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Bankruptcy Emergence Is Music To Camelot's Ears

After emerging in January from Chapter 11, Camelot Music Inc. is showing no signs of slipping down the charts. In fact, the North Canton, Ohio-based music retailer aims to squelch its post-bankruptcy reverberations by seeking new real estate opportunities, strategic deals and acquisitions in order to grow its business and build its access to capital.

According to Bob Roberts, Camelot's director of new business development, the company will be publicly listed on the NASDAQ exchange sometime this summer. He notes that, although official trading will commence with the listing, shares of stock already have been created by the company's debt-to-shares revitalization process.

"We became a publicly traded company through our reorganization proceedings," he says. "Those who held debt in our company, as a measure of our bankruptcy filing, converted their debt into equity, which now represents shares in our company.

"According to Roberts, Camelot's debt-to-equity plan is not unusual, at least in concept. "What is unique about the process was the [large] amount of debt that was converted," he explains. "A company with as much debt as Camelot had is typically sold off, split or liquidated. Our situation is unique because it's highly unusual to have $300 million in debt converted and put back into the company."

In 1993, a New York-based investment firm named InvestCorp. paid a premium for Camelot Music Inc., while the music industry was consistently hitting high notes in annual revenue. But, says Roberts, the industry began suffering from a price war - caused in part by aggressively priced music from category-killers - and the company could no longer service its debt.

Following the industry shift, he says, InvestCorp decided to release its interest in the company in the bankruptcy process, as a means to preserve its current and future bank relationships. The banking committees also decided not to break up the company, as it was deemed more valuable as a whole entity.

"The creditors supported the company and its management, and felt there was a lot to build on, and that's basically why they stuck with us and didn't liquidate or split us up," he explains. "That's how we were able to get to this point - where the best reorganization plan was one in which that debt was converted into equity or shares of stock.

"Although the company filed for protection in August 1996, the company's creditors understood the financial and competitive advantages to acquiring The Wall, while still in bankruptcy. The Philadelphia-based music chain, purchased by Camelot in February, was shopped around by its former parent, London-based W.H. Smith Group plc. (also parent to Atlanta-based W.H. Smith), when the firm decided to divest from the U.S. music industry and concentrate on other retail concepts.

Originally, says Roberts, W.H. Smith had approached Camelot Music in March 1997 for a potential merger, but Camelot's creditors felt that the company would realize greater value as a stand-alone company. In August 1997, however, W.H. Smith looked to Camelot not as a potential merger partner but as a buyer.

"They approached us again and said they wanted to sell off The Wall, and we looked at it," he says. "The price was right. And geographically, [the purchase] was a perfect fit because we had just a handful of stores in the New York, Pennsylvania, Washington, D.C., and Baltimore areas, which are very significant markets for the music industry."

After the deal closed, Camelot began servicing the new stores, closing the last chapter on the company's unique strategic move. "Everything worked out just right," he says. "The sale price was right, and we had enough operating cash to actually make the purchase. And as far as our legal and financial advisers have been able to tell us, this has never happened in federal bankruptcy court before - where a company grows by 50 percent before they emerge from Chapter 11."

Further, Roberts says, Camelot may have found itself at a competitive disadvantage had the chain not been acquired. "That was exactly the discussion during our strategy meetings. It was obvious that there were other companies out there that had the wherewithal to make the acquisition," he says. "If we're in a position, however unusual, where we can make the transaction through some means, that growth was still a great opportunity. The committee and our shareholders recognized that there was tremendous opportunity to grow the company."

As Camelot looks to the future, Roberts says, both The Wall and Camelot Music will see growth in some form (the company will retain The Wall nameplate). He also notes that,although much of the company's growth will come via acquisition, Camelot Music's real estate department is hot on the trail for new opportunities.

"There aren't a tremendous number of centers being built, so it's difficult to go in that direction," he says. "The vast majority of our growth will come via acquisition, which is really the wave in the industry right now anyway. Our real estate group is talking to the shopping center community, and where it fits our plans and goals, we will certainly be popping new stores in the future."

Although acquisitions and new stores will likely power Camelot Music further from bankruptcy protection, Roberts credits its management team with helping to buoy the company.

"In a bankruptcy process, the creditors committee usually finds fault with the company's management group and the decisions they've made to put the company into the position it's in," he says. "In our case, the entire management group stayed the course, and there was no effort on the part of the creditors to move anyone out. And that continues to be our strength."

Contact: Roger Marks, vice president of real estate, Camelot Music Inc., 8000 Freedom Ave., N.W., North Canton, Ohio 44720; (330) 494-2282.

Desq Reaches For Top-drawer Retail Presence

How would a small- to medium-sized business owner find a convenient way to shop for office furnishings? One of the newest answers to that question is Desq, an Edina, Minn.-based retailer making its debut at Yorktown Mall, also in Edina. The concept centers around a European construction system that can be customized and modified according to the needs of each office furniture customer.

Desq's owner and president, Dennis McGraw, saw an underserved market segment during his tenure as a small-business owner in the retail carpet business. For Desq's first 4,000 sq. ft. showroom, he says, the company searched for a convenient location where customers could view product categories and selections in a tasteful, non-pressure retail environment.

"Small-business owners don't have a very strong selection or positive shopping experiences for quality office furniture," he says. "We wanted to be where the small-business owner lived or ran his business. The [retail location] also allows them to browse a showroom rather than a catalog and not necessarily be pressured into a sale."

Designed in the 1960s by a Denmark-based manufacturer, Desq's furniture system was originally used in store fixturing and trade show construction. McGraw saw great potential in the product, which is based on a customizable, extruded aluminum, tubular component system. He purchased the struggling company last July and repositioned it into a line of office furniture.

The result, says McGraw, is a quick-turnaround furniture product that is set in a unique, user-friendly selling space. Project designer Sandy Stein, president of Minneapolis-based SteinDesign, says the store environment needed to communicate a direct message to its target customer.

"We felt that the store should be understood quickly so that it engages the customer [right off the bat]," says Stein. "The store was designed around a strong drive aisle, one that clearly shows the product groupings. The store spine runs from front to back and uses a series of pylon signs on the aisle to influence and assist in wayfinding."

Desq offers a unique retail concept to the shopping center tenant mix, says Stein, and makes shopping for office furniture more convenient. "If someone leaves a company to start out on their own, how do they shop for furniture?" he asks. "Customers traditionally have a sea of 22,000 desks from which to choose, and it can be incredibly overwhelming. Desq allows for focus in that process and makes it simple and user-friendly.

"McGraw notes that the concept has been received well by the public. With a bit more operating time, he says, Desq could expand into other markets that have high office and entrepreneurial densities.

"Certainly the opportunity exists to go somewhere else," he says. "Based on its initial acceptance - and knowing what our manufacturing costs are - we see an opportunity to do something on a very large scale. Where we will go will depend upon the success of this first operation.

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