Hastings Entertainment & Allegro Media Corp's Different Strategies for Handling Financial Woes

Two longtime music industry companies, Hastings Entertainment and the Allegro Media Corp, engaged in the physical-end have become insolvent and are taking different routes to deal with their financial difficulties.

Draw Another Circle, the parent of Amarillo, Texas, -based Hastings Entertainment, MovieStop and SP Images, has filed for Chapter 11 protection in the U.S. Bankruptcy Court in the District of Delaware and hopes to put itself up for sale to satisfy creditors' claims.

Meanwhile, Portland, Oregon, -based Allegro is trying to pull off an out-of-court liquidation of its independent distribution and home entertainment wholesale businesses and has hired the liquidation firm of Edward Horstmann Inc. to conduct the liquidation. According to sources, it's unclear if any money will be left over for unsecured creditors after the secured creditors -- believed to be the bank that supplies the company's revolving credit facility -- is paid off.

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According to the Draw Another Circle petition, the company is claiming less than $50,000 in assets and liabilities of $50 million-$100 million in liabilities.

The company has hired the law firm Cooley LLP and Whitford Taylor & Preston LLC to represent it through the proceedings; FTI Consulting as the financial advisor; and Rust Consulting/Omnio Bankruptcy as the administrative agent. It also appears to have secured up to $90 million of DIP (debtor-in-possession) financing from a consortium of banks, apparently led by Bank of America, N.A.

In a press release, Hastings president and chief operating officer Jim Litwak says it is pursuing this strategy in order to disassociate from unique challenges facing its sister companies but also to seek a buyer that can finance the chain going forward.

"In the past six months, Hastings has made significant progress in transforming our stores into entertainment destinations with exciting new categories that appeal to every member of the family and also extend to our e-commerce business," Litwak said in a statement. "We are hopeful that we are on the right path but need an additional cash infusion to complete our remerchandising strategy. An asset sale to a well-capitalized purchaser would give us this financial stability and allow the buyer to pick and choose the assets it wants to acquire, while also disassociating us from the unique challenges facing our sister companies and creating new opportunities to generate long-term value for our creditors, associates, customers, suppliers and ultimately the communities we serve."

Hastings operates 123 superstores, which combines all types of entertainment software with trend merchandise. Billboard estimates Hastings revenue at about $350 million-$375 million.

According to Draw Another Circle's Chapter 11 filing, film studios and book publishers appear among the 30 largest unsecured creditors, including Universal Studios Home Video at $3.7 million; Fox Home Entertainment, at $3.3 million; Sony Pictures Home Entertainment at $1.2 million and HarperCollins, at $1.06 million.

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Alliance Entertainment is the sixth largest unsecured creditor, owed about $841,000 according to the filing. Other music industry top 30 unsecured creditors are Sony Music Entertainment at $453,000; RED Distribution, at $248,000; and E1 Entertainment, at $212,000.

Other creditors include Sony Interactive Entertainment, at $751,000; Fox Video Revenue Sharing at $262,000. In all, Sony entertainment software companies appear to be owed $2.66 million.

Ironically, Hastings Entertainment held its annual convention just last week, where vendors converged in Amarillo to help the company finance the event. But where Hastings Entertainment usually just brings in store managers and field management staff, this year it coughed up extra money to sponsor dinners and provide entertainment.

Draw Another Circle and the companies named in the Chapter 11 petition are owned by Joel Weinshanker, who is also the principle of the National Entertainment Collectibles Association, based in Hillside, New Jersey. NECA owns licenses to create merchandising for many movie and book properties. NECA principal Weinshanker was also involved in the acquisition of Muhammed Ali Enterprises by the Authentic Brands Group. NECA and his other interest are not among the companies listed in the Chapter 11 filing.

Meanwhile, independent labels who went through Allegro are feeling the squeeze in its liquidation. According to the Allegro website, the distributor handles about 100 labels of all genres including Purple Frog Records, Bob's Kids Music, A Gentle Wind and American Melody Records, BMC Records, Dialtone Records, Linn Records, Storyville Records, Zoho, Hearts of Space and Narada, to name a few.

In addition, Allegro also distributed about 25 film labels including Anime Works, Asian Crush, New Conquest Pictures, Nu Lite Entertainment, TAB Fitness and Tokyo Shock.

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Besides its indie distribution business, Allegro runs a wholesale operation which racks music in truck stops, gift shops and the U.S. Marine Exchange Services and other armed forces retail operations. It is the indie distribution business and the wholesale racking operations that are being liquidated.

Beyond that, Allegro has begun creating its own content and acquiring music and films under the Somerset Entertainment Operation, which it acquired in 2013. According to sources, those assets are not a part of the liquidation and will continue too run as a separate entity, much to the chagrin of unsecured indie label creditors.

While indie labels generally provide music product to their distributors and wait for payment, some have contacted Billboard wondering if their product could be considered tendered to Allegro on consignment, since the wholesaler had yet to pay them for it. In order for product to be considered given on consignment, there is a legal procedure that must be followed in order to "perfect" the consignment status, including making sure that your label's product is key in a special area of the distributors warehouse away from other product. If all of the legal steps are not followed, the product is not considered under consignment and therefore can be used by a distributor as collateral in securing a loan.

In 2008, Billboard reported that Allegro had a $25 million cash infusion from private equity firm, Canterbury Park Capital and had obtained a $15 million revolving credit facility from USB Capital Resources. At the time, the company said it would have $100 million in annuals sales.

Via e-mail, Allegro principle Joe Micallif said that Canterbury's stake in the company had been bought out three years ago. He also said that Umpqua Bank was the secured lender providing the company's credit facility, but it had pulled the credit line, which apparently forced Allegro's hand.

In choosing to go through an out-of-court liquidation, that saves on legal fees, which means that it can provided a greater reclamation by creditors, but sometimes doesn't provide the transparency that unsecured creditors want.

Draw Another Circle is not commenting beyond its press release. Allegro principle Joe Micallif answered some questions by e-mail, but didn't make himself available for an interview.