree to amend subsection 7.7 (Capital Expenditures) of the Credit Agreement; and WHEREAS, the Lenders are willing to agree to (a) amend the Credit Agreement to provide for a term loan facility and modify subsection 7.7, (b) waive certain provisions of the Credit Agreement to permit the consummation of the Spec's Transaction and (c) waive compliance with subsection 6.7 of the Credit Agreement with respect to the Spec's Property; but in each case only upon the terms and subject to the conditions set forth herein. NOW THEREFORE, in consideration of the premises, and for other good and valuable consideration the receipt of which is hereby acknowledged, the Borrower, the Lenders and the Agent hereby agree as follows: 1. DEFINED TERMS. Unless otherwise defined herein, capitalized terms which are defined in the Credit Agreement (including after giving effect to this Amendment) are used herein as therein defined. 2. AMENDMENT TO SUBSECTION 1.1 (DEFINITIONS). Subsection 1.1 of the Credit Agreement is hereby amended as follows: (a) Deleting in their entirety the definition of the terms "AVAILABLE COMMITMENT", "BORROWING BASE", "COMMITMENT", "COMMITMENT PERCENTAGE", "LOANS", "NOTE" and "REQUIRED LENDERS" contained therein. (b) Adding in their proper alphabetical order the following definitions: 3 3 "AVAILABLE REVOLVING CREDIT COMMITMENT": as to any Revolving Credit Lender, at a particular time, an amount equal to the excess, if any, of (a) such Revolving Credit Lender's Revolving Credit Commitment over (b) the sum of (i) the outstanding Revolving Credit Loans made by such Revolving Credit Lender and (ii) such Revolving Credit Lender's Commitment Percentage of the L/C Obligations then outstanding. "BORROWING BASE": means, as at any date of determination, an amount equal to sixty percent (60%) of Eligible Inventory MINUS the amount shown as "gift certificate liabilities" on the books and records of the Loan Parties determined in a manner consistent with the Borrower's historic practices. The Borrowing Base shall be computed using the Borrowing Base Certificate most recently provided by the Borrower to the Agent pursuant to subsection 6.1(i); PROVIDED, HOWEVER, the Agent shall have the right to review and adjust, in its reasonable judgment, any computation of the Borrowing Base (but not the percentages set forth above) to the extent such computation of the Borrowing Base pursuant to such Borrowing Base Certificate is not in accordance with this Agreement. "COMMITMENT PERCENTAGE": at any time, as to any Revolving Credit Lender, the percentage of the aggregate Revolving Credit Commitments then constituted by such Revolving Credit Lender's Revolving Credit Commitment, and as to any Term Loan Lender, the percentage of the aggregate Term Loan Commitments then constituted by such Term Loan Lender's Term Loan Commitment. "COMMITMENTS": the collective reference to the Revolving Credit Commitments and the Term Loan Commitments; individually as applicable, a "COMMITMENT". "FIRST AMENDMENT": the First Amendment and Waiver, dated as of June 12, 1998, to this Agreement. "FIRST AMENDMENT EFFECTIVE DATE": the date on which the conditions precedent to the effectiveness of the First Amendment are satisfied. "LOANS": the collective reference to the Revolving Credit Loans and the Term Loans; individually as applicable, a "LOAN". "NOTES": the collective reference to the Revolving Credit Notes and the Term Loan Notes; individually as applicable, a "NOTE". "Required Lenders": Lenders holding in the aggregate at least 51% of the sum of (a) the aggregate Revolving Credit Commitments in effect at such time (or, if the Revolving Credit Commitments have then terminated or are no longer in effect, the sum of (i) the Revolving Credit Loans outstanding at such time made by such Revolving Credit Lender and (ii) such Revolving Credit Lender's Commitment Percentage of the L/C Obligations outstanding at such time), plus (b) the aggregate 4 4 Term Loan Commitments in effect at such time (or, after the making of the Term Loans, the aggregate outstanding Term Loans at such time). "REVOLVING CREDIT COMMITMENT": as to any Revolving Credit Lender at any time, during the Non-Peak Period, its Non-Peak Period Commitment, or during the Peak Period, its Peak Period Commitment, as the case may be. "REVOLVING CREDIT LENDERS": the collective reference to the Lenders with Revolving Credit Commitments. "REVOLVING CREDIT LOANS": as defined in subsection 2.1(a). "REVOLVING CREDIT NOTES": as defined in subsection 2.2. "SPEC'S": Spec's Music, Inc., a Florida corporation. "SPEC'S MERGER AGREEMENT": the Agreement and Plan of Merger dated as of June 3, 1998, by and among Holdings, SM Acquisition, Inc. and Spec's, as the same may be amended, supplemented or otherwise modified from time to time. "SPEC'S TRANSACTION": the merger of SM Acquisition, Inc., a wholly-owned Subsidiary of Camelot Southeast, Inc., into Spec's (which will become a wholly-owned Subsidiary of Camelot Southeast, Inc.) pursuant to the Spec's Merger Agreement and the other Spec's Transaction Documents. "SPEC'S TRANSACTION DOCUMENTS": the collective reference to the Spec's Merger Agreement and any other instrument or agreement executed and delivered in connection with the Spec's Merger Agreement, as each of the foregoing may be amended, supplemented or otherwise modified from time to time. "TERM LOAN COMMITMENT": as to any Term Loan Lender, its obligation to make a Term Loan to the Borrower pursuant to subsection 2A. 1 in an aggregate amount not to exceed the amount set forth under such Term Loan Lender's name opposite the caption "Term Loan Commitment" on Schedule I hereto or on Schedule 1 to the Assignment and Acceptance by which such Term Loan Lender acquired its Term Loan Commitment. "TERM LOAN LENDERS": the collective reference to the Lenders with Term Loan Commitments. "TERM LOAN NOTES" as defined in subsection 2A.2. "TERM LOANS": as defined in subsection 2A.1(a). 5 5 (c) Adding the phrase "or subsection 2A.3, as the case may be," immediately after the reference to "subsection 2.5" contained in the definition of the term "BORROWING DATE". (d) Deleting the phrase "and (g) reserve for shrink" contained in the definition of the term "ELIGIBLE INVENTORY" and by substituting in lieu thereof the phrase "(g) reserve for shrink; and (h) reserve for non-defective Inventory which is not returnable to the applicable vendors". (e) Deleting the phrase "acquired its Commitment" in the definition of the terms "NON-PEAK PERIOD COMMITMENT" and "PEAK PERIOD COMMITMENT" and by substituting in lieu thereof the phrase "acquired its Revolving Credit Commitment". 3. WAIVER. (a) The Lenders hereby waive compliance with subsections 7.2 (Limitations on Liens), 7.4 (Prohibition on Fundamental Changes) and 7.6 (Limitations on Investments, Loans and Advances) of the Credit Agreement, but solely to the extent necessary to permit the New Subsidiary to consummate the Spec's Merger (it being understood that the investments made to consummate the Spec's Merger shall not be included in the calculation of the maximum permitted investments under subsection 7.6(g) of the Credit Agreement), PROVIDED that: (i) the aggregate cash purchase price to be paid to consummate the Spec's Merger, including the Indebtedness of Spec's described in clause (iv) below to be repaid in connection with the Spec's Merger, does not exceed $28,500,000; (ii) the Agent is reasonably satisfied with the Spec's Merger Agreement and the other Spec's Transaction Documents executed and delivered by the Borrower, Holdings and the New Subsidiary in connection with, and to implement, the Spec's Transaction, and no material provision of any of the Spec's Transaction Documents shall have been amended, supplemented, waived or otherwise modified without the prior written consent of the Agent and the Lenders, which consent shall not be unreasonably withheld; (iii) the New Subsidiary consummates the Spec's Transaction on or before August 31, 1998 in accordance with the terms of the Spec's Merger Agreement and the other Spec's Transaction Documents; (iv) the Indebtedness of Spec's to General Electric Capital Corporation and Music Funding I, L.L.C. in the aggregate amount of approximately $8,000,000 is repaid in full upon consummation of the Spec's Transaction and any Liens granted to secure such Indebtedness are released upon such repayment; (v) the New Subsidiary has become a Loan Party and has complied with all of the requirements of subsection 6.7 of the Credit Agreement, and subject to 6 6 clause (b) below, Spec's will timely comply with all of the requirements of subsection 6.7 of the Credit Agreement, including without limitation, within five Business Days after consummation of the Spec's Transaction, the requirement to pledge all of the Capital Stock of DS Latino and Sobe Music to secure the obligations of Spec's to the Agent and the Lenders under the Subsidiaries Guarantee and the other Loan Documents to which Spec's is a party; (vi) unless DS Latino and Sobe Music have merged or otherwise consolidated into a Loan Party, within 60 days after the consummation of the Spec's Transaction DS Latino and Sobe Music become Loan Parties and comply with all of the requirements of subsection 6.7 of the Credit Agreement: (vii) the waiver of subsection 7.2 (Limitations on Liens) of the Credit Agreement is limited to the Liens set forth on Schedule 1 to this Amendment; and (viii) the Agent receives a written legal opinion of outside counsel to the applicable Loan Parties, addressed to the Agent and the Lenders, to the effect that the New Subsidiary has been duly organized and the Spec's Transaction Documents, and the transactions contemplated thereby, have been duly authorized by the applicable Loan Parties and constitute the valid, binding and enforceable obligations of such Loan Parties and covering such other matters as reasonably requested by the Agent. (b) The Lenders hereby waive compliance with the provision of subsection 6.7 of the Credit Agreement which would require the execution and delivery of a mortgage with respect to the Spec's Property, PROVIDED that if either parcel of the Spec's Property has not been sold on or before the date referenced in clause (i) or (ii) below (as applicable) Spec's shall comply with subsection 6.7 of the Credit Agreement, including without limitation, by executing a mortgage, substantially in the form of the Camelot Distribution Mortgage, with respect to such parcel or parcels (as applicable) of the Spec's Property within five Business Days after the earlier to occur of (i) the six month anniversary of the consummation of the Spec's Transaction or (ii) upon the request of the Agent or the Required Lenders after the occurrence of a Default or an Event of Default under the Credit Agreement. 4. AMENDMENTS TO SECTION 2 (AMOUNT AND TERMS OF COMMITMENT) AND SECTION 3 (LETTERS OF CREDIT). Sections 2 and 3 of the Credit Agreement are hereby amended as follows: (a) Deleting all references in subsections 2.1(a), 2.1(c), 2.2, 2.3, 2.4, 2.5, 2.7, 2.8(b), 2.8(d), 2.18 and 3.1(a) to the terms "AVAILABLE COMMITMENT", "COMMITMENT", "COMMITMENTS", "LENDER", "LENDERS", "LOAN", "LOANS" and "NOTE" and by substituting in lieu thereof the terms "AVAILABLE REVOLVING CREDIT COMMITMENT", "REVOLVING CREDIT COMMITMENT", "REVOLVING CREDIT COMMITMENTS", "REVOLVING CREDIT LENDER", "REVOLVING CREDIT LENDERS", "REVOLVING CREDIT LOAN", "REVOLVING CREDIT LOANS" AND "REVOLVING CREDIT NOTE", respectively. 7 7 (b) Amending subsection 2.8(a) by (i) adding the phrase "(i) of Term Loans or Revolving Credit Loans, or a combination thereof, and (ii)" immediately after the phrase "and whether the prepayment is" contained in the 14th line of said subsection, (ii) adding the word "affected" immediately after the phrase "shall promptly notify each" contained in the 17th line of said subsection, (iii) adding the phrase "and, in the case of prepayments of the Term Loans only, accrued interest to such date on the amount prepaid" immediately before the period at the end of the third sentence of said subsection and (iv) adding the following sentence at the end of said subsection: "Any prepayment of the Term Loans pursuant to subsection 2.8(a) or (b) shall be applied FIRST, to prepay the next succeeding installment of principal of the Term Loans until paid in full and SECOND, to prepay the Term Loans PRO RATA based upon the remaining installments of principal thereof set forth in subsection 2A.2(b) until paid in full. Amounts prepaid on account of the Term Loans may not be reborrowed." (c) Amending subsection 2.8(b) by (i) deleting the following from said subsection: (A) the reference to "(i)", (B) the phrase '", or (ii) the Borrowing Base" and (C) the phrase "in each such case" and (ii) adding the following sentence at the end of said subsection: "To the extent the sum of the outstanding Revolving Credit Loans, Term Loans and L/C Obligations on any Business Day exceeds the Borrowing Base, the Borrower shall on the next Business Day pay in frill an amount equal to such excess in accordance with clauses FIRST SECOND and THIRD of the immediately preceding sentence and FOURTH, to payment in frill of "all outstanding Term Loans." (d) Deleting subsection 2.8(c) in its entirety and by substituting in lieu thereof the following: "(c) If any Loan Party shall receive in excess of $750,000 of Net Proceeds from Asset Sales during any fiscal year then, unless Term Loan Lenders holding a majority of the aggregate amount of Term Loans then outstanding (or the Required Lenders if no Term Loans are then outstanding) shall otherwise agree, within five Business Days of the receipt by such Loan Party of such excess Net Proceeds the amount of such Net Proceeds in excess of $750,000 shall be applied FIRST to prepay the Term Loans PRO RATA based upon the remaining installments of principal thereof set forth in subsection 2A.2(b) until paid in frill and SECOND to reduce permanently the Revolving Credit Commitments." (e) Amending subsection 2.11 by (i) deleting the reference to "$50,000" contained therein and by substituting in lieu thereof a reference to "$75,000" and (ii) deleting the phrase "be termination of the Commitments" contained therein and by substituting in lieu thereof the phrase "the Termination Date". (f) Amending subsection 2.13 by (i) deleting the word "respective" contained in the 4th line of said subsection and by substituting in lieu thereof the word "relevant" and (ii) deleting the second sentence of said subsection in its entirety and by substituting in lieu thereof the following: "Each payment (including each prepayment) by the Borrower on account of principal of and interest on any Revolving Credit Loans shall be allocated by the Agent PRO RATA according to the respective outstanding principal amounts of such Revolving 8 8 Credit Loans then held by the Revolving Credit Lenders. Each payment (including each prepayment) by the Borrower on account of principal of and interest on any Term Loans shall be allocated by the Agent PRO RATA according to the respective outstanding principal amounts of such Term Loans then held by the Term Loan Lenders." (g) Adding at the end of Section 2 a new Section 2A as follows: "SECTION 2A. AMOUNT AND TERMS OF TERM LOAN 2A.1 TERM LOAN COMMITMENT. Subject to the terms and conditions hereof, each Term Loan Lender severally agrees to make a single term loan (a "TERM LOAN") to the Borrower after satisfaction or waiver of the conditions precedent contained in subsections 5.2(a) through (e) and (g) in an amount equal to the amount of the Term Loan Commitment of such Term Loan Lender. The Term Loans may from time to time be (a) Eurodollar Loans, (b) ABR Loans or (c) a combination thereof, as determined by the Borrower and notified to the Agent in accordance with subsections 2A.3 and 2.6. 2A.2 TERM NOTES. (a) The Term Loan made by each Term Loan Lender shall be evidenced by a promissory note of the Borrower, substantially in the form of Exhibit N hereto (each a "TERM LOAN NOTE"), with appropriate insertions, payable to the order of such Term Loan Lender and representing the obligations of the Borrower to pay the principal amount equal to the Term Loan Commitment of such Term Loan Lender, with interest thereon as prescribed in subsection 2.9. Each Term Loan Lender is hereby authorized to record the date, the Type and the amount of the Term Loan made by such Term Loan Lender, each continuation thereof, each conversion of all or a portion thereof to another Type, the date and amount of each payment or prepayment of principal thereof, and, in the case of Eurodollar Loans, the length of the Interest Period with respect thereto on the schedule annexed to and constituting a part of its Term Loan Note, and any such recordation shall constitute PRIMA FACIE evidence of the accuracy of the information so recorded, PROVIDED that the failure of any Term Loan Lender to make such recordation (or any error in such recordation) shall not affect the obligations of the Borrower hereunder or under such Term Loan Note. Each Term Loan Note shall (i) be dated the First Amendment Effective Date, (ii) be payable as provided in subsection 2A.2(b) and (iii) provide for the payment of interest in accordance with subsection 2.9. (b) The aggregate Term Loans of all the Term Loan Lenders shall be payable in six (6) consecutive semi-annual installments on the dates and in the principal amounts set forth below (together with all accrued interest thereon) opposite the applicable installment date (or, if less, the aggregate amount of the Term Loans then outstanding): 9 9
Dates Amount ----- ------ January 31, 1999 $3,000,000 July 31,1999 2,000,000 January 31, 2000 6,000,000 July 31, 2000 4,000,000 January 31, 2001 6,000,000 July 31, 2001 4,000,000
2A.3 PROCEDURE FOR TERM LOAN BORROWING. The Borrower may only borrow under the Term Loan Commitments in a single drawing on a Business Day after satisfaction or waiver of the conditions precedent contained in subsections 5.2(a) through (e) and (g), PROVIDED that the Borrower shall give the Agent a Borrowing Notice, which notice must be received by the Agent prior to (a) 12:00 noon, New York City time, three Business Days prior to the requested Borrowing Date if all or any part of the Term Loans are to be Eurodollar Loans and (b) 10:00 a.m., New York City time, on the requested Borrowing Date if the borrowing is solely of ABR Loans, and specifying (i) the amount of the borrowing, (ii) whether such Term Loans are initially to be Eurodollar Loans or ABR Loans or a combination thereof and (iii) if the borrowing is to be entirely or partly Eurodollar Loans, the length of the Interest Period -for such Eurodollar Loans. Not later than 1:00 p.m., New York City time, on the Borrowing Date specified in such notice, each Term Loan Lender shall make available to the Agent at the office of the Agent specified in subsection 10.2 (or at such other location as the Agent may direct) an amount in immediately available funds equal to the amount of the Term Loan to be made by such Term Loan Lender. Term Loan proceeds received by the Agent hereunder shall promptly be made available to the Borrower by the Agent crediting the account of the Borrower on the books of such office with the aggregate of the amounts made available to the Agent by the Term Loan Lenders and in like funds as received by the Agent. 2A.4 USE OF PROCEEDS OF TERM LOANS. The proceeds of the Term Loans hereunder shall be used by the Borrower solely to finance the Spec's Transaction." 5. AMENDMENT TO SECTION 4 (REPRESENTATIONS AND WARRANTIES). Section 4 of the Credit Agreement is hereby amended as follows: (a) Adding the phrase "and the Spec's Transaction Documents" immediately after the phrase "the Wall Transaction Documents" each time such phrase appears in subsections 4.5, 4.7 and 4.18. (b) Adding the phrase "and each Spec's Transaction Document" immediately after the phrase "each Wall Transaction Document" contained in subsection 4.6. (c) Adding the phrase "any Spec's Transaction Document" immediately after the phrase "any Wall Transaction Document" contained in subsection 4.7. 10 10 (d) Adding the phrase "and the Spec's Transaction" immediately after the phrase "the Wall Transaction" contained in subsection 4.13. (e) Adding the following new subsection 4.20 at the end of said Section 4: "4.20 YEAR 2000 MATTERS. Any reprogramming required to permit the proper functioning (but only to the extent that such proper functioning would otherwise be impaired by the occurrence of the year 2000) in and following the year 2000 of computer Systems and other equipment containing embedded microchips, in either case owned or operated by any Loan Party or used or relied upon in the conduct of its business (including any such Systems and other equipment supplied by others or with which the computer systems of any Loan Party interface), and the testing of all such systems and other equipment as so reprogrammed, will be completed by February 27, 1999. The costs to the Loan Parties that have not been incurred (as of any date on which this representation and warranty is made) for such reprogramming and testing and for the other reasonably foreseeable consequences to them of any improper functioning of other computer systems and equipment containing embedded microchips due to the occurrence of the year 2000 could not reasonably be expected to result in a Default or Event of Default or to have a Material Adverse Effect. Except for any reprogramming referred to above, the computer systems of the Loan Parties are and, with ordinary course upgrading and maintenance, will continue during the period prior to the Maturity Date to be, sufficient for the conduct of their business as currently conducted." 6. AMENDMENT OF SUBSECTION 5.2 (CONDITIONS TO EACH LOAN AND LETTER OF CREDIT). Subsection 5.2 of the Credit Agreement is hereby amended by adding immediately after clause (f) thereof a new clause (g) as follows: "(g) ADDITIONAL CONDITIONS PRECEDENT TO TERM LOANS. In the case of such Lender's Term Loan only, in addition to the satisfaction of the conditions precedent contained in subsections 5.2(a) through (e) above, (i) The Agent shall have received for each Lender, a copy of the Spec's Merger Agreement and any of the other Spec's Transaction Documents reasonably requested by the Agent. (ii) (A) The Spec's Transaction shall have been consummated pursuant to the Spec's Transaction Documents on or before August 31, 1998 for an aggregate cash purchase price not to exceed $28,500,000 (including the Indebtedness of Spec's to be repaid in connection with the Spec's Transaction), (B) the Indebtedness of Spec's to General Electric Capital Corporation and Music Funding I, L.L.C. in the aggregate amount of approximately $8,000,000 shall have been repaid in full and any Liens granted to secure such Indebtedness shall have been released upon such repayment, (C) all of the conditions precedent set forth in the Spec's Merger Agreement shall have been 11 11 satisfied, and (D) no material provision of the Spec's Transaction Documents shall have been amended, supplemented, waived or otherwise modified without the prior written consent of the Agent and the Lenders, which consent shall not be unreasonably withheld. The Agent shall be reasonably satisfied with the Spec's Transaction Documents in all respects. (iii) The Agent shall have received the unaudited consolidated balance sheet of Spec's and its consolidated Subsidiaries as at the end of the most recent fiscal quarter ended and the related unaudited consolidated statements of income and cash flows of Spec's and its consolidated Subsidiaries for such quarterly period, which, in each case, shall be in form and substance reasonably satisfactory to the Agent. (iv) The Agent shall have received, with a copy for each Lender, (A) a new Schedule 4.12 (Fee and Leased Properties) and a new Schedule 4.14 (Trademarks and Copyrights) to this Agreement and (B) new Schedules to the Subsidiaries Security Agreement, in each case, giving effect to the Spec's Transaction; upon satisfaction of the conditions precedent contained in this subsection 5.2(g) this Agreement and the Subsidiaries Security Agreement shall each be deemed amended to substitute the Schedules delivered pursuant to this paragraph (iv) for the corresponding Schedules delivered on the Closing Date. (v) The Agent shall have received evidence in form and substance reasonably satisfactory to it that any farther filings, recordings, registrations and any other actions, including without limitation, the filing of duly executed financing statements on form UCC-1, necessary or, in the reasonable opinion of the Agent, desirable to perfect the Liens created by the Security Documents, after giving effect to the Spec's Transaction, shall have been completed. (vi) The Agent shall have received (A) for each Loan Party, a certificate executed by the President or any Vice President and the Secretary or Assistant Secretary of such Loan Party dated the Borrowing Date with respect to the Term Loans and certifying (x) that the by-laws and the certificate of incorporation of such Loan Party have not been amended since the Closing Date, (y) in the case of the Borrower, that attached thereto is a true and complete copy of the resolutions adopted by the Board of Directors of the Borrower authorizing (1) the borrowing of the Term Loans, (2) the execution, delivery and performance in accordance with its terms of this Agreement, as amended by the First Amendment, and the Term Loan Notes and (3) any other matters as reasonably requested by the Agent and (z) as to the incumbency and specimen signature of each officer of such Loan Party executing the First Amendment and the Term Loan Notes and (B) with a counterpart for each Lender, the executed legal opinion of outside counsel to the Borrower to the effect that the First Amendment and the Term Loan Notes have been duly authorized by the Borrower and the First Amendment, this Agreement, as amended by the First Amendment, and the Term Loan Notes constitute the 12 12 valid, binding and enforceable obligations of the Borrower, and covering such other matters incident to the transactions contemplated by the First Amendment as reasonably requested by the Agent.". 7. AMENDMENTS TO SECTION 7 (NEGATIVE COVENANTS). Section 7 of the Credit Agreement is hereby amended as follows: (a) Deleting the references to "$17,000,000", "$19,400,000", "$21,400,000" and "$22,500,000" contained in clause (b) subsection 7.7 (Capital Expenditures) and by substituting in lieu thereof "$20,000,000", "$25,000,000", "$27,500,000" and "$30,000,000", respectively. (b) Deleting the reference to "Available Commitments" contained in clause (c) of subsection 7.9 (Limitation on Dividends) and by substituting in lieu thereof a reference to the term "Available Revolving Credit Commitments". 8. AMENDMENTS TO SECTION 10 (MISCELLANEOUS). Section 10 of the Credit Agreement is hereby amended as follows: (a) Amending subsection 10.1 (Amendments and Waivers) by (i) adding the phrase "or any scheduled installment thereof" after the phrase "maturity date of any Note" in clause (a)(i) of said subsection and (ii) adding at the end of clause (a) of said subsection the phrase "or (iii) amend, modify or waive any provision of subsection 2.8(c) without the written consent of Term Loan Lenders holding a majority of the aggregate amount of Term Loans then outstanding; or (iv) amend, modify or waive any provision of subsection 2.8(d) without the written consent of all of the Revolving Credit Lenders". (b) Adding a reference to "2A.3 ," immediately before the reference to "2.5" contained in subsection 10.2 (Notices). (c) (i) Adding the phrase "or Term Loan Commitment, as applicable," immediately after each reference to "Peak Period Commitment" contained in the second sentence of clause (e) of subsection 10.6 (Successors and Assigns; Participations and Assignments) and (ii) adding the phrase "(in the case of Revolving Credit Notes) or the First Amendment Effective Date (in the case of Term Loan Notes)" immediately after the reference to "Closing Date" contained in the last sentence of clause (e) of said subsection of 10.6. (d) Amending subsection 10.7 (Adjustments; Set-off) by deleting all references in said subsection to "Loans" and by substituting in lieu thereof the phrase "Revolving Credit Loans, Term Loans". 9. AMENDMENT TO SCHEDULE I AND ADDITION OF EXHIBIT N. The Credit Agreement is hereby further amended by (a) deleting Schedule I attached thereto in its entirety and by substituting in lieu thereof a new Schedule I in the form attached hereto as Schedule 2 and (b) adding a new Exhibit N thereto in the form attached hereto as Exhibit A. 13 13 10. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents and warrants that, after giving effect to the amendments and waivers effected hereby, the representations and warranties contained in Section 4 of the Credit Agreement are true and correct in all material respects as of the date hereof. 11. LIMITED EFFECT. Except as expressly amended or waived hereby, all the terms and provisions of the Credit Agreement are and shall remain in full force and effect. The amendments and waivers provided for herein are limited to the specific subsections of the Credit Agreement specified herein and shall not constitute an amendment or waiver of, or an indication of the Agent's or the Lenders' willingness to amend or waive, any other provisions of the Credit Agreement or the same subsections for any other purpose, date or time period. 12. CONDITIONS PRECEDENT TO EFFECTIVENESS. This Amendment shall become effective on the date on which the following conditions precedent have been satisfied: (a) receipt by the Agent of counterparts of (i) this Amendment, duly executed and delivered by the Borrower and the Lenders, and (ii) the attached Acknowledgement and Consent, duly executed and delivered by the Guarantors, (b) receipt by the Agent, for the account of the Term Loan Lenders allocated based upon their respective Term Loan Commitments, of a Term Loan Commitment fee in immediately available funds equal to $125,000 and (c) receipt by the Agent, for the account of each Term Loan Lender, of a Term Loan Note in the form attached hereto as Exhibit A and executed by a duly authorized officer of the Borrower. 13. MISCELLANEOUS. (a) This Amendment may be executed by the parties hereto and delivered by facsimile transmission on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. (b) The Borrower agrees to pay or reimburse the Agent for all of its out-of-pocket costs and expenses incurred in connection with the development, preparation and execution of this Amendment including, without limitation, the fees and disbursements of counsel to the Agent. (c) THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 14 14 IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to be duly executed and delivered by its proper and duly authorized officers as of the day and year first above written. CAMELOT MUSIC, INC. By: /s/ Jack K. Rogers ------------------------------- Name: Jack K. Rogers Title: Executive Vice President/COO THE CHASE MANHATTAN BANK, as Agent and as a Lender By: /s/ William P. Rindfuss ------------------------------- Name: William P. Rindfuss Title: Vice President BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: /s/ Charels W. A. Hagel ------------------------------- Name: Charles W. A. Hagel Title: Vice President FIRST UNION NATIONAL BANK By: /s/ T. L. James ------------------------------- Name: T. L. James Title: Senior Vice President 15 15 SOCIETE GENERALE By: /s/ Antoine Broustra ------------------------------- Name: Antoine Broustra Title: Vice Presidnet VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST By: /s/ Jeffrey W. Maillet ------------------------------- Name: Jeffrey W. Maillet Title: Senior Vice President & Director 16 ACKNOWLEDGEMENT AND CONSENT Dated as of June 12, 1998 Reference is made to the attached First Amendment and Waiver, dated as of June 12, 1998 (the "AMENDMENT"), to the Credit Agreement dated as of January 27, 1998 (as heretofore amended, supplemented or otherwise modified, the "CREDIT AGREEMENT"; unless otherwise defined herein, capitalized terms appearing herein shall have the meanings specified in the Credit Agreement), among the Borrower, the Lenders and the Agent. Each of the undersigned hereby (i) acknowledges and consents to the terms and provisions of the Amendment, (ii) agrees, acknowledges and affirms that each Guarantee executed by it and each other Loan Document to which it is a party shall remain in full force and effect and shall apply to the Credit Agreement as amended by the Amendment and (iii) agrees, acknowledges and affirms that any reference to the Credit Agreement appearing in each Guarantee executed by it and each other Loan Document to which it is a party shall be deemed to include the Credit Agreement as amended by the Amendment. IN WITNESS WHEREOF, each of the undersigned has caused this Acknowledgement and Consent to be duly executed and delivered as of the date first above written. CAMELOT MUSIC HOLDINGS, INC. CAMELOT DISTRIBUTION CO., INC CAMELOT MIDWEST REGION, INC. CAMELOT NORTHEAST REGION, INC. CAMELOT SOUTHEAST REGION, INC. CAMELOT WESTERN REGION, INC. GRAPEVINE RECORDS AND TAPES, INC. SM ACQUISITION, INC. By: /s/ Jack K. Rogers ------------------------------- Name: Jack K. Rogers Title: Executive Vice President/COO 17 Schedule 1 to First Amendment SPEC'S PROPERTY SUBJECT TO PERMITTED LIENS ------------------------------------------ 1. AT&T Credit Corporation, secured party, to secure obligations under one or more operating leases in respect of office equipment. 2. NCR Credit Corporation, secured party, to secure obligations under one or more operating leases in respect of office equipment. 18 Schedule 2 to First Amendment Schedule I to Credit Agreement LIST OF ADDRESSES FOR NOTICES TO LENDERS, COMMITMENT AMOUNTS THE CHASE MANHATTAN BANK Address for Notice: ------------------- 270 Park Avenue New York, New York 10017 Attn: Margaret Lane Telecopy: 212-270-5646
REVOLVING CREDIT COMMITMENT: ---------------------------- NON-PEAK PERIOD: $10,500,000.00 ---------------- PEAK PERIOD: $15,000,000.00 ------------ COMMITMENT PERCENTAGE: 30.00% ---------------------- TERM LOAN COMMITMENT: $7,500,000.00 --------------------- COMMITMENT PERCENTAGE: 30.00% ----------------------
19 2 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION Address for Notice: ------------------- Bank of America 231 South LaSalle Street Suite 614 Chicago, IL 60697 Attn: Charles Hagel Telecopy: 312-828-1974
REVOLVING CREDIT COMMITMENT: ---------------------------- NON-PEAK PERIOD: $7,000,000.00 ---------------- PEAK PERIOD: $10,000,000.00 ------------ COMMITMENT PERCENTAGE: 20.00% ---------------------- TERM LOAN COMMITMENT: $5,000,000.00 --------------------- COMMITMENT PERCENTAGE: 20.00% ----------------------
FIRST UNION NATIONAL BANK Address for Notice: ------------------- First Union National Bank 301 S. College Street DC-S Charlotte, NC 28288-0737 Attn: Jorge Gonzalez Telecopy: (704) 374-3300
REVOLVING CREDIT COMMITMENT: ---------------------------- NON-PEAK PERIOD: $7,000,000.00 ---------------- PEAK PERIOD: $10,000,000.00 ------------ COMMITMENT PERCENTAGE: 20.00% ---------------------- TERM LOAN COMMITMENT: $5,000,000.00 --------------------- COMMITMENT PERCENTAGE: 20.00% ----------------------
20 3 SOCIETE GENERALE Address for Notice: ------------------- 1221 Avenue of the Americas New York, New York 10020 Attn: Antoine Broustra Telecopy: (212) 278-7463
REVOLVING CREDIT COMMITMENT: ---------------------------- NON-PEAK PERIOD: $7,000,000.00 ---------------- PEAK PERIOD: $10,000,000.00 ------------ COMMITMENT PERCENTAGE: 20.00% ---------------------- TERM LOAN COMMITMENT: $5,000,000.00 --------------------- COMMITMENT PERCENTAGE: 20.00% ----------------------
VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST Address for Notice: ------------------- One Parkview Plaza Oakbrook Terrace, Illinois 60181 Attn: Jeffrey Maillet Telecopy: (630) 684-6740
REVOLVING CREDIT COMMITMENT: ---------------------------- NON-PEAK PERIOD: $3,500,000.00 ---------------- PEAK PERIOD: $5,000,000.00 ------------ COMMITMENT PERCENTAGE: 10.00% ---------------------- TERM LOAN COMMITMENT: $2,500,000.00 --------------------- COMMITMENT PERCENTAGE: 10.00% ----------------------
21 Exhibit A to First Amendment Exhibit N to Credit Agreement FORM OF TERM LOAN NOTE ---------------------- $_______________ New York, New York June __, 1998 FOR VALUE RECEIVED, the undersigned, Camelot Music, Inc., a Pennsylvania corporation (the "BORROWER"), hereby unconditionally promises to pay to the order of _____________________________________ (the "LENDER") at the office of The Chase Manhattan Bank, located at 270 Park Avenue, New York, New York 10017, in lawful money of the United States of America and in immediately available funds, the principal amount of (a) _______________________________ ($___________), or, if less, (b) the aggregate unpaid principal amount of all Term Loans made by the Lender to the Borrower pursuant to subsection 2A. 1 of the Credit Agreement, as hereinafter defined. The principal amount shall be paid in the amounts and on the dates specified in subsection 2A.2(b) of the Credit Agreement. The Borrower farther agrees to pay interest in like money at such office on the unpaid principal amount hereof from time to time outstanding at the rates and on the dates specified in subsection 2.9 of the Credit Agreement. The holder of this Term Loan Note is authorized to endorse on the schedules annexed hereto and made a part hereof or on a continuation thereof which shall be attached hereto and made a part hereof the date, the Type and the amount of each Term Loan made by such holder pursuant to the Credit Agreement and the date and amount of each payment or prepayment of principal thereof, each continuation thereof, each conversion of all or a portion thereof to another Type and, in the case of Eurodollar Loans, the length of each Interest Period with respect thereto. Each such endorsement shall constitute PRIMA FACIE evidence of the accuracy of the information endorsed. The failure to make any such endorsement or any error in any such endorsement shall not affect the obligations of the Borrower in respect of any Term Loan. This Term Loan Note (a) is one of the Term Loan Notes referred to in the Revolving Credit Agreement, dated as of January 27, 1998 (as amended, supplemented or otherwise modified from time to time, the "CREDIT AGREEMENT"), among the Borrower, the several lenders from time to time parties thereto (the "LENDERS") and The Chase Manhattan Bank, as agent for the Lenders (in such capacity, the "AGENT"), (b) is subject to the provisions of the Credit Agreement and (c) is subject to optional and mandatory prepayment in whole or in part as provided in the Credit Agreement. This Term Loan Note is secured and guaranteed as provided in the Loan Documents. Reference is hereby made to the Loan Documents for a 22 2 description of the properties and assets in which a security interest has been granted, the nature and extent of the security and guarantees, the terms and conditions upon which the security interests and each guarantee were granted and the rights of the holder of this Term Loan Note in respect thereof. Upon the occurrence of any one or more Events of Default, all amounts then remaining unpaid on this Term Loan Note shall become, or may be declared to be, immediately due and payable, all as provided in the Credit Agreement. All parties now and hereafter liable with respect to this Term Loan Note, whether maker, principal, surety, guarantor, endorser or otherwise, hereby waive presentment, demand, protest and all other notices of any kind. Unless otherwise defined herein, capitalized terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement. THIS TERM LOAN NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. CAMELOT MUSIC, INC. By: ------------------------------- Jack K. Rogers Executive Vice President and Chief Operating Officer 23 Schedule A to Term Loan Note LOANS, CONVERSIONS AND REPAYMENTS OF ABR LOANS
Amount Amount of ABR Loans Converted to Amount of Principal of Converted to Unpaid Principal Balance Date Amount of ABR Loans ABR Loans ABR Loans Repaid Eurodollar Loans of ABR Loans Notation Made By
24 Schedule B to Term Loan Note LOANS, CONTINUATIONS, CONVERSIONS AND REPAYMENTS OF EURODOLLAR LOANS
Interest Period and Amount of Principal Amount of Eurodollar Unpaid Principal Amount of Amount Converted Eurodollar Rate with of Eurodollar Loans Loans Converted to Balance of Notation Date Eurodollar Loans to Eurodollar Loans Respect Thereto Repaid ABR Loans Eurodollar Loans Made By
EX-10.18 7 EXHIBIT 10.18 1 Exhibit 10.18 EMPLOYMENT AND SEVERANCE AGREEMENT ---------------------------------- THIS EMPLOYMENT AND SEVERANCE AGREEMENT (this "Agreement") is made, entered into and effective as of the 20th day of July, 1998, by and between Camelot Music Holdings, Inc., a Delaware corporation ("Employer"), and Larry K. Mundorf ("Employee"). R E C I T A L S: WHEREAS, Employer believes that Employee's services are especially critical to its success, and desires to assume certain obligations relating to Employee's employment, as more fully described herein. NOW, THEREFORE, in consideration of the foregoing, Employer and Employee hereby agree to the following terms of this Agreement: 1. SEVERANCE. In the event Employee's employment is "Terminated without Cause" by Employer prior to Employee's normal retirement date, Employee shall be entitled to receive as severance payment, and Employer shall pay to Employee severance payments in an amount equal to twelve (12) months' worth of the greater of (a) the salary payment Employee received immediately prior to such termination or (b) the amount of salary payment Employee is receiving at the date of this Agreement, payable at the same intervals as Employee's salary had been paid. Such severance payments shall be made for a period of twelve (12) full calendar months following such termination, together with a pro rata amount for any partial calendar month following such termination, and shall be subject to mitigation. In addition, Employer shall provide to Employee during the period when severance payments are paid either (a) all the fringe benefits maintained by Employer which were available to Employee on the date of termination or, if different, (b) all of the fringe benefits available to Employee at the date of this Agreement as described on Schedule A attached hereto; Employee may elect between options (a) and (b) at the time of Employee's termination. Such benefits will be provided on the terms and conditions in effect as of the date either of termination or this Agreement as chosen by 1 2 Employee. The amount of Employee's salary as of the date of this Agreement is also set forth on Schedule A. The aforesaid severance payments and maintenance of fringe benefits shall be in addition to and not in lieu of the base salary, bonus compensation, accumulated vacation pay and other employee benefits payable to Employee at the time of termination, on account of service prior to Employee's termination. For purposes of this Agreement, the term "Terminated without Cause" shall mean termination by reason of layoff or reduction in force or for any other reason except "Employee's Voluntary Act" or "Termination for Cause" by Employer. The term "Employee's Voluntary Act" shall mean resignation or quitting by Employee unless such resignation or quitting is preceded by, or reasonably contemporaneous with, a "Change in Control." The term "Termination for Cause" shall mean a termination of Employee arising from gross incompetence, insubordination, dishonesty in performance of company duties, or conviction of fraud, theft, embezzlement or any felony. However, any termination for insubordination is subject to written notice by Employer and a thirty (30) day cure period to correct the alleged insubordination. The term "Change in Control" shall mean a change of the holders of 50% or more of the equity of Employer (other than as a result of the issuance of equity to creditors on emergence from bankruptcy pursuant to a plan of reorganization proposed by Employer), a change in the majority of the Board of Directors of Employer (other than pursuant to a plan of reorganization proposed by Employer), merger with less than 50% of the merged entity owned by pre-merger shareholders, or sale or abandonment of more than 50% of Employer's revenue-generating assets. 2. EMPLOYMENT AT WILL. Notwithstanding anything in this Agreement to the contrary, to the extent that Employee is an at-will employee on the date of execution and delivery of this Agreement, Employee remains an at-will employee thereafter. An at-will employee may be discharged or may quit for any or no reason, and the rights of Employee and Employer upon termination shall be as set forth herein. Nothing in this Agreement obligates Employee to remain 2 3 in Employer's employ for any particular period or prevents Employee from resigning at any time for any reason with or without notice to Employer. 3. ENTIRE AGREEMENT. This Agreement represents the entire agreement between the parties with respect to the subject matter hereof and supersedes any prior understanding whether written or oral. 4. AMENDMENT. This Agreement may be amended only by written agreement signed by each of the parties hereto. 5. CHOICE OF Law. This Agreement shall be construed and interpreted in accordance with the laws of the State of Ohio. 6. NOTICE. Any notice to be given in connection with this Agreement shall be deemed to have been effectively given if hand-delivered to the recipient or sent by certified mail, return receipt requested, to the recipient at the address last provided by recipient for purposes of receiving notices hereunder or, unless or until such address shall be so furnished, to the address indicated opposite his, her or its signature to this Agreement. 7. ASSIGNABILITY. This Agreement, and all actions and decisions hereunder, shall inure to the benefit of and be binding upon Employer, its representatives, successors and assigns, and upon Employee, and Employee's heirs, executors, successors and assigns. None of the rights of Employee to receive any form of compensation or benefit payable pursuant to this Agreement shall be assignable or transferable except through a testamentary disposition or by the laws of descent and distribution upon the death of Employee. Any attempted assignment, transfer, conveyance or other disposition (other than as aforesaid) of any interest in the rights of Employee to receive any form of compensation or benefit to be paid by Employer pursuant to this Agreement shall be void. 8. SEVERABILITY. In the event that any provision of this Agreement shall be held to be illegal, invalid or unenforceable for any reason, said illegality, invalidity or unenforceability shall not affect the remaining provisions, but shall be fully severable and the 3 4 Agreement shall be construed and enforced as if said illegal, invalid or unenforceable provisions had never been inserted herein. 9. EFFECTIVENESS. Employer hereby represents and warrants to Employee that execution and performance of this Agreement shall become a valid and binding obligation of Employer. 10. COMPLIANCE WITH APPLICABLE LAW. Employer reserves discretion to interpret and apply the terms and conditions of this Agreement consistent with applicable law. IN WITNESS WHEREOF, this Agreement has been duly executed as of the date and year first above written. CAMELOT MUSIC HOLDINGS, INC. By /s/ Jack K. Rogers ------------------------------- Jack K. Rogers For Notices: 8000 Freedom Avenue, N.W. North Canton, Ohio 44720 Attention: President EMPLOYEE: /s/ Larry K. Mundorf ------------------------------ Larry K. Mundorf 4 5 SCHEDULE A ---------- to Employment and Severance Agreement Name of Employee: Larry K. Mundorf Amount of Monthly Salary Payment as of date of this Agreement: $16,667.00 Fringe Benefits Available to Employee as of the date of this Agreement which will be continued during the severance period: Group Medical Group Dental Group Long-Term Disability Group Life Insurance 5 EX-10.19 8 EXHIBIT 10.19 1 Exhibit 10.19 CAMELOT MUSIC HOLDINGS, INC. ---------------------------- INDEMNITY AGREEMENT ------------------- THIS AGREEMENT is made as of the 4th day of June, 1998, by and between CAMELOT MUSIC HOLDINGS, INC., a Delaware corporation (the "Corporation"), and Stephen H. Baum ("Indemnitee"), a Director of the Corporation. WHEREAS, it is essential to the Corporation to retain and attract as Directors and/or Officers the most capable persons available; and WHEREAS, the substantial increase in corporate litigation subjects directors and officers to expensive litigation risks at the same time that the availability of directors' and officers' liability insurance has been severely limited; and WHEREAS, it is now the express policy of the Corporation to indemnify its Directors and/or Officers so as to provide them with the maximum possible protection permitted by law; and WHEREAS, in addition, because the statutory indemnification provisions of the Delaware General Corporation Law expressly provide that they are non-exclusive, it is the policy of the Corporation to indemnify directors and officers of the Corporation who have entered into settlements of derivative suits provided they have not breached the applicable statutory standard of conduct; and WHEREAS, Indemnitee does not regard the protection available under the Corporation's Certificate of Incorporation and insurance, if any, as adequate in the present circumstances, and considers it necessary and desirable to his or her service as a Director and/or Officer to have adequate protection, and the Corporation desires Indemnitee to serve in such capacity; and WHEREAS, the Delaware General Corporation Law provides that indemnification of directors and officers of a corporation may be authorized by agreement, and thereby contemplates that contracts of this nature may be entered into between the Company and Indemnitee with respect to indemnification of Indemnitee as a Director and/or Officer of the Corporation. NOW, THEREFORE, the Corporation and Indemnitee do hereby agree as follows: 1. AGREEMENT TO SERVE. Indemnitee agrees to serve or continue to serve as a Director of the Corporation for so long as he or she is duly elected or appointed or until such time as he or she tenders his or her resignation in writing. 2. DEFINITIONS. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending, or completed action, suit or proceeding, whether brought by or 2 in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature, in which Indemnitee may be or may have been involved as a party or otherwise, by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, by reason of any action taken by Indemnitee or of any inaction on his or her part while acting as such a Director and/or Officer, or by reason of the fact that he or she is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise; in each case whether or not he or she is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification or reimbursement can be provided under this Agreement. (b) The term "Expenses" shall include, without limitation, expenses of investigations, judicial or administrative proceedings or appeals, attorneys' fees and disbursements and any expenses of establishing a right to indemnification under Paragraph 8 of this Agreement, but shall not include the amount of judgments, fines or penalties against or settlements paid by Indemnitee. (c) References to "other enterprise" shall include, without limitation, employee benefit plans; references to "fines" shall include, without limitation, any excise tax assessed with respect to any employee benefit plan; references to "serving at the request of the Corporation" shall include, without limitation, any service as a Director and/or Officer of the Corporation which imposes duties on, or involves services by, such Director and/or Officer with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he or she reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Agreement. 3. INDEMNITY IN THIRD-PARTY PROCEEDINGS. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 3 if Indemnitee is a party to or threatened to be made a party to or otherwise involved in any Proceeding (other than a Proceeding by or in the right of the Corporation to procure a judgment in its favor) by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against all Expenses, judgments, settlements, fines and penalties, actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such Proceeding, but only if Indemnitee acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation and, in the case of a criminal proceeding, had no reasonable cause to believe that his or her conduct was unlawful. The termination of any such Proceeding by judgment, order of court, settlement, conviction or upon a plea of nolo contendere, or its -2- 3 equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal proceeding, that such person had reasonable cause to believe that his or her conduct was unlawful. 4. INDEMNITY FOR EXPENSES IN PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 4 if Indemnitee is a party to or threatened to be made a party to any Proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, against all Expenses actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such Proceeding, but only if he or she acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification for Expenses shall be made under this Paragraph 4 in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Corporation, unless and only to the extent that any court in which such Proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses as such court shall deem proper. 5. INDEMNITY FOR AMOUNTS PAID IN SETTLEMENT IN PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 5 if Indemnitee is a party to or threatened to be made a party to any Proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, against all amounts actually and reasonably paid in settlement by Indemnitee in connection with any such Proceeding, but only if he or she acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation. 6. INDEMNIFICATION OF EXPENSES OF SUCCESSFUL PARTY. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any Proceeding or in defense of any claim, issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses incurred in connection therewith. 7. ADVANCES OF EXPENSES. Any Expenses incurred by or on behalf of Indemnitee pursuant to Paragraphs 3 and 4 in any Proceeding shall be paid by the Corporation in advance upon the written request of Indemnitee if Indemnitee -3- 4 shall undertake to repay such amount to the extent that it is ultimately determined that Indemnitee is not entitled to indemnification hereunder. 8. RIGHT OF INDEMNITEE TO INDEMNIFICATION UPON APPLICATION; PROCEDURE UPON APPLICATION. Any indemnification under Paragraphs 3, 4 and 5 shall be made no later than thirty (30) days after receipt by the Corporation of the written request of Indemnitee, unless a determination is made within said thirty-day period by (a) the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such Proceeding, or (b) independent legal counsel, agreed to by the Corporation, in a written opinion (which counsel shall be appointed if such a quorum is not obtainable), that the Indemnitee has not met the relevant standards for indemnification set forth in Paragraphs 3, 4 or 5. The right to indemnification or advances as provided by this Agreement shall be enforceable by Indemnitee in any court of competent jurisdiction. There shall exist in such action a rebuttable presumption that Indemnitee has met the applicable standard(s) of conduct and is therefore entitled to indemnification pursuant to this Agreement, and the burden of proving that the relevant standards have not been met by Indemnitee shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors or independent legal counsel) prior to the commencement of such action to have made a determination that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Corporation (including its Board of Directors or independent legal counsel) that Indemnitee has not met such applicable standard of conduct, shall (i) constitute a defense to the action, (ii) create a presumption that Indemnitee has not met the applicable standard of conduct, or (iii) otherwise alter the presumption in favor of Indemnitee referred to in the preceding sentence. Indemnitee's expenses reasonably incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be indemnified by the Corporation. 9. ALLOWANCE FOR COMPLIANCE WITH SEC REQUIREMENTS. Indemnitee acknowledges that the Securities and Exchange Commission ("SEC") has expressed the opinion that indemnification of directors and officers from liabilities under the Securities Act of 1933 ("Act") is against public policy as expressed in the Act and, is therefore, unenforceable. Indemnitee hereby agrees that it will not be a breach of this Agreement for the Corporation to undertake with the Commission in connection with the registration for sale of any stock or other securities of the Corporation from time to time that, in the event a claim for indemnification against such liabilities (other than the payment by the Corporation of expenses incurred or paid by a director or officer of the Corporation in the successful defense of any action, suit or proceeding) is asserted in connection with such stock or other securities being registered, the Corporation will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of competent jurisdiction on the question of whether or not such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication -4- 5 of such issue. Indemnitee further agrees that such submission to a court of competent jurisdiction shall not be a breach of this Agreement. 10. INDEMNIFICATION HEREUNDER NOT EXCLUSIVE. The indemnification provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may be entitled under the Certificate of Incorporation or the By-Laws of the Corporation, any agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Delaware, or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office. The indemnification under this Agreement shall continue as to Indemnitee even though he or she may have ceased to be a Director and/or Officer and shall inure to the benefit of the heirs, executors and personal representatives of Indemnitee. 11. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Corporation for some claims, issues or matters, but not as to other claims, issues or matters, or for some or a portion of the Expenses, judgments, fines or penalties actually and reasonably incurred by Indemnitee or amounts actually and reasonably paid in settlement by Indemnitee in the investigation, defense, appeal or settlement of any Proceeding, but not for the total amount thereof, the Corporation shall nevertheless indemnify Indemnitee for the portion of such claims, issues or matters or Expenses, judgments, fines, penalties or amounts paid in settlement to which Indemnitee is entitled. 12. REIMBURSEMENT TO CORPORATION BY INDEMNITEE; LIMITATION ON AMOUNTS PAID BY CORPORATION. To the extent Indemnitee has been indemnified by the Corporation hereunder and later receives payments from any insurance carrier covering the same Expenses, judgments, fines, penalties or amounts paid in settlement so indemnified by the Corporation hereunder, Indemnitee shall immediately reimburse the Corporation hereunder for all such amounts received from the insurer. Notwithstanding anything contained herein to the contrary, Indemnitee shall not be entitled to recover amounts under this Agreement which, when added to the amount of indemnification payments made to, or on behalf of, Indemnitee, under the Certificate of Incorporation or By-Laws of the Corporation, in the aggregate exceed the Expenses, judgments, fines, penalties and amounts paid in settlement actually and reasonably incurred by Indemnitee ("Excess Amounts"). To the extent the Corporation has paid Excess Amounts to Indemnitee, Indemnitee shall be obligated to immediately reimburse the Corporation for such Excess Amounts. 13. CONTINUATION OF RIGHTS AND OBLIGATIONS. All rights and obligations of the Corporation and Indemnitee hereunder shall continue in full force and effect despite the subsequent amendment or modification of the Corporation's Certificate of Incorporation or By-Laws, as such are in effect on the date hereof, and such rights and obligations shall not be affected by any -5- 6 such amendment or modification, any resolution of directors or stockholders of the Corporation, or by any other corporate action which conflicts with or purports to amend, modify, limit or eliminate any of the rights or obligations of the Corporation and/or Indemnitee hereunder. 14. AMENDMENT AND MODIFICATION. This Agreement may only be amended, modified or supplemented by the written agreement of the Corporation and Indemnitee. 15. ASSIGNMENT. This Agreement shall not be assigned by the Corporation or Indemnitee without the prior written consent of the other party thereto, except that the Corporation may freely assign its rights and obligations under this Agreement to any subsidiary for whom Indemnitee is serving as a director and/or officer thereof; provided, however, that no permitted assignment shall release the assignor from its obligations hereunder. Subject to the foregoing, this Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, including, without limitation, any successor to the Corporation by way of merger, consolidation and/or sale or disposition of all or substantially all of the capital stock of the Corporation. 16. SAVING CLAUSE. If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall nevertheless indemnify Indemnitee as to Expenses, judgments, fines, penalties and amounts paid in settlement with respect to any Proceeding to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. 17. COUNTERPARTS. This Agreement may be executed in two or more fully or partially executed counterparts each of which shall be deemed an original binding the signer thereof against the other signing parties, but all counterparts together shall constitute one and the same instrument. Executed signature pages may be removed from counterpart agreements and attached to one or more fully executed copies of this Agreement. 18. NOTICE. Indemnitee shall, as a condition precedent to his or her right to be indemnified under this Agreement, give to the Corporation notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to the Corporation shall be directed to the Corporation at its headquarters located at 8000 Freedom Avenue N.W., North Canton, Ohio 44720-0169, Attention: Chairman (or such other address as the Corporation shall designate in writing to Indemnitee). Notice shall be deemed received three days after the date postmarked if sent by prepaid mail, properly addressed. In addition, Indemnitee shall give the Corporation such information and cooperation as it may reasonably require within Indemnitee's power. 19. APPLICABLE LAW. All matters with respect to this Agreement, including, without limitation, matters of validity, construction, effect and performance shall be governed by the internal laws of the State of Delaware -6- 7 applicable to contracts made and to be performed therein between the residents thereof (regardless of the laws that might otherwise be applicable under principles of conflicts of law). IN WITNESS WHEREOF, the parties hereby have caused this Agreement to be duly executed and signed as of the day and year first above written. CAMELOT MUSIC HOLDINGS, INC. THE "CORPORATION" By /s/ Jack K. Rogers --------------------------------- Its Executive Vice President --------------------------------- "INDEMNITEE" /s/ Stephen H. Baum ------------------------------------ Stephen H. Baum -7- EX-10.20 9 EXHIBIT 10.20 1 Exhibit 10.20 CAMELOT MUSIC HOLDINGS, INC. ---------------------------- INDEMNITY AGREEMENT ------------------- THIS AGREEMENT is made as of the 4th day of June, 1998, by and between CAMELOT MUSIC HOLDINGS, INC., a Delaware corporation (the "Corporation"), and George R. Zoffinger ("Indemnitee"), a Director of the Corporation. WHEREAS, it is essential to the Corporation to retain and attract as Directors and/or Officers the most capable persons available; and WHEREAS, the substantial increase in corporate litigation subjects directors and officers to expensive litigation risks at the same time that the availability of directors' and officers' liability insurance has been severely limited; and WHEREAS, it is now the express policy of the Corporation to indemnify its Directors and/or Officers so as to provide them with the maximum possible protection permitted by law; and WHEREAS, in addition, because the statutory indemnification provisions of the Delaware General Corporation Law expressly provide that they are non-exclusive, it is the policy of the Corporation to indemnify directors and officers of the Corporation who have entered into settlements of derivative suits provided they have not breached the applicable statutory standard of conduct; and WHEREAS, Indemnitee does not regard the protection available under the Corporation's Certificate of Incorporation and insurance, if any, as adequate in the present circumstances, and considers it necessary and desirable to his or her service as a Director and/or Officer to have adequate protection, and the Corporation desires Indemnitee to serve in such capacity; and WHEREAS, the Delaware General Corporation Law provides that indemnification of directors and officers of a corporation may be authorized by agreement, and thereby contemplates that contracts of this nature may be entered into between the Company and Indemnitee with respect to indemnification of Indemnitee as a Director and/or Officer of the Corporation. NOW, THEREFORE, the Corporation and Indemnitee do hereby agree as follows: 1. AGREEMENT TO SERVE. Indemnitee agrees to serve or continue to serve as a Director of the Corporation for so long as he or she is duly elected or appointed or until such time as he or she tenders his or her resignation in writing. 2. DEFINITIONS. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending, or completed action, suit or proceeding, whether brought by or 2 in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature, in which Indemnitee may be or may have been involved as a party or otherwise, by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, by reason of any action taken by Indemnitee or of any inaction on his or her part while acting as such a Director and/or Officer, or by reason of the fact that he or she is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise; in each case whether or not he or she is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification or reimbursement can be provided under this Agreement. (b) The term "Expenses" shall include, without limitation, expenses of investigations, judicial or administrative proceedings or appeals, attorneys' fees and disbursements and any expenses of establishing a right to indemnification under Paragraph 8 of this Agreement, but shall not include the amount of judgments, fines or penalties against or settlements paid by Indemnitee. (c) References to "other enterprise" shall include, without limitation, employee benefit plans; references to "fines" shall include, without limitation, any excise tax assessed with respect to any employee benefit plan; references to "serving at the request of the Corporation" shall include, without limitation, any service as a Director and/or Officer of the Corporation which imposes duties on, or involves services by, such Director and/or Officer with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he or she reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Agreement. 3. INDEMNITY IN THIRD-PARTY PROCEEDINGS. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 3 if Indemnitee is a party to or threatened to be made a party to or otherwise involved in any Proceeding (other than a Proceeding by or in the right of the Corporation to procure a judgment in its favor) by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against all Expenses, judgments, settlements, fines and penalties, actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such Proceeding, but only if Indemnitee acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation and, in the case of a criminal proceeding, had no reasonable cause to believe that his or her conduct was unlawful. The termination of any such Proceeding by judgment, order of court, settlement, conviction or upon a plea of nolo contendere, or its -2- 3 equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal proceeding, that such person had reasonable cause to believe that his or her conduct was unlawful. 4. INDEMNITY FOR EXPENSES IN PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 4 if Indemnitee is a party to or threatened to be made a party to any Proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, against all Expenses actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such Proceeding, but only if he or she acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification for Expenses shall be made under this Paragraph 4 in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Corporation, unless and only to the extent that any court in which such Proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses as such court shall deem proper. 5. INDEMNITY FOR AMOUNTS PAID IN SETTLEMENT IN PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 5 if Indemnitee is a party to or threatened to be made a party to any Proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, against all amounts actually and reasonably paid in settlement by Indemnitee in connection with any such Proceeding, but only if he or she acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation. 6. INDEMNIFICATION OF EXPENSES OF SUCCESSFUL PARTY. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any Proceeding or in defense of any claim, issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses incurred in connection therewith. 7. ADVANCES OF EXPENSES. Any Expenses incurred by or on behalf of Indemnitee pursuant to Paragraphs 3 and 4 in any Proceeding shall be paid by the Corporation in advance upon the written request of Indemnitee if Indemnitee -3- 4 shall undertake to repay such amount to the extent that it is ultimately determined that Indemnitee is not entitled to indemnification hereunder. 8. RIGHT OF INDEMNITEE TO INDEMNIFICATION UPON APPLICATION; PROCEDURE UPON APPLICATION. Any indemnification under Paragraphs 3, 4 and 5 shall be made no later than thirty (30) days after receipt by the Corporation of the written request of Indemnitee, unless a determination is made within said thirty-day period by (a) the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such Proceeding, or (b) independent legal counsel, agreed to by the Corporation, in a written opinion (which counsel shall be appointed if such a quorum is not obtainable), that the Indemnitee has not met the relevant standards for indemnification set forth in Paragraphs 3, 4 or 5. The right to indemnification or advances as provided by this Agreement shall be enforceable by Indemnitee in any court of competent jurisdiction. There shall exist in such action a rebuttable presumption that Indemnitee has met the applicable standard(s) of conduct and is therefore entitled to indemnification pursuant to this Agreement, and the burden of proving that the relevant standards have not been met by Indemnitee shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors or independent legal counsel) prior to the commencement of such action to have made a determination that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Corporation (including its Board of Directors or independent legal counsel) that Indemnitee has not met such applicable standard of conduct, shall (i) constitute a defense to the action, (ii) create a presumption that Indemnitee has not met the applicable standard of conduct, or (iii) otherwise alter the presumption in favor of Indemnitee referred to in the preceding sentence. Indemnitee's expenses reasonably incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be indemnified by the Corporation. 9. ALLOWANCE FOR COMPLIANCE WITH SEC REQUIREMENTS. Indemnitee acknowledges that the Securities and Exchange Commission ("SEC") has expressed the opinion that indemnification of directors and officers from liabilities under the Securities Act of 1933 ("Act") is against public policy as expressed in the Act and, is therefore, unenforceable. Indemnitee hereby agrees that it will not be a breach of this Agreement for the Corporation to undertake with the Commission in connection with the registration for sale of any stock or other securities of the Corporation from time to time that, in the event a claim for indemnification against such liabilities (other than the payment by the Corporation of expenses incurred or paid by a director or officer of the Corporation in the successful defense of any action, suit or proceeding) is asserted in connection with such stock or other securities being registered, the Corporation will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of competent jurisdiction on the question of whether or not such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication -4- 5 of such issue. Indemnitee further agrees that such submission to a court of competent jurisdiction shall not be a breach of this Agreement. 10. INDEMNIFICATION HEREUNDER NOT EXCLUSIVE. The indemnification provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may be entitled under the Certificate of Incorporation or the By-Laws of the Corporation, any agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Delaware, or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office. The indemnification under this Agreement shall continue as to Indemnitee even though he or she may have ceased to be a Director and/or Officer and shall inure to the benefit of the heirs, executors and personal representatives of Indemnitee. 11. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Corporation for some claims, issues or matters, but not as to other claims, issues or matters, or for some or a portion of the Expenses, judgments, fines or penalties actually and reasonably incurred by Indemnitee or amounts actually and reasonably paid in settlement by Indemnitee in the investigation, defense, appeal or settlement of any Proceeding, but not for the total amount thereof, the Corporation shall nevertheless indemnify Indemnitee for the portion of such claims, issues or matters or Expenses, judgments, fines, penalties or amounts paid in settlement to which Indemnitee is entitled. 12. REIMBURSEMENT TO CORPORATION BY INDEMNITEE; LIMITATION ON AMOUNTS PAID BY CORPORATION. To the extent Indemnitee has been indemnified by the Corporation hereunder and later receives payments from any insurance carrier covering the same Expenses, judgments, fines, penalties or amounts paid in settlement so indemnified by the Corporation hereunder, Indemnitee shall immediately reimburse the Corporation hereunder for all such amounts received from the insurer. Notwithstanding anything contained herein to the contrary, Indemnitee shall not be entitled to recover amounts under this Agreement which, when added to the amount of indemnification payments made to, or on behalf of, Indemnitee, under the Certificate of Incorporation or By-Laws of the Corporation, in the aggregate exceed the Expenses, judgments, fines, penalties and amounts paid in settlement actually and reasonably incurred by Indemnitee ("Excess Amounts"). To the extent the Corporation has paid Excess Amounts to Indemnitee, Indemnitee shall be obligated to immediately reimburse the Corporation for such Excess Amounts. 13. CONTINUATION OF RIGHTS AND OBLIGATIONS. All rights and obligations of the Corporation and Indemnitee hereunder shall continue in full force and effect despite the subsequent amendment or modification of the Corporation's Certificate of Incorporation or By-Laws, as such are in effect on the date hereof, and such rights and obligations shall not be affected by any -5- 6 such amendment or modification, any resolution of directors or stockholders of the Corporation, or by any other corporate action which conflicts with or purports to amend, modify, limit or eliminate any of the rights or obligations of the Corporation and/or Indemnitee hereunder. 14. AMENDMENT AND MODIFICATION. This Agreement may only be amended, modified or supplemented by the written agreement of the Corporation and Indemnitee. 15. ASSIGNMENT. This Agreement shall not be assigned by the Corporation or Indemnitee without the prior written consent of the other party thereto, except that the Corporation may freely assign its rights and obligations under this Agreement to any subsidiary for whom Indemnitee is serving as a director and/or officer thereof; provided, however, that no permitted assignment shall release the assignor from its obligations hereunder. Subject to the foregoing, this Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, including, without limitation, any successor to the Corporation by way of merger, consolidation and/or sale or disposition of all or substantially all of the capital stock of the Corporation. 16. SAVING CLAUSE. If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall nevertheless indemnify Indemnitee as to Expenses, judgments, fines, penalties and amounts paid in settlement with respect to any Proceeding to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. 17. COUNTERPARTS. This Agreement may be executed in two or more fully or partially executed counterparts each of which shall be deemed an original binding the signer thereof against the other signing parties, but all counterparts together shall constitute one and the same instrument. Executed signature pages may be removed from counterpart agreements and attached to one or more fully executed copies of this Agreement. 18. NOTICE. Indemnitee shall, as a condition precedent to his or her right to be indemnified under this Agreement, give to the Corporation notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to the Corporation shall be directed to the Corporation at its headquarters located at 8000 Freedom Avenue N.W., North Canton, Ohio 44720-0169, Attention: Chairman (or such other address as the Corporation shall designate in writing to Indemnitee). Notice shall be deemed received three days after the date postmarked if sent by prepaid mail, properly addressed. In addition, Indemnitee shall give the Corporation such information and cooperation as it may reasonably require within Indemnitee's power. 19. APPLICABLE LAW. All matters with respect to this Agreement, including, without limitation, matters of validity, construction, effect and performance shall be governed by the internal laws of the State of Delaware -6- 7 applicable to contracts made and to be performed therein between the residents thereof (regardless of the laws that might otherwise be applicable under principles of conflicts of law). IN WITNESS WHEREOF, the parties hereby have caused this Agreement to be duly executed and signed as of the day and year first above written. CAMELOT MUSIC HOLDINGS, INC. THE "CORPORATION" By /s/ Jack K. Rogers --------------------------------- Its Executive Vice President --------------------------------- "INDEMNITEE" /s/ George R. Zoffinger ------------------------------------ George R. Zoffinger -7- EX-10.21 10 EXHIBIT 10.21 1 Exhibit 10.21 CAMELOT MUSIC HOLDINGS, INC. ---------------------------- INDEMNITY AGREEMENT ------------------- THIS AGREEMENT is made as of the 4th day of June, 1998, by and between CAMELOT MUSIC HOLDINGS, INC., a Delaware corporation (the "Corporation"), and Michael B. Solow ("Indemnitee"), a Director of the Corporation. WHEREAS, it is essential to the Corporation to retain and attract as Directors and/or Officers the most capable persons available; and WHEREAS, the substantial increase in corporate litigation subjects directors and officers to expensive litigation risks at the same time that the availability of directors' and officers' liability insurance has been severely limited; and WHEREAS, it is now the express policy of the Corporation to indemnify its Directors and/or Officers so as to provide them with the maximum possible protection permitted by law; and WHEREAS, in addition, because the statutory indemnification provisions of the Delaware General Corporation Law expressly provide that they are non-exclusive, it is the policy of the Corporation to indemnify directors and officers of the Corporation who have entered into settlements of derivative suits provided they have not breached the applicable statutory standard of conduct; and WHEREAS, Indemnitee does not regard the protection available under the Corporation's Certificate of Incorporation and insurance, if any, as adequate in the present circumstances, and considers it necessary and desirable to his or her service as a Director and/or Officer to have adequate protection, and the Corporation desires Indemnitee to serve in such capacity; and WHEREAS, the Delaware General Corporation Law provides that indemnification of directors and officers of a corporation may be authorized by agreement, and thereby contemplates that contracts of this nature may be entered into between the Company and Indemnitee with respect to indemnification of Indemnitee as a Director and/or Officer of the Corporation. NOW, THEREFORE, the Corporation and Indemnitee do hereby agree as follows: 1. AGREEMENT TO SERVE. Indemnitee agrees to serve or continue to serve as a Director of the Corporation for so long as he or she is duly elected or appointed or until such time as he or she tenders his or her resignation in writing. 2. DEFINITIONS. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending, or completed action, suit or proceeding, whether brought by or 2 in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature, in which Indemnitee may be or may have been involved as a party or otherwise, by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, by reason of any action taken by Indemnitee or of any inaction on his or her part while acting as such a Director and/or Officer, or by reason of the fact that he or she is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise; in each case whether or not he or she is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification or reimbursement can be provided under this Agreement. (b) The term "Expenses" shall include, without limitation, expenses of investigations, judicial or administrative proceedings or appeals, attorneys' fees and disbursements and any expenses of establishing a right to indemnification under Paragraph 8 of this Agreement, but shall not include the amount of judgments, fines or penalties against or settlements paid by Indemnitee. (c) References to "other enterprise" shall include, without limitation, employee benefit plans; references to "fines" shall include, without limitation, any excise tax assessed with respect to any employee benefit plan; references to "serving at the request of the Corporation" shall include, without limitation, any service as a Director and/or Officer of the Corporation which imposes duties on, or involves services by, such Director and/or Officer with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he or she reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Agreement. 3. INDEMNITY IN THIRD-PARTY PROCEEDINGS. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 3 if Indemnitee is a party to or threatened to be made a party to or otherwise involved in any Proceeding (other than a Proceeding by or in the right of the Corporation to procure a judgment in its favor) by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against all Expenses, judgments, settlements, fines and penalties, actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such Proceeding, but only if Indemnitee acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation and, in the case of a criminal proceeding, had no reasonable cause to believe that his or her conduct was unlawful. The termination of any such Proceeding by judgment, order of court, settlement, conviction or upon a plea of nolo contendere, or its -2- 3 equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal proceeding, that such person had reasonable cause to believe that his or her conduct was unlawful. 4. INDEMNITY FOR EXPENSES IN PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 4 if Indemnitee is a party to or threatened to be made a party to any Proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, against all Expenses actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such Proceeding, but only if he or she acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification for Expenses shall be made under this Paragraph 4 in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Corporation, unless and only to the extent that any court in which such Proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses as such court shall deem proper. 5. INDEMNITY FOR AMOUNTS PAID IN SETTLEMENT IN PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 5 if Indemnitee is a party to or threatened to be made a party to any Proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, against all amounts actually and reasonably paid in settlement by Indemnitee in connection with any such Proceeding, but only if he or she acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation. 6. INDEMNIFICATION OF EXPENSES OF SUCCESSFUL PARTY. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any Proceeding or in defense of any claim, issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses incurred in connection therewith. 7. ADVANCES OF EXPENSES. Any Expenses incurred by or on behalf of Indemnitee pursuant to Paragraphs 3 and 4 in any Proceeding shall be paid by the Corporation in advance upon the written request of Indemnitee if Indemnitee -3- 4 shall undertake to repay such amount to the extent that it is ultimately determined that Indemnitee is not entitled to indemnification hereunder. 8. RIGHT OF INDEMNITEE TO INDEMNIFICATION UPON APPLICATION; PROCEDURE UPON APPLICATION. Any indemnification under Paragraphs 3, 4 and 5 shall be made no later than thirty (30) days after receipt by the Corporation of the written request of Indemnitee, unless a determination is made within said thirty-day period by (a) the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such Proceeding, or (b) independent legal counsel, agreed to by the Corporation, in a written opinion (which counsel shall be appointed if such a quorum is not obtainable), that the Indemnitee has not met the relevant standards for indemnification set forth in Paragraphs 3, 4 or 5. The right to indemnification or advances as provided by this Agreement shall be enforceable by Indemnitee in any court of competent jurisdiction. There shall exist in such action a rebuttable presumption that Indemnitee has met the applicable standard(s) of conduct and is therefore entitled to indemnification pursuant to this Agreement, and the burden of proving that the relevant standards have not been met by Indemnitee shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors or independent legal counsel) prior to the commencement of such action to have made a determination that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Corporation (including its Board of Directors or independent legal counsel) that Indemnitee has not met such applicable standard of conduct, shall (i) constitute a defense to the action, (ii) create a presumption that Indemnitee has not met the applicable standard of conduct, or (iii) otherwise alter the presumption in favor of Indemnitee referred to in the preceding sentence. Indemnitee's expenses reasonably incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be indemnified by the Corporation. 9. ALLOWANCE FOR COMPLIANCE WITH SEC REQUIREMENTS. Indemnitee acknowledges that the Securities and Exchange Commission ("SEC") has expressed the opinion that indemnification of directors and officers from liabilities under the Securities Act of 1933 ("Act") is against public policy as expressed in the Act and, is therefore, unenforceable. Indemnitee hereby agrees that it will not be a breach of this Agreement for the Corporation to undertake with the Commission in connection with the registration for sale of any stock or other securities of the Corporation from time to time that, in the event a claim for indemnification against such liabilities (other than the payment by the Corporation of expenses incurred or paid by a director or officer of the Corporation in the successful defense of any action, suit or proceeding) is asserted in connection with such stock or other securities being registered, the Corporation will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of competent jurisdiction on the question of whether or not such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication -4- 5 of such issue. Indemnitee further agrees that such submission to a court of competent jurisdiction shall not be a breach of this Agreement. 10. INDEMNIFICATION HEREUNDER NOT EXCLUSIVE. The indemnification provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may be entitled under the Certificate of Incorporation or the By-Laws of the Corporation, any agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Delaware, or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office. The indemnification under this Agreement shall continue as to Indemnitee even though he or she may have ceased to be a Director and/or Officer and shall inure to the benefit of the heirs, executors and personal representatives of Indemnitee. 11. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Corporation for some claims, issues or matters, but not as to other claims, issues or matters, or for some or a portion of the Expenses, judgments, fines or penalties actually and reasonably incurred by Indemnitee or amounts actually and reasonably paid in settlement by Indemnitee in the investigation, defense, appeal or settlement of any Proceeding, but not for the total amount thereof, the Corporation shall nevertheless indemnify Indemnitee for the portion of such claims, issues or matters or Expenses, judgments, fines, penalties or amounts paid in settlement to which Indemnitee is entitled. 12. REIMBURSEMENT TO CORPORATION BY INDEMNITEE; LIMITATION ON AMOUNTS PAID BY CORPORATION. To the extent Indemnitee has been indemnified by the Corporation hereunder and later receives payments from any insurance carrier covering the same Expenses, judgments, fines, penalties or amounts paid in settlement so indemnified by the Corporation hereunder, Indemnitee shall immediately reimburse the Corporation hereunder for all such amounts received from the insurer. Notwithstanding anything contained herein to the contrary, Indemnitee shall not be entitled to recover amounts under this Agreement which, when added to the amount of indemnification payments made to, or on behalf of, Indemnitee, under the Certificate of Incorporation or By-Laws of the Corporation, in the aggregate exceed the Expenses, judgments, fines, penalties and amounts paid in settlement actually and reasonably incurred by Indemnitee ("Excess Amounts"). To the extent the Corporation has paid Excess Amounts to Indemnitee, Indemnitee shall be obligated to immediately reimburse the Corporation for such Excess Amounts. 13. CONTINUATION OF RIGHTS AND OBLIGATIONS. All rights and obligations of the Corporation and Indemnitee hereunder shall continue in full force and effect despite the subsequent amendment or modification of the Corporation's Certificate of Incorporation or By-Laws, as such are in effect on the date hereof, and such rights and obligations shall not be affected by any -5- 6 such amendment or modification, any resolution of directors or stockholders of the Corporation, or by any other corporate action which conflicts with or purports to amend, modify, limit or eliminate any of the rights or obligations of the Corporation and/or Indemnitee hereunder. 14. AMENDMENT AND MODIFICATION. This Agreement may only be amended, modified or supplemented by the written agreement of the Corporation and Indemnitee. 15. ASSIGNMENT. This Agreement shall not be assigned by the Corporation or Indemnitee without the prior written consent of the other party thereto, except that the Corporation may freely assign its rights and obligations under this Agreement to any subsidiary for whom Indemnitee is serving as a director and/or officer thereof; provided, however, that no permitted assignment shall release the assignor from its obligations hereunder. Subject to the foregoing, this Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, including, without limitation, any successor to the Corporation by way of merger, consolidation and/or sale or disposition of all or substantially all of the capital stock of the Corporation. 16. SAVING CLAUSE. If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall nevertheless indemnify Indemnitee as to Expenses, judgments, fines, penalties and amounts paid in settlement with respect to any Proceeding to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. 17. COUNTERPARTS. This Agreement may be executed in two or more fully or partially executed counterparts each of which shall be deemed an original binding the signer thereof against the other signing parties, but all counterparts together shall constitute one and the same instrument. Executed signature pages may be removed from counterpart agreements and attached to one or more fully executed copies of this Agreement. 18. NOTICE. Indemnitee shall, as a condition precedent to his or her right to be indemnified under this Agreement, give to the Corporation notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to the Corporation shall be directed to the Corporation at its headquarters located at 8000 Freedom Avenue N.W., North Canton, Ohio 44720-0169, Attention: Chairman (or such other address as the Corporation shall designate in writing to Indemnitee). Notice shall be deemed received three days after the date postmarked if sent by prepaid mail, properly addressed. In addition, Indemnitee shall give the Corporation such information and cooperation as it may reasonably require within Indemnitee's power. 19. APPLICABLE LAW. All matters with respect to this Agreement, including, without limitation, matters of validity, construction, effect and performance shall be governed by the internal laws of the State of Delaware -6- 7 applicable to contracts made and to be performed therein between the residents thereof (regardless of the laws that might otherwise be applicable under principles of conflicts of law). IN WITNESS WHEREOF, the parties hereby have caused this Agreement to be duly executed and signed as of the day and year first above written. CAMELOT MUSIC HOLDINGS, INC. THE "CORPORATION" By /s/ Jack K. Rogers --------------------------------- Its Executive Vice President --------------------------------- "INDEMNITEE" /s/ Michael B. Solow ------------------------------------ Michael B. Solow -7- EX-10.22 11 EXHIBIT 10.22 1 Exhibit 10.22 CAMELOT MUSIC HOLDINGS, INC. ---------------------------- INDEMNITY AGREEMENT ------------------- THIS AGREEMENT is made as of the 4th day of June, 1998, by and between CAMELOT MUSIC HOLDINGS, INC., a Delaware corporation (the "Corporation"), and Marc L. Luzzatto ("Indemnitee"), a Director of the Corporation. WHEREAS, it is essential to the Corporation to retain and attract as Directors and/or Officers the most capable persons available; and WHEREAS, the substantial increase in corporate litigation subjects directors and officers to expensive litigation risks at the same time that the availability of directors' and officers' liability insurance has been severely limited; and WHEREAS, it is now the express policy of the Corporation to indemnify its Directors and/or Officers so as to provide them with the maximum possible protection permitted by law; and WHEREAS, in addition, because the statutory indemnification provisions of the Delaware General Corporation Law expressly provide that they are non-exclusive, it is the policy of the Corporation to indemnify directors and officers of the Corporation who have entered into settlements of derivative suits provided they have not breached the applicable statutory standard of conduct; and WHEREAS, Indemnitee does not regard the protection available under the Corporation's Certificate of Incorporation and insurance, if any, as adequate in the present circumstances, and considers it necessary and desirable to his or her service as a Director and/or Officer to have adequate protection, and the Corporation desires Indemnitee to serve in such capacity; and WHEREAS, the Delaware General Corporation Law provides that indemnification of directors and officers of a corporation may be authorized by agreement, and thereby contemplates that contracts of this nature may be entered into between the Company and Indemnitee with respect to indemnification of Indemnitee as a Director and/or Officer of the Corporation. NOW, THEREFORE, the Corporation and Indemnitee do hereby agree as follows: 1. AGREEMENT TO SERVE. Indemnitee agrees to serve or continue to serve as a Director of the Corporation for so long as he or she is duly elected or appointed or until such time as he or she tenders his or her resignation in writing. 2. DEFINITIONS. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending, or completed action, suit or proceeding, whether brought by or 2 in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature, in which Indemnitee may be or may have been involved as a party or otherwise, by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, by reason of any action taken by Indemnitee or of any inaction on his or her part while acting as such a Director and/or Officer, or by reason of the fact that he or she is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise; in each case whether or not he or she is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification or reimbursement can be provided under this Agreement. (b) The term "Expenses" shall include, without limitation, expenses of investigations, judicial or administrative proceedings or appeals, attorneys' fees and disbursements and any expenses of establishing a right to indemnification under Paragraph 8 of this Agreement, but shall not include the amount of judgments, fines or penalties against or settlements paid by Indemnitee. (c) References to "other enterprise" shall include, without limitation, employee benefit plans; references to "fines" shall include, without limitation, any excise tax assessed with respect to any employee benefit plan; references to "serving at the request of the Corporation" shall include, without limitation, any service as a Director and/or Officer of the Corporation which imposes duties on, or involves services by, such Director and/or Officer with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he or she reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Agreement. 3. INDEMNITY IN THIRD-PARTY PROCEEDINGS. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 3 if Indemnitee is a party to or threatened to be made a party to or otherwise involved in any Proceeding (other than a Proceeding by or in the right of the Corporation to procure a judgment in its favor) by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against all Expenses, judgments, settlements, fines and penalties, actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such Proceeding, but only if Indemnitee acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation and, in the case of a criminal proceeding, had no reasonable cause to believe that his or her conduct was unlawful. The termination of any such Proceeding by judgment, order of court, settlement, conviction or upon a plea of nolo contendere, or its -2- 3 equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal proceeding, that such person had reasonable cause to believe that his or her conduct was unlawful. 4. INDEMNITY FOR EXPENSES IN PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 4 if Indemnitee is a party to or threatened to be made a party to any Proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, against all Expenses actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such Proceeding, but only if he or she acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification for Expenses shall be made under this Paragraph 4 in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Corporation, unless and only to the extent that any court in which such Proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses as such court shall deem proper. 5. INDEMNITY FOR AMOUNTS PAID IN SETTLEMENT IN PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 5 if Indemnitee is a party to or threatened to be made a party to any Proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, against all amounts actually and reasonably paid in settlement by Indemnitee in connection with any such Proceeding, but only if he or she acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation. 6. INDEMNIFICATION OF EXPENSES OF SUCCESSFUL PARTY. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any Proceeding or in defense of any claim, issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses incurred in connection therewith. 7. ADVANCES OF EXPENSES. Any Expenses incurred by or on behalf of Indemnitee pursuant to Paragraphs 3 and 4 in any Proceeding shall be paid by the Corporation in advance upon the written request of Indemnitee if Indemnitee -3- 4 shall undertake to repay such amount to the extent that it is ultimately determined that Indemnitee is not entitled to indemnification hereunder. 8. RIGHT OF INDEMNITEE TO INDEMNIFICATION UPON APPLICATION; PROCEDURE UPON APPLICATION. Any indemnification under Paragraphs 3, 4 and 5 shall be made no later than thirty (30) days after receipt by the Corporation of the written request of Indemnitee, unless a determination is made within said thirty-day period by (a) the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such Proceeding, or (b) independent legal counsel, agreed to by the Corporation, in a written opinion (which counsel shall be appointed if such a quorum is not obtainable), that the Indemnitee has not met the relevant standards for indemnification set forth in Paragraphs 3, 4 or 5. The right to indemnification or advances as provided by this Agreement shall be enforceable by Indemnitee in any court of competent jurisdiction. There shall exist in such action a rebuttable presumption that Indemnitee has met the applicable standard(s) of conduct and is therefore entitled to indemnification pursuant to this Agreement, and the burden of proving that the relevant standards have not been met by Indemnitee shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors or independent legal counsel) prior to the commencement of such action to have made a determination that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Corporation (including its Board of Directors or independent legal counsel) that Indemnitee has not met such applicable standard of conduct, shall (i) constitute a defense to the action, (ii) create a presumption that Indemnitee has not met the applicable standard of conduct, or (iii) otherwise alter the presumption in favor of Indemnitee referred to in the preceding sentence. Indemnitee's expenses reasonably incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be indemnified by the Corporation. 9. ALLOWANCE FOR COMPLIANCE WITH SEC REQUIREMENTS. Indemnitee acknowledges that the Securities and Exchange Commission ("SEC") has expressed the opinion that indemnification of directors and officers from liabilities under the Securities Act of 1933 ("Act") is against public policy as expressed in the Act and, is therefore, unenforceable. Indemnitee hereby agrees that it will not be a breach of this Agreement for the Corporation to undertake with the Commission in connection with the registration for sale of any stock or other securities of the Corporation from time to time that, in the event a claim for indemnification against such liabilities (other than the payment by the Corporation of expenses incurred or paid by a director or officer of the Corporation in the successful defense of any action, suit or proceeding) is asserted in connection with such stock or other securities being registered, the Corporation will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of competent jurisdiction on the question of whether or not such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication -4- 5 of such issue. Indemnitee further agrees that such submission to a court of competent jurisdiction shall not be a breach of this Agreement. 10. INDEMNIFICATION HEREUNDER NOT EXCLUSIVE. The indemnification provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may be entitled under the Certificate of Incorporation or the By-Laws of the Corporation, any agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Delaware, or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office. The indemnification under this Agreement shall continue as to Indemnitee even though he or she may have ceased to be a Director and/or Officer and shall inure to the benefit of the heirs, executors and personal representatives of Indemnitee. 11. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Corporation for some claims, issues or matters, but not as to other claims, issues or matters, or for some or a portion of the Expenses, judgments, fines or penalties actually and reasonably incurred by Indemnitee or amounts actually and reasonably paid in settlement by Indemnitee in the investigation, defense, appeal or settlement of any Proceeding, but not for the total amount thereof, the Corporation shall nevertheless indemnify Indemnitee for the portion of such claims, issues or matters or Expenses, judgments, fines, penalties or amounts paid in settlement to which Indemnitee is entitled. 12. REIMBURSEMENT TO CORPORATION BY INDEMNITEE; LIMITATION ON AMOUNTS PAID BY CORPORATION. To the extent Indemnitee has been indemnified by the Corporation hereunder and later receives payments from any insurance carrier covering the same Expenses, judgments, fines, penalties or amounts paid in settlement so indemnified by the Corporation hereunder, Indemnitee shall immediately reimburse the Corporation hereunder for all such amounts received from the insurer. Notwithstanding anything contained herein to the contrary, Indemnitee shall not be entitled to recover amounts under this Agreement which, when added to the amount of indemnification payments made to, or on behalf of, Indemnitee, under the Certificate of Incorporation or By-Laws of the Corporation, in the aggregate exceed the Expenses, judgments, fines, penalties and amounts paid in settlement actually and reasonably incurred by Indemnitee ("Excess Amounts"). To the extent the Corporation has paid Excess Amounts to Indemnitee, Indemnitee shall be obligated to immediately reimburse the Corporation for such Excess Amounts. 13. CONTINUATION OF RIGHTS AND OBLIGATIONS. All rights and obligations of the Corporation and Indemnitee hereunder shall continue in full force and effect despite the subsequent amendment or modification of the Corporation's Certificate of Incorporation or By-Laws, as such are in effect on the date hereof, and such rights and obligations shall not be affected by any -5- 6 such amendment or modification, any resolution of directors or stockholders of the Corporation, or by any other corporate action which conflicts with or purports to amend, modify, limit or eliminate any of the rights or obligations of the Corporation and/or Indemnitee hereunder. 14. AMENDMENT AND MODIFICATION. This Agreement may only be amended, modified or supplemented by the written agreement of the Corporation and Indemnitee. 15. ASSIGNMENT. This Agreement shall not be assigned by the Corporation or Indemnitee without the prior written consent of the other party thereto, except that the Corporation may freely assign its rights and obligations under this Agreement to any subsidiary for whom Indemnitee is serving as a director and/or officer thereof; provided, however, that no permitted assignment shall release the assignor from its obligations hereunder. Subject to the foregoing, this Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, including, without limitation, any successor to the Corporation by way of merger, consolidation and/or sale or disposition of all or substantially all of the capital stock of the Corporation. 16. SAVING CLAUSE. If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall nevertheless indemnify Indemnitee as to Expenses, judgments, fines, penalties and amounts paid in settlement with respect to any Proceeding to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. 17. COUNTERPARTS. This Agreement may be executed in two or more fully or partially executed counterparts each of which shall be deemed an original binding the signer thereof against the other signing parties, but all counterparts together shall constitute one and the same instrument. Executed signature pages may be removed from counterpart agreements and attached to one or more fully executed copies of this Agreement. 18. NOTICE. Indemnitee shall, as a condition precedent to his or her right to be indemnified under this Agreement, give to the Corporation notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to the Corporation shall be directed to the Corporation at its headquarters located at 8000 Freedom Avenue N.W., North Canton, Ohio 44720-0169, Attention: Chairman (or such other address as the Corporation shall designate in writing to Indemnitee). Notice shall be deemed received three days after the date postmarked if sent by prepaid mail, properly addressed. In addition, Indemnitee shall give the Corporation such information and cooperation as it may reasonably require within Indemnitee's power. 19. APPLICABLE LAW. All matters with respect to this Agreement, including, without limitation, matters of validity, construction, effect and performance shall be governed by the internal laws of the State of Delaware -6- 7 applicable to contracts made and to be performed therein between the residents thereof (regardless of the laws that might otherwise be applicable under principles of conflicts of law). IN WITNESS WHEREOF, the parties hereby have caused this Agreement to be duly executed and signed as of the day and year first above written. CAMELOT MUSIC HOLDINGS, INC. THE "CORPORATION" By /s/ Jack K. Rogers --------------------------------- Its Executive Vice President --------------------------------- "INDEMNITEE" /s/ Marc L. Luzzatto ------------------------------------ Marc L. Luzzatto -7- EX-10.23 12 EXHIBIT 10.23 1 Exhibit 10.23 CAMELOT MUSIC HOLDINGS, INC. ---------------------------- INDEMNITY AGREEMENT ------------------- THIS AGREEMENT is made as of the 4th day of June, 1998, by and between CAMELOT MUSIC HOLDINGS, INC., a Delaware corporation (the "Corporation"), and Herbert J. Marks ("Indemnitee"), a Director of the Corporation. WHEREAS, it is essential to the Corporation to retain and attract as Directors and/or Officers the most capable persons available; and WHEREAS, the substantial increase in corporate litigation subjects directors and officers to expensive litigation risks at the same time that the availability of directors' and officers' liability insurance has been severely limited; and WHEREAS, it is now the express policy of the Corporation to indemnify its Directors and/or Officers so as to provide them with the maximum possible protection permitted by law; and WHEREAS, in addition, because the statutory indemnification provisions of the Delaware General Corporation Law expressly provide that they are non-exclusive, it is the policy of the Corporation to indemnify directors and officers of the Corporation who have entered into settlements of derivative suits provided they have not breached the applicable statutory standard of conduct; and WHEREAS, Indemnitee does not regard the protection available under the Corporation's Certificate of Incorporation and insurance, if any, as adequate in the present circumstances, and considers it necessary and desirable to his or her service as a Director and/or Officer to have adequate protection, and the Corporation desires Indemnitee to serve in such capacity; and WHEREAS, the Delaware General Corporation Law provides that indemnification of directors and officers of a corporation may be authorized by agreement, and thereby contemplates that contracts of this nature may be entered into between the Company and Indemnitee with respect to indemnification of Indemnitee as a Director and/or Officer of the Corporation. NOW, THEREFORE, the Corporation and Indemnitee do hereby agree as follows: 1. AGREEMENT TO SERVE. Indemnitee agrees to serve or continue to serve as a Director of the Corporation for so long as he or she is duly elected or appointed or until such time as he or she tenders his or her resignation in writing. 2. DEFINITIONS. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending, or completed action, suit or proceeding, whether brought by or 2 in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature, in which Indemnitee may be or may have been involved as a party or otherwise, by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, by reason of any action taken by Indemnitee or of any inaction on his or her part while acting as such a Director and/or Officer, or by reason of the fact that he or she is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise; in each case whether or not he or she is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification or reimbursement can be provided under this Agreement. (b) The term "Expenses" shall include, without limitation, expenses of investigations, judicial or administrative proceedings or appeals, attorneys' fees and disbursements and any expenses of establishing a right to indemnification under Paragraph 8 of this Agreement, but shall not include the amount of judgments, fines or penalties against or settlements paid by Indemnitee. (c) References to "other enterprise" shall include, without limitation, employee benefit plans; references to "fines" shall include, without limitation, any excise tax assessed with respect to any employee benefit plan; references to "serving at the request of the Corporation" shall include, without limitation, any service as a Director and/or Officer of the Corporation which imposes duties on, or involves services by, such Director and/or Officer with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he or she reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Agreement. 3. INDEMNITY IN THIRD-PARTY PROCEEDINGS. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 3 if Indemnitee is a party to or threatened to be made a party to or otherwise involved in any Proceeding (other than a Proceeding by or in the right of the Corporation to procure a judgment in its favor) by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against all Expenses, judgments, settlements, fines and penalties, actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such Proceeding, but only if Indemnitee acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation and, in the case of a criminal proceeding, had no reasonable cause to believe that his or her conduct was unlawful. The termination of any such Proceeding by judgment, order of court, settlement, conviction or upon a plea of nolo contendere, or its -2- 3 equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal proceeding, that such person had reasonable cause to believe that his or her conduct was unlawful. 4. INDEMNITY FOR EXPENSES IN PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 4 if Indemnitee is a party to or threatened to be made a party to any Proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, against all Expenses actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such Proceeding, but only if he or she acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification for Expenses shall be made under this Paragraph 4 in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Corporation, unless and only to the extent that any court in which such Proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses as such court shall deem proper. 5. INDEMNITY FOR AMOUNTS PAID IN SETTLEMENT IN PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 5 if Indemnitee is a party to or threatened to be made a party to any Proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, against all amounts actually and reasonably paid in settlement by Indemnitee in connection with any such Proceeding, but only if he or she acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation. 6. INDEMNIFICATION OF EXPENSES OF SUCCESSFUL PARTY. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any Proceeding or in defense of any claim, issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses incurred in connection therewith. 7. ADVANCES OF EXPENSES. Any Expenses incurred by or on behalf of Indemnitee pursuant to Paragraphs 3 and 4 in any Proceeding shall be paid by the Corporation in advance upon the written request of Indemnitee if Indemnitee -3- 4 shall undertake to repay such amount to the extent that it is ultimately determined that Indemnitee is not entitled to indemnification hereunder. 8. RIGHT OF INDEMNITEE TO INDEMNIFICATION UPON APPLICATION; PROCEDURE UPON APPLICATION. Any indemnification under Paragraphs 3, 4 and 5 shall be made no later than thirty (30) days after receipt by the Corporation of the written request of Indemnitee, unless a determination is made within said thirty-day period by (a) the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such Proceeding, or (b) independent legal counsel, agreed to by the Corporation, in a written opinion (which counsel shall be appointed if such a quorum is not obtainable), that the Indemnitee has not met the relevant standards for indemnification set forth in Paragraphs 3, 4 or 5. The right to indemnification or advances as provided by this Agreement shall be enforceable by Indemnitee in any court of competent jurisdiction. There shall exist in such action a rebuttable presumption that Indemnitee has met the applicable standard(s) of conduct and is therefore entitled to indemnification pursuant to this Agreement, and the burden of proving that the relevant standards have not been met by Indemnitee shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors or independent legal counsel) prior to the commencement of such action to have made a determination that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Corporation (including its Board of Directors or independent legal counsel) that Indemnitee has not met such applicable standard of conduct, shall (i) constitute a defense to the action, (ii) create a presumption that Indemnitee has not met the applicable standard of conduct, or (iii) otherwise alter the presumption in favor of Indemnitee referred to in the preceding sentence. Indemnitee's expenses reasonably incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be indemnified by the Corporation. 9. ALLOWANCE FOR COMPLIANCE WITH SEC REQUIREMENTS. Indemnitee acknowledges that the Securities and Exchange Commission ("SEC") has expressed the opinion that indemnification of directors and officers from liabilities under the Securities Act of 1933 ("Act") is against public policy as expressed in the Act and, is therefore, unenforceable. Indemnitee hereby agrees that it will not be a breach of this Agreement for the Corporation to undertake with the Commission in connection with the registration for sale of any stock or other securities of the Corporation from time to time that, in the event a claim for indemnification against such liabilities (other than the payment by the Corporation of expenses incurred or paid by a director or officer of the Corporation in the successful defense of any action, suit or proceeding) is asserted in connection with such stock or other securities being registered, the Corporation will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of competent jurisdiction on the question of whether or not such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication -4- 5 of such issue. Indemnitee further agrees that such submission to a court of competent jurisdiction shall not be a breach of this Agreement. 10. INDEMNIFICATION HEREUNDER NOT EXCLUSIVE. The indemnification provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may be entitled under the Certificate of Incorporation or the By-Laws of the Corporation, any agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Delaware, or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office. The indemnification under this Agreement shall continue as to Indemnitee even though he or she may have ceased to be a Director and/or Officer and shall inure to the benefit of the heirs, executors and personal representatives of Indemnitee. 11. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Corporation for some claims, issues or matters, but not as to other claims, issues or matters, or for some or a portion of the Expenses, judgments, fines or penalties actually and reasonably incurred by Indemnitee or amounts actually and reasonably paid in settlement by Indemnitee in the investigation, defense, appeal or settlement of any Proceeding, but not for the total amount thereof, the Corporation shall nevertheless indemnify Indemnitee for the portion of such claims, issues or matters or Expenses, judgments, fines, penalties or amounts paid in settlement to which Indemnitee is entitled. 12. REIMBURSEMENT TO CORPORATION BY INDEMNITEE; LIMITATION ON AMOUNTS PAID BY CORPORATION. To the extent Indemnitee has been indemnified by the Corporation hereunder and later receives payments from any insurance carrier covering the same Expenses, judgments, fines, penalties or amounts paid in settlement so indemnified by the Corporation hereunder, Indemnitee shall immediately reimburse the Corporation hereunder for all such amounts received from the insurer. Notwithstanding anything contained herein to the contrary, Indemnitee shall not be entitled to recover amounts under this Agreement which, when added to the amount of indemnification payments made to, or on behalf of, Indemnitee, under the Certificate of Incorporation or By-Laws of the Corporation, in the aggregate exceed the Expenses, judgments, fines, penalties and amounts paid in settlement actually and reasonably incurred by Indemnitee ("Excess Amounts"). To the extent the Corporation has paid Excess Amounts to Indemnitee, Indemnitee shall be obligated to immediately reimburse the Corporation for such Excess Amounts. 13. CONTINUATION OF RIGHTS AND OBLIGATIONS. All rights and obligations of the Corporation and Indemnitee hereunder shall continue in full force and effect despite the subsequent amendment or modification of the Corporation's Certificate of Incorporation or By-Laws, as such are in effect on the date hereof, and such rights and obligations shall not be affected by any -5- 6 such amendment or modification, any resolution of directors or stockholders of the Corporation, or by any other corporate action which conflicts with or purports to amend, modify, limit or eliminate any of the rights or obligations of the Corporation and/or Indemnitee hereunder. 14. AMENDMENT AND MODIFICATION. This Agreement may only be amended, modified or supplemented by the written agreement of the Corporation and Indemnitee. 15. ASSIGNMENT. This Agreement shall not be assigned by the Corporation or Indemnitee without the prior written consent of the other party thereto, except that the Corporation may freely assign its rights and obligations under this Agreement to any subsidiary for whom Indemnitee is serving as a director and/or officer thereof; provided, however, that no permitted assignment shall release the assignor from its obligations hereunder. Subject to the foregoing, this Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, including, without limitation, any successor to the Corporation by way of merger, consolidation and/or sale or disposition of all or substantially all of the capital stock of the Corporation. 16. SAVING CLAUSE. If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall nevertheless indemnify Indemnitee as to Expenses, judgments, fines, penalties and amounts paid in settlement with respect to any Proceeding to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. 17. COUNTERPARTS. This Agreement may be executed in two or more fully or partially executed counterparts each of which shall be deemed an original binding the signer thereof against the other signing parties, but all counterparts together shall constitute one and the same instrument. Executed signature pages may be removed from counterpart agreements and attached to one or more fully executed copies of this Agreement. 18. NOTICE. Indemnitee shall, as a condition precedent to his or her right to be indemnified under this Agreement, give to the Corporation notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to the Corporation shall be directed to the Corporation at its headquarters located at 8000 Freedom Avenue N.W., North Canton, Ohio 44720-0169, Attention: Chairman (or such other address as the Corporation shall designate in writing to Indemnitee). Notice shall be deemed received three days after the date postmarked if sent by prepaid mail, properly addressed. In addition, Indemnitee shall give the Corporation such information and cooperation as it may reasonably require within Indemnitee's power. 19. APPLICABLE LAW. All matters with respect to this Agreement, including, without limitation, matters of validity, construction, effect and performance shall be governed by the internal laws of the State of Delaware -6- 7 applicable to contracts made and to be performed therein between the residents thereof (regardless of the laws that might otherwise be applicable under principles of conflicts of law). IN WITNESS WHEREOF, the parties hereby have caused this Agreement to be duly executed and signed as of the day and year first above written. CAMELOT MUSIC HOLDINGS, INC. THE "CORPORATION" By /s/ Jack K. Rogers --------------------------------- Its Executive Vice President --------------------------------- "INDEMNITEE" /s/ Herbert J. Marks ------------------------------------ Herbert J. Marks -7- EX-10.24 13 EXHIBIT 10.24 1 Exhibit 10.24 CAMELOT MUSIC HOLDINGS, INC. ---------------------------- INDEMNITY AGREEMENT ------------------- THIS AGREEMENT is made as of the 4th day of June, 1998, by and between CAMELOT MUSIC HOLDINGS, INC., a Delaware corporation (the "Corporation"), and James E. Bonk ("Indemnitee"), an Officer and a Director of the Corporation. WHEREAS, it is essential to the Corporation to retain and attract as Directors and/or Officers the most capable persons available; and WHEREAS, the substantial increase in corporate litigation subjects directors and officers to expensive litigation risks at the same time that the availability of directors' and officers' liability insurance has been severely limited; and WHEREAS, it is now the express policy of the Corporation to indemnify its Directors and/or Officers so as to provide them with the maximum possible protection permitted by law; and WHEREAS, in addition, because the statutory indemnification provisions of the Delaware General Corporation Law expressly provide that they are non-exclusive, it is the policy of the Corporation to indemnify directors and officers of the Corporation who have entered into settlements of derivative suits provided they have not breached the applicable statutory standard of conduct; and WHEREAS, Indemnitee does not regard the protection available under the Corporation's Certificate of Incorporation and insurance, if any, as adequate in the present circumstances, and considers it necessary and desirable to his or her service as a Director and/or Officer to have adequate protection, and the Corporation desires Indemnitee to serve in such capacity; and WHEREAS, the Delaware General Corporation Law provides that indemnification of directors and officers of a corporation may be authorized by agreement, and thereby contemplates that contracts of this nature may be entered into between the Company and Indemnitee with respect to indemnification of Indemnitee as a Director and/or Officer of the Corporation. NOW, THEREFORE, the Corporation and Indemnitee do hereby agree as follows: 1. AGREEMENT TO SERVE. Indemnitee agrees to serve or continue to serve as an Officer and a Director of the Corporation for so long as he or she is duly elected or appointed or until such time as he or she tenders his or her resignation in writing. 2. DEFINITIONS. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending, or completed action, suit or proceeding, whether brought by or 2 in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature, in which Indemnitee may be or may have been involved as a party or otherwise, by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, by reason of any action taken by Indemnitee or of any inaction on his or her part while acting as such a Director and/or Officer, or by reason of the fact that he or she is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise; in each case whether or not he or she is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification or reimbursement can be provided under this Agreement. (b) The term "Expenses" shall include, without limitation, expenses of investigations, judicial or administrative proceedings or appeals, attorneys' fees and disbursements and any expenses of establishing a right to indemnification under Paragraph 8 of this Agreement, but shall not include the amount of judgments, fines or penalties against or settlements paid by Indemnitee. (c) References to "other enterprise" shall include, without limitation, employee benefit plans; references to "fines" shall include, without limitation, any excise tax assessed with respect to any employee benefit plan; references to "serving at the request of the Corporation" shall include, without limitation, any service as a Director and/or Officer of the Corporation which imposes duties on, or involves services by, such Director and/or Officer with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he or she reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Agreement. 3. INDEMNITY IN THIRD-PARTY PROCEEDINGS. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 3 if Indemnitee is a party to or threatened to be made a party to or otherwise involved in any Proceeding (other than a Proceeding by or in the right of the Corporation to procure a judgment in its favor) by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against all Expenses, judgments, settlements, fines and penalties, actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such Proceeding, but only if Indemnitee acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation and, in the case of a criminal proceeding, had no reasonable cause to believe that his or her conduct was unlawful. The termination of any such Proceeding by judgment, order of court, settlement, conviction or upon a plea of nolo contendere, or its -2- 3 equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal proceeding, that such person had reasonable cause to believe that his or her conduct was unlawful. 4. INDEMNITY FOR EXPENSES IN PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 4 if Indemnitee is a party to or threatened to be made a party to any Proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, against all Expenses actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such Proceeding, but only if he or she acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification for Expenses shall be made under this Paragraph 4 in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Corporation, unless and only to the extent that any court in which such Proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses as such court shall deem proper. 5. INDEMNITY FOR AMOUNTS PAID IN SETTLEMENT IN PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 5 if Indemnitee is a party to or threatened to be made a party to any Proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, against all amounts actually and reasonably paid in settlement by Indemnitee in connection with any such Proceeding, but only if he or she acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation. 6. INDEMNIFICATION OF EXPENSES OF SUCCESSFUL PARTY. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any Proceeding or in defense of any claim, issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses incurred in connection therewith. 7. ADVANCES OF EXPENSES. Any Expenses incurred by or on behalf of Indemnitee pursuant to Paragraphs 3 and 4 in any Proceeding shall be paid by the Corporation in advance upon the written request of Indemnitee if Indemnitee -3- 4 shall undertake to repay such amount to the extent that it is ultimately determined that Indemnitee is not entitled to indemnification hereunder. 8. RIGHT OF INDEMNITEE TO INDEMNIFICATION UPON APPLICATION; PROCEDURE UPON APPLICATION. Any indemnification under Paragraphs 3, 4 and 5 shall be made no later than thirty (30) days after receipt by the Corporation of the written request of Indemnitee, unless a determination is made within said thirty-day period by (a) the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such Proceeding, or (b) independent legal counsel, agreed to by the Corporation, in a written opinion (which counsel shall be appointed if such a quorum is not obtainable), that the Indemnitee has not met the relevant standards for indemnification set forth in Paragraphs 3, 4 or 5. The right to indemnification or advances as provided by this Agreement shall be enforceable by Indemnitee in any court of competent jurisdiction. There shall exist in such action a rebuttable presumption that Indemnitee has met the applicable standard(s) of conduct and is therefore entitled to indemnification pursuant to this Agreement, and the burden of proving that the relevant standards have not been met by Indemnitee shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors or independent legal counsel) prior to the commencement of such action to have made a determination that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Corporation (including its Board of Directors or independent legal counsel) that Indemnitee has not met such applicable standard of conduct, shall (i) constitute a defense to the action, (ii) create a presumption that Indemnitee has not met the applicable standard of conduct, or (iii) otherwise alter the presumption in favor of Indemnitee referred to in the preceding sentence. Indemnitee's expenses reasonably incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be indemnified by the Corporation. 9. ALLOWANCE FOR COMPLIANCE WITH SEC REQUIREMENTS. Indemnitee acknowledges that the Securities and Exchange Commission ("SEC") has expressed the opinion that indemnification of directors and officers from liabilities under the Securities Act of 1933 ("Act") is against public policy as expressed in the Act and, is therefore, unenforceable. Indemnitee hereby agrees that it will not be a breach of this Agreement for the Corporation to undertake with the Commission in connection with the registration for sale of any stock or other securities of the Corporation from time to time that, in the event a claim for indemnification against such liabilities (other than the payment by the Corporation of expenses incurred or paid by a director or officer of the Corporation in the successful defense of any action, suit or proceeding) is asserted in connection with such stock or other securities being registered, the Corporation will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of competent jurisdiction on the question of whether or not such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication -4- 5 of such issue. Indemnitee further agrees that such submission to a court of competent jurisdiction shall not be a breach of this Agreement. 10. INDEMNIFICATION HEREUNDER NOT EXCLUSIVE. The indemnification provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may be entitled under the Certificate of Incorporation or the By-Laws of the Corporation, any agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Delaware, or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office. The indemnification under this Agreement shall continue as to Indemnitee even though he or she may have ceased to be a Director and/or Officer and shall inure to the benefit of the heirs, executors and personal representatives of Indemnitee. 11. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Corporation for some claims, issues or matters, but not as to other claims, issues or matters, or for some or a portion of the Expenses, judgments, fines or penalties actually and reasonably incurred by Indemnitee or amounts actually and reasonably paid in settlement by Indemnitee in the investigation, defense, appeal or settlement of any Proceeding, but not for the total amount thereof, the Corporation shall nevertheless indemnify Indemnitee for the portion of such claims, issues or matters or Expenses, judgments, fines, penalties or amounts paid in settlement to which Indemnitee is entitled. 12. REIMBURSEMENT TO CORPORATION BY INDEMNITEE; LIMITATION ON AMOUNTS PAID BY CORPORATION. To the extent Indemnitee has been indemnified by the Corporation hereunder and later receives payments from any insurance carrier covering the same Expenses, judgments, fines, penalties or amounts paid in settlement so indemnified by the Corporation hereunder, Indemnitee shall immediately reimburse the Corporation hereunder for all such amounts received from the insurer. Notwithstanding anything contained herein to the contrary, Indemnitee shall not be entitled to recover amounts under this Agreement which, when added to the amount of indemnification payments made to, or on behalf of, Indemnitee, under the Certificate of Incorporation or By-Laws of the Corporation, in the aggregate exceed the Expenses, judgments, fines, penalties and amounts paid in settlement actually and reasonably incurred by Indemnitee ("Excess Amounts"). To the extent the Corporation has paid Excess Amounts to Indemnitee, Indemnitee shall be obligated to immediately reimburse the Corporation for such Excess Amounts. 13. CONTINUATION OF RIGHTS AND OBLIGATIONS. All rights and obligations of the Corporation and Indemnitee hereunder shall continue in full force and effect despite the subsequent amendment or modification of the Corporation's Certificate of Incorporation or By-Laws, as such are in effect on the date hereof, and such rights and obligations shall not be affected by any -5- 6 such amendment or modification, any resolution of directors or stockholders of the Corporation, or by any other corporate action which conflicts with or purports to amend, modify, limit or eliminate any of the rights or obligations of the Corporation and/or Indemnitee hereunder. 14. AMENDMENT AND MODIFICATION. This Agreement may only be amended, modified or supplemented by the written agreement of the Corporation and Indemnitee. 15. ASSIGNMENT. This Agreement shall not be assigned by the Corporation or Indemnitee without the prior written consent of the other party thereto, except that the Corporation may freely assign its rights and obligations under this Agreement to any subsidiary for whom Indemnitee is serving as a director and/or officer thereof; provided, however, that no permitted assignment shall release the assignor from its obligations hereunder. Subject to the foregoing, this Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, including, without limitation, any successor to the Corporation by way of merger, consolidation and/or sale or disposition of all or substantially all of the capital stock of the Corporation. 16. SAVING CLAUSE. If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall nevertheless indemnify Indemnitee as to Expenses, judgments, fines, penalties and amounts paid in settlement with respect to any Proceeding to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. 17. COUNTERPARTS. This Agreement may be executed in two or more fully or partially executed counterparts each of which shall be deemed an original binding the signer thereof against the other signing parties, but all counterparts together shall constitute one and the same instrument. Executed signature pages may be removed from counterpart agreements and attached to one or more fully executed copies of this Agreement. 18. NOTICE. Indemnitee shall, as a condition precedent to his or her right to be indemnified under this Agreement, give to the Corporation notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to the Corporation shall be directed to the Corporation at its headquarters located at 8000 Freedom Avenue N.W., North Canton, Ohio 44720-0169, Attention: Chairman (or such other address as the Corporation shall designate in writing to Indemnitee). Notice shall be deemed received three days after the date postmarked if sent by prepaid mail, properly addressed. In addition, Indemnitee shall give the Corporation such information and cooperation as it may reasonably require within Indemnitee's power. 19. APPLICABLE LAW. All matters with respect to this Agreement, including, without limitation, matters of validity, construction, effect and performance shall be governed by the internal laws of the State of Delaware -6- 7 applicable to contracts made and to be performed therein between the residents thereof (regardless of the laws that might otherwise be applicable under principles of conflicts of law). IN WITNESS WHEREOF, the parties hereby have caused this Agreement to be duly executed and signed as of the day and year first above written. CAMELOT MUSIC HOLDINGS, INC. THE "CORPORATION" By /s/ Jack K. Rogers --------------------------------- Its Corporate Secretary --------------------------------- "INDEMNITEE" /s/ James E. Bonk ------------------------------------ James E. Bonk -7- EX-10.25 14 EXHIBIT 10.25 1 Exhibit 10.25 CAMELOT MUSIC HOLDINGS, INC. ---------------------------- INDEMNITY AGREEMENT ------------------- THIS AGREEMENT is made as of the 4th day of June, 1998, by and between CAMELOT MUSIC HOLDINGS, INC., a Delaware corporation (the "Corporation"), and Jack K. Rogers ("Indemnitee"), an Officer and a Director of the Corporation. WHEREAS, it is essential to the Corporation to retain and attract as Directors and/or Officers the most capable persons available; and WHEREAS, the substantial increase in corporate litigation subjects directors and officers to expensive litigation risks at the same time that the availability of directors' and officers' liability insurance has been severely limited; and WHEREAS, it is now the express policy of the Corporation to indemnify its Directors and/or Officers so as to provide them with the maximum possible protection permitted by law; and WHEREAS, in addition, because the statutory indemnification provisions of the Delaware General Corporation Law expressly provide that they are non-exclusive, it is the policy of the Corporation to indemnify directors and officers of the Corporation who have entered into settlements of derivative suits provided they have not breached the applicable statutory standard of conduct; and WHEREAS, Indemnitee does not regard the protection available under the Corporation's Certificate of Incorporation and insurance, if any, as adequate in the present circumstances, and considers it necessary and desirable to his or her service as a Director and/or Officer to have adequate protection, and the Corporation desires Indemnitee to serve in such capacity; and WHEREAS, the Delaware General Corporation Law provides that indemnification of directors and officers of a corporation may be authorized by agreement, and thereby contemplates that contracts of this nature may be entered into between the Company and Indemnitee with respect to indemnification of Indemnitee as a Director and/or Officer of the Corporation. NOW, THEREFORE, the Corporation and Indemnitee do hereby agree as follows: 1. AGREEMENT TO SERVE. Indemnitee agrees to serve or continue to serve as an Officer and a Director of the Corporation for so long as he or she is duly elected or appointed or until such time as he or she tenders his or her resignation in writing. 2. DEFINITIONS. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending, or completed action, suit or proceeding, whether brought by or 2 in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature, in which Indemnitee may be or may have been involved as a party or otherwise, by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, by reason of any action taken by Indemnitee or of any inaction on his or her part while acting as such a Director and/or Officer, or by reason of the fact that he or she is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise; in each case whether or not he or she is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification or reimbursement can be provided under this Agreement. (b) The term "Expenses" shall include, without limitation, expenses of investigations, judicial or administrative proceedings or appeals, attorneys' fees and disbursements and any expenses of establishing a right to indemnification under Paragraph 8 of this Agreement, but shall not include the amount of judgments, fines or penalties against or settlements paid by Indemnitee. (c) References to "other enterprise" shall include, without limitation, employee benefit plans; references to "fines" shall include, without limitation, any excise tax assessed with respect to any employee benefit plan; references to "serving at the request of the Corporation" shall include, without limitation, any service as a Director and/or Officer of the Corporation which imposes duties on, or involves services by, such Director and/or Officer with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he or she reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Agreement. 3. INDEMNITY IN THIRD-PARTY PROCEEDINGS. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 3 if Indemnitee is a party to or threatened to be made a party to or otherwise involved in any Proceeding (other than a Proceeding by or in the right of the Corporation to procure a judgment in its favor) by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against all Expenses, judgments, settlements, fines and penalties, actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such Proceeding, but only if Indemnitee acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation and, in the case of a criminal proceeding, had no reasonable cause to believe that his or her conduct was unlawful. The termination of any such Proceeding by judgment, order of court, settlement, conviction or upon a plea of nolo contendere, or its -2- 3 equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal proceeding, that such person had reasonable cause to believe that his or her conduct was unlawful. 4. INDEMNITY FOR EXPENSES IN PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 4 if Indemnitee is a party to or threatened to be made a party to any Proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, against all Expenses actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such Proceeding, but only if he or she acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification for Expenses shall be made under this Paragraph 4 in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Corporation, unless and only to the extent that any court in which such Proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses as such court shall deem proper. 5. INDEMNITY FOR AMOUNTS PAID IN SETTLEMENT IN PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 5 if Indemnitee is a party to or threatened to be made a party to any Proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, against all amounts actually and reasonably paid in settlement by Indemnitee in connection with any such Proceeding, but only if he or she acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation. 6. INDEMNIFICATION OF EXPENSES OF SUCCESSFUL PARTY. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any Proceeding or in defense of any claim, issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses incurred in connection therewith. 7. ADVANCES OF EXPENSES. Any Expenses incurred by or on behalf of Indemnitee pursuant to Paragraphs 3 and 4 in any Proceeding shall be paid by the Corporation in advance upon the written request of Indemnitee if Indemnitee -3- 4 shall undertake to repay such amount to the extent that it is ultimately determined that Indemnitee is not entitled to indemnification hereunder. 8. RIGHT OF INDEMNITEE TO INDEMNIFICATION UPON APPLICATION; PROCEDURE UPON APPLICATION. Any indemnification under Paragraphs 3, 4 and 5 shall be made no later than thirty (30) days after receipt by the Corporation of the written request of Indemnitee, unless a determination is made within said thirty-day period by (a) the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such Proceeding, or (b) independent legal counsel, agreed to by the Corporation, in a written opinion (which counsel shall be appointed if such a quorum is not obtainable), that the Indemnitee has not met the relevant standards for indemnification set forth in Paragraphs 3, 4 or 5. The right to indemnification or advances as provided by this Agreement shall be enforceable by Indemnitee in any court of competent jurisdiction. There shall exist in such action a rebuttable presumption that Indemnitee has met the applicable standard(s) of conduct and is therefore entitled to indemnification pursuant to this Agreement, and the burden of proving that the relevant standards have not been met by Indemnitee shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors or independent legal counsel) prior to the commencement of such action to have made a determination that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Corporation (including its Board of Directors or independent legal counsel) that Indemnitee has not met such applicable standard of conduct, shall (i) constitute a defense to the action, (ii) create a presumption that Indemnitee has not met the applicable standard of conduct, or (iii) otherwise alter the presumption in favor of Indemnitee referred to in the preceding sentence. Indemnitee's expenses reasonably incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be indemnified by the Corporation. 9. ALLOWANCE FOR COMPLIANCE WITH SEC REQUIREMENTS. Indemnitee acknowledges that the Securities and Exchange Commission ("SEC") has expressed the opinion that indemnification of directors and officers from liabilities under the Securities Act of 1933 ("Act") is against public policy as expressed in the Act and, is therefore, unenforceable. Indemnitee hereby agrees that it will not be a breach of this Agreement for the Corporation to undertake with the Commission in connection with the registration for sale of any stock or other securities of the Corporation from time to time that, in the event a claim for indemnification against such liabilities (other than the payment by the Corporation of expenses incurred or paid by a director or officer of the Corporation in the successful defense of any action, suit or proceeding) is asserted in connection with such stock or other securities being registered, the Corporation will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of competent jurisdiction on the question of whether or not such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication -4- 5 of such issue. Indemnitee further agrees that such submission to a court of competent jurisdiction shall not be a breach of this Agreement. 10. INDEMNIFICATION HEREUNDER NOT EXCLUSIVE. The indemnification provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may be entitled under the Certificate of Incorporation or the By-Laws of the Corporation, any agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Delaware, or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office. The indemnification under this Agreement shall continue as to Indemnitee even though he or she may have ceased to be a Director and/or Officer and shall inure to the benefit of the heirs, executors and personal representatives of Indemnitee. 11. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Corporation for some claims, issues or matters, but not as to other claims, issues or matters, or for some or a portion of the Expenses, judgments, fines or penalties actually and reasonably incurred by Indemnitee or amounts actually and reasonably paid in settlement by Indemnitee in the investigation, defense, appeal or settlement of any Proceeding, but not for the total amount thereof, the Corporation shall nevertheless indemnify Indemnitee for the portion of such claims, issues or matters or Expenses, judgments, fines, penalties or amounts paid in settlement to which Indemnitee is entitled. 12. REIMBURSEMENT TO CORPORATION BY INDEMNITEE; LIMITATION ON AMOUNTS PAID BY CORPORATION. To the extent Indemnitee has been indemnified by the Corporation hereunder and later receives payments from any insurance carrier covering the same Expenses, judgments, fines, penalties or amounts paid in settlement so indemnified by the Corporation hereunder, Indemnitee shall immediately reimburse the Corporation hereunder for all such amounts received from the insurer. Notwithstanding anything contained herein to the contrary, Indemnitee shall not be entitled to recover amounts under this Agreement which, when added to the amount of indemnification payments made to, or on behalf of, Indemnitee, under the Certificate of Incorporation or By-Laws of the Corporation, in the aggregate exceed the Expenses, judgments, fines, penalties and amounts paid in settlement actually and reasonably incurred by Indemnitee ("Excess Amounts"). To the extent the Corporation has paid Excess Amounts to Indemnitee, Indemnitee shall be obligated to immediately reimburse the Corporation for such Excess Amounts. 13. CONTINUATION OF RIGHTS AND OBLIGATIONS. All rights and obligations of the Corporation and Indemnitee hereunder shall continue in full force and effect despite the subsequent amendment or modification of the Corporation's Certificate of Incorporation or By-Laws, as such are in effect on the date hereof, and such rights and obligations shall not be affected by any -5- 6 such amendment or modification, any resolution of directors or stockholders of the Corporation, or by any other corporate action which conflicts with or purports to amend, modify, limit or eliminate any of the rights or obligations of the Corporation and/or Indemnitee hereunder. 14. AMENDMENT AND MODIFICATION. This Agreement may only be amended, modified or supplemented by the written agreement of the Corporation and Indemnitee. 15. ASSIGNMENT. This Agreement shall not be assigned by the Corporation or Indemnitee without the prior written consent of the other party thereto, except that the Corporation may freely assign its rights and obligations under this Agreement to any subsidiary for whom Indemnitee is serving as a director and/or officer thereof; provided, however, that no permitted assignment shall release the assignor from its obligations hereunder. Subject to the foregoing, this Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, including, without limitation, any successor to the Corporation by way of merger, consolidation and/or sale or disposition of all or substantially all of the capital stock of the Corporation. 16. SAVING CLAUSE. If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall nevertheless indemnify Indemnitee as to Expenses, judgments, fines, penalties and amounts paid in settlement with respect to any Proceeding to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. 17. COUNTERPARTS. This Agreement may be executed in two or more fully or partially executed counterparts each of which shall be deemed an original binding the signer thereof against the other signing parties, but all counterparts together shall constitute one and the same instrument. Executed signature pages may be removed from counterpart agreements and attached to one or more fully executed copies of this Agreement. 18. NOTICE. Indemnitee shall, as a condition precedent to his or her right to be indemnified under this Agreement, give to the Corporation notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to the Corporation shall be directed to the Corporation at its headquarters located at 8000 Freedom Avenue N.W., North Canton, Ohio 44720-0169, Attention: Chairman (or such other address as the Corporation shall designate in writing to Indemnitee). Notice shall be deemed received three days after the date postmarked if sent by prepaid mail, properly addressed. In addition, Indemnitee shall give the Corporation such information and cooperation as it may reasonably require within Indemnitee's power. 19. APPLICABLE LAW. All matters with respect to this Agreement, including, without limitation, matters of validity, construction, effect and performance shall be governed by the internal laws of the State of Delaware -6- 7 applicable to contracts made and to be performed therein between the residents thereof (regardless of the laws that might otherwise be applicable under principles of conflicts of law). IN WITNESS WHEREOF, the parties hereby have caused this Agreement to be duly executed and signed as of the day and year first above written. CAMELOT MUSIC HOLDINGS, INC. THE "CORPORATION" By /s/ Lee Ann Thorn --------------------------------- Its Chief Financial Officer --------------------------------- "INDEMNITEE" /s/ Jack K. Rogers ------------------------------------ Jack K. Rogers -7- EX-10.26 15 EXHIBIT 10.26 1 Exhibit 10.26 CAMELOT MUSIC HOLDINGS, INC. ---------------------------- INDEMNITY AGREEMENT ------------------- THIS AGREEMENT is made as of the 4th day of June, 1998, by and between CAMELOT MUSIC HOLDINGS, INC., a Delaware corporation (the "Corporation"), and Lee Ann Thorn ("Indemnitee"), an Officer of the Corporation. WHEREAS, it is essential to the Corporation to retain and attract as Directors and/or Officers the most capable persons available; and WHEREAS, the substantial increase in corporate litigation subjects directors and officers to expensive litigation risks at the same time that the availability of directors' and officers' liability insurance has been severely limited; and WHEREAS, it is now the express policy of the Corporation to indemnify its Directors and/or Officers so as to provide them with the maximum possible protection permitted by law; and WHEREAS, in addition, because the statutory indemnification provisions of the Delaware General Corporation Law expressly provide that they are non-exclusive, it is the policy of the Corporation to indemnify directors and officers of the Corporation who have entered into settlements of derivative suits provided they have not breached the applicable statutory standard of conduct; and WHEREAS, Indemnitee does not regard the protection available under the Corporation's Certificate of Incorporation and insurance, if any, as adequate in the present circumstances, and considers it necessary and desirable to his or her service as a Director and/or Officer to have adequate protection, and the Corporation desires Indemnitee to serve in such capacity; and WHEREAS, the Delaware General Corporation Law provides that indemnification of directors and officers of a corporation may be authorized by agreement, and thereby contemplates that contracts of this nature may be entered into between the Company and Indemnitee with respect to indemnification of Indemnitee as a Director and/or Officer of the Corporation. NOW, THEREFORE, the Corporation and Indemnitee do hereby agree as follows: 1. AGREEMENT TO SERVE. Indemnitee agrees to serve or continue to serve as an Officer of the Corporation for so long as he or she is duly elected or appointed or until such time as he or she tenders his or her resignation in writing. 2. DEFINITIONS. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending, or completed action, suit or proceeding, whether brought by or 2 in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature, in which Indemnitee may be or may have been involved as a party or otherwise, by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, by reason of any action taken by Indemnitee or of any inaction on his or her part while acting as such a Director and/or Officer, or by reason of the fact that he or she is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise; in each case whether or not he or she is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification or reimbursement can be provided under this Agreement. (b) The term "Expenses" shall include, without limitation, expenses of investigations, judicial or administrative proceedings or appeals, attorneys' fees and disbursements and any expenses of establishing a right to indemnification under Paragraph 8 of this Agreement, but shall not include the amount of judgments, fines or penalties against or settlements paid by Indemnitee. (c) References to "other enterprise" shall include, without limitation, employee benefit plans; references to "fines" shall include, without limitation, any excise tax assessed with respect to any employee benefit plan; references to "serving at the request of the Corporation" shall include, without limitation, any service as a Director and/or Officer of the Corporation which imposes duties on, or involves services by, such Director and/or Officer with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he or she reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Agreement. 3. INDEMNITY IN THIRD-PARTY PROCEEDINGS. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 3 if Indemnitee is a party to or threatened to be made a party to or otherwise involved in any Proceeding (other than a Proceeding by or in the right of the Corporation to procure a judgment in its favor) by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against all Expenses, judgments, settlements, fines and penalties, actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such Proceeding, but only if Indemnitee acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation and, in the case of a criminal proceeding, had no reasonable cause to believe that his or her conduct was unlawful. The termination of any such Proceeding by judgment, order of court, settlement, conviction or upon a plea of nolo contendere, or its -2- 3 equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal proceeding, that such person had reasonable cause to believe that his or her conduct was unlawful. 4. INDEMNITY FOR EXPENSES IN PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 4 if Indemnitee is a party to or threatened to be made a party to any Proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, against all Expenses actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such Proceeding, but only if he or she acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification for Expenses shall be made under this Paragraph 4 in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Corporation, unless and only to the extent that any court in which such Proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses as such court shall deem proper. 5. INDEMNITY FOR AMOUNTS PAID IN SETTLEMENT IN PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 5 if Indemnitee is a party to or threatened to be made a party to any Proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, against all amounts actually and reasonably paid in settlement by Indemnitee in connection with any such Proceeding, but only if he or she acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation. 6. INDEMNIFICATION OF EXPENSES OF SUCCESSFUL PARTY. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any Proceeding or in defense of any claim, issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses incurred in connection therewith. 7. ADVANCES OF EXPENSES. Any Expenses incurred by or on behalf of Indemnitee pursuant to Paragraphs 3 and 4 in any Proceeding shall be paid by the Corporation in advance upon the written request of Indemnitee if Indemnitee -3- 4 shall undertake to repay such amount to the extent that it is ultimately determined that Indemnitee is not entitled to indemnification hereunder. 8. RIGHT OF INDEMNITEE TO INDEMNIFICATION UPON APPLICATION; PROCEDURE UPON APPLICATION. Any indemnification under Paragraphs 3, 4 and 5 shall be made no later than thirty (30) days after receipt by the Corporation of the written request of Indemnitee, unless a determination is made within said thirty-day period by (a) the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such Proceeding, or (b) independent legal counsel, agreed to by the Corporation, in a written opinion (which counsel shall be appointed if such a quorum is not obtainable), that the Indemnitee has not met the relevant standards for indemnification set forth in Paragraphs 3, 4 or 5. The right to indemnification or advances as provided by this Agreement shall be enforceable by Indemnitee in any court of competent jurisdiction. There shall exist in such action a rebuttable presumption that Indemnitee has met the applicable standard(s) of conduct and is therefore entitled to indemnification pursuant to this Agreement, and the burden of proving that the relevant standards have not been met by Indemnitee shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors or independent legal counsel) prior to the commencement of such action to have made a determination that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Corporation (including its Board of Directors or independent legal counsel) that Indemnitee has not met such applicable standard of conduct, shall (i) constitute a defense to the action, (ii) create a presumption that Indemnitee has not met the applicable standard of conduct, or (iii) otherwise alter the presumption in favor of Indemnitee referred to in the preceding sentence. Indemnitee's expenses reasonably incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be indemnified by the Corporation. 9. ALLOWANCE FOR COMPLIANCE WITH SEC REQUIREMENTS. Indemnitee acknowledges that the Securities and Exchange Commission ("SEC") has expressed the opinion that indemnification of directors and officers from liabilities under the Securities Act of 1933 ("Act") is against public policy as expressed in the Act and, is therefore, unenforceable. Indemnitee hereby agrees that it will not be a breach of this Agreement for the Corporation to undertake with the Commission in connection with the registration for sale of any stock or other securities of the Corporation from time to time that, in the event a claim for indemnification against such liabilities (other than the payment by the Corporation of expenses incurred or paid by a director or officer of the Corporation in the successful defense of any action, suit or proceeding) is asserted in connection with such stock or other securities being registered, the Corporation will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of competent jurisdiction on the question of whether or not such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication -4- 5 of such issue. Indemnitee further agrees that such submission to a court of competent jurisdiction shall not be a breach of this Agreement. 10. INDEMNIFICATION HEREUNDER NOT EXCLUSIVE. The indemnification provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may be entitled under the Certificate of Incorporation or the By-Laws of the Corporation, any agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Delaware, or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office. The indemnification under this Agreement shall continue as to Indemnitee even though he or she may have ceased to be a Director and/or Officer and shall inure to the benefit of the heirs, executors and personal representatives of Indemnitee. 11. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Corporation for some claims, issues or matters, but not as to other claims, issues or matters, or for some or a portion of the Expenses, judgments, fines or penalties actually and reasonably incurred by Indemnitee or amounts actually and reasonably paid in settlement by Indemnitee in the investigation, defense, appeal or settlement of any Proceeding, but not for the total amount thereof, the Corporation shall nevertheless indemnify Indemnitee for the portion of such claims, issues or matters or Expenses, judgments, fines, penalties or amounts paid in settlement to which Indemnitee is entitled. 12. REIMBURSEMENT TO CORPORATION BY INDEMNITEE; LIMITATION ON AMOUNTS PAID BY CORPORATION. To the extent Indemnitee has been indemnified by the Corporation hereunder and later receives payments from any insurance carrier covering the same Expenses, judgments, fines, penalties or amounts paid in settlement so indemnified by the Corporation hereunder, Indemnitee shall immediately reimburse the Corporation hereunder for all such amounts received from the insurer. Notwithstanding anything contained herein to the contrary, Indemnitee shall not be entitled to recover amounts under this Agreement which, when added to the amount of indemnification payments made to, or on behalf of, Indemnitee, under the Certificate of Incorporation or By-Laws of the Corporation, in the aggregate exceed the Expenses, judgments, fines, penalties and amounts paid in settlement actually and reasonably incurred by Indemnitee ("Excess Amounts"). To the extent the Corporation has paid Excess Amounts to Indemnitee, Indemnitee shall be obligated to immediately reimburse the Corporation for such Excess Amounts. 13. CONTINUATION OF RIGHTS AND OBLIGATIONS. All rights and obligations of the Corporation and Indemnitee hereunder shall continue in full force and effect despite the subsequent amendment or modification of the Corporation's Certificate of Incorporation or By-Laws, as such are in effect on the date hereof, and such rights and obligations shall not be affected by any -5- 6 such amendment or modification, any resolution of directors or stockholders of the Corporation, or by any other corporate action which conflicts with or purports to amend, modify, limit or eliminate any of the rights or obligations of the Corporation and/or Indemnitee hereunder. 14. AMENDMENT AND MODIFICATION. This Agreement may only be amended, modified or supplemented by the written agreement of the Corporation and Indemnitee. 15. ASSIGNMENT. This Agreement shall not be assigned by the Corporation or Indemnitee without the prior written consent of the other party thereto, except that the Corporation may freely assign its rights and obligations under this Agreement to any subsidiary for whom Indemnitee is serving as a director and/or officer thereof; provided, however, that no permitted assignment shall release the assignor from its obligations hereunder. Subject to the foregoing, this Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, including, without limitation, any successor to the Corporation by way of merger, consolidation and/or sale or disposition of all or substantially all of the capital stock of the Corporation. 16. SAVING CLAUSE. If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall nevertheless indemnify Indemnitee as to Expenses, judgments, fines, penalties and amounts paid in settlement with respect to any Proceeding to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. 17. COUNTERPARTS. This Agreement may be executed in two or more fully or partially executed counterparts each of which shall be deemed an original binding the signer thereof against the other signing parties, but all counterparts together shall constitute one and the same instrument. Executed signature pages may be removed from counterpart agreements and attached to one or more fully executed copies of this Agreement. 18. NOTICE. Indemnitee shall, as a condition precedent to his or her right to be indemnified under this Agreement, give to the Corporation notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to the Corporation shall be directed to the Corporation at its headquarters located at 8000 Freedom Avenue N.W., North Canton, Ohio 44720-0169, Attention: Chairman (or such other address as the Corporation shall designate in writing to Indemnitee). Notice shall be deemed received three days after the date postmarked if sent by prepaid mail, properly addressed. In addition, Indemnitee shall give the Corporation such information and cooperation as it may reasonably require within Indemnitee's power. 19. APPLICABLE LAW. All matters with respect to this Agreement, including, without limitation, matters of validity, construction, effect and performance shall be governed by the internal laws of the State of Delaware -6- 7 applicable to contracts made and to be performed therein between the residents thereof (regardless of the laws that might otherwise be applicable under principles of conflicts of law). IN WITNESS WHEREOF, the parties hereby have caused this Agreement to be duly executed and signed as of the day and year first above written. CAMELOT MUSIC HOLDINGS, INC. THE "CORPORATION" By /s/ Jack K. Rogers --------------------------------- Its Corporate Secretary --------------------------------- "INDEMNITEE" /s/ Lee Ann Thorn ------------------------------------ Lee Ann Thorn -7- EX-10.27 16 EXHIBIT 10.27 1 Exhibit 10.27 CAMELOT MUSIC HOLDINGS, INC. ---------------------------- INDEMNITY AGREEMENT ------------------- THIS AGREEMENT is made as of the 4th day of June, 1998, by and between CAMELOT MUSIC HOLDINGS, INC., a Delaware corporation (the "Corporation"), and Charles R. Rinehimer III ("Indemnitee"), an Officer of the Corporation. WHEREAS, it is essential to the Corporation to retain and attract as Directors and/or Officers the most capable persons available; and WHEREAS, the substantial increase in corporate litigation subjects directors and officers to expensive litigation risks at the same time that the availability of directors' and officers' liability insurance has been severely limited; and WHEREAS, it is now the express policy of the Corporation to indemnify its Directors and/or Officers so as to provide them with the maximum possible protection permitted by law; and WHEREAS, in addition, because the statutory indemnification provisions of the Delaware General Corporation Law expressly provide that they are non-exclusive, it is the policy of the Corporation to indemnify directors and officers of the Corporation who have entered into settlements of derivative suits provided they have not breached the applicable statutory standard of conduct; and WHEREAS, Indemnitee does not regard the protection available under the Corporation's Certificate of Incorporation and insurance, if any, as adequate in the present circumstances, and considers it necessary and desirable to his or her service as a Director and/or Officer to have adequate protection, and the Corporation desires Indemnitee to serve in such capacity; and WHEREAS, the Delaware General Corporation Law provides that indemnification of directors and officers of a corporation may be authorized by agreement, and thereby contemplates that contracts of this nature may be entered into between the Company and Indemnitee with respect to indemnification of Indemnitee as a Director and/or Officer of the Corporation. NOW, THEREFORE, the Corporation and Indemnitee do hereby agree as follows: 1. AGREEMENT TO SERVE. Indemnitee agrees to serve or continue to serve as an Officer of the Corporation for so long as he or she is duly elected or appointed or until such time as he or she tenders his or her resignation in writing. 2. DEFINITIONS. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending, or completed action, suit or proceeding, whether brought by or 2 in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature, in which Indemnitee may be or may have been involved as a party or otherwise, by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, by reason of any action taken by Indemnitee or of any inaction on his or her part while acting as such a Director and/or Officer, or by reason of the fact that he or she is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise; in each case whether or not he or she is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification or reimbursement can be provided under this Agreement. (b) The term "Expenses" shall include, without limitation, expenses of investigations, judicial or administrative proceedings or appeals, attorneys' fees and disbursements and any expenses of establishing a right to indemnification under Paragraph 8 of this Agreement, but shall not include the amount of judgments, fines or penalties against or settlements paid by Indemnitee. (c) References to "other enterprise" shall include, without limitation, employee benefit plans; references to "fines" shall include, without limitation, any excise tax assessed with respect to any employee benefit plan; references to "serving at the request of the Corporation" shall include, without limitation, any service as a Director and/or Officer of the Corporation which imposes duties on, or involves services by, such Director and/or Officer with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he or she reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Agreement. 3. INDEMNITY IN THIRD-PARTY PROCEEDINGS. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 3 if Indemnitee is a party to or threatened to be made a party to or otherwise involved in any Proceeding (other than a Proceeding by or in the right of the Corporation to procure a judgment in its favor) by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against all Expenses, judgments, settlements, fines and penalties, actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such Proceeding, but only if Indemnitee acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation and, in the case of a criminal proceeding, had no reasonable cause to believe that his or her conduct was unlawful. The termination of any such Proceeding by judgment, order of court, settlement, conviction or upon a plea of nolo contendere, or its -2- 3 equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal proceeding, that such person had reasonable cause to believe that his or her conduct was unlawful. 4. INDEMNITY FOR EXPENSES IN PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 4 if Indemnitee is a party to or threatened to be made a party to any Proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, against all Expenses actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such Proceeding, but only if he or she acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification for Expenses shall be made under this Paragraph 4 in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Corporation, unless and only to the extent that any court in which such Proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses as such court shall deem proper. 5. INDEMNITY FOR AMOUNTS PAID IN SETTLEMENT IN PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 5 if Indemnitee is a party to or threatened to be made a party to any Proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, against all amounts actually and reasonably paid in settlement by Indemnitee in connection with any such Proceeding, but only if he or she acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation. 6. INDEMNIFICATION OF EXPENSES OF SUCCESSFUL PARTY. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any Proceeding or in defense of any claim, issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses incurred in connection therewith. 7. ADVANCES OF EXPENSES. Any Expenses incurred by or on behalf of Indemnitee pursuant to Paragraphs 3 and 4 in any Proceeding shall be paid by the Corporation in advance upon the written request of Indemnitee if Indemnitee -3- 4 shall undertake to repay such amount to the extent that it is ultimately determined that Indemnitee is not entitled to indemnification hereunder. 8. RIGHT OF INDEMNITEE TO INDEMNIFICATION UPON APPLICATION; PROCEDURE UPON APPLICATION. Any indemnification under Paragraphs 3, 4 and 5 shall be made no later than thirty (30) days after receipt by the Corporation of the written request of Indemnitee, unless a determination is made within said thirty-day period by (a) the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such Proceeding, or (b) independent legal counsel, agreed to by the Corporation, in a written opinion (which counsel shall be appointed if such a quorum is not obtainable), that the Indemnitee has not met the relevant standards for indemnification set forth in Paragraphs 3, 4 or 5. The right to indemnification or advances as provided by this Agreement shall be enforceable by Indemnitee in any court of competent jurisdiction. There shall exist in such action a rebuttable presumption that Indemnitee has met the applicable standard(s) of conduct and is therefore entitled to indemnification pursuant to this Agreement, and the burden of proving that the relevant standards have not been met by Indemnitee shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors or independent legal counsel) prior to the commencement of such action to have made a determination that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Corporation (including its Board of Directors or independent legal counsel) that Indemnitee has not met such applicable standard of conduct, shall (i) constitute a defense to the action, (ii) create a presumption that Indemnitee has not met the applicable standard of conduct, or (iii) otherwise alter the presumption in favor of Indemnitee referred to in the preceding sentence. Indemnitee's expenses reasonably incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be indemnified by the Corporation. 9. ALLOWANCE FOR COMPLIANCE WITH SEC REQUIREMENTS. Indemnitee acknowledges that the Securities and Exchange Commission ("SEC") has expressed the opinion that indemnification of directors and officers from liabilities under the Securities Act of 1933 ("Act") is against public policy as expressed in the Act and, is therefore, unenforceable. Indemnitee hereby agrees that it will not be a breach of this Agreement for the Corporation to undertake with the Commission in connection with the registration for sale of any stock or other securities of the Corporation from time to time that, in the event a claim for indemnification against such liabilities (other than the payment by the Corporation of expenses incurred or paid by a director or officer of the Corporation in the successful defense of any action, suit or proceeding) is asserted in connection with such stock or other securities being registered, the Corporation will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of competent jurisdiction on the question of whether or not such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication -4- 5 of such issue. Indemnitee further agrees that such submission to a court of competent jurisdiction shall not be a breach of this Agreement. 10. INDEMNIFICATION HEREUNDER NOT EXCLUSIVE. The indemnification provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may be entitled under the Certificate of Incorporation or the By-Laws of the Corporation, any agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Delaware, or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office. The indemnification under this Agreement shall continue as to Indemnitee even though he or she may have ceased to be a Director and/or Officer and shall inure to the benefit of the heirs, executors and personal representatives of Indemnitee. 11. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Corporation for some claims, issues or matters, but not as to other claims, issues or matters, or for some or a portion of the Expenses, judgments, fines or penalties actually and reasonably incurred by Indemnitee or amounts actually and reasonably paid in settlement by Indemnitee in the investigation, defense, appeal or settlement of any Proceeding, but not for the total amount thereof, the Corporation shall nevertheless indemnify Indemnitee for the portion of such claims, issues or matters or Expenses, judgments, fines, penalties or amounts paid in settlement to which Indemnitee is entitled. 12. REIMBURSEMENT TO CORPORATION BY INDEMNITEE; LIMITATION ON AMOUNTS PAID BY CORPORATION. To the extent Indemnitee has been indemnified by the Corporation hereunder and later receives payments from any insurance carrier covering the same Expenses, judgments, fines, penalties or amounts paid in settlement so indemnified by the Corporation hereunder, Indemnitee shall immediately reimburse the Corporation hereunder for all such amounts received from the insurer. Notwithstanding anything contained herein to the contrary, Indemnitee shall not be entitled to recover amounts under this Agreement which, when added to the amount of indemnification payments made to, or on behalf of, Indemnitee, under the Certificate of Incorporation or By-Laws of the Corporation, in the aggregate exceed the Expenses, judgments, fines, penalties and amounts paid in settlement actually and reasonably incurred by Indemnitee ("Excess Amounts"). To the extent the Corporation has paid Excess Amounts to Indemnitee, Indemnitee shall be obligated to immediately reimburse the Corporation for such Excess Amounts. 13. CONTINUATION OF RIGHTS AND OBLIGATIONS. All rights and obligations of the Corporation and Indemnitee hereunder shall continue in full force and effect despite the subsequent amendment or modification of the Corporation's Certificate of Incorporation or By-Laws, as such are in effect on the date hereof, and such rights and obligations shall not be affected by any -5- 6 such amendment or modification, any resolution of directors or stockholders of the Corporation, or by any other corporate action which conflicts with or purports to amend, modify, limit or eliminate any of the rights or obligations of the Corporation and/or Indemnitee hereunder. 14. AMENDMENT AND MODIFICATION. This Agreement may only be amended, modified or supplemented by the written agreement of the Corporation and Indemnitee. 15. ASSIGNMENT. This Agreement shall not be assigned by the Corporation or Indemnitee without the prior written consent of the other party thereto, except that the Corporation may freely assign its rights and obligations under this Agreement to any subsidiary for whom Indemnitee is serving as a director and/or officer thereof; provided, however, that no permitted assignment shall release the assignor from its obligations hereunder. Subject to the foregoing, this Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, including, without limitation, any successor to the Corporation by way of merger, consolidation and/or sale or disposition of all or substantially all of the capital stock of the Corporation. 16. SAVING CLAUSE. If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall nevertheless indemnify Indemnitee as to Expenses, judgments, fines, penalties and amounts paid in settlement with respect to any Proceeding to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. 17. COUNTERPARTS. This Agreement may be executed in two or more fully or partially executed counterparts each of which shall be deemed an original binding the signer thereof against the other signing parties, but all counterparts together shall constitute one and the same instrument. Executed signature pages may be removed from counterpart agreements and attached to one or more fully executed copies of this Agreement. 18. NOTICE. Indemnitee shall, as a condition precedent to his or her right to be indemnified under this Agreement, give to the Corporation notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to the Corporation shall be directed to the Corporation at its headquarters located at 8000 Freedom Avenue N.W., North Canton, Ohio 44720-0169, Attention: Chairman (or such other address as the Corporation shall designate in writing to Indemnitee). Notice shall be deemed received three days after the date postmarked if sent by prepaid mail, properly addressed. In addition, Indemnitee shall give the Corporation such information and cooperation as it may reasonably require within Indemnitee's power. 19. APPLICABLE LAW. All matters with respect to this Agreement, including, without limitation, matters of validity, construction, effect and performance shall be governed by the internal laws of the State of Delaware -6- 7 applicable to contracts made and to be performed therein between the residents thereof (regardless of the laws that might otherwise be applicable under principles of conflicts of law). IN WITNESS WHEREOF, the parties hereby have caused this Agreement to be duly executed and signed as of the day and year first above written. CAMELOT MUSIC HOLDINGS, INC. THE "CORPORATION" By /s/ Jack K. Rogers --------------------------------- Its Corporate Secretary --------------------------------- "INDEMNITEE" /s/ Charles R. Rinehimer III ------------------------------------ Charles R. Rinehimer III -7- EX-10.28 17 EXHIBIT 10.28 1 Exhibit 10.28 CAMELOT MUSIC HOLDINGS, INC. ---------------------------- INDEMNITY AGREEMENT ------------------- THIS AGREEMENT is made as of the 4th day of June, 1998, by and between CAMELOT MUSIC HOLDINGS, INC., a Delaware corporation (the "Corporation"), and Lewis S. Garrett ("Indemnitee"), an Officer of the Corporation. WHEREAS, it is essential to the Corporation to retain and attract as Directors and/or Officers the most capable persons available; and WHEREAS, the substantial increase in corporate litigation subjects directors and officers to expensive litigation risks at the same time that the availability of directors' and officers' liability insurance has been severely limited; and WHEREAS, it is now the express policy of the Corporation to indemnify its Directors and/or Officers so as to provide them with the maximum possible protection permitted by law; and WHEREAS, in addition, because the statutory indemnification provisions of the Delaware General Corporation Law expressly provide that they are non-exclusive, it is the policy of the Corporation to indemnify directors and officers of the Corporation who have entered into settlements of derivative suits provided they have not breached the applicable statutory standard of conduct; and WHEREAS, Indemnitee does not regard the protection available under the Corporation's Certificate of Incorporation and insurance, if any, as adequate in the present circumstances, and considers it necessary and desirable to his or her service as a Director and/or Officer to have adequate protection, and the Corporation desires Indemnitee to serve in such capacity; and WHEREAS, the Delaware General Corporation Law provides that indemnification of directors and officers of a corporation may be authorized by agreement, and thereby contemplates that contracts of this nature may be entered into between the Company and Indemnitee with respect to indemnification of Indemnitee as a Director and/or Officer of the Corporation. NOW, THEREFORE, the Corporation and Indemnitee do hereby agree as follows: 1. AGREEMENT TO SERVE. Indemnitee agrees to serve or continue to serve as an Officer of the Corporation for so long as he or she is duly elected or appointed or until such time as he or she tenders his or her resignation in writing. 2. DEFINITIONS. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending, or completed action, suit or proceeding, whether brought by or 2 in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature, in which Indemnitee may be or may have been involved as a party or otherwise, by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, by reason of any action taken by Indemnitee or of any inaction on his or her part while acting as such a Director and/or Officer, or by reason of the fact that he or she is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise; in each case whether or not he or she is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification or reimbursement can be provided under this Agreement. (b) The term "Expenses" shall include, without limitation, expenses of investigations, judicial or administrative proceedings or appeals, attorneys' fees and disbursements and any expenses of establishing a right to indemnification under Paragraph 8 of this Agreement, but shall not include the amount of judgments, fines or penalties against or settlements paid by Indemnitee. (c) References to "other enterprise" shall include, without limitation, employee benefit plans; references to "fines" shall include, without limitation, any excise tax assessed with respect to any employee benefit plan; references to "serving at the request of the Corporation" shall include, without limitation, any service as a Director and/or Officer of the Corporation which imposes duties on, or involves services by, such Director and/or Officer with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he or she reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Agreement. 3. INDEMNITY IN THIRD-PARTY PROCEEDINGS. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 3 if Indemnitee is a party to or threatened to be made a party to or otherwise involved in any Proceeding (other than a Proceeding by or in the right of the Corporation to procure a judgment in its favor) by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against all Expenses, judgments, settlements, fines and penalties, actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such Proceeding, but only if Indemnitee acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation and, in the case of a criminal proceeding, had no reasonable cause to believe that his or her conduct was unlawful. The termination of any such Proceeding by judgment, order of court, settlement, conviction or upon a plea of nolo contendere, or its -2- 3 equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal proceeding, that such person had reasonable cause to believe that his or her conduct was unlawful. 4. INDEMNITY FOR EXPENSES IN PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 4 if Indemnitee is a party to or threatened to be made a party to any Proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, against all Expenses actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such Proceeding, but only if he or she acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification for Expenses shall be made under this Paragraph 4 in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Corporation, unless and only to the extent that any court in which such Proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses as such court shall deem proper. 5. INDEMNITY FOR AMOUNTS PAID IN SETTLEMENT IN PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 5 if Indemnitee is a party to or threatened to be made a party to any Proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, against all amounts actually and reasonably paid in settlement by Indemnitee in connection with any such Proceeding, but only if he or she acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation. 6. INDEMNIFICATION OF EXPENSES OF SUCCESSFUL PARTY. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any Proceeding or in defense of any claim, issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses incurred in connection therewith. 7. ADVANCES OF EXPENSES. Any Expenses incurred by or on behalf of Indemnitee pursuant to Paragraphs 3 and 4 in any Proceeding shall be paid by the Corporation in advance upon the written request of Indemnitee if Indemnitee -3- 4 shall undertake to repay such amount to the extent that it is ultimately determined that Indemnitee is not entitled to indemnification hereunder. 8. RIGHT OF INDEMNITEE TO INDEMNIFICATION UPON APPLICATION; PROCEDURE UPON APPLICATION. Any indemnification under Paragraphs 3, 4 and 5 shall be made no later than thirty (30) days after receipt by the Corporation of the written request of Indemnitee, unless a determination is made within said thirty-day period by (a) the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such Proceeding, or (b) independent legal counsel, agreed to by the Corporation, in a written opinion (which counsel shall be appointed if such a quorum is not obtainable), that the Indemnitee has not met the relevant standards for indemnification set forth in Paragraphs 3, 4 or 5. The right to indemnification or advances as provided by this Agreement shall be enforceable by Indemnitee in any court of competent jurisdiction. There shall exist in such action a rebuttable presumption that Indemnitee has met the applicable standard(s) of conduct and is therefore entitled to indemnification pursuant to this Agreement, and the burden of proving that the relevant standards have not been met by Indemnitee shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors or independent legal counsel) prior to the commencement of such action to have made a determination that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Corporation (including its Board of Directors or independent legal counsel) that Indemnitee has not met such applicable standard of conduct, shall (i) constitute a defense to the action, (ii) create a presumption that Indemnitee has not met the applicable standard of conduct, or (iii) otherwise alter the presumption in favor of Indemnitee referred to in the preceding sentence. Indemnitee's expenses reasonably incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be indemnified by the Corporation. 9. ALLOWANCE FOR COMPLIANCE WITH SEC REQUIREMENTS. Indemnitee acknowledges that the Securities and Exchange Commission ("SEC") has expressed the opinion that indemnification of directors and officers from liabilities under the Securities Act of 1933 ("Act") is against public policy as expressed in the Act and, is therefore, unenforceable. Indemnitee hereby agrees that it will not be a breach of this Agreement for the Corporation to undertake with the Commission in connection with the registration for sale of any stock or other securities of the Corporation from time to time that, in the event a claim for indemnification against such liabilities (other than the payment by the Corporation of expenses incurred or paid by a director or officer of the Corporation in the successful defense of any action, suit or proceeding) is asserted in connection with such stock or other securities being registered, the Corporation will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of competent jurisdiction on the question of whether or not such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication -4- 5 of such issue. Indemnitee further agrees that such submission to a court of competent jurisdiction shall not be a breach of this Agreement. 10. INDEMNIFICATION HEREUNDER NOT EXCLUSIVE. The indemnification provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may be entitled under the Certificate of Incorporation or the By-Laws of the Corporation, any agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Delaware, or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office. The indemnification under this Agreement shall continue as to Indemnitee even though he or she may have ceased to be a Director and/or Officer and shall inure to the benefit of the heirs, executors and personal representatives of Indemnitee. 11. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Corporation for some claims, issues or matters, but not as to other claims, issues or matters, or for some or a portion of the Expenses, judgments, fines or penalties actually and reasonably incurred by Indemnitee or amounts actually and reasonably paid in settlement by Indemnitee in the investigation, defense, appeal or settlement of any Proceeding, but not for the total amount thereof, the Corporation shall nevertheless indemnify Indemnitee for the portion of such claims, issues or matters or Expenses, judgments, fines, penalties or amounts paid in settlement to which Indemnitee is entitled. 12. REIMBURSEMENT TO CORPORATION BY INDEMNITEE; LIMITATION ON AMOUNTS PAID BY CORPORATION. To the extent Indemnitee has been indemnified by the Corporation hereunder and later receives payments from any insurance carrier covering the same Expenses, judgments, fines, penalties or amounts paid in settlement so indemnified by the Corporation hereunder, Indemnitee shall immediately reimburse the Corporation hereunder for all such amounts received from the insurer. Notwithstanding anything contained herein to the contrary, Indemnitee shall not be entitled to recover amounts under this Agreement which, when added to the amount of indemnification payments made to, or on behalf of, Indemnitee, under the Certificate of Incorporation or By-Laws of the Corporation, in the aggregate exceed the Expenses, judgments, fines, penalties and amounts paid in settlement actually and reasonably incurred by Indemnitee ("Excess Amounts"). To the extent the Corporation has paid Excess Amounts to Indemnitee, Indemnitee shall be obligated to immediately reimburse the Corporation for such Excess Amounts. 13. CONTINUATION OF RIGHTS AND OBLIGATIONS. All rights and obligations of the Corporation and Indemnitee hereunder shall continue in full force and effect despite the subsequent amendment or modification of the Corporation's Certificate of Incorporation or By-Laws, as such are in effect on the date hereof, and such rights and obligations shall not be affected by any -5- 6 such amendment or modification, any resolution of directors or stockholders of the Corporation, or by any other corporate action which conflicts with or purports to amend, modify, limit or eliminate any of the rights or obligations of the Corporation and/or Indemnitee hereunder. 14. AMENDMENT AND MODIFICATION. This Agreement may only be amended, modified or supplemented by the written agreement of the Corporation and Indemnitee. 15. ASSIGNMENT. This Agreement shall not be assigned by the Corporation or Indemnitee without the prior written consent of the other party thereto, except that the Corporation may freely assign its rights and obligations under this Agreement to any subsidiary for whom Indemnitee is serving as a director and/or officer thereof; provided, however, that no permitted assignment shall release the assignor from its obligations hereunder. Subject to the foregoing, this Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, including, without limitation, any successor to the Corporation by way of merger, consolidation and/or sale or disposition of all or substantially all of the capital stock of the Corporation. 16. SAVING CLAUSE. If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall nevertheless indemnify Indemnitee as to Expenses, judgments, fines, penalties and amounts paid in settlement with respect to any Proceeding to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. 17. COUNTERPARTS. This Agreement may be executed in two or more fully or partially executed counterparts each of which shall be deemed an original binding the signer thereof against the other signing parties, but all counterparts together shall constitute one and the same instrument. Executed signature pages may be removed from counterpart agreements and attached to one or more fully executed copies of this Agreement. 18. NOTICE. Indemnitee shall, as a condition precedent to his or her right to be indemnified under this Agreement, give to the Corporation notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to the Corporation shall be directed to the Corporation at its headquarters located at 8000 Freedom Avenue N.W., North Canton, Ohio 44720-0169, Attention: Chairman (or such other address as the Corporation shall designate in writing to Indemnitee). Notice shall be deemed received three days after the date postmarked if sent by prepaid mail, properly addressed. In addition, Indemnitee shall give the Corporation such information and cooperation as it may reasonably require within Indemnitee's power. 19. APPLICABLE LAW. All matters with respect to this Agreement, including, without limitation, matters of validity, construction, effect and performance shall be governed by the internal laws of the State of Delaware -6- 7 applicable to contracts made and to be performed therein between the residents thereof (regardless of the laws that might otherwise be applicable under principles of conflicts of law). IN WITNESS WHEREOF, the parties hereby have caused this Agreement to be duly executed and signed as of the day and year first above written. CAMELOT MUSIC HOLDINGS, INC. THE "CORPORATION" By /s/ Jack K. Rogers --------------------------------- Its Corporate Secretary --------------------------------- "INDEMNITEE" /s/ Lewis S. Garrett ------------------------------------ Lewis S. Garrett -7- EX-10.29 18 EXHIBIT 10.29 1 Exhibit 10.29 CAMELOT MUSIC HOLDINGS, INC. ---------------------------- INDEMNITY AGREEMENT ------------------- THIS AGREEMENT is made as of the 4th day of June, 1998, by and between CAMELOT MUSIC HOLDINGS, INC., a Delaware corporation (the "Corporation"), and Larry K. Mundorf ("Indemnitee"), an Officer of the Corporation. WHEREAS, it is essential to the Corporation to retain and attract as Directors and/or Officers the most capable persons available; and WHEREAS, the substantial increase in corporate litigation subjects directors and officers to expensive litigation risks at the same time that the availability of directors' and officers' liability insurance has been severely limited; and WHEREAS, it is now the express policy of the Corporation to indemnify its Directors and/or Officers so as to provide them with the maximum possible protection permitted by law; and WHEREAS, in addition, because the statutory indemnification provisions of the Delaware General Corporation Law expressly provide that they are non-exclusive, it is the policy of the Corporation to indemnify directors and officers of the Corporation who have entered into settlements of derivative suits provided they have not breached the applicable statutory standard of conduct; and WHEREAS, Indemnitee does not regard the protection available under the Corporation's Certificate of Incorporation and insurance, if any, as adequate in the present circumstances, and considers it necessary and desirable to his or her service as a Director and/or Officer to have adequate protection, and the Corporation desires Indemnitee to serve in such capacity; and WHEREAS, the Delaware General Corporation Law provides that indemnification of directors and officers of a corporation may be authorized by agreement, and thereby contemplates that contracts of this nature may be entered into between the Company and Indemnitee with respect to indemnification of Indemnitee as a Director and/or Officer of the Corporation. NOW, THEREFORE, the Corporation and Indemnitee do hereby agree as follows: 1. AGREEMENT TO SERVE. Indemnitee agrees to serve or continue to serve as an Officer of the Corporation for so long as he or she is duly elected or appointed or until such time as he or she tenders his or her resignation in writing. 2. DEFINITIONS. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending, or completed action, suit or proceeding, whether brought by or 2 in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature, in which Indemnitee may be or may have been involved as a party or otherwise, by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, by reason of any action taken by Indemnitee or of any inaction on his or her part while acting as such a Director and/or Officer, or by reason of the fact that he or she is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise; in each case whether or not he or she is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification or reimbursement can be provided under this Agreement. (b) The term "Expenses" shall include, without limitation, expenses of investigations, judicial or administrative proceedings or appeals, attorneys' fees and disbursements and any expenses of establishing a right to indemnification under Paragraph 8 of this Agreement, but shall not include the amount of judgments, fines or penalties against or settlements paid by Indemnitee. (c) References to "other enterprise" shall include, without limitation, employee benefit plans; references to "fines" shall include, without limitation, any excise tax assessed with respect to any employee benefit plan; references to "serving at the request of the Corporation" shall include, without limitation, any service as a Director and/or Officer of the Corporation which imposes duties on, or involves services by, such Director and/or Officer with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he or she reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Agreement. 3. INDEMNITY IN THIRD-PARTY PROCEEDINGS. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 3 if Indemnitee is a party to or threatened to be made a party to or otherwise involved in any Proceeding (other than a Proceeding by or in the right of the Corporation to procure a judgment in its favor) by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against all Expenses, judgments, settlements, fines and penalties, actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such Proceeding, but only if Indemnitee acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation and, in the case of a criminal proceeding, had no reasonable cause to believe that his or her conduct was unlawful. The termination of any such Proceeding by judgment, order of court, settlement, conviction or upon a plea of nolo contendere, or its -2- 3 equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal proceeding, that such person had reasonable cause to believe that his or her conduct was unlawful. 4. INDEMNITY FOR EXPENSES IN PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 4 if Indemnitee is a party to or threatened to be made a party to any Proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, against all Expenses actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such Proceeding, but only if he or she acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification for Expenses shall be made under this Paragraph 4 in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Corporation, unless and only to the extent that any court in which such Proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses as such court shall deem proper. 5. INDEMNITY FOR AMOUNTS PAID IN SETTLEMENT IN PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 5 if Indemnitee is a party to or threatened to be made a party to any Proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, against all amounts actually and reasonably paid in settlement by Indemnitee in connection with any such Proceeding, but only if he or she acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation. 6. INDEMNIFICATION OF EXPENSES OF SUCCESSFUL PARTY. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any Proceeding or in defense of any claim, issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses incurred in connection therewith. 7. ADVANCES OF EXPENSES. Any Expenses incurred by or on behalf of Indemnitee pursuant to Paragraphs 3 and 4 in any Proceeding shall be paid by the Corporation in advance upon the written request of Indemnitee if Indemnitee -3- 4 shall undertake to repay such amount to the extent that it is ultimately determined that Indemnitee is not entitled to indemnification hereunder. 8. RIGHT OF INDEMNITEE TO INDEMNIFICATION UPON APPLICATION; PROCEDURE UPON APPLICATION. Any indemnification under Paragraphs 3, 4 and 5 shall be made no later than thirty (30) days after receipt by the Corporation of the written request of Indemnitee, unless a determination is made within said thirty-day period by (a) the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such Proceeding, or (b) independent legal counsel, agreed to by the Corporation, in a written opinion (which counsel shall be appointed if such a quorum is not obtainable), that the Indemnitee has not met the relevant standards for indemnification set forth in Paragraphs 3, 4 or 5. The right to indemnification or advances as provided by this Agreement shall be enforceable by Indemnitee in any court of competent jurisdiction. There shall exist in such action a rebuttable presumption that Indemnitee has met the applicable standard(s) of conduct and is therefore entitled to indemnification pursuant to this Agreement, and the burden of proving that the relevant standards have not been met by Indemnitee shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors or independent legal counsel) prior to the commencement of such action to have made a determination that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Corporation (including its Board of Directors or independent legal counsel) that Indemnitee has not met such applicable standard of conduct, shall (i) constitute a defense to the action, (ii) create a presumption that Indemnitee has not met the applicable standard of conduct, or (iii) otherwise alter the presumption in favor of Indemnitee referred to in the preceding sentence. Indemnitee's expenses reasonably incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be indemnified by the Corporation. 9. ALLOWANCE FOR COMPLIANCE WITH SEC REQUIREMENTS. Indemnitee acknowledges that the Securities and Exchange Commission ("SEC") has expressed the opinion that indemnification of directors and officers from liabilities under the Securities Act of 1933 ("Act") is against public policy as expressed in the Act and, is therefore, unenforceable. Indemnitee hereby agrees that it will not be a breach of this Agreement for the Corporation to undertake with the Commission in connection with the registration for sale of any stock or other securities of the Corporation from time to time that, in the event a claim for indemnification against such liabilities (other than the payment by the Corporation of expenses incurred or paid by a director or officer of the Corporation in the successful defense of any action, suit or proceeding) is asserted in connection with such stock or other securities being registered, the Corporation will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of competent jurisdiction on the question of whether or not such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication -4- 5 of such issue. Indemnitee further agrees that such submission to a court of competent jurisdiction shall not be a breach of this Agreement. 10. INDEMNIFICATION HEREUNDER NOT EXCLUSIVE. The indemnification provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may be entitled under the Certificate of Incorporation or the By-Laws of the Corporation, any agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Delaware, or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office. The indemnification under this Agreement shall continue as to Indemnitee even though he or she may have ceased to be a Director and/or Officer and shall inure to the benefit of the heirs, executors and personal representatives of Indemnitee. 11. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Corporation for some claims, issues or matters, but not as to other claims, issues or matters, or for some or a portion of the Expenses, judgments, fines or penalties actually and reasonably incurred by Indemnitee or amounts actually and reasonably paid in settlement by Indemnitee in the investigation, defense, appeal or settlement of any Proceeding, but not for the total amount thereof, the Corporation shall nevertheless indemnify Indemnitee for the portion of such claims, issues or matters or Expenses, judgments, fines, penalties or amounts paid in settlement to which Indemnitee is entitled. 12. REIMBURSEMENT TO CORPORATION BY INDEMNITEE; LIMITATION ON AMOUNTS PAID BY CORPORATION. To the extent Indemnitee has been indemnified by the Corporation hereunder and later receives payments from any insurance carrier covering the same Expenses, judgments, fines, penalties or amounts paid in settlement so indemnified by the Corporation hereunder, Indemnitee shall immediately reimburse the Corporation hereunder for all such amounts received from the insurer. Notwithstanding anything contained herein to the contrary, Indemnitee shall not be entitled to recover amounts under this Agreement which, when added to the amount of indemnification payments made to, or on behalf of, Indemnitee, under the Certificate of Incorporation or By-Laws of the Corporation, in the aggregate exceed the Expenses, judgments, fines, penalties and amounts paid in settlement actually and reasonably incurred by Indemnitee ("Excess Amounts"). To the extent the Corporation has paid Excess Amounts to Indemnitee, Indemnitee shall be obligated to immediately reimburse the Corporation for such Excess Amounts. 13. CONTINUATION OF RIGHTS AND OBLIGATIONS. All rights and obligations of the Corporation and Indemnitee hereunder shall continue in full force and effect despite the subsequent amendment or modification of the Corporation's Certificate of Incorporation or By-Laws, as such are in effect on the date hereof, and such rights and obligations shall not be affected by any -5- 6 such amendment or modification, any resolution of directors or stockholders of the Corporation, or by any other corporate action which conflicts with or purports to amend, modify, limit or eliminate any of the rights or obligations of the Corporation and/or Indemnitee hereunder. 14. AMENDMENT AND MODIFICATION. This Agreement may only be amended, modified or supplemented by the written agreement of the Corporation and Indemnitee. 15. ASSIGNMENT. This Agreement shall not be assigned by the Corporation or Indemnitee without the prior written consent of the other party thereto, except that the Corporation may freely assign its rights and obligations under this Agreement to any subsidiary for whom Indemnitee is serving as a director and/or officer thereof; provided, however, that no permitted assignment shall release the assignor from its obligations hereunder. Subject to the foregoing, this Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, including, without limitation, any successor to the Corporation by way of merger, consolidation and/or sale or disposition of all or substantially all of the capital stock of the Corporation. 16. SAVING CLAUSE. If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall nevertheless indemnify Indemnitee as to Expenses, judgments, fines, penalties and amounts paid in settlement with respect to any Proceeding to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. 17. COUNTERPARTS. This Agreement may be executed in two or more fully or partially executed counterparts each of which shall be deemed an original binding the signer thereof against the other signing parties, but all counterparts together shall constitute one and the same instrument. Executed signature pages may be removed from counterpart agreements and attached to one or more fully executed copies of this Agreement. 18. NOTICE. Indemnitee shall, as a condition precedent to his or her right to be indemnified under this Agreement, give to the Corporation notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to the Corporation shall be directed to the Corporation at its headquarters located at 8000 Freedom Avenue N.W., North Canton, Ohio 44720-0169, Attention: Chairman (or such other address as the Corporation shall designate in writing to Indemnitee). Notice shall be deemed received three days after the date postmarked if sent by prepaid mail, properly addressed. In addition, Indemnitee shall give the Corporation such information and cooperation as it may reasonably require within Indemnitee's power. 19. APPLICABLE LAW. All matters with respect to this Agreement, including, without limitation, matters of validity, construction, effect and performance shall be governed by the internal laws of the State of Delaware -6- 7 applicable to contracts made and to be performed therein between the residents thereof (regardless of the laws that might otherwise be applicable under principles of conflicts of law). IN WITNESS WHEREOF, the parties hereby have caused this Agreement to be duly executed and signed as of the day and year first above written. CAMELOT MUSIC HOLDINGS, INC. THE "CORPORATION" By /s/ Jack K. Rogers --------------------------------- Its Corporate Secretary --------------------------------- "INDEMNITEE" /s/ Larry K. Mundorf ------------------------------------ Larry K. Mundorf -7- EX-10.30 19 EXHIBIT 10.30 1 Exhibit 10.30 CAMELOT MUSIC HOLDINGS, INC. DEFERRED COMPENSATION PLAN FOR OUTSIDE DIRECTORS EFFECTIVE: JUNE 30, 1998 2 DEFERRED COMPENSATION PLAN FOR OUTSIDE DIRECTORS This Plan is hereby adopted on this 4th day of June, 1998, effective June 30, 1998, by CAMELOT MUSIC HOLDINGS, INC.(the "Company"). I. NAME AND PURPOSE 1.1. NAME. The name of this Plan shall be the CAMELOT MUSIC HOLDINGS, INC. DEFERRED COMPENSATION PLAN FOR OUTSIDE DIRECTORS. 1.2. PURPOSE. This Plan is hereby established to provide unfunded deferred compensation to Directors under certain conditions specified herein. 1.3. NOT A FUNDED PLAN. It is the intention and purpose of the Company that this Plan shall be deemed to be "unfunded" for tax purposes as well as any other purpose. This Plan shall be administered in such a manner, notwithstanding any contrary provision of this Plan, that it will be so deemed and would be so described. II. DEFINITIONS 2.1. "ACCOUNTS" mean the Participants' Elective Accounts maintained on the books of the Company for Participants under this Plan. A Participant's Account shall not constitute or be treated as a trust fund of any kind. 2.2. "ADMINISTRATOR" means the person, persons, corporation, partnership or other entity designated as Administrator under Section 7.6. 2.3. "AGREEMENT" means the Deferred Compensation Deferral Agreement(s) executed between a Participant and the Company, whereby a Participant agrees to defer a portion of his Compensation in accordance with the provisions of the Plan. 2.4. "APPEALS COMMITTEE" means the Appeals Committee established pursuant to Article VI. 2.5. "BENEFICIARY" means the person, persons or entity so designated, or deemed to be so designated, by a Participant pursuant to Section 4.9. 1 3 2.6. "BOARD OF DIRECTORS" means the Board of Directors of the Company. 2.7. "CODE" means the Internal Revenue Code of 1986, as amended and any lawful regulations or other pronouncements promulgated thereunder. 2.8. "COMPANY" means Camelot Music Holdings, Inc. and any successor corporation or business organization which shall assume the duties and obligations of Camelot Music Holdings, Inc. under this Plan. 2.9. "COMPENSATION" means for any Participant the retainer and meeting fees paid to him for his services as a Director. 2.10. "DETERMINATION DATE" means the last day of each calendar quarter. 2.11. "DIRECTOR" shall mean a member of the Board of Directors of the Company or any of its subsidiaries or affiliated companies, who is not otherwise employed by the Company or any of its subsidiaries or affiliated companies. 2.12. "DISABILITY" shall mean a physical or mental condition of a Participant resulting from bodily injury, disease or mental disorder which renders him incapable of continuing his usual and customary duties as a Director. 2.13. "EFFECTIVE DATE" means the date this Plan shall become effective which date shall be June 30, 1998. 2.14. "ELECTION YEAR" means the period from the Effective Date through December 31, 1998 and any calendar year thereafter. 2.15. "ELECTIVE AMOUNT" means for each Participant an amount equal to the amount by which his Compensation is reduced pursuant to Section 3.4 hereof. 2.16. "ENTRY DATE" means, with respect to any Participant with respect to any Election Year, the beginning of such Election Year or, if, pursuant to Section 3.2, such Participant first becomes eligible to participate in the Plan on a date following the commencement of an Election Year, then the first day of the month coincident with or next following the date he first 2 4 meets the eligibility requirements in such Election Year. 2.17. "NORMAL RETIREMENT DATE" means the date a Participant attains age 65. 2.18. "PARTICIPANT" means any Director who elects to participate in the Plan in accordance with Section 3.1 hereof and who enters into an Agreement and who has commenced Compensation reductions pursuant to such Agreement. A Participant shall cease to be a Participant, and shall become a former Participant, upon his Termination of Service. However, the word Participant may also include, where the context indicates, any former Participant in this Plan. 2.19. "PARTICIPANT ELECTIVE ACCOUNT" means for each Participant the bookkeeping account maintained by the Company on his behalf to reflect his Elective Amounts for an Election Year and all earnings, gains and losses thereon. 2.20. "PLAN" means the Camelot Music Holdings, Inc. Deferred Compensation Plan for Outside Directors, as set forth in this instrument, as amended from time to time. 2.21. "TERMINATION OF SERVICE" means the Participant's cessation of his service as a Director for any reason whatsoever, whether voluntarily or involuntarily, including by reason of retirement, death, or Disability. III. PARTICIPATION, COMPENSATION REDUCTIONS AND ACCOUNTS 3.1. ELIGIBILITY. A Director shall be eligible to participate in the Plan for any Election Year as of the first date that the Director has been elected a Director of the Company. 3.2. PARTICIPATION. Each Director who has satisfied the eligibility requirements set forth in Section 3.1 shall become a Participant and actively participate for an Election Year by completing and filing an Agreement described in Section 3.3 with the Company prior to the first day of the Election Year or the Effective Date, in the case of the initial Election Year. In the event a Director first meets such eligibility requirements after the beginning of an Election Year, such Director may become a Participant and actively participate for 3 5 the period commencing on the first day of the month coincident with or after which he meets the eligibility requirements until the end of such Election Year by completing and filing an Agreement described in Section 3.3 with the Company prior to the first day of such month. Such Agreement shall contain such provisions as the Company shall require and shall otherwise be in such form as the Administrator shall determine. 3.3. DEFERRAL ELECTIONS UNDER AN AGREEMENT. With respect to each Election Year, each eligible Director may elect, under his Agreement for such Election Year, to make a deferral of his Compensation at least a reasonable time, as determined by the Company in its sole discretion, prior to the time any such deferred amounts would otherwise be payable to such Participants. Any such deferral shall be evidenced by an Agreement in a form acceptable to the Administrator. 3.4. COMPENSATION REDUCTIONS AND DEFERRAL AMOUNTS. A Participant's election to defer in accordance with 3.3 shall cause an equivalent reduction in the Participant's Compensation at the time such amounts would otherwise be payable. An amount equal to such reductions in a Participant's Compensation shall constitute an Elective Amount hereunder and shall be credited to such Participant's Elective Account as of the time of such reductions. 3.5. ALTERATION OF DEFERRALS. A Participant's deferral election made pursuant to Section 3.3 above shall be irrevocable. 3.6. ESTABLISHMENT OF ACCOUNTS. The Company shall establish a Participant Elective Account in the name of each Participant. All amounts so credited to the Accounts of any Participant or former Participant shall constitute a general, unsecured liability of the Company to such person. 3.7. ALLOCATION OF ELECTIVE AMOUNTS. At the time a Participant's Compensation is reduced pursuant to Section 3.4 hereof, the Company shall credit the Participant Elective Account of such Participant with the Participant's Elective Amount with respect to such Compensation. 3.8. CREDITING OF EARNINGS. The Company shall credit the Account of each Participant with earnings at the rate of interest on such Account as if an amount equal to 4 6 the Participant's Account balance had been advanced under the Revolving Credit Agreement, dated as of January 27, 1998 and amended as of June 12, 1998, by and among Camelot Music, Inc., the several lenders named therein and The Chase Manhattan Bank, N.A., as agent as such agreement may be amended, supplemented or otherwise modified from time to time, including replacement of such agreement with another credit agreement of like kind and tenor. In the event that no such agreement is extant, the Company shall credit the Account of each Participant with earnings calculated in such other manner as the Company may determine. 3.9. DETERMINATION OF ACCOUNT. The balance of each Participant's Account as of each Determination Date shall be calculated as follows, using the terms and methods in the order defined below: (a) Earnings, gains and losses determined pursuant to Section 3.8 shall be allocated based on the Participant's Adjusted Account. A Participant's Adjusted Account is equal to the Participant's Account as of the prior Determination Date, plus 50% of Elective Amounts, less forfeitures, and less distributions, which occurred after the prior Determination Date and up through and including the current Determination Date. IV. BENEFITS 4.1. IN-SERVICE DISTRIBUTION. A Participant who is an active Director of the Company may request to withdraw all or a portion of his Accounts, provided that any such amounts have been credited to his Accounts for two (2) or more calendar years at the time of distribution. Such request shall be made in writing in a form and manner specified by the Company and must specify the amounts to be withdrawn and the date upon which such amounts shall be paid which must be as soon as administratively possible following a Determination Date that is at least one (1) year after the date on which the request is made. Any such request shall be irrevocable unless, prior to payment, the Participant has a Termination of Service, dies, or becomes disabled, at which time the request shall become null and void and the Participant's Accounts shall be paid as provided in Section 4.3, 4.4, 4.5 or 4.6 hereof, whichever shall be applicable. 4.2. PARTICIPANT CALL PROVISION. A Participant (or the Participant's Beneficiary in the case of the death of 5 7 the Participant) at any time may request an accelerated distribution of all or a portion of the amounts credited to his Accounts except those amounts that have been contributed during the Election Year when such request is made, subject to the forfeiture of an amount equal to ten percent (10%) of such accelerated amount. Such request shall be made in writing in a form and manner specified by the Company. The Company shall distribute to the Participant or Beneficiary such accelerated amount in the form of a lump sum as soon as administratively possible after the Determination Date that coincides with or is immediately after the date on which the Company receives the request. Such distribution shall completely discharge the Company from all liability with respect to the Participant's or Beneficiary's Accounts or portion thereof that is either distributed or forfeited as set forth herein. Further, if the Participant is a Director at the time of the distribution, the Participant may not make any further deferrals into the Plan until January 1 of the second calendar year following the calendar year in which the Participant receives the distribution. 4.3. TERMINATION BENEFIT. Upon the Termination of Service of a Participant, for reasons other than death or Disability, he shall be entitled to receive a distribution of the balance of his Accounts. Such distribution shall be in the form of benefit provided in Section 4.7 and shall be paid or commence to be paid as soon as administratively possible after a Determination Date that is at least one (1) year after the date on which such a Participant makes a written request for distribution; provided, however, that such payment or commencement date shall in no event be later than a date which is as soon as administratively possible after the January 1st coinciding with or immediately after the later of either the Participant's Normal Retirement Date or his date of actual retirement. 4.4. DEATH PRIOR TO BENEFIT COMMENCEMENT. Upon the Participant's death prior to commencement of benefits hereunder, the Beneficiary of the deceased Participant shall be entitled to a death benefit equal to the balance of the Participant's Accounts. Such distribution shall be in the form of benefit determined under Section 4.7 shall commence as of the date determined under Section 4.8 and shall be in lieu of all other benefits under this Plan. 4.5. DEATH SUBSEQUENT TO BENEFIT COMMENCEMENT. Upon the death of a Participant subsequent to commencement of 6 8 his benefits, the Beneficiary of the deceased Participant shall be entitled to receive a distribution of the Participant's remaining Accounts. Such distribution shall be in the form of benefit determined under Section 4.7, shall commence as of the date determined under Section 4.8 and shall be in lieu of all other benefits under this Plan. 4.6. DISABILITY. In the event the Administrator has determined that the Participant has incurred a Termination of Service due to a Disability of at least six months duration which first manifests itself after the Effective Date and prior to his Normal Retirement Date, a disabled Participant shall be entitled to receive a distribution of the balance of his Accounts. Such distribution shall be in the form of benefit determined under Section 4.7 and shall commence as of the date determined under Section 4.8; provided, however, that the payment or commencement date shall not be later than a date which is as soon as administratively possible after the Determination Date coinciding with or immediately following the Participant's Normal Retirement Date. 4.7. FORM AND AMOUNT OF BENEFIT PAYMENT. (a) Subject to such rules, procedures, limits and restrictions as the Administrator may establish from time to time, a Participant, may elect that distributions payable under Sections 4.3, 4.4, 4.5 and 4.6 shall be made in a single sum or in the form of annual installments over a period of no less than two (2) calendar years and no more than ten (10) calendar years. (b) Initially, the amount of any installments under any installment form of payment shall be equal to the balance of the Accounts to be distributed divided by the number of installments to be paid. The amount of the installment payments shall be recomputed annually and the installment payments shall be increased or decreased to reflect any changes in the Accounts due to fluctuations in earnings, gains and losses on the remaining balance and the number of remaining installments. (c) In the event of the death of the Participant, as described in Sections 4.4 or 4.5, the Participant's Beneficiary may, with the consent of the Administrator, request an alternative form of benefit payment, such as a lump-sum payment or an installment form with an installment period of 7 9 less than ten (10) years. Such request shall be made in accordance with such procedures as the Administrator may establish. Any such procedures shall either require such request be made a reasonable period of time, as determined by the Company in its sole discretion, before the amounts affected by such a request shall be distributable, or require a forfeiture of a significant portion of such amounts. The Administrator may, but is not required to, grant any such requests. (d) The Administrator, with the consent of the Company, may establish procedures to permit some or all Participants to request to change their prior elections regarding the form of their benefit payments hereunder, provided that any such procedures shall either require such request be made a reasonable period of time, as determined by the Company in its sole discretion, before the amounts affected by such request shall be distributable, or require a forfeiture of a significant portion of such amounts. The Administrator may, but is not required to, grant any such requests. (e) Notwithstanding anything in this Section IV to the contrary, in no event shall any distribution under Section 4.1 or 4.2 hereunder be less than the lesser of One Thousand Dollars ($1,000.00) or the entire balance of the Participant's Accounts hereunder. 4.8. COMMENCEMENT OF PAYMENTS. (a) Except as otherwise provided, commencement of payments under this Plan shall be as soon as administratively possible following receipt of notice by the Administrator of an event which entitles a Participant or a Beneficiary to payments under this Plan. All payments shall be made as of the first day of the month. (b) Subject to such rules, procedures, limits and restrictions as the Administrator may establish from time to time, a Participant may elect that any single sum distributions payable under this Article IV be made as soon as administratively possible after the start of any calendar year after the event permitting payment. (c) In the event of the death of the Participant, as described in Sections 4.4 or 4.5, the 8 10 Participant's Beneficiary may, with the consent of the Administrator, request to change the time of commencement of benefits hereunder. Such request shall be made in accordance with such procedures as the Administrator may establish. Any such procedures shall either require such request be made a reasonable period of time, as determined by the Company in its sole discretion, before the amounts affected by such a request shall be distributable, or require a forfeiture of a significant portion of such amounts. The Administrator may, but is not required to, grant any such requests. (d) The Administrator, with the consent of the Company, may establish procedures to permit some or all Participants to request to change their prior elections regarding the time of commencement of benefits hereunder, provided that any such procedures shall either require that the request be made a reasonable period of time, as determined by the Company in its sole discretion, before the amounts affected by such request shall be distributable, or require a forfeiture of a significant portion of such amounts. The Administrator may, but is not required to, grant any such requests. 4.9. DESIGNATION OF BENEFICIARY. Subject to rules and procedures promulgated by the Administrator, a Participant may sign a document designating a Beneficiary or Beneficiaries. In the event that a Participant fails to designate any Beneficiary in accordance with the provisions of this Section, he shall be deemed to have designated his spouse, or if no spouse is then living, his estate, as his Beneficiary. 4.10. TAX WITHHOLDING. The Company may withhold from any payment made by it under the Plan of such amount or amounts as may be required for purposes of complying with the tax withholding or other provisions of the Code or the Social Security Act or any state or local income or employment tax act or for purposes of paying any estate, inheritance or other tax attributable to any amounts payable hereunder. V. RIGHTS OF PARTICIPANTS 5.1. CREDITOR STATUS OF PARTICIPANTS. The Elective Amounts of a Participant shall be merely unfunded, unsecured promises of the Company to make benefit payments in the 9 11 future and shall be liabilities solely against the general assets of the Company. The Company shall not be required to segregate, set aside or escrow the Elective Amounts nor any earnings, gains and losses credited thereon. With respect to amounts credited to any Accounts hereunder and any benefits payable hereunder, a Participant and his or her Beneficiary shall have the status of general unsecured creditors of the Company, and may look only to the Company and its general assets for payment of such Accounts and benefits. VI. ADMINISTRATION AND CLAIMS PROCEDURE 6.1. ADMINISTRATOR. The Company shall be the Administrator unless and until the Board shall appoint some other person, persons, committee, corporation, partnership or other entity as Administrator. 6.2. GENERAL RIGHTS, POWERS, AND DUTIES OF ADMINISTRATOR. The Administrator shall be responsible for the general administration of the Plan and shall have all powers as may be necessary to carry out the provisions of the Plan and may, from time to time, establish rules for the administration of the Plan and the transaction of the Plan's business. In addition to any powers, rights and duties set forth elsewhere in the Plan, it shall have the following powers and duties: (a) To enact such rules, regulations, and procedures and to prescribe the use of such forms as it shall deem advisable; (b) To appoint or employ such agents, attorneys, actuaries, accountants, assistants or other persons (who may also be Participants in the Plan or be employed by or represent the Company or any of it subsidiaries or affiliated companies) at the expense of the Company, as it may deem necessary to keep its records or to assist it in taking any other action authorized or required hereunder; (c) To interpret the Plan, and to resolve ambiguities, inconsistencies and omissions, to determine any question of fact, to determine the right to benefits of, and the amount of benefits, if any, payable to, any person in accordance with the provisions of the Plan and resolve all questions arising under the Plan; 10 12 (d) To administer the Plan in accordance with its terms and any rules and regulations it establishes; (e) To maintain such records concerning the Plan as it deems sufficient to prepare reports, returns and other information required by the Plan or by law; and (f) To direct the Company to pay benefits under the Plan, and to give such other directions and instructions as may be necessary for the proper administration of the Plan. 6.3. INFORMATION TO BE FURNISHED TO ADMINISTRATOR. The Company shall furnish the Administrator with such data and information as it may reasonably require. The records of the Company shall be determinative of each Participant's period of service as a Director, Termination of Service and the reason therefor, leave of absence, years of service, personal data, and data regarding Compensation and all reductions thereof under this Plan. Participants and their Beneficiaries shall furnish to the Administrator such evidence, data or information and execute such documents as the Administrator requests. 6.4. CLAIM FOR BENEFITS. Any claim for benefits under the Plan shall be made in writing to the Administrator in such a manner as the Administrator shall prescribe. The Administrator shall process each such claim and determine entitlement to benefits within ninety (90) days following its receipt of a completed application for benefits unless special circumstances require an extension of time for processing the claim. If such an extension of time for processing is required, written notice of the extension shall be furnished to the claimant prior to the termination of the initial ninety (90) day period. In no event shall such extension exceed a period of ninety (90) days from the end of such initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date as of which the Administrator expects to render the final decision. If such claim is wholly or partially denied by the Administrator, the Administrator shall notify the claimant of the denial of the claim in writing, delivered in person or mailed by first class mail to the claimant's last known address. Such notice of denial shall be in writing and shall contain: 11 13 (a) the specific reason or reasons for denial of the claim; (b) a reference to the relevant Plan provisions upon which the denial is based; (c) a description of any additional material or information necessary for the claimant to perfect the claim, together with an explanation of why such material or information is necessary; and (d) an explanation of the Plan's claim review procedure. If no such notice is provided, the claim shall be deemed denied. The interpretations, determinations and decisions of the Administrator shall be final and binding upon all persons with respect to any right, benefit and privilege hereunder, subject to the review procedures set forth in this Article. 6.5. REQUEST FOR REVIEW OF A DENIAL OF A CLAIM FOR BENEFITS. Any claimant or any authorized representative of such claimant whose claim for benefits under this Plan has been denied or deemed denied, in whole or in part, by the Administrator may upon written notice to the Appeals Committee request a review by the Appeals Committee of such denial of her or his claim for benefits. Such claimant shall have sixty (60) days from the date the claim is deemed denied, or sixty (60) days from receipt of the notice denying the claim, as the case may be, in which to request a review by written application delivered to the Appeals Committee, which must specify the relief requested and the reason such claimant believes the denial should be reversed. 6.6. APPEALS PROCEDURE. The Appeals Committee is hereby authorized to review the facts and relevant documents as well as this Plan, to interpret this Plan and other relevant documents and to render a decision on the claim of the claimant. Such review may be made by written briefs submitted by the claimant and the Administrator or at a hearing, or by both as shall be deemed necessary by the Appeals Committee. Any such hearing shall be held in the main offices of the Company or such other location as the Appeals Committee shall select on such date and at such time as the Appeals Committee shall designate upon not less than fifteen (15) days notice to the claimant and the Administrator unless both of them accept shorter notice. The notice shall specify that such claimant must indicate in writing, at least five (5) days in 12 14 advance of the time established for such hearing, his intention to appear at the appointed time and place, or the hearing will be automatically canceled. The reply shall specify any other persons who will accompany him to the hearing, or such other persons will not be admitted to the hearing. The Appeals Committee shall make every effort to schedule the hearing on a day and at a time which is convenient to both the claimant and the Administrator. The claimant, or his duly authorized representative, may review all pertinent documents relating to the claim in preparation for the hearing and may submit issues and comments in writing prior to or during the hearing. 6.7. DECISION UPON REVIEW OF DENIAL OF CLAIM FOR BENEFITS. After the review has been completed, the Appeals Committee shall render a decision in writing, a copy of which shall be sent to both the applicant and the Administrator. In making its decision the Appeals Committee shall have full power and discretion to interpret the Plan, and to resolve ambiguities, inconsistencies and omissions, to determine any question of fact, to determine the right to benefits of, and the amount of benefits, if any, payable to, any person in accordance with the provisions of the Plan. The Appeals Committee shall render a decision on the claim review promptly, but no more than sixty (60) days after the receipt of the claimant's request for review, unless special circumstances (such as the need to hold a hearing) require an extension of time, in which case the sixty (60) day period shall be extended to one hundred twenty (120) days. Such decision shall include specific reasons for the decision and contain specific references to the relevant Plan provisions upon which the decision is based. The decision on review shall be furnished to the claimant within the appropriate time described above. If the decision on review is not furnished within such time, the claim shall be deemed denied on review. The decision of the Appeals Committee shall be final and binding in all respects on the Administrator and the Company and claimant involved. The review procedures of this Article shall be the sole and exclusive remedy and shall be in lieu of all actions at law, in equity, pursuant to arbitration or otherwise. 6.8. ESTABLISHMENT OF APPEALS COMMITTEE. The Company shall appoint the members of an Appeals Committee which shall consist of three (3) or more members. The Company may appoint one Appeals Committee to hear all appeals of denied benefits that may arise under the Plan or a number of Appeals Committees with different members to 13 15 hear the appeals of denied benefits. The members of the Appeals Committee shall remain in office at the will of the Company and the Company, from time to time, may remove any of said members with or without cause. A member of the Appeals Committee may resign upon written notice to the remaining member or members of the Appeals Committee and to the Company, respectively. The fact that a person is a Participant or a former Participant or a prospective Participant shall not disqualify him from acting as a member of the Appeals Committee, nor shall any member of the Appeals Committee be disqualified from acting on any question because of his interest therein, except that no member of the Appeals Committee may act on any claim which such member has brought as a Participant, former Participant, or Beneficiary under this Plan. In case of the death, resignation or removal of any member of the Appeals Committee, the remaining members shall act until a successor-member shall be appointed by the Company. At the Administrator's request, the Secretary of the Company shall notify the Administrator in writing of the names of the original members of the Appeals Committee, of any and all changes in the membership of the Appeals Committee, of the member designated as Chairman, and the member designated as Secretary, and of any changes in either office. Until notified of a change, the Administrator shall be protected in assuming that there has been no change in the membership of the Appeals Committee or the designation of Chairman or of Secretary since the last notification was filed with it. The Administrator shall be under no obligation at any time to inquire into the membership of the Appeals Committee or its officers. All communications to the Appeals Committee shall be addressed to its Secretary at the address of the Company. 6.9. OPERATIONS OF APPEALS COMMITTEE. On all matters and questions, the decision of a majority of the members of the Appeals Committee shall govern and control; but a meeting need not be called or held to make any decision. The Appeals Committee shall appoint one of its members to act as its Chairman and another member to act as Secretary. The terms of office of these members shall be determined by the Appeals Committee, and the Secretary and/or Chairman may be removed by the other members of the Appeals Committee for any reason which such other members may deem just and proper. The Secretary shall do all things directed by the Appeals Committee. Although the Appeals Committee shall act by decision of a majority of its members as above provided, nevertheless in the absence of written notice 14 16 to the contrary, every person may deal with the Secretary and consider his acts as having been authorized by the Appeals Committee. Any notice served or demand made on the Secretary shall be deemed to have been served or made upon the Appeals Committee. 6.10. LIMITATION OF DUTIES. The Company, the Administrator, the Appeals Committee, and their respective officers, members, employees and agents shall have no duty or responsibility under the Plan other than the duties and responsibilities expressly assigned to them herein or delegated to them pursuant hereto. None of them shall have any duty or responsibility with respect to the duties or responsibilities assigned or delegated to another of them. 6.11. EXPENSES OF ADMINISTRATION AND THE APPEALS COMMITTEE. No fee or compensation shall be paid to the Administrator or any member of the Appeals Committee for his or its services as such, but the Administrator and Appeals Committee may be reimbursed for its expenses from any Trust established by the Company in connection herewith, or, if no funds exist therein or if the Company determines that they should not be paid by such Trust, by the Company. The Appeals Committee and the Administrator may hire such attorneys, accountants, actuaries, agents, clerks, and secretaries as it may deem desirable in the performance of its functions, any of whom may also be advisors to the Company or any affiliated company, and the expense associated with the hiring or retention of any such person or persons shall be paid directly by the Company or from such Trust, as directed by the Company. 6.12. INDEMNIFICATION. In addition to whatever rights of indemnification any individual who serves as a delegate of the Administrator, Company and the members of the Appeals Committee may be entitled to under the articles of incorporation, regulations or bylaws of the Company, under any provision of law or under any other agreement, the Company shall satisfy any liability actually incurred by any such individual including reasonable expenses and attorneys' fees, and any judgments, fines, and amounts paid in settlement, in connection with any threatened, pending or completed action, suit or proceeding which is related to the exercise or failure to exercise by such individual of any powers, authority, responsibilities or discretion provided under this Plan or reasonably believed by such member to be provided hereunder, and any action taken by such individual in connection therewith. This indemnification for all such acts taken or omitted is 15 17 intentionally broad, but shall not provide indemnification for embezzlement or diversion of Plan funds for the benefit of any such individual. Such indemnification will not be provided to any person who is not a present or former employee the Company or a subsidiary or affiliated company thereof nor shall it be provided for any claim by the Company or a subsidiary or affiliated company thereof against any such person. No indemnification shall be provided to any person who is not an individual. 6.13. LIMITATION OF ADMINISTRATIVE LIABILITY. Neither the Administrator nor the Appeals Committee while acting on behalf of the Administrator, nor any of their respective officers, members, employees, agents and delegates shall be liable for any act taken by such person or entity pursuant to any provision of the Plan except for gross abuse of the discretion given it and them hereunder. No member of the Appeals Committee shall be liable for the act of any other member. No member of the Board of Directors of the Company shall be liable to any person for any action taken or omitted in connection with the administration of this Plan. 6.14. LIMITATION OF SPONSOR LIABILITY. Any right or authority exercisable by the Company or Board pursuant to any provision of this Plan shall be exercised in the Company's capacity as sponsor of the Plan, or on behalf of the Company in such capacity, and not in a fiduciary capacity, and may be exercised without the approval or consent of any person in a fiduciary capacity. Neither the Company, nor the Board, nor any of their respective officers, members, employees, agents and delegates, shall have any liability to any party for its exercise of any such right or authority. VII. AMENDMENT AND TERMINATION 7.1. AMENDMENT, MODIFICATION AND TERMINATION. This Plan may be amended, modified or terminated by the Company at any time, or from time to time, by a document executed on behalf of the Company by an officer thereof, which amendment, modification or termination is authorized or ratified by the Board. No such amendment, modification or termination shall reduce the amounts credited to any Participant's Accounts, all determined as of the date of such amendment, modification or termination. 7.2. DISTRIBUTIONS ON TERMINATION. In the event this Plan is terminated, the amounts then credited to all Participants' Accounts may, in the Company's sole 16 18 discretion, (i) be distributed to the Participants in quarterly installments over such period not more than fifteen (15) years as the Company may determine, (ii) be distributed to the Participants in a lump sum, or (iii) continue to be credited with earnings, gains and losses pursuant to Article III and be distributed pursuant to Article IV. VII. MISCELLANEOUS 8.1. NO IMPLIED RIGHTS. Neither the establishment of the Plan nor any amendment thereof shall be construed as giving any Participant, Beneficiary or any other person any legal or equitable right unless such right shall be specifically provided for in the Plan or conferred by specific action of the Company in accordance with the terms and provisions of the Plan. Except as expressly provided in this Plan, the Company shall not be required or be liable to make any payment under the Plan. 8.2. NO RIGHT TO COMPANY ASSETS. Neither the Participant nor any other person shall acquire by reason of the Plan any right in or title to any assets, funds or property of the Company whatsoever including, without limiting the generality of the foregoing, any specific funds, assets or other property which the Company, in its sole discretion, may set aside in anticipation of a liability hereunder. Any benefits which become payable hereunder shall be paid from the general assets of the Company. The Participant shall have only a contractual right to the amounts, if any, payable hereunder unsecured by any asset of the Company. Nothing contained in the Plan constitutes a guarantee by the Company that the assets of the Company shall be sufficient to pay any benefit to any person. 8.3. NO RIGHTS TO CONTINUE AS DIRECTOR CREATED. This Plan shall not be deemed to constitute a contract for services between the Company and any Participant, nor confer upon any Participant the right to be retained in the service of Director for any period of time. Nothing herein shall be construed as fixing or regulating the Compensation payable to any Participant. 8.4. OFFSET. If, at the time payments or installments of payments are to be made hereunder, the Participant or the Beneficiary or both are indebted or obligated to the Company, then the payments remaining to be made to the Participant or the Beneficiary or both may, at the discretion of the Company, be reduced by the amount of 17 19 such indebtedness or obligation, provided, however, that an election by the Company not to reduce any such payment or payments shall not constitute a waiver of its claim for such indebtedness or obligation. 8.5. NON-ASSIGNABILITY. Neither the Participant nor any other person shall have any voluntary or involuntary right to commute, sell, assign, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable hereunder, or any part thereof, and any attempt to do so shall be void. All benefits or amounts credited to Accounts under this Plan are expressly declared to be unassignable and non-transferable. No part of the benefits or amounts credited to Accounts under this Plan shall be, prior to actual payment, subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by the Participant or any other person, or be transferable by operation of law in the event of the Participant's or any other person's bankruptcy or insolvency. 8.6. NOTICE. Any notice required or permitted to be given under the Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, and if given to the Company, delivered to the principal office of the Company, directed to the attention of the Vice President of Human Resources. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark or the receipt for registration or certification. 8.7. GOVERNING LAWS. The Plan shall be construed and administered according to the laws of the State of Ohio to the extent not preempted by the laws of the United States of America. 8.8. INCAPACITY. If the Administrator determines that any Participant or Beneficiary entitled to payments under the Plan is incompetent by reason of physical or mental disability and is consequently unable to give a valid receipt for payments made hereunder, or is a minor, the Administrator may order the payments becoming due to such Participant or Beneficiary to be made to another person for the benefit of such Participant or Beneficiary, without responsibility on the part of the Administrator to follow the application of amounts so paid. Payments made pursuant to this Section shall completely discharge the Plan, any Trust, the 18 20 Administrator, the Company and the Appeals Committee with respect to such payments. 8.9. ADMINISTRATIVE FORMS. All applications, elections and designations in connection with the Plan made by a Participant or Beneficiary shall become effective only when duly executed on forms provided by the Administrator and filed with the Administrator. 8.10. RESPONSIBILITY FOR LEGAL EFFECT. Neither the Company, the Administrator, the Appeals Committee, nor any officer, member, delegate or agent of any of them, makes any representations or warranties, express or implied, or assumes any responsibility concerning the legal, tax, or other implications or effects of this Plan. 8.11. SUCCESSORS. The terms and conditions of this Plan shall inure to the benefit of and bind the Company, the Administrator, the Appeals Committee and its members, the Participants, their beneficiaries, and the successors, assigns, and personal representatives of any of them. 8.12. HEADINGS AND TITLES. The Section headings and titles of Articles used in this Plan are for convenience of reference only and shall not be considered in construing this Plan. 8.13. GENERAL RULES OF CONSTRUCTION. The masculine gender shall include the feminine and neuter, and vice versa, as the context shall require. The singular number shall include the plural, and vice versa, as the context shall require. The present tense of a verb shall include the past and future tenses, and vice versa, as the context may require. 8.14. SEVERABILITY. In the event that any provision or term of this Plan, or any agreement or instrument required by the Administrator hereunder, is determined by a judicial, quasi-judicial or administrative body to be void or not enforceable for any reason, all other provisions or terms of this Plan or such agreement or instrument shall remain in full force and effect and shall be enforceable as if such void or nonenforceable provision or term had never been a part of this Plan, or such agreement or instrument. 8.15. ACTIONS BY THE COMPANY. Except as otherwise provided herein, all actions of the Company under this Plan shall be taken by the Board, by any officer of the 19 21 Company, or by any other person designated by any of the foregoing. IN WITNESS WHEREOF, the Company, by two of its appropriate officers duly authorized, has executed this Deferred Compensation Plan for Outside Directors as of the date first above written. CAMELOT MUSIC HOLDINGS, INC. ("Company") By ----------------------------- Title -------------------------- And ---------------------------- Title -------------------------- 20 EX-10.31 20 EXHIBIT 10.31 1 Exhibit 10.31 STOCK OPTION AGREEMENT (OUTSIDE DIRECTORS) THIS AGREEMENT, entered into as of the _____ day of __________, 1998, by and between CAMELOT MUSIC HOLDINGS, INC., a Delaware corporation (the "Company"), and ________________ (the "Optionee"). W I T N E S S E T H ------------------- WHEREAS, the Board of Directors of the Company has established the Camelot Music Holdings, Inc. 1998 Outside Directors' Stock Option Plan (the "Plan"); and WHEREAS, the Plan provides that the Optionee, as an eligible director of the Company shall be granted an option to purchase the number of shares of Common Stock, par value $.01 per share ("Shares"), of the Company set forth in Section 1 hereof, upon the terms and subject to the conditions of the Plan and this Agreement. NOW, THEREFORE, the Company and the Optionee hereby agree with respect to such stock options as follows: 1. Effective as of the date of this Agreement, the Company grants to the Optionee, upon the terms and subject to the conditions hereinafter set forth, the right and option to purchase all or any part of an aggregate of ____________ (_______) Shares (such collective right and option being hereinafter referred to as the "Option"), at a price of $_________ per share ("Option Price"). 2. The term of the Option shall be for a period of ten (10) years from the date hereof, and the Option shall expire at 5:00 p.m., North Canton, Ohio time on the last day of the term of the Option, which date is _____________ or, if earlier, on the applicable expiration date provided for in paragraphs 4 and 5 hereof. 3. Except as provided in paragraph 6 hereof, the Option shall not be exercisable to any extent until one (1) year from the date hereof. The Optionee shall be entitled to exercise the Option with respect to the number of Shares indicated below on or after the date indicated opposite such number below: (a) Number of Shares That Date as of Which Option May be Exercised May Be Exercised __________ ____________, 19___ __________ ____________, 19___ __________ ____________, 19___ 2 To the extent that the Option has become exercisable with respect to a number of Shares, as provided above, the Option may thereafter be exercised by the Optionee either as to all or part of such whole Shares at any time or from time to time prior to expiration of the Option, pursuant to paragraph 2 hereof. Except as provided in paragraphs 4 and 5 hereof, the Option may not be exercised at any time unless the Optionee shall continue to be at the time of exercise an eligible Outside Director of the Company. 4. If the Optionee ceases to be an eligible Outside Director, the Option shall terminate upon the earlier of the date which is three (3) months after the date of the cessation of his directorship or the last day of the term of the Option. Nothing contained in this Agreement shall confer upon the Optionee any right to continue as an Outside Director of the Company. 5. If the Optionee dies while an eligible Outside Director, such person or persons as shall have acquired, by will or by the laws of descent and distribution, the right to exercise the Option (the "Personal Representative") may exercise the Option to the extent of the purchase rights, if any, which had accrued as of the date of the Optionee's death pursuant to paragraph 3 hereof and which have not theretofore been exercised. Such accrued purchase rights shall in any event terminate upon the earlier of the date which is three (3) months after the date of the Optionee's death or the last day of the term of the Option. 6. In the event of a "change in control" the eligible Outside Director shall have the immediate right and option (notwithstanding the provisions of paragraph 3) to exercise the Option with respect to all Shares covered by the Option, which exercise, if made, shall be irrevocable. The term "change in control" shall include, but not be limited to: (i) the first purchase of shares pursuant to a tender offer or exchange (other than a tender offer or exchange by the Company) for all or part of the Company's shares of any class of common stock or any securities convertible into such common stock; (ii) the receipt by the Company of a Schedule 13D or other advice indicating that a person is the "beneficial owner" (as that term is defined in Rule 13d-3 under the Securities Exchange Act of 1934) of twenty percent (20%) or more of the Company's shares of capital stock calculated as provided in paragraph (d) of said Rule 13d-3; (iii) the date of approval by stockholders of the Company of an agreement providing for any consolidation or merger of the Company in which the Company will not be the continuing or surviving corporation or pursuant to which shares of capital stock, of any class or any securities convertible into such capital stock, of the Company would be converted into cash, securities, or other property, other than a merger of the Company in which the holders of shares of all classes of the Company's capital stock immediately prior to the merger would have the same proportion of ownership of common stock of the surviving corporation immediately after the merger; (iv) the date of the approval by stockholders of the Company of any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of the Company; or (v) the adoption of any plan or proposal for the liquidation (but not a partial liquidation) or dissolution of the Company. 7. In the event of any change in the number of outstanding Shares through the declaration of share dividends, share splits, or consolidations, through recapitalization, or by reason of any other increase or decrease in the number of outstanding Shares effected without 2 3 receipt of consideration by the Company, the number of Shares then covered by the Option and the Option Price shall be appropriately adjusted consistent with such change. The determination of the Board of Directors of the Company as to any such adjustment shall be conclusive and binding upon the Optionee and upon the Personal Representative. 8. The Option may be exercised by delivery to the Secretary of the Company at its corporate office, 8000 Freedom Avenue, N.W., North Canton, Ohio 44720, of a completed Notice of Exercise of Option (obtainable from the Secretary of the Company) setting forth the number of whole Shares with respect to which the Option is being exercised together with a certified or cashier's check payable to the Company in the amount of the total purchase price for such Shares. 9. Upon receipt by the Company prior to the expiration of the Option of a duly completed Notice of Exercise of Option accompanied by a certified or cashier's check, as provided in paragraph 8 hereof, in full payment for the Shares being purchased pursuant to such Notice (and, with respect to any Option exercised pursuant to paragraph 5 hereof by the Personal Representative, accompanied in addition by proof satisfactory to the Board of Directors of the Company as to the right of the Personal Representative, to exercise the Option), the Company shall cause to be mailed or otherwise delivered to the Optionee or the Personal Representative, as the case may be, within thirty (30) days of such receipt, a certificate or certificates for the number of Shares so purchased. Notwithstanding the foregoing, the delivery of such certificates is hereby expressly conditioned upon obtaining an investment representation from the Optionee or the Personal Representative in the form set forth at Section 6 of the Plan or in such other form as the Company, in its sole discretion, shall determine to be adequate. The Optionee or the Personal Representative shall not have any of the rights of a shareholder with respect to the Shares covered by the Option unless and until one or more certificates representing such Shares shall be issued to the Optionee or the Personal representative. 10. This Agreement shall be binding upon and inure to the benefit of any successor or successors of the Company and the heirs, estate and Personal Representative of the Optionee. The Option shall not be transferrable other than by will or the laws of descent and distribution. The Option may be exercised during the lifetime of the Optionee only by the Optionee. 11. This Agreement is subject to all of the terms, conditions, and provisions of the Camelot Music Holdings, Inc. 1998 Outside Directors' Stock Option Plan, as it may be amended from time to time, and to such rules, regulations, and interpretations of the Plan as may be adopted by the Board of Directors of the Company and in effect from time to time. In the event and to the extent that this Agreement conflicts with or is inconsistent with the terms, conditions, and provisions of the Plan, the Plan shall control, and this Agreement shall be deemed to be modified accordingly. 3 4 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on its behalf by its undersigned officer thereunto duly authorized, and the Optionee has hereunto set his hand, all as of the day and year first above written. CAMELOT MUSIC HOLDINGS, INC. By: ------------------------------ Its: ------------------------------ ------------------------------ "Optionee" 4 EX-23.1 21 EXHIBIT 23.1 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to inclusion in the Prospectus constituting part, and/or, of this Registration Statement on Form S-1 of our reports dated June 10, 1998 relating to the consolidated financial statements and financial statement schedule of Camelot Music Holdings, Inc. ("Successor Company") and CM Holdings, Inc. ("Predecessor Company") which appears in such Prospectus and/or Registration Statement. We also consent to the reference to our firm under the caption "Experts" in such Prospectus. PricewaterhouseCoopers LLP Cleveland, Ohio August 11, 1998 II-5 EX-23.2 22 EXHIBIT 23.2 1 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We hereby consent to the use in this Amendment Number One to the Registration Statement Number 333-56811 of Camelot Music Holdings, Inc. on Form S-1 of our report dated August 21, 1997 (February 28, 1998 as to Note 1) relating to the financial statements of The Wall Music, Inc. for the year ended June 1, 1997 appearing in the Prospectus which is a part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. Deloitte & Touche LLP Atlanta, Georgia August 11, 1998 II-6 EX-24.1 23 EXHIBIT 24.1 1 EXHIBIT 24.1 CAMELOT MUSIC HOLDINGS, INC. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that Camelot Music Holdings, Inc. hereby constitutes and appoints James E. Bonk, Jack K. Rogers and Lee Ann Thorn, or any one or more of them, its attorneys-in-fact and agents, each with full power of substitution and resubstitution for it in any and all capacities, to sign any or all amendments or post-effective amendments to this Registration Statement, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each of such attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary in connection with such matters and hereby ratifying and confirming all that each of such attorneys-in-fact and agents or his substitute or substitutes may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, this Power of Attorney has been signed at Cleveland, Ohio this 11th day of June, 1998. CAMELOT MUSIC HOLDINGS, INC. By: /s/ JACK K. ROGERS ------------------------------------ II-7 2 EXHIBIT 24.1 -- (CONTINUED) CAMELOT MUSIC HOLDINGS, INC. CERTIFIED RESOLUTION I, Jack K. Rogers, Secretary of Camelot Music Holdings, Inc., a Delaware corporation (the "Company"), do hereby certify that the following is a true copy of a resolution adopted by the Board of Directors on June 4, 1998, and that the same has not been changed and remains in full force and effect. RESOLVED, that each of James E. Bonk, Jack K. Rogers and Lee Ann Thorn is hereby appointed as attorney of the Company with full power of substitution and resubstitution for and in the name, place and stead of the Company to sign, attest and file a Registration Statement on Form S-1, or any other appropriate form that may be used from time to time, and any related registration statement filed pursuant to Rule 462(b) under the Securities Act, with respect to the issue and sale of the Company's Common Stock (the "Securities"), and any and all amendments and exhibits to such Registration Statement and any and all applications or other documents to be filed with the Commission and any and all applicable applications or other documents in connection with the inclusion in any automated interdealer quotation system of the securities covered by such Registration Statement or any and all applications or other documents to be filed with any governmental or private agency or official relative to the issuance of said Securities, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises, hereby ratifying and approving the acts of such attorneys or any such substitute or substitutes and, without implied limitation, including in the above the authority to do the foregoing things on behalf of the Company in the name of the person so acting or on behalf and in the name of any duly authorized officer of the Company; and that each of the Chairman, the President and Secretary and the Chief Financial Officer of the Company is hereby authorized, for and on behalf of the Company, to execute a Power of Attorney evidencing the foregoing appointment. /s/ JACK K. ROGERS -------------------------------------- Jack K. Rogers, Secretary Dated: June 11, 1998 II-8 EX-27.2 24 EXHIBIT 27.2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF THE SUCCESSOR AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 3-MOS DEC-31-1998 MAR-01-1998 MAY-30-1998 15,680 0 2,922 0 176,659 204,915 40,519 0 303,894 90,398 0 0 0 102 197,590 303,894 113,456 113,456 71,147 36,213 1,765 (350) 141 4,158 1,603 2,555 0 0 0 2,555 $.25 $.24 DEPRECIATION AND AMORTIZATION EXPENSE SPECIAL ITEMS. SEE FOOTNOTE 4 TO THE COMPANY'S INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INTEREST EXPENSE AND AMORTIZATION OF FINANCING FEES.
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