<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-27852
PLATINUM ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3802328
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2001 BUTTERFIELD ROAD
DOWNERS GROVE, ILLINOIS 60515
(Address of principal executive offices, including zip code)
(630) 769-0033
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. ( )
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant (based upon the per share closing sale price of
$15.00 on August 27, 1996, and for the purpose of this calculation only, the
assumption that all of the registrant's directors and executive officers are
affiliates) was approximately $58,383,015.
The number of shares outstanding of the registrant's Common Stock, par value
$.001, as of August 27, 1996 was 5,063,207.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into this
report:
Annual Report to Stockholders for the Fiscal Year Ended May 31, 1996
(the "1996 Annual Report") (Parts II and IV)
Notice of Annual Meeting of Stockholders and Proxy Statement for the
Annual Meeting of Stockholders to be held on October 8, 1996
(the "1996 Proxy Statement") (Part III)
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PART I
ITEM 1. BUSINESS.
THE COMPANY
The Company is a full-service music company that produces, licenses,
acquires, markets and distributes high quality recorded music. The Company
currently produces recorded music products in the Gospel, Adult Contemporary,
Country and Blues music formats, primarily under its CGI Records, Light Records
and River North Records labels. The Company primarily concentrates on markets
that the Company believes, based on its own experience, industry sources and
census data, offer growth and profit potential. The Company initially targeted
Gospel music as such a market.
Since its inception, the Company has sought to expand its catalog of master
recordings and publishing rights through acquisition, as well as through the
signing of artists. One of the Company's core business activities, and an
integral part of the Company's growth strategy, is the expansion and
exploitation of its music catalog, which to date is comprised primarily of
Gospel recordings. The Company owns a music catalog that contains master
recordings of some of the best selling Gospel music acts in the history of
recorded music, such as The Winans, Andrae Crouch, Walter Hawkins and Daryl
Coley. The Company has also released music by established artists in other music
genres; these artists include Peter Cetera, Crystal Bernard, Holly Dunn and The
Beach Boys. The Company has also entered into an agreement with Alan Parsons to
distribute his next album.
Pursuant to a joint venture with subsidiaries of HOB Entertainment, Inc.
("House of Blues"), the Company is producing, marketing and distributing
compilations on the House of Blues record label. During fiscal 1996, the Company
released ESSENTIAL BLUES VOLUME 1, ESSENTIAL BLUES VOLUME II and ESSENTIAL
GOSPEL. Isaac Tigrett, the Chairman, Chief Executive Officer and principal
founder of House of Blues, was also a principal founder of the Hard Rock Cafe,
and is a member of the Company's Board of Directors.
The Company's products are primarily distributed through a multi-channel
system comprised of (i) an exclusive relationship with PolyGram Group
Distribution, Inc. ("PolyGram"), one of the six major recorded music
distribution groups worldwide, for domestic retail distribution, (ii)
relationships with MCA Records, Ltd. ("MCA"), PolyGram and Bertelsmann Music
Group ("BMG") for international distribution and (iii) the Company's operating
division, Light Distribution, for distribution to Christian bookstores.
STRATEGY
The Company's strategy for growth and expansion of its position in the
recorded music business is based on: (i) selling diversified recorded music
offerings in markets with growth potential, (ii) introducing records by
established artists with a history of successful releases and (iii) expanding
and exploiting its music catalog through the acquisition of master recordings
and music publishing rights from other record companies at attractive prices.
The Company believes that this strategy distinguishes the Company from certain
of its larger competitors who have traditionally focused on the development of
new artists with the potential for mass appeal. The Company intends to remain
focused on the production of artist-driven records by established artists with a
history of stable base sales as well as current sales potential. This strategy
may also include re-releases, "Best ofs" or inclusion in compilation products.
MARKET FOCUS.
The Company initially targeted the Gospel music market as a market with
growth and profit potential. The Company's catalog of master recordings includes
some of the best selling Gospel acts of all time and provides the Company with a
source of low cost revenues. In addition, the Company signs and develops
selected current Gospel artists. The Company plans to broaden its musical
catalog in order to expand its sales opportunities in other markets such as
Blues, Country and Adult Contemporary. Because the recorded music business is
particularly dependent on changing audience tastes and the ability to identify,
attract and sign artists as well as repackage existing recorded music, the
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Company believes that a diversification of musical offerings, through the
identification of additional markets with growth potential, reduces revenue
volatility. The Company believes that it can obtain market share in these
markets through the identification, acquisition and exploitation of catalog
items.
INTRODUCE ARTIST-DRIVEN RECORDS.
The Company is committed to developing high quality recorded music with
artists with a history of successful releases. The Company does not primarily
focus on developing new acts due to unpredictable sales and high development
costs. The Company believes that its strategy reduces the risks associated with
promoting and sponsoring records because of the artist's existing fan base. In
addition, the recoupment of costs associated with recording and marketing an
album is more predictable with an artist who has a history of sales because the
Company is less involved in selecting producers, recording studios and
additional musicians than would be the case with a new artist.
ACQUIRE MUSIC MASTER RECORDING AND PUBLISHING RIGHTS.
The Company is committed to developing its music catalog, which has
historically provided a recurring source of sales for the Company. The Company
believes that its success depends significantly on its ability to invest in,
develop and market rights to its catalog of recorded music. The Company plans to
expand its catalog for exploitation through acquisitions and strategic
relationships as long as it is economically feasible. Consistent with this
strategy, the Company has formed a joint venture with subsidiaries of House of
Blues, and has targeted other record companies for acquisition or long-term
licensing arrangements, which, if successfully completed, are expected to
enhance the Company's position in other markets, including Blues.
MARKETS
GOSPEL.
The Company owns a catalog of master recordings of some of the best selling
Gospel music acts of all time. These acts include The Winans, Andrae Crouch,
Walter Hawkins and Daryl Coley. A significant portion of this catalog was
acquired by the Company in 1993 from Lexicon Music, Inc.
Consistent with its belief that Gospel music products are artist-driven
rather than "hit" driven, the Company has acquired, and continues to pursue the
acquisition of, master recordings of established Gospel artists who have a
history of stable base sales. In addition, the Company has signed established
artists, typically artists with a ministry, for modest advances to produce new
recordings. Gospel music products accounted for 57.5% and 75.1% of the Company's
gross revenues during fiscal 1996 and 1995, respectively.
ADULT CONTEMPORARY.
The Company has expanded its music offerings to include Adult Contemporary
music. In 1993, the Company signed Peter Cetera, formerly the lead singer of the
rock group CHICAGO and an established solo artist. Mr. Cetera's first album by
the Company was released in July 1995 and was titled ONE CLEAR VOICE. His next
release is scheduled for release in fiscal 1997.
In addition, the Company has relationships with other established Adult
Contemporary artists. The Company is currently working on projects with Alan
Parsons and Crystal Bernard. These artists, along with Peter Cetera, not only
provide the Company with the ability to produce and market artist-driven records
with predictable sales, but also, based on the artists' past sales and
established fan base, have the potential to produce a record that charts in the
"top ten." The Company believes that its association with these artists will
increase its ability to sign other established artists. Adult Contemporary music
products accounted for 20.0% and 6.7% of the Company's gross revenues during
fiscal 1996 and 1995, respectively.
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COUNTRY.
During the Company's fiscal year ended May 31, 1995, the Company established
its Country music operations in Nashville, Tennessee. These operations include
Country radio promotions, talent evaluation and artist development and
relations.
Consistent with the Company's objectives for its music operations, the
Company has signed established Country artists as well as up and coming artists.
Holly Dunn and Ronna Reeves have both been installed on the Country Music
Foundation's Walkway of Stars. The Company has also signed new artists Steve
Azar and Steve Kolander, both of whom, the Company believes, have hit potential.
The Beach Boys' August 1996 release for the Company features established
artists, such as Willie Nelson and Lorrie Morgan, backed by The Beach Boys and
performing songs originally recorded by The Beach Boys. Country music products
accounted for 17.7% and 16.5% of the Company's gross revenues during fiscal 1996
and 1995, respectively.
BLUES.
The Company produces and markets compilations of Blues recordings, primarily
with music licensed from other companies. The Company successfully produced and
marketed a compilation of Blues recordings featuring a variety of artists titled
ESSENTIAL BLUES, VOLUME I, which was the product of the joint venture with the
House of Blues. The Company utilized television ads featuring Dan Ackroyd
(Saturday Night Live, The Blues Brothers) to promote ESSENTIAL BLUES, VOLUME 1.
A second compilation album, ESSENTIAL BLUES, VOLUME 2, was released in May 1996.
The Company has also co-produced a video Gospel program taped at the House of
Blues and three live Gospel records. The first, ESSENTIAL GOSPEL, was released
in January 1996 and the remaining two are scheduled to be released in fiscal
1997. Blues music products accounted for less than 5.0% of the Company's gross
revenues during fiscal 1996 and 1995.
LIBRARY
The Company owns over 450 album master recordings and the copyrights to over
675 musical compositions, primarily in the Gospel music genre. By combining
selections from its library with licensed rights to certain master recordings
and compositions obtained from third parties, including most major labels, the
Company has been successful in creating compilation products. See "--
Intellectual Property -- Licensing."
DISTRIBUTION, SALES AND PROMOTION
The Company distributes its products through a multi-channel system
comprised of (i) PolyGram domestically, (ii) MCA, PolyGram and BMG
internationally and (iii) the Company's Light Distribution division to the
Christian retail market. The Company has had an exclusive domestic retail
distribution agreement with PolyGram since 1993. The Company's Christian
distribution company, Light Distribution, distributes the Company's Christian
music products as well as recorded music for artists
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affiliated with other record companies. The Company also repackages and catalogs
its excess inventory of recorded music through the Company's in-house
telemarketing services and other distribution channels. The following table sets
forth the percentage of gross product sales by distribution channel:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL GROSS PRODUCT SALES BY
DISTRIBUTION CHANNEL
FISCAL
FISCAL 1996 FISCAL 1995 1994(1)
------------ ------------ -------------
<S> <C> <C> <C>
(1) PolyGram................................ 56.6% 57.5% 86.8%
(2) Christian Bookstores.................... 24.1 23.2 10.5
(3) Record Clubs/Direct Sales............... 11.2 3.0 2.7
(4) Telemarketing........................... 8.1 16.2 0.0
</TABLE>
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(1) The Company adopted a May 31 fiscal year end effective June 1, 1994. The pro
forma year ended May 31, 1994 was derived from the audited financial
statements for the five-month period ended May 31, 1994 and the year ended
December 31, 1993 in order to present a period comparable to the new fiscal
period adopted by the Company.
During fiscal 1996, Company management significantly reduced the Company's
telemarketing efforts due to the increased costs of television advertising.
Telemarketing sales for fiscal 1996 and 1995 were $1,422,000 and $1,949,000,
respectively.
The Company believes that the diversity of its distribution channels, which
was established through substantial investment in fiscal 1995 and which the
Company plans to continue to pursue, will help the Company absorb shifts in
audience taste and the economy, and provide the foundation for the Company's
expansion into and exploitation of additional markets.
THIRD PARTIES.
In May of 1993, the Company entered into an exclusive distribution agreement
(the "Distribution Agreement") with PolyGram, the largest distributor of
recorded music in the world. Under the Distribution Agreement, PolyGram was
appointed the exclusive distributor for the Company's records throughout the
United States. The Company has retained the right to distribute its records
through key-outlet sales, licenses or sales to record clubs, sales through
Christian bookstore channels and other third party licenses of master
recordings. The services provided by PolyGram include billing and collecting
from customers, distributing promotional copies of records, coordinating and
placing advertisements and undertaking retail marketing and inventory control
activities. The Company is solely responsible for all costs of production and
manufacture of the records including packaging, advertisement, freight and
insurance and is obliged to deliver to PolyGram sufficient records to ensure
adequate stock for distribution. For its services, PolyGram is entitled to a
distribution fee of 18% of the gross billings for all records distributed under
the agreement, less reserves set aside against returns and credits, and a
monthly fee of 2% of the aggregate credit price for copies of returned records.
Fees owed by the Company to PolyGram are secured by all Company products in
PolyGram's possession. The terms of the distribution agreement, initially three
years, was extended to December 31, 2000.
PolyGram owns and distributes labels such as Motown Records, A&M Records,
Mercury Records and others. The Company is one of the few record companies not
owned by PolyGram whose products are distributed by PolyGram. The Company's
relationship with PolyGram has provided, and is expected to continue to provide,
the Company with access to distribution channels not readily available to other
independent recorded music companies.
International distribution of the Company's products is handled principally
by MCA. However, the Company also has relationships with BMG and PolyGram for
international distribution. Under the terms of the agreement with MCA, MCA has
the right to sell the Company's records worldwide, excluding the United States
and Canada. MCA is responsible for all manufacturing and related costs
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(other than artist royalties, which are paid by the Company). The Company
receives a royalty from MCA based on retail sales net of returns ranging from
15% to 20.57% of the suggested retail list price. The agreement with MCA expires
on September 30, 1996, subject to MCA's option to extend the term for an
additional six months under certain circumstances. The PolyGram Distribution
Agreement provides that if the Company desires to enter into an agreement with
any party regarding international distribution, the Company must give PolyGram a
right of first refusal.
LIGHT DISTRIBUTION.
Light Distribution, an operating division of the Company, distributes the
Company's Christian music products, as well as recorded music for artists
affiliated with other labels, including Mercury, Motown, PolyGram and R.E.X.
Music, which was recently purchased by the Company. Light Distribution also
distributes Christmas albums for artists including Donna Summer and Kathy
Mattea.
RELATIONSHIP WITH ARTISTS
CONTRACT TERMS.
The Company seeks to contract with its artists on an exclusive basis for the
marketing of their recordings in return for a percentage royalty based on the
retail selling price of the recording. The Company generally seeks to obtain
rights on a worldwide basis. A typical contract with an artist may provide for a
number of albums to be delivered, with advances against royalties being paid
upon delivery of each album, although advances are often made prior to
recording. The Company generally has an option to take each album that the
artist is contracted to deliver, exercisable within an agreed period of time,
usually a few months following delivery of the previous album. Normally, if an
option is not exercised, the artist has no obligation to deliver additional
albums. Provisions in contracts with established artists vary considerably, and
may, for example, require the Company to release a fixed number of albums and/or
contain an option exercisable by the Company covering more than one album. The
Company seeks to obtain rights to exploit product delivered by the artist for
the life of the product's copyright. Under the contracts, advances are normally
recoupable against royalties paid to the artist. The Company also seeks to
recoup a portion of certain marketing and tour support costs, if any, against
artist royalties.
RECORDING.
Contracts either provide for the artists to deliver completed recordings or
for the Company to undertake the recording with the artist. If the recording
costs are advanced by the Company, they are added to the advances paid to the
artist and recouped against royalties payable to the artist. The Company's staff
is involved in selecting producers, recording studios, any additional musicians
needed and songs to be recorded, as well as supervising the output of recording
sessions, although for experienced artists, such involvement may be less.
MUSIC VIDEO.
The Company produces music videos of single songs for promotional purposes
(clips) and longer music programs (for example, concert programs) for retail
sale. Income from music videos is derived from the sale of videocassettes and
from the publishing of music included in such videos.
OPTION PROGRAM.
The Company intends to grant stock options to certain artists ("Artist
Options") as an inducement to sign with the Company. The Company expects that
these stock options will have vesting schedules tied to the achievement of
identified sales and other performance milestones. The Company will evaluate the
use of options on a case by case basis based on its assessment of the cost of
making cash advances to the artist, the sales potential of the artist and the
financial impact of granting such options. Under current industry practice, cash
advances to an artist are recouped from royalties payable to the artist from
record sales. Because the Artist Options would not be subject to recoupment, the
Company believes that such options will provide a valuable method of attracting,
signing and retaining artists while maintaining appropriate economic incentives
for the artists. In addition, the corresponding reduction in cash advances
should positively impact the Company's cash flow.
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PRODUCTION AND MANUFACTURING
The Company is a full service record company with an art department that
provides design and finished film for print-ready manufacturing of record cover
design.
The Company previously owned and operated River North Studios ("Studio") but
disposed of the studio assets concurrent with the Company's initial public
offering, having determined that it is more cost effective to use outside
facilities for the recording time actually required by the Company.
Although a number of alternative manufacturing sources are available to the
Company, the Company's finished music products are generally manufactured by
wholly-owned subsidiaries of PolyGram because management finds this source cost
effective.
INTELLECTUAL PROPERTY
COPYRIGHT.
The Company's recorded music business, like that of other companies involved
in recorded music, primarily rests on ownership or control and exploitation of
musical works and sound recordings. The Company's music products are protected
under applicable domestic and international copyright laws. In addition, the
Company has ownership rights to over 450 album master recordings and over 675
songs, primarily in the Gospel music genre, which are also protected under
copyright laws.
Although circumstances vary from case to case, rights and royalties relating
to a particular recording typically operate as follows: When a recording is
made, copyright in that recording vests either in the recording artist (and is
licensed to the recording company) or in the record company itself, depending on
the terms of the agreement between them. Similarly, when a musical composition
is written, copyright in the composition vests either in the writer (and is
licensed to a music publishing company) or in the publishing company itself.
Artists generally record songs that are controlled by music publishers. The
rights to reproduce such songs on soundcarriers are obtained by the Company from
music publishers or collection societies on their behalf. The manufacture and
sale of a soundcarrier results in royalties being payable by the record company
to the publishing company at industry agreed or statutory rates for the use of
the composition (and the publishing company in turn pays a royalty to the
writer) and by the record company to the recording artist for the use of the
recording. The Company operates in an industry in which revenues are adversely
affected by the unauthorized reproduction of recordings for commercial sale,
commonly referred to as "piracy," and by home taping for personal use.
LICENSING.
The Company is engaged in licensing activity involving both the acquisition
of rights to certain master recordings and compositions for its own projects and
the granting of rights to third parties in the master recordings and
compositions it owns. The Company typically obtains an ownership or co-ownership
interest in all newly-recorded compositions appearing on albums released by the
Company that are written by the artists performing the compositions. The rights
to use all other compositions appearing on albums or audiovisual works are
obtained from the publishers of those compositions under agreements that, for
albums, are called mechanical licenses, which are often issued through a central
agency, and for audiovisual works are called synchronization licenses. The
mechanical license fee is customarily indexed to a statutory rate established
under the United States Copyright Act, which currently is 6.95 cents for a
performance of up to five minutes and higher for performances of greater length.
Although fees for synchronization licenses vary from set fees to percentages of
sales price, the fee often corresponds to the statutory rate for mechanical
licenses. The Company typically issues its own mechanical and synchronization
licenses to third parties when compositions from its own catalog are used by
others. The availability and terms of such cross-licensing arrangements are
generally made possible by existing industry practices based on reciprocity.
Performance rights in compositions owned by the Company are enforced under
agreements the Company has with the performing rights organizations, American
Society of Composers, Authors and Publishers ("ASCAP"), Broadcast Music, Inc.
("BMI") and SESAC, Inc., which licenses commercial
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users of music such as radio and television broadcasters, restaurants and
retailers and disburses collected fees based upon the frequency and type of
performances they identify. Print publishing rights in compositions owned by the
Company are either directly licensed by the Company to third party users or are
enforced through an agency called Christian Copyright Licensing International,
which issues print licenses to churches and other organizations and collects and
disburses the fees.
The Company will also, in selected instances, obtain under license
agreements the right to use master recordings owned by others, either in
original album form or for compilation projects. Although the terms of such
agreements vary, they are typically for a period of three to five years and
involve the payment of a royalty in the range of five to eight cents for the use
of individual masters and between 16% and 20% of suggested retail price for
complete original albums. The Company typically licenses to others only the
right to use individual masters for compilation projects under terms similar to
those under which the Company obtains master license rights. Should such
industry practices change, there can be no assurance that the Company will be
able to obtain licenses from third parties on terms satisfactory to the Company,
and the Company's business, particularly with respect to compilation products,
could be materially adversely affected.
COMPETITION
The business success of the Company depends, among other things, on the
skill and creativity of the employees of the Company and on their relationships
with artists. The Company faces intense competition for discretionary consumer
spending from numerous other record companies and other forms of entertainment
offered by film companies, video companies and others. The Company competes
directly with other record companies, including the six major international
recorded music companies, which distribute Gospel, Blues, Adult Contemporary and
Country music, as well as other record and music publishing companies for
signing established and new artists and songwriters and acquiring music
catalogs. Many of the Company's competitors have significantly longer operating
histories, greater financial resources and larger music catalogs than the
Company. The Company's ability to compete successfully will be largely dependent
upon its ability to build upon and maintain its reputation for quality music
products and to introduce music products which are accepted by consumers.
EMPLOYEES
As of August 12, 1996, the Company employed 64 employees, of whom 37 were
located in the Company's Downers Grove, Illinois facilities, 2 were located at
the Studio facilities in Chicago, Illinois and 25 were located in Nashville,
Tennessee. Of such employees, 37 were engaged in marketing, sales and related
customer services, 25 were engaged in administration and accounting and 2 were
engaged in production.
None of the Company's employees is represented by a labor union. The Company
has not experienced any work stoppage and considers relations with its employees
to be good.
RECENT DEVELOPMENTS
During June 1996, the Company acquired substantially all of the assets of
R.E.X. Music, Inc. ("REX"). REX produces, licenses and markets recorded music.
Prior to the acquisition, the Company was the primary distributor for REX. REX's
artist roster acquired by the Company includes Sixpence None the Richer,
Whitecross, Six Feet Deep, The Waiting and Tammy Trent. REX's artists focus on
Modern Rock, Pop and Alternative Christian music.
SAFE HARBOR PROVISION
This Report contains certain forward-looking statements (within the meaning
of the Private Securities Litigation Reform Act of 1995) that involve
substantial risks and uncertainties. When used in this Report, the words
"anticipate," "believe," "estimate" and "expect" and similar expressions as they
relate to the Company or its management are intended to identify such
forward-looking statements. A number of important factors could cause the
Company's actual results, performance or achievements for fiscal 1997 and beyond
to differ materially from those expressed in such forward-
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looking statements. These factors include, without limitation, commercial
success of the Company's repertoire, charges and costs related to acquisitions,
relationships with artists and producers, attraction and retention of key
personnel, general economic and business conditions and enhanced competition and
new competitors in the recorded music industry.
ITEM 2. FACILITIES.
The Company's headquarters are based in Downers Grove, Illinois. It
currently leases its 6,500 square foot office facility pursuant to a lease that
will expire January 31, 1997. This facility houses the executive office offices
of the Company, as well as the management, accounting and sales staff. The
Company also leases 6,142 square feet of office space in Nashville, Tennessee,
pursuant to a lease expiring November 17, 1997, that houses the promotional
staff of River North Records and the administrative and telephone sales staff of
Light Distribution; a 3,300 square foot warehouse, located in Downers Grove,
Illinois, that houses the mail order distribution operations of the Company; and
a 1,250 square foot office, also located in Downers Grove, that houses the
Company's direct marketing operations. Finally, the Company leases 14,262 square
feet of recording studio and related office space pursuant to a lease that
expires December 31, 1996. As part of the disposition of its Studio operations,
the Company subleases a portion of such facility to the purchaser and an
affiliate of the purchaser. The Company, however, remains the obligor under this
lease. The aggregate monthly lease payments under the foregoing are
approximately $52,000 (including Studio payments of approximately $26,000 of
which $15,600 is attributable to the sublease). The Company believes that its
facilities are in good condition and adequate for its current operations.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not presently a party to any legal proceedings that the
Company believes are material to the Company or its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended May 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock trades publicly on the Nasdaq Stock Market's
National Market under the symbol "PTET." The following table sets forth the high
and low closing prices for fiscal 1996 since the Company's initial public
offering on March 12, 1996, as reported by Nasdaq. Such quotations reflect
inter-dealer prices without markup, markdown or commissions and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
QUARTER ENDED
MAY 31, 1996*
--------------
<S> <C>
High............ $ 17.75
Low............. $ 11.50
</TABLE>
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* Prior to March 12, 1996, there was no established public trading market for
the Common Stock.
At August 27, 1996, there were approximately 60 shareholders of record and
5,063,207 shares of outstanding Common Stock. The Company has not paid any
dividends to holders of Common Stock since its inception and does not intend to
pay any dividends on its Common Stock in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected consolidated statement of operations
and consolidated balance sheet data for the Company as of the dates and for the
periods indicated. The selected consolidated financial data as of and for the
years ended May 31, 1996 and 1995, the five months ended May 31, 1994 and the
year ended December 31, 1993 listed below have been derived from the audited
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consolidated financial statements of the Company. The selected consolidated
financial data as of and for the unaudited pro forma year ended May 31, 1994 was
derived from audited financial statements of the Company as of and for the five
months ended May 31, 1994 and the year ended December 31, 1993. The following
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and related notes incorporated by reference herein.
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, MAY 31, MAY 31, FIVE MONTHS ENDED DECEMBER 31,
1996 1995 1994 (1) MAY 31, 1994 1993
----------- ----------- ----------- ----------------- -------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Gross product sales................... $ 17,610 $ 12,068 $ 7,216 $ 3,474 $ 4,010
Less: Returns and allowances.......... (4,732) (3,126) (1,174) (584) (590)
----------- ----------- ----------- ------- -------------
Net product sales..................... 12,878 8,942 6,042 2,890 3,420
Cost of product sales................. 8,107 4,300 3,439 1,743 1,901
----------- ----------- ----------- ------- -------------
4,771 4,642 2,603 1,147 1,519
Gross artist project revenues......... 5,367 3,084 1,639 728 1,451
Less: Allowance for unrecoupable
artist advances...................... (2,506) (1,128) (1,219) (433) (1,361)
----------- ----------- ----------- ------- -------------
Net artist project revenues........... 2,861 1,956 420 295 90
Licensing, publishing and other
revenues............................. 1,799(2) 207 74 53 28
----------- ----------- ----------- ------- -------------
Net artist project and other
revenues............................. 4,660 2,163 494 348 118
Cost of artist project and other
revenues............................. 5,195 2,601 1,862 1,005 1,061
----------- ----------- ----------- ------- -------------
(535) (438) (1,368) (657) (943)
----------- ----------- ----------- ------- -------------
Gross profit.......................... 4,236 4,204 1,235 490 576
Depreciation and amortization......... 212 133 88 39 55
Selling, general and administrative
expenses............................. 7,961 8,800 2,553 1,352 2,287
----------- ----------- ----------- ------- -------------
Operating loss........................ (3,937) (4,729) (1,406) (901) (1,766)
Interest income....................... 106 46 -- -- --
Interest expense...................... (570) (157) (48) (27) (33)
----------- ----------- ----------- ------- -------------
Loss from continuing operations....... (4,401) (4,840) (1,454) (928) (1,799)
Discontinued operations:
Loss from operations................ -- (2,073) (2,050) (755) (1,519)
Estimated loss on disposal.......... (226) (2,611) -- -- --
----------- ----------- ----------- ------- -------------
Loss from discontinued operations..... (226) (4,684) (2,050) (755) (1,519)
----------- ----------- ----------- ------- -------------
Net loss.............................. (4,627) $ (9,524) $ (3,504) $ (1,683) $ (3,318)
----------- ----------- ------- -------------
----------- ----------- ------- -------------
Less: Cumulative preferred dividends
(3).................................. (602)
-----------
Loss appicable to common shares....... $ (5,229)
-----------
-----------
Net loss per common share:
Continuing operations............... $ (1.71) $ (2.12)
Discontinued operations............. (0.08) (2.05)
----------- -----------
Net loss per common share (4): $ (1.79) $ (4.17)
----------- -----------
----------- -----------
Weighted average number of common
shares outstanding (4)............... 2,925,987 2,284,090
<CAPTION>
AS OF MAY 31,
------------------------------------- AS OF DECEMBER
BALANCE SHEET DATA (5): 1996 1995 1994 31, 1993
----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Cash.................................. $ 8,222 $ 87 $ 9 $ 36
Working capital (deficit) (6)......... 12,055 (9,128) (4,117) (3,349)
Total assets.......................... 19,744 6,353 5,385 4,656
Long-term debt (including current
portion)............................. -- -- 1,140 1,243
Redeemable preferred stock............ -- 5,423 -- --
Stockholders' equity (net capital
deficiency).......................... 15,215 (12,320) (3,302) (1,618)
</TABLE>
10
<PAGE>
- ------------------------------
(1) The Company adopted a May 31 fiscal year end effective June 1, 1994. The
pro forma year ended May 31, 1994 was derived from the audited financial
statements for the five-month period ended May 31, 1994 and the year ended
December 31, 1993 in order to present a period comparable to the new fiscal
period adopted by the Company.
(2) Licensing, publishing and other revenues include approximately $553,000 of
licensing revenue derived from the sale of Company products through its
international licensee, MCA. Under the contract with MCA, revenues paid to
the Company are calculated as a percentage (varying from country to
country) of retail sales by MCA net of returns. Manufacturing and related
costs (other than artist royalties) are borne by MCA. Retail sales, net of
returns, reported to the Company by MCA, were approximately $3,409,000 for
the year ended May 31, 1996.
(3) Represents accrued dividends on the Company's Series A-1 Non-Convertible
Preferred Stock, which dividends were paid concurrent with the redemption
of such stock on March 15, 1996. The Company has never paid a dividend on
its Common Stock.
(4) Net loss per common share is computed based upon the weighted average
number of common shares outstanding. Common and common equivalent shares
issued during the twelve-month period prior to the March 12, 1996 public
offering have been included in the calculation as if they were outstanding
for all periods presented using the treasury stock method and the public
offering price of $13.00 per share. No effect has been given to common
equivalent shares issued for any other period as the effect would be
antidilutive. In addition, all Series A-2 Convertible Preferred Stock,
Class A Common Stock and Class B Common Stock are treated as if converted
into common shares at the date of issuance.
A portion of the net proceeds received from the Offering were used to
retire indebtedness of the Company and redeem a portion of the Series A-1
Non-Convertible Preferred Stock. Supplemental loss per common share,
adjusted to reflect the elimination of interest expense incurred on such
borrowings during fiscal 1996 and the payment of mandatory preferred
dividends, is $1.52 per common share.
(5) Includes the assets and liabilities of the Studio. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and Note 3 of the Notes to Consolidated Financial Statements, incorporated
by reference herein.
(6) Includes short-term debt for all periods indicated.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information in response to this item is incorporated by reference to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 14 through 17 of the 1996 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information in response to this item is incorporated by reference to the
Consolidated Financial Statements, together with the report thereon of Ernst &
Young LLP dated August 14, 1996, on pages 17 through 23 of the 1996 Annual
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information in response to this item is incorporated by reference from
the "PROPOSAL NO. 1 -- ELECTION OF DIRECTORS" section of the 1996 Proxy
Statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information in response to this item is incorporated by reference from
the sections of the 1996 Proxy Statement captioned "EXECUTIVE COMPENSATION AND
CERTAIN TRANSACTIONS," "COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION"
and "PERFORMANCE GRAPH."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information in response to this item is incorporated by reference from
the section of the 1996 Proxy Statement captioned "SECURITY OWNERSHIP OF
MANAGEMENT AND PRINCIPAL STOCKHOLDERS."
11
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information in response to this item is incorporated by reference from
the section of the 1996 Proxy Statement captioned "EXECUTIVE COMPENSATION AND
CERTAIN TRANSACTIONS."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. The following Consolidated Financial Statements and Notes thereto,
included on pages 17 through 23 of the 1996 Annual Report, are
incorporated by reference:
Report of Independent Auditors
Consolidated Balance Sheets as of May 31, 1996 and 1995
Consolidated Statements of Operations for the Years Ended May 31,
1996 and 1995, the Five Months Ended May 31, 1994 and the Year
Ended December 31, 1993
Consolidated Statements of Stockholders' Equity (Net Capital
Deficiency) for the Years Ended May 31, 1996 and 1995, the Five
Months Ended May 31, 1994 and the Year Ended December 31, 1993
Notes to Consolidated Financial Statements
2. All financial statement schedules are omitted because such schedules are
not required or the information required has been presented in the
aforementioned financial statements.
3. The following exhibits are filed with this Report or incorporated by
reference as set forth below.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <S>
*3.1 Third Amended and Restated Certificate of Incorporation of the
Registrant.
*3.2 Amended and Restated Bylaws of the Registrant.
*4.1 Specimen stock certificate representing Common Stock.
*4.2 Amended and Restated Registration Rights Agreement.
*4.3 Amendment No. 1 to Amended and Restated Registration Rights Agreement.
*10.1 Distribution Agreement by and between PolyGram Group Distribution, Inc.
and the Registrant, dated May 14, 1993 and amended November 1, 1995.
*10.2 Employment Agreement by and between Douglas C. Laux and the Registrant,
dated August 21, 1995.
*10.3 Studio Agreement by and among River North Studios, Inc., the Registrant
and River North Studios, Ltd., Joseph Thomas and Ira Antelis, dated
December 4, 1995 (amended May 31, 1996 -- see exhibit 10.5).
*10.4 Agreement by and between Joseph Thomas and the Registrant, dated
December 4, 1995 (amended May 31, 1996 -- see exhibit 10.5).
10.5 Agreement by and between River North Studios, Inc., the Registrant,
River North Studios II, Inc., Joe Thomas and Ira Antelis, dated May 31,
1996.
*10.6 Letter Agreement by and among Steven Devick, Andrew Filipowski, Chicago
Gospel International, Inc. and the Registrant, dated December 7, 1995.
</TABLE>
- ------------------------
* Previously filed with the Securities and Exchange Commission as an Exhibit to
the Company's Registration Statement on Form S-1, as amended (File No.
33-80357), and incorporated herein by reference.
12
<PAGE>
<TABLE>
<C> <S>
*10.7 Platinum Entertainment, Inc. Amended and Restated 1995 Employee
Incentive Compensation Plan.
*10.8 Devick Diversified Enterprises 401(k) Plan and Trust Document,
effective July 8, 1994.
*10.9 Form of Indemnification Agreement for directors and certain officers.
*10.10 Loan and Security Agreement by and between American National Bank and
the Registrant, dated September 15, 1994 and amended August 3, 1995,
with exhibits.
*10.11 Commitment Letter from American National Bank dated February 2, 1996.
11. Statement re computation of per share earnings.
13. 1996 Annual Report. With the exception of the information incorporated
by reference into Items 7, 8 and 14(a) of this Annual Report on Form
10-K, the 1996 Annual Report to Stockholders is not deemed filed as
part of this Annual Report on Form 10-K.
*21. Subsidiaries of the Company.
23. Report and Consent of Independent Auditors.
27. Financial Data Schedule.
</TABLE>
- ------------------------
* Previously filed with the Securities and Exchange Commission as an Exhibit to
the Company's Registration Statement on Form S-1, as amended (File No.
33-80357), and incorporated herein by reference.
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the last quarter
of the period covered by this Annual Report on Form 10-K.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Platinum Entertainment, Inc. has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 27th day of
August, 1996.
PLATINUM ENTERTAINMENT, INC.
By: /s/ STEVEN DEVICK
--------------------------------------
Steven Devick
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities
indicated on August 27, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------------- -------------------------------------------------------
<C> <S>
/s/ STEVEN DEVICK Chairman of the Board, President and Chief Executive
------------------------------------------- Officer (principal executive officer)
Steven Devick
/s/ DOUGLAS C. LAUX Chief Financial Officer (principal financial and
------------------------------------------- accounting officer) and Director
Douglas C. Laux
Director
-------------------------------------------
Casey Cowell
/s/ MICHAEL P. CULLINANE Director
-------------------------------------------
Michael P. Cullinane
/s/ CRAIG DUCHOSSOIS Director
-------------------------------------------
Craig Duchossois
Director
-------------------------------------------
Andrew J. Filipowski
/s/ RODNEY L. GOLDSTEIN Director
-------------------------------------------
Rodney L. Goldstein
/s/ PAUL L. HUMENANSKY Director
-------------------------------------------
Paul L. Humenansky
/s/ LAURA P. PEARL Director
-------------------------------------------
Laura P. Pearl
Director
-------------------------------------------
Isaac Tigrett
</TABLE>
14
<PAGE>
AGREEMENT May 31,1996
River North Studios, Inc., Platinum Entertainment, Inc., ("Platinum"),
River North Studio II, Inc. ("River North"), Joe Thomas ("Thomas") and Ira
Antelis entered an agreement dated as of December 4, 1995 (the "Agreement")
providing, INTER ALIO, for the use of the recording studio facilities of River
North by Platinum without charge for a period of time described in the
Agreement.
Platinum has also entered an agreement with Brother Records, Inc. and the
performing group The Beach Boys for the production of master recordings for a
compilation album featuring performances in a country music style by The Beach
Boys and various guest country music artists of songs the group has previously
recorded (the "Album"). Platinum has engaged Thomas to produce the Album
pursuant to the terms of its agreement with Thomas dated as of December 4, 1995
(the "Employment Agreement"), and recording of the Album has begun.
In connection with the production of the Album, Platinum has originated the
concept of producing an audio-visual work featuring The Beach Boys and the
various guest artists performing on the Album (the "Project"). The Project
would include performances of and interviews with The Beach Boys, the guest
performers, and various other people on the topic of the recording of the Album,
the influence of The Beach Boys on the music of the guest performers and music
in general, and other related matters. Platinum has developed the Project by
creating film, videotape, and other material featuring The Beach Boys and
various guest artists (the "Material") and by other means.
Platinum, River North, and Thomas believe it is in their respective best
interests to amend the Agreement to provide for an alternative method of
providing recording facilities to Platinum. Thomas also wishes to acquire all
rights in and to the Project and the Material, and Platinum wishes to assign all
such rights to Thomas. The parties therefore agree as follows.
1. (a) In consideration of the payment of a total of Eight Hundred Fifty
Thousand Dollars ($850,000.00) by River North and Thomas to Platinum, Platinum
hereby agrees that Paragraphs 4(a) and 4(b) of the Agreement are hereby deleted
and the following Paragraph 4 substituted therefor:
" 4. (a) Newco and Thomas agree that, during the period of March 13,
1996, through December 31, 1996 (the "Initial Period"), Platinum shall be
entitled to use of the Property and the recording studio facilities and
other equipment in the Studio Space (currently identified as Studio A,
Studio D, and the shared performance space for Studio A and Studio D (the
"Performance Space") ) for its requirements of producing, mixing, dubbing,
or mastering recordings. Platinum shall also be exclusively
<PAGE>
entitled to use the Property installed in Studio E for purposes of renting
Studio E to Antelis. The use of Studio A by Platinum during the Initial
Period shall be on a so-called "bumpable" basis, meaning that in the event
of a conflict between the dates and times for bona fide use of Studio A for
recording purposes scheduled by Newco and Platinum, (which conflict cannot
be resolved in good faith cooperation), the use of Studio A by Newco shall
control. During the Initial Period, Platinum shall be entitled to
exclusive use of Studio D. Platinum's use of Studio D during the Initial
Period shall be exclusive and shall be uninterrupted, unimpaired, and
unrestricted. Platinum and Newco shall share the use of the Performance
Space. In the event of a conflict between the dates and times for bona
fide use of the Performance Space by Newco and Platinum, (which conflict
cannot be resolved in good faith cooperation), the use of such Performance
Space by Platinum shall control. The cost of the use of the Studio Space
shall be at the hourly rate of $175.00 ($185.00 for The Beach Boys country
albums project being produced pursuant to the agreement between Platinum,
Brother Records, Inc., and The Beach Boys dated as of December 12, 1995 (the
"Beach Boys Records")), excluding the cost of tape, which, at Platinum's
election, shall be billed to Platinum at Newco's cost. There shall be no
separate charge for the use of the Property. During the Initial Period,
Platinum shall pay to Newco the sum of $6,500.00 per month, which sum shall
constitute a prepayment of the cost of the use of the Studio Space by
Platinum during the month of such payment.
(b) During the period of January 1, 1997, through December 31, 1998
("Lease Period"), Newco and Thomas agree that Platinum shall be entitled to
use the Property and the exclusive use of Studio D and the shared use of
the Performance Space equipped as described in Exhibit C attatched hereto
("Leased Studio") for its requirements of producing, mixing, dubbing, or
mastering recordings. Platinum shall also be entitled to the use of Studio
A on a bumpable basis. Payment for use of the Studios during the Lease
Period shall be at the hourly rate of $175.00 ($185.00 for The Beach Boys
Record), which rate shall exclude the cost of tape, which, at Platinum's
election, shall be billed to Platinum at Newco's cost. There shall be no
separate charge for the use of the Property. Platinum's use of the Leased
Studio shall be uninteruppted, unimpaired, and unrestricted. Platinum and
Newco shall share the use of the Performance Space. In the event of a
conflict between the dates and times for bona fide use of the Performance
Space by Newco and Platinum, (which conflict cannot be resolved in good
faith cooperation), the use of such Performance Space by Platinum shall
control. Prior to the payment in full of the Note (as defined in
Paragraph 4 (b) of the agreement dated as of May 31, 1996, between
Platinum, Newco, and
<PAGE>
Thomas), Platinum shall pay to Newco, during the Lease Period, the sum of
$10,000.00 per month ("Rental Payment"), which sum shall constitute a
prepayment of the cost of the use of the Studios by Platinum during the
month of such payment. Commencing with the month following the month
during which the Note is paid in full, Platinum shall pay to Newco, during
the Lease Period, the Rental Payment as a flat fee rental for unlimited use
of the Leased Studio. Newco and Thomas hereby grant to Platinum two (2)
separate, irrevocable options to extend the term of the Lease Period , such
renewal terms ("Renewal Terms") to run consecutively beginning at the
expiration of the immediately preceding period, all upon the same terms
and conditions applicable to the initial Lease Period; provided, however,
that at any time during any Renewal Term Platinum may elect to pay the
actual rental cost to Newco for the Leased Studio in lieu of the Rental
Payment. The term of each option period shall be one (1) year. Each
option shall be exercised by notice to Newco at least thirty (30) days
prior to the date the Lease Period would otherwise expire. Notwithstanding
the foregoing, in the event of a change of control of Platinum, the
termination of the Employment Agreement between Platinum and Thomas
dated as of December 4, 1995, or the vacating of the Building by Newco,
Platinum may terminate the Lease Period, effective upon the date of
occurrence of any of such events. For purposes this agreement, a change
of control of Platinum shall have occurred on the date which (1) all or
substantially all of the assets or stock of Platinum are sold or (ii)
Steven Devick ceases to be Platinum's chief executive officer.
(c) Newco and Thomas agree to maintain the Studio Space, the Leased
Studio, and the Property at all times during the Initial Period and the
Lease Period in proper working condition. In the event Newco or Thomas
fail to so maintain the Studio Space, the Leased Studio, or the Property,
Platinum may elect to repair, restore, or otherwise bring the Studio Space,
Leased Studio, or Property to working condition and to deduct the cost
incurred in connection with such work from any amounts due from Platinum to
Newco or Thomas. For purposes of clarity, all profits, fees and other
amounts derived by Newco and Thomas for use of the Property and Studio
Space shall, as between Platinum, Newco, and Thomas, be the sole and
exclusive property of Newco and Thomas and shall not be used to recoup or
otherwise offset any monies payable to Thomas pursuant to the Employment
Agreement. Further, except with respect to the hourly rates chargeable to
Platinum hereunder, all rates and charges for the use of the Property and
Studio Space may be set by Newco and Thomas in their sole and absolute
discretion.
3
<PAGE>
(d) Platinum agrees that Newco shall be entitled to bill Platinum for
the use of Rick Fritz as an engineer for the Beach Boys Records up to the
amount or thirty two thousand dollars ($32,000.00) per album, provided,
however, that Platinum shall not be obligated to pay for any use of Rick
Fritz unless The Beach Boys agree that the full amount of such charge is
recoupable as a recording expense under their recording agreement with
Platinum for the production of the Beach Boy Records and the payment of
such charge does not cause the budget for the Beach Boy Record to which the
charge will be applied to exceed $695,000.00. The payment for the use of
Rick Fritz for the second Beach Boy Record shall be due within fifteen (15)
days after the delivery of such record.
(e) Platinum has entered an employment agreement with Stan Miller
dated as of May 3, 1995 (the "Miller Agreement") engaging Miller to provide
technical engineering services to the Studios and the Property. In
consideration of the payment by Platinum to Newco of the sum of Thirty Five
Thousand Dollars ($35,000.00), Platinum hereby assigns to Newco, effective
as of the date hereof, all its rights, obligations, and interests in and to
the Miller Agreement, and Newco hereby accepts such assignment and agrees
to perform all obligations required to be performed by it under the Miller
Agreement as employer of Stan Miller. Commencing June 1, 1996, Platinum
also agrees to pay to Newco the sum of $2,000.00 each month the Miller
Agreement remains in effect, but in no event longer than December 31, 1996.
Newco and Thomas hereby agree to indemnify and hold Platinum harmless from
any and all claims, demands, damages, costs and expenses (including
reasonable attorney's fees), and all causes of action of whatsoever nature
that Stan Miller or his successors ever may have against Platinum for, on
account of, by reason of or arising out of or connected with the Miller
Agreement for acts or ommissions occurring after March 13, 1996.
(f) In the event Newco or Thomas vacate the Building, Newco and
Thomas may, at their election, terminate this agreement upon notice to
Platinum of their election to do so, effective as of the date occuring
three (3) weeks prior to the date the Building is so vacated. In the event
this agreement is so terminated, the Note set forth as Exhibit A to the
agreement dated as of May 31, 1996, between Platinum, Thomas, and Newco
shall be canceled, effective as of the date of termination."
(b) The following sentence shall be added to the end of paragraph
2(a) of the Agreement:
4
<PAGE>
"The monthly rent for the Sub-Lease (excluding the cost for studio B), for
the period commencing March 12, 1996, and ending December 31, 1996, shall
be $8,557.38, plus a pro rata portion of the real estate assessment for the
Building."
(C) The Agreement, as amended, is hereby ratified and confirmed and
acknowledged to be in full force and effect.
2. In consideration of the payment to Platinum by Thomas of the amount of
$401,000.00, Platinum hereby assigns to Thomas, effective as of the date hereof,
all its right , title, and interest in and to the Project and the Material,
including, but not limited to, all copyright, trademark, and other rights
therein, together with all film, videotape, or other material produced in
connection with the Project that constitutes the Material (it being understood
that all rights in and to the Album remain the exclusive property of Platinum
and are not considered included in the Project or the Material). Platinum
warrants to Thomas that no right, license or privilege to exploit the Project or
the Material has heretofore been granted to anyone, but not limited to, the
disclaimer of any warranty concerning whether (i) the use of the Material or
exloitation of the Project will in any way violate or infringe upon the rights
of any third party or (ii) the consent of any person depicted in the Material to
use the Material in any way has been obtained.
3. The foregoing consideration shall be paid by Newco and Thomas to
Platinum as follows:
(a) The sum of $850,000.00 shall be paid in cash upon execution of
this agreement.
(b) The balance of $401,000.00 shall be paid by delivery of a
promissory note in the form set forth in Exhibit A attached hereto (the
"Note").
(c) Thomas further agrees to remit to Platinum all sums in excess of
$45,000.00 that are received by him, either directly or indirectly, from the
exploitation of the Project and/or the Material up to the amount of
$350,000.00. Thomas shall direct all parties acquiring any right or interest
in or to the Project or the Material to direct all payments to Platinum,
which shall retain all such payments for its own account until it has
received the sum of $350,000.00, after which Platinum shall direct that all
such payments shall be made to Thomas for his own account.
(d) In the event Platinum elects to terminate the Lease Period (as
defined in amended Paragraph 4 of the Agreement) on the grounds of a change
of control of Platinum (as defined in amended Paragraph 1 of the Agreement),
or Platinum fails to exercise an option to extend the Lease Period, or
Thomas or Newco elect to
5
<PAGE>
terminate the Agreement on the grounds of the vacating of the Building, the
balance of the Note outstanding as of the date of either such occurrence shall
be forgiven, effective as of the date of either such occurrence.
4. (a) Thomas agrees to execute and cause to be executed such further
documents and instruments as Platinum may reasonably request in order to
effectuate the terms and intentions of this agreement during and after the term
hereof, and if Thomas fails or is unable to execute any such documents or
instruments, Thomas hereby appoints Platinum as his attorney-in-fact with the
full right and authority to execute and deliver the same, which appointment
shall be deemed a power coupled with an interest and shall be irrevocable
under any and all circumstances. Without limited the generality of the
foregoing, Thomas agrees duly to execute and deliver to Platinum a power of
attorney in the form provided in Exhibit D attached hereto. Thomas assents to
the execution of this agreement by Newco and agrees to be bound by the terms and
conditions thereof. Thomas guarantees the full and complete performance by
Newco of this agreement insofar as any provision thereof relates to him or his
services in any way, directly or indirectly.
(b) In order to effectuate the repayment or the indebtedness under
the Note, Thomas and Newco hereby direct Platinum to apply (i) all amounts due
from Platinum to Newco during the Initial Period for use of the Studio Space and
the Property in excess of six thousand five hundred dollars ($6,500.00), and
(ii) all amounts in excess of ten thousand dollars ($10,000.00) that are due
from Platinum to Newco for use of the Studio Space and the Property during any
month during the Lease Period, to repay the indebtedness under the Note. The
foregoing direction shall be irrevocable during the period prior to the
repayment of the Note in full. The amount of any reduction by Platinum of the
balance due under the Note by offset of the foregoing indebtedness from Platinum
to Newco shall constitute payment in full of such indebtedness to the extent of
such reduction.
5. (d) The Employment Agreement is hereby amended in the following
respects:
(i) Paragraph 6(D) is deleted and the following is substituted
therefor:
"D. 'Produced Masters' ... sound recordings to which, during the term
of this Agreement, you have materially contributed your services as a producer,
co-producer, or arranger, whether or not you are actually accorded credit as
producer, co-producer, or arranger on album or other record packages."
(ii) Paragraph 6(E) is deleted and the following is
6
<PAGE>
substituted therefor:
"6. 'Contract Masters' ... sound recordings produced pursuant to
agreements between Company and its recording artists, or between Company
and a third person supplying the services of Company's recording artists,
that are entered during the term of this Agreement for which you were the
procuring cause of the entry of such agreements (but not including any
extensions of such agreements beyond their original period, including
original option periods)."
(iii) The prefatory paragraph for Paragraph 7 and Paragraph 7(A)
are deleted and the following is substituted therefore:
"7. Conditioned upon your full and faithful performance of all of
the material terms and provisions hereof, you shall be paid in respect of
the sale by Company or its licensees, both during the term of this
agreement and after, of phonograph records embodying the Produced Masters
and the Contract Masters (hereinafter individually and collectively "Record
Masters") and in respect of any other exploitation by Company or its
licensees of the Record Masters, the following royalties upon the terms
hereinafter set forth. The royalties payable to you hereunder shall not be
cumulative. In the event a Record Master is both a Produced Master and a
Contract Master, the royalty payable to you shall not be increased.
A. (i) In respect of long-playing records sold in the United
States through normal distribution channels directly by Company or by
companies with which Company has a so-called production and distribution
agreement, in the form of discs (including, without limitation, compact
discs) and in the form of pre-recorded tapes (including reel to reel tapes,
cartridges and cassettes), Company shall pay you a royalty at the rate of
two percent (2%) ("Basic Royalty") of the suggested retail list price from
time to time of such records:
(ii) in respect of 7-inch 45 RPM single records, 12-inch
"disco-single" records, whether 33-1/3 RPM or 45 RPM, cassette or compact
disc singles, or EPs (all such configurations are hereinafter sometimes
referred to collectively by the term "Single Record") sold in the United
States through normal distribution channels directly by Company or by
companies with which Company has a so-called production and distribution
agreement, Company shall pay you a royalty at the rate of one and one-half
percent (1.5%) of the suggested retail
7
<PAGE>
list price from time to time of such records."
(iv) Paragraph 1 is hereby redesignated as Paragraph 1(A),
and the following Paragraph 1(B) is added to the agreement:
"1(B). Notwithstanding the provisions of Paragraph 1(A), Company
shall consent, during each annual period of this agreement, to furnish your
services to others as a producer for the purposes producing master
recordings ("Outside Masters"), subject to the following terms and
conditions:
(i) The number of Outside Masters produced during any annual
period shall not exceed that number sufficient to constitute one long-
playing record album of no more than one disc.
(ii) The artist whose performance is featured in such Outside
Masters shall have achieved the sale of at least 500,000 copies of a prior
record album.
(iii) All consideration due for your services in connection with
the production of the Outside Masters (including, but not limited to,
advances, fees, and royalties, but excluding actual expenses incurred by
you for which you may be reimbursed) shall be paid directly to Company and
shall be credited to your account hereunder in the following proportions:
one hundred percent (100%) until your account in fully recouped, fifty
percent (50%) of all amounts thereafter until Company has received the sum
of Fifty Thousand Dollars ($50,000.00), and one hundred percent (100%)
thereafter.
(iv) The production of Outside Masters shall not interrupt,
delay, or interfere with the rendition of your services hereunder.
(v) In the event your name appears on liner notes, Company
shall receive appropriate credit. You agree to use your best efforts to
have Company accorded such credit.
(vi) You shall furnish to Company a copy of all agreements
relating to your services in connection with the production of the Outside
Masters."
(v) Paragraph 2(a) is amended to provide that the agreement will be
for a period ending December 31, 1996, provided, however, that, at the election
of Thomas delivered in writing to Platinum on or before August 31, 1996, the
agreement may be extended for an additional period of four (4) years, beginning
January 1, 1997. This paragraph is also amended by adding the word
"nonrefundable" prior to the word "advance" appearing in line three. The
following additional language is added to Paragraph
8
<PAGE>
2(a):
"In the event, during any period when Thomas is not in breach of any
material term of this agreement, Company fails to pay to Thomas when
due the compensation under Paragraphs 2(a) or (b), and Company fails
to cure such breach within ten (10) business days of its receipt from
Thomas of notice of such breach, Thomas shall be entitled to terminate
this agreement upon notice to Company of his election to do so. The
foregoing right of termination shall not be in limitation of any other
right or remedy Thomas may have."
(vi) The following Paragraph 2(d) is added to the agreement:
"2(d). In the event Company elects, at Thomas' request, to engage
outside attorneys in connection with the negotiation of any recording
agreement for the production of Contract Masters, the fees and
disbursements paid by Company in connection with such negotiation shall
constitute costs recoupable from the royalties otherwise payable under this
agreement."
(vii) The following Paragraph 7(e) is added to the agreement:
"G. Notwithstanding anything to the contrary contained herein, on
exploitations of the Record Masters for which the applicable artist is paid
a percentage of Company's net royalty or net flat fees under the applicable
agreement engaging such artist's recording services, and on exploitations
of the Record Masters embodied in audio-visual devices (such as videodiscs
and videocassettes) after Artist's video account is in a fully recouped
position with respect to such devices embodying the Masters, you shall be
paid a royalty equal to that percentage of the applicable artist's net flat
fees or net royalties on such exploitations that results from dividing the
aggregate royalty rate payable under the agreement engaging the applicable
artist and all record producers on reproductions of the applicable Record
Masters, or audio-visual devices, whichever the case may be, by the
aggregate royalty rate payable to you on reproductions and exploitations of
such Record Masters or audio-visual devices."
(L) Platinum and Thomas acknowledge and agree that the initial sound
recordings to be defined as Produced Masters under the Employment Agreement, as
amended, shall be the recordings featuring The Beach Boys produced pursuant to
the agreement between
9
<PAGE>
Platinum, Brother Records, Inc., and The Beach Boys dated as of December 12,
1995 (the Beach Boys Records), and that no sound recordings released prior to
the release of the Beach Boy Records shall be deemed Produced Masters.
(c) Platinum agrees that Thomas shall be entitled to receive
additional compensation in the form of royalties computed on the sale of
Produced Masters on the following terms and conditions;
(i) All such royalties shall be paid from the royalties
otherwise payable to the artist featured on the Produced Masters and shall be
paid only with the prior written consent of such artist.
(ii) In no event shall such royalties exceed the amount of
three percent (3%) of the retail price of records featuring such Produced
Masters, as such royalties are customarily computed and paid by Platinum.
(iii) No such royalties shall be credited to your account
unless and until the aggregate of recording costs with respect to the
applicable Produced Masters are recouped from royalties on reproductions and
exploitations of the Produced Masters at the "Net Artist Royalty Rate".
Recoupment shall be determined on a record master by record master basis.
The term "Net Artist Royalty Rate" shall mean the aggregate royalty rate
payable under the agreement engaging the applicable artist and all record
producers on reproductions of the applicable Produced Masters, less the
aggregate royalty rate payable to you on reproductions and exploitations of
such Produced Masters. After that recoupment, your royalty account shall be
credited with royalties earned by you hereunder on all exploitations of the
applicable Produced Masters retroactively to the first record sold.
(iv) All such royalties shall be used to recoup all other
advances, costs and other amounts payable to you under the Employment Agreement.
(d) The Employment Agreement, as amended, is hereby ratified and
confirmed and acknowledged to be in full force and effect.
6. In the event Thomas fails to elect to extend the term of the Employment
Agreement pursuant to amended Paragraph 2(a), then, during the period commencing
January 1, 1997 and ending December 31, 2000, no person, firm or corporation
other than Platinum will be authorized to make, sell, broadcast or otherwise
exploit sound recordings featuring artists contractually engaged by Thomas, or
any entity owned, co-owned, or controlled by Thomas, for their recording
services unless: (i) Thomas first notifies Platinum of all of the material
terms and conditions of the proposed agreement
10
<PAGE>
pursuant to which the sound recordings are to be made, sold, broadcast or
otherwise exploited, including, but not limited to, the identity of all artists
to be recorded, the budgets for recording costs, royalty rates, territory of
rights, number of masters to be recorded, advances, term, other financial
commitments, and publishing interests, and (ii) Thomas offers to enter into an
agreement with Platinum containing the same terms and conditions described in
such notice and otherwise in the same form as Platinum's customary recording
agreement with artists of the stature involved in such notice. If Platinum does
not accept Thomas's offer within thirty (30) days after Platinum's receipt of
same, Thomas may then enter into that proposed agreement with the same parties
mentioned in such notice, provided that such agreement is consummated with those
parties within ninety (90) days after the end of that thirty (30) day period
upon terms and conditions that are either the same as, or more favorable to
Thomas than, those term and conditions set forth in Thomas's notice and offer to
Platinum. If that agreement is not consummated within the latter ninety (90)
day period, no party except Platinum will be authorized to make, sell, broadcast
or otherwise exploit such sound recordings unless Thomas first offers to enter
into an agreement with Platinum as provided in the first sentence of this
Paragraph 6. Platinum will not be required, as a condition for accepting any
offer made to Platinum pursuant to this Paragraph 6, to agree to any terms or
conditions which cannot be fulfilled by Platinum as readily as by any other
party (for example, but without limitation, the employment of a particular
producer or the use of any particular means or method of distribution or sale).
7. In the event Thomas fails to elect to extend the term of the Employment
Agreement pursuant to amended Paragraph 2(a), Platinum agrees to pay to Thomas a
sum equal to the Basic Royalty, as such term is defined, adjusted, calculated,
paid, and otherwise interpreted or construed pursuant to the terms of the
Employment Agreement, for the sale or other exploitation of sound recordings
produced pursuant to agreements between Platinum and its recording artists, or
between Platinum and a third person supplying the services of Platinum's
recording artists, that are entered during the period commencing January 1,
1997, and ending December 31, 2000, for which Thomas was the procuring cause of
the entry of such agreements (but not including any extensions of such
agreements beyond their original period, including original option
periods)(hereinafter "Finder Agreements").
8. Thomas agrees to provide Platinum with timely reports of all recoupable
recording costs within his knowledge or control that are incurred in connection
with the production by him of sound recordings under the Employment Agreement,
or as an independent producer after the termination of the Employment Agreement.
No costs incurred by Thomas in connection with the production of sound
recordings under the Employment Agreement (other than the payment for the use of
recording studio facilities owned, co-owned, or
11
<PAGE>
controlled by Thomas, or tape costs incurred in connection with recordings
produced at such facilities) shall be reimbursed to Thomas except as described
in the remainder of this paragraph. Platinum and Thomas agree that costs
reimbursable to Thomas shall be limited to the cost of travel by Thomas away
from the Chicago metropolitan area (rental car, lodging, business or coach class
airfare, car fare) (hereinafter "Reimbursable Costs") directly incurred by
Thomas in connection with the production by him of sound recordings under the
Employment Agreement, and that the cost of meals for Thomas, the expenses of any
related party, any expenses of a personal nature, and any expenses relating to
Thomas' efforts to obtain Finder Agreements are specifically excluded from
Reimbursable Costs. Notwithstanding the foregoing, in the event Thomas incurs a
recoupable third party recording cost that constitutes an approved item in an
approved budget in connection with the production by him of sound recordings
under the Employment Agreement, Platinum agrees to reimburse Thomas within a
reasonable time for such cost; provided, however, that Thomas agrees to use his
best efforts to arrange for such costs to be directly billed to Platinum rather
than paid by Thomas for reimbursement. Platinum agrees to notify Thomas
promptly after the receipt of cost reports (from Thomas and any other party
submitting invoices for reimbursement) equal to eighty percent (80%) of the
budget of each applicable recording project, and Thomas shall promptly
thereafter submit to Platinum an itemization and all supporting documentation
for all costs incurred by Thomas in connection with such project. Promptly
after the receipt of such itemization and documentation, Platinum shall
reimburse Thomas for the amount of Reimbursable Costs set forth in such
itemization and documentation, and Thomas and Platinum shall promptly consult
with the featured artist involved in such project to insure that such project is
completed within the budget.
9. The parties agree that Thomas shall not be required to produce
recordings under the Employment Agreement featuring performers that are not
members of either AFTRA of the AF of M.
10. The parties hereto, and each of them, represent and warrant to each
other and agree with each other as follows:
(a) Each of the parties hereto has received independent legal advice
from attorneys of its or his own choice, with respect to the advisability of
making the amendment provided for herein, and with respect to the advisability
of this agreement by each party, that party's attorneys carefully reviewed this
agreement and approved this agreement as to form and substance.
(b) In negotiating this agreement, each party and its or his
attorneys have made various statements and representations to other parties
and their attorneys. Nevertheless, each party specifically does not rely
upon any statement, representation, legal opinion, or promise of any other
party in executing this
12
<PAGE>
Agreement or in making the amendment provided for herein, except as expressly
stated in this agreement.
(c) Each party, together with its or his attorneys, has made such
investigation of the law pertaining to this agreement, and of all the matters
pertaining thereto, as it or he deems necessary.
(d) The terms of this agreement are contractual and not a mere
recital. This agreement is the result of negotiation between the parties, each
of whom has participated in the drafting hereof, through its or his respective
attorneys.
(e) This agreement has been carefully read by, the contents hereof
are known and understood by, and it is signed freely by, each person executing
this agreement.
(f) Each person executing this agreement in a representative capacity
represents and warrants that he is empowered to do so.
11. This agreement (a) represents the entire agreement between Newco,
Thomas, and Platinum concerning the subject matter hereof; (b) is not to be
amended, supplemented, varied or discharged except by an instrument in writing;
(c) may be executed in counterparts, each of which shall be deemed an original;
and (d) shall be interpreted in accordance with and in all respects governed by
the laws of the State of Illinois. If any provision of this agreement is
declared void, or otherwise unenforceable, such provision shall be deemed to
have been severed from this agreement, which shall otherwise remain in full
force and effect.
RIVER NORTH STUDIOS II, INC. PLATINUM ENTERTAINMENT, INC.
By: /s/ Joe Thomas 5/31/96 By: /s/ Steve Devick
-------------------------------- ------------------------------------
/s/ Joe Thomas
--------------------------------
JOE THOMAS
13
<PAGE>
EXHIBIT A
PROMISSORY NOTE
$401,000.00 May 31, 1996
Chicago, Illinois
FOR VALUE RECEIVED, the undersigned promises to pay to the order of
Platinum Entertainment, Inc., on demand at any time after the date of December
1, 2000, the principal sum of Four Hundred One Thousand and 00/100ths Dollars
($401,000.00), together with interest thereon at the annual rate of six percent
(6%) until paid in full.
In case of default, the undersigned agrees to pay all costs of collection,
including a reasonable attorney's fee, whether or not suit is instituted, and
interest at the annual rate of twelve percent (12%) on all sums remaining unpaid
from the date of default until payment is made in full. The undersigned
consents to the personal jurisdiction of the courts (state and federal) located
in Cook County, Illinois for the purposes of any suit based upon this promissory
note.
Presentment for payment, notice of dishonor, and protest are hereby waived
by the undersigned. Failure by the holder hereof to exercise any option granted
holder shall not constitute a waiver of future rights. Platinum Entertainment,
Inc. shall not assign this note to any third party without the consent of the
undersigned, and any other assignment, or purported assignment, shall be null
and void.
RIVER NORTH STUDIOS II, INC.
By: /s/ Joe Thomas
----------------
The undersigned Joe Thomas guarantees, absolutely and unconditionally, the
full performance by River North Studios II, Inc. of the above installment
promissory note and agrees to indemnify and hold Platinum Entertainment, Inc.
harmless from any loss, damage, liability or expense which arise from any
failure by
14
<PAGE>
River North Studios II, Inc. to fulfill its obligations, or which are incurred
by Platinum Entertainment, Inc. in the enforcement of its rights under this
guaranty. The undersigned's liability under this guaranty is direct and
immediate, and is not conditioned upon the pursuit by Platinum Entertainment,
Inc. of any remedy it may have against River North Studios II, Inc. This
guaranty shall not be revocable at any time or for any reason, including,
without limitation, any modification of the above installment promissory note,
with or without notice to the undersigned. No failure by Platinum Entertainment
to exercise any of its rights will operate as a waiver of those rights or any
others.
/s/ Joe Thomas
---------------------------------------
Joe Thomas
15
<PAGE>
EXHIBIT B
In consideration of the obligations of Platinum Entertainment, Inc.
("Platinum") set forth in an agreement dated as of May 31, 1996 (the
"Agreement"), and to induce Platinum to execute and perform its obligations
under the Agreement, the undersigned, JOE THOMAS ("Thomas") hereby grants to
Platinum a power of attorney and appoints Platinum his attorney in fact with
full power of substitution to take acts or bring actions in Thomas' name and
endorse checks and collect amounts from or made by licensees, agents and other
parties with respect to the Project and the Material (as defined in the
Agreement); with the proceed therefrom to be allocated in the manner provided in
the Agreement. The foregoing grant of power of attorney is coupled with an
interest and is irrevocable.
/s/ Joe Thomas
---------------------------------------
JOE THOMAS
COUNTY OF COOK )
) SS
STATE OF ILLINOIS )
On this 31st day of May, 1996, before me, the undersigned Notary Public,
duly commissioned and sworn, personally appeared Joe Thomas, personally known to
me (or proved to me on the basis of satisfactory evidence) to be the person
whose name is subscribed to the within instrument, and subscribed and swore to
such instrument and acknowledged that he executed the same.
NOTARY PUBLIC in and for the
aforesaid County and State
My commission expires on:
12/11/99 /s/ Samantha L. Whitfield
- --------------------
--------------------------------
"OFFICIAL SEAL"
SAMANTHA L. WHITFIELD
NOTARY PUBLIC, STATE OF ILLINOIS
MY COMMISSION EXPIRES 12/11/99
--------------------------------
16
<PAGE>
EXHIBIT C
CONSOLE AND TAPE MACHINES
- -------------------------
SSL 40 Channel console with G series software and monitor
Otari DTR 900 32 track digital machine
Studer A827 24 track analog tape machine
Otari time code DAT machine
Panasonic 3700 DAT machine
2 Tascam 3-heads tape cassette decks
3 Akai tape cassette decks
CD player
2 Lynx modules for locking tape machines
Monitors: Genelec self-powered
Yamaha NS-10
Urie Large Monitors
3 power amps to drive both speakers and headphone mix
OUTBOARD GEAR
- -------------
TC M 5000 reverb, compression, and effects unit
AMS reverb unit RMX 16
Lexicon PCM 70
Lexicon PCM 60
DMX delay
Eventide H 3000 SE Harmonizer and effects unit
Lexicon PCM 42
TC 2290
Lex LXP1/MRC
Yamaha SPX 900
Yamaha SPX 90
Roland SRV-330
Tectronics LA2A Compressor
Urie 1176 Compressor
Urie 1178 Stereo Compressor
DBX 160 Stereo Compressor
Dromer Stereo Gate
Urie Metronome
Korg Tuner
SHARED EQUIPMENT
- ----------------
Music stands and chairs
Microphones
Headphones
Mic stands
All cables and adapters
Drum kit
Piano
B3 organ
17
<PAGE>
Direct boxes
Private cue boxes
Baffles
Focusrite module and H3000SE
Pro Disk digital editing unit
technician
Otari MX 8O 24 track tape machine
D 70 keyboard
ADDITIONS
- ---------
Studio D rewired
Video camera and monitor installed to allow view between Studio D
Performance Space
Install tower for computer for console
CDR
18
<PAGE>
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
YEAR ENDED YEAR ENDED
MAY 31, MAY 31,
1996 1995
Weighted average common
shares outstanding . . . . . . . . . 2,175,146 1,379,960
Weighted average cumulative
preferred shares outstanding . . . . 568,236 669,444
Effect of options granted within
one year prior to the offering . . . 182,605 234,686
--------------- ---------------
Total. . . . . . . . . . . . . . . . 2,925,987 2,284,090
Net loss:
Continuing operations. . . . . . . . $ (4,400,592) $ (4,839,651)
Discontinued operations. . . . . . . (226,044) (4,683,820)
--------------- ---------------
Net loss . . . . . . . . . . . . . . (4,626,636) (9,523,471)
Less: accrued dividends. . . . . . . (602,500) -
--------------- ---------------
Adjusted net loss. . . . . . . . . . (5,229,136) (9,523,471)
Net loss
per common share:
Continuing operations. . . . . . . . $ (1.71) $ (2.12)
Discontinued operations. . . . . . . (0.08) (2.05)
--------------- ---------------
Net loss
per common share . . . . . . . . . . $ (1.79) $ (4.17)
--------------- ---------------
--------------- ---------------
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information in this section should be read together with the consolidated
financial statements and notes thereto that are included elsewhere in the Annual
Report.
The Company adopted a May 31 fiscal year end effective June 1, 1994. The
discussion below covers the three fiscal years ended May 31, 1996, 1995 and
1994. References herein to "fiscal 1994" or the fiscal year ended May 31, 1994
refer to the pro forma unaudited period derived from the audited financial
statements for the five-month period ended May 31, 1994 and the year ended
December 31, 1993 in order to present a period comparable to the new fiscal
period adopted by the Company.
OVERVIEW
The Company produces, licenses, acquires, markets and distributes high quality
recorded music for a variety of musical formats. The Company and its wholly-
owned subsidiaries currently produce music for the Gospel, Adult Contemporary,
Country and Blues formats, principally under the CGI Records, River North
Records, River North Nashville Records and House of Blues labels. The Company's
products include new releases, typically by artists established in a particular
format, as well as compilations and repackagings of previously recorded music
that enable the Company to exploit its catalog of master recordings.
As an integral part of the Company's growth strategy, during March 1996, the
Company completed an initial public offering (the "Offering") of 2,740,000
shares of Common Stock resulting in net proceeds of $32,127,000. See "Public
Offering" following.
The Company has historically sustained losses, in part due to the high
costs associated with the establishment and expansion of its activities.
Management believes that the significant investments made to date will
enhance future profitability. In addition, a significant portion of the
Company's historical losses resulted from the operation of the Company's
River North recording studio (the "Studio"). During fiscal 1995, the Company
decided to discontinue this business and disposed of the Studio operations in
conjunction with the Offering. In fiscal 1995, the Company recorded a charge
to write down the assets of the Studio to their estimated net realizable
value, which was determined to be zero, and to accrue for operating losses
through the expected disposal date; such charges of $4,684,000 were included
in the net loss for fiscal 1995. The fiscal 1996 net loss includes $226,000
relating to Studio operating costs in excess of amounts estimated at the
measurement date.
The Company records revenues for music products, other than telemarketing
C.O.D. sales, when such products are shipped to retailers. In accordance with
industry practice, the Company's music products are sold on a returnable basis.
The Company's allowance for future returns is based upon its historical results
of operations, SOUNDSCAN data and the return rate of the Company's primary
distributor, PolyGram Group Distribution, Inc. (PGD). For the fiscal years ended
May 31, 1996, 1995 and 1994, the amounts charged against gross revenues for
returns and allowances for future returns were $4,732,000, $3,126,000 and
$1,174,000, respectively.
The Company recognizes revenues from the shipment of telemarketing C.O.D.
sales when cash is received from the customer. C.O.D. product shipments began
during the first quarter of fiscal 1995 and were discontinued in mid-February
1996, when the Company determined that C.O.D. orders would no longer be
accepted.
A significant recurring funding requirement of the Company is for repertoire
expenses, which include recording costs and advances to artists. The Company
makes substantial payments each year for recording costs and advances in order
to maintain and enhance its artist ros-
<PAGE>
ter. These costs are recouped from the artists' royalties, to the extent
possible, from future album sales. Artist advances are capitalized as an asset
when the current popularity and past performance of the artist provides a sound
basis for estimating the probable future recoupment of such advances from
earnings otherwise payable to the artist.
In fiscal 1996, the Company entered into an international licensing
agreement with MCA Records, Ltd. (MCA). The Company was not a party to any
such licensing arrangement in fiscal 1995 or 1994. Revenues derived from the
licensing are calculated as a percentage of retail sales by the licensee net
of returns and are recognized by the Company upon notification of retail
sales net of returns by the licensee. Manufacturing and related costs (other
than artist royalties, which are paid by the Company) are borne by the
licensee. Artist royalties paid by the Company in connection with
international sales are recorded as costs of artist projects and other
revenues and are calculated as a percentage of retail sales net of returns.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items derived
from the Company's consolidated statements of operations as a percentage of
gross revenues:
<TABLE>
<CAPTION>
Pro Forma
Year Ended Year Ended Year Ended
May 31, 1996 May 31, 1995 May 31, 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total gross revenues $24,777,000 100.0% $15,359,000 100.0% $ 8,929,000 100.0%
Less: Returns and allowances (4,732,000) 19.1% (3,126,000) 20.4% (1,174,000) 13.2%
Less: Allowance for unrecoupable artist advances (2,507,000) 10.1% (1,128,000) 7.3% (1,219,000) 13.7%
- ----------------------------------------------------------------------------------------------------------------------------
Total net revenues 17,538,000 70.8% 11,105,000 72.3% 6,536,000 73.1%
Cost of product sales 8,107,000 32.7% 4,300,000 28.0% 3,439,000 38.5%
Cost of artist project and other revenues 5,195,000 21.0% 2,601,000 16.9% 1,862,000 20.9%
- ----------------------------------------------------------------------------------------------------------------------------
Total cost of sales and services 13,302,000 53.7% 6,901,000 44.9% 5,301,000 59.4%
- ----------------------------------------------------------------------------------------------------------------------------
Gross profit 4,236,000 17.1% 4,204,000 27.4% 1,235,000 13.7%
- ----------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 8,173,000 33.0% 8,933,000 58.2% 2,641,000 29.6%
- ----------------------------------------------------------------------------------------------------------------------------
Operating loss (3,937,000) (15.9%) (4,729,000) (30.8%) (1,406,000) (15.9%)
Interest income 106,000 0.4% 46,000 0.3% - -
Interest expense (570,000) (2.3%) (157,000) (1.0%) (48,000) (0.5%)
- ----------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations (4,401,000) (17.8%) (4,840,000) (31.5%) (1,454,000) (16.4%)
Discontinued operations:
Loss from operations - - (2,073,000) (13.5%) (2,050,000) (22.9%)
Estimated loss on disposal (226,000) (0.9%) (2,611,000) (17.0%) - -
- ----------------------------------------------------------------------------------------------------------------------------
Loss from discontinued operations (226,000) (0.9%) (4,684,000) (30.5%) (2,050,000) (22.9%)
- ----------------------------------------------------------------------------------------------------------------------------
Net loss $(4,627,000) (18.7%) $(9,524,000) (62.0%) $(3,504,000) (39.3%)
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
FISCAL YEAR ENDED MAY 31, 1996 COMPARED
TO FISCAL YEAR ENDED MAY 31, 1995
Gross revenues increased $9,418,000 or 61.3% to $24,777,000 for fiscal 1996
compared to $15,359,000 for the prior fiscal year, while net revenues increased
$6,433,000 or 57.9%. Product sales increased $5,542,000 or 45.9% to $17,610,000
for fiscal 1996 compared to $12,068,000 for the prior fiscal year. This increase
primarily occurred in product sales through PGD and Light Distribution, an
operating division of the Company, which increased $3,025,000 and $1,439,000,
respectively, for fiscal 1996 compared to the prior fiscal year. The increases
in gross revenues generated in the Adult Contemporary, Gospel and Country
markets are due principally to increases of $4,116,000, $2,716,000 and
$1,655,000, respectively, for fiscal 1996 compared to the prior fiscal year. The
increase in Adult Contemporary revenue growth is due, in part, to the success of
Peter Cetera's ONE CLEAR VOICE album. The increase in Gospel revenue growth is
attributable to the success of a number of new releases, such as THE LIGHT YEARS
series, Witness' A SONG IN THE NIGHT and two releases from Glad, A CAPPELLA
GERSHWIN and THE A CAPPELLA PROJECT III, combined with the continued popularity
of many of the Company's older Gospel releases. The increase in Country revenues
is principally due to the release of Ronna Reeves' AFTER THE DANCE, Steve Azar's
HEARTBREAK TOWN and production of The Beach Boy's STARS AND STRIPES, VOLUME I,
which was released at the end of the first quarter of fiscal 1997. In addition,
the Company released its initial three albums, ESSENTIAL BLUES, VOLUMES I & II
and ESSENTIAL GOSPEL, under the House of Blues label during fiscal 1996. The
licensing, publishing and other revenues increased $1,592,000 to $1,799,000 for
fiscal 1996 compared to $207,000 for the prior fiscal year. The most significant
component of this increase was the result of the Company's first licensing
revenue from international sales through MCA of $553,000. During fiscal 1996,
Company management significantly reduced the Company's telemarketing efforts due
to the increased costs of television advertising. The increase in other product
revenues more than offset decreased telemarketing sales, which declined $527,000
or 27% to $1,422,000 for fiscal 1996 compared to $1,949,000 for the prior fiscal
year.
Returns and allowances increased $1,606,000 or 54.1% to $4,732,000 for fiscal
1996 compared to $3,126,000 for the prior fiscal year. Returns and allowances as
a percentage of gross product sales remained relatively unchanged at 26.9% for
fiscal 1996 from 25.9% for the prior fiscal year.
The allowance for unrecoupable artist advances increased $1,378,000 or 95.7%
to $2,506,000 for fiscal 1996 compared to $1,128,000 for the prior fiscal year.
The fiscal 1996 allowance for unrecoupable artist advances is net of write-offs
of approximately $560,000. Allowances for unrecoupable artist advances as a
percentage of gross project revenues increased to 46.7% for fiscal 1996 from
36.6% for the prior fiscal year reflecting the Company's increased investment in
new releases. This increase resulted from several debut projects produced during
fiscal 1996 for which the related advances are fully reserved in accordance with
accounting requirements. This increase also reflects increased investments in
recently released, or soon to be released, artist projects at May 31, 1996 which
require a larger unit sales volume to recoup the related artist advances. In
addition, the reserve was increased at fiscal year-end to reflect the continued
weakness in the retail music sales market, and management's decision to
significantly reduce its telemarketing sales activity as a result of the
increased cost of television advertising.
Cost of product sales increased $3,807,000 or 88.5% to $8,107,000 for fiscal
1996 compared to $4,300,000 for the prior fiscal year, primarily as a
consequence of increased product sales. Cost of product sales as a percentage of
gross revenues increased to 32.7% for fiscal 1996 from 28.0% in the prior fiscal
year. This increase is primarily attributable to increased royalty costs
associated with albums released during fiscal 1996 featuring established artists
in non-Gospel formats. Further, the reduction in telemarketing sales negatively
impacted this percentage due to the lower cost of product sales attributable to
telemarketing sales compared with other distribution channels.
Cost of artist project and other revenues increased $2,594,000 or 99.7% to
$5,195,000 for fiscal 1996 compared to $2,601,000 for the prior fiscal year.
These costs as a percentage of gross revenues increased to 21.0% for fiscal 1996
compared to 16.9% for the prior fiscal year. The increase reflects the Company's
increasing volume of new products and the higher costs associated with
developing projects in the Adult Contemporary and Country formats, including
projects involving Peter Cetera, Ronna Reeves, Steve Azar and The Beach Boys, as
compared to Gospel projects.
In addition, these costs include the royalties paid by the Company to artists
in connection with its first international sales through MCA, which occurred
during fiscal 1996. The Company's liability for such royalties is based on MCA's
retail sales of the Company's products net of returns, and equaled approximately
10% of such net retail sales. When presented as a percentage of licensing
revenues received by the Company, however, royalties were equal to approximately
50% of such revenues.
Gross profit increased $32,000 or 0.8% to $4,236,000 for fiscal 1996 compared
to $4,204,000 for the prior fiscal year. As a percentage of gross revenues,
gross profit decreased to 17.1% for fiscal 1996 compared to 27.4% for the prior
fiscal year. This decrease relates to increased allowances on artist advances
and an increase in cost of product sales as described above. The decrease is
also attributable to increased royalty rates on non-Gospel record sales, a
decrease in telemarketing revenues which provide higher gross margins due to the
lack of a third-party distribution channel and an increase in product returns.
The timing of releases also affects gross profit. The costs of developing
several recently released, or soon to be released, projects at May 31, 1996 have
the affect of decreasing fiscal 1996 gross profit as product sales on these
projects will occur in future periods.
Selling, general and administrative expenses decreased $760,000 or 8.5% to
$8,173,000 for fiscal 1996 compared to $8,933,000 for the prior fiscal year.
Selling, general and administrative expenses as a percentage of gross revenues
decreased to 33.0% for fiscal 1996 compared to 58.2% for the prior fiscal year.
These decreases are primarily attributable to an increased revenue base as well
as new budgeting and approval procedures to control and monitor marketing,
promotion, production and other costs implemented during the second quarter of
fiscal 1996. In addition, the Company incurred substantial one-time investments
during fiscal 1995 as described below.
As a result of the factors described above, the operating loss decreased
$792,000 or 16.7% to $3,937,000 for fiscal 1996 from $4,729,000 for the prior
fiscal year.
No tax benefit has been recorded to date through May 31, 1996 due to the
Company's valuation allowance at May 31, 1996, as required under generally
accepted accounting principles. Pursuant to Section 382 of the Internal Revenue
Code of 1986, as amended, the Company's net operating loss carryforward of
approximately $12,523,000, expiring in years 2007 through 2011, is subject to
annual limitations due to a change in ownership as a result of the Offering.
Consequently, approximately $3,700,000 of the loss carryforward at May 31, 1996
will be available to offset fiscal 1997 taxable income.
Interest expense increased $413,000 to $570,000 for fiscal 1996 compared to
$157,000 for the prior fiscal year. This increase is due to increased bank and
related party financing used by the Company to fund operations in fiscal 1996
compared to the prior fiscal year. In fis-
<PAGE>
cal 1996, all outstanding debt was retired with the net proceeds received from
the Offering. Accordingly, no interest expense was incurred following the
closing of the Offering.
Net loss decreased $4,897,000 to $4,627,000 for fiscal 1996 from $9,524,000
for the prior fiscal year. The net loss for fiscal 1995 included $4,684,000
related to operations discontinued during fiscal 1995. During fiscal 1996, the
Company experienced an additional $226,000 of costs related to the discontinued
operations in excess of estimated amounts at the measurement date. Included in
the aforementioned costs of the discontinued operations for fiscal 1996, are
$302,000 for management, administrative services and interest expense charged by
the Company to the Studio. The improved net loss for fiscal 1996 also reflects
the success of the Company's recent releases, the Company's first international
sales through MCA during fiscal 1996 and the effect of the Company's efforts to
reduce expenses, which included the implementation of cost controls as discussed
above.
FISCAL YEAR ENDED MAY 31, 1995 COMPARED
TO FISCAL YEAR ENDED MAY 31, 1994
Gross revenues increased $6,430,000 or 72.0% to $15,359,000 for fiscal 1995
compared to $8,929,000 for the prior fiscal year, while net revenues increased
$4,569,000 or 69.9%. Telemarketing sales, which began in fiscal 1995, accounted
for $1,949,000 of gross revenues. Gross product sales into the Christian
bookstore market experienced a significant increase from $758,000 in fiscal 1994
to $2,809,000 in fiscal 1995, due principally to the efforts of the newly formed
Light Distribution sales staff. In addition, fiscal 1995 was the first full year
in which the Company benefited from its distribution agreement with PGD, which
dramatically broadened the market for the Company's products. Fiscal 1995
results also reflected the Company's first significant sales efforts outside of
its traditional Gospel music market. On a music format basis, the increase in
gross revenues in fiscal 1995 resulted from an $896,000 increase in Adult
Contemporary sales attributable to the production of Peter Cetera's ONE CLEAR
VOICE album, an increase in Gospel gross revenues of $3,419,000 attributable to
the success of new releases combined with the continued popularity of many of
the Company's older releases and an increase in Country gross revenues of
$1,949,000 due primarily to the production and release of albums by Holly Dunn
and Steve Kolander.
Returns and allowances increased $1,952,000 or 166.3% to $3,126,000 for fiscal
1995 compared to $1,174,000 for the prior fiscal year. Returns as a percentage
of gross product sales increased to 25.9% in fiscal 1995 from 16.3% in the prior
fiscal year. This increase was due primarily to the higher return experience
rates associated with the release of various Country artists.
The allowance for unrecoupable artist advances decreased $91,000 or 7.5% to
$1,128,000 for fiscal 1995 from $1,219,000 for the prior fiscal year. Allowances
for unrecoupable artist advances as a percentage of gross project revenues
decreased to 36.6% for fiscal 1995 from 74.4% for the prior fiscal year. This
decrease resulted from significant projects produced during fiscal 1995 with
artists whose current popularity and past performance provide a sound basis for
estimating the probable future recoupment of their advances.
Cost of product sales increased $861,000 or 25.0% to $4,300,000 for fiscal
1995 from $3,439,000 for the prior fiscal year. However, these costs as a
percentage of gross revenues declined to 28.0% for fiscal 1995 from 38.5% for
the prior fiscal year. This favorable variance was due primarily to the revenues
generated by the Company's telemarketing operations. As discussed below, the
favorable impact from telemarketing sales was offset in part by additional
selling, general and administrative costs incurred to create and support the
telemarketing sales infrastructure.
Cost of artist project and other revenues increased $739,000 or 39.7% to
$2,601,000 for fiscal 1995 from $1,862,000 for the prior fiscal year. However,
these costs as a percentage of gross revenues decreased to 16.9% for fiscal 1995
compared to 20.9% for the prior fiscal year. The dollar increase reflected an
increase in Adult Contemporary and Country projects which were higher in cost
than Gospel projects.
Gross profit increased $2,969,000 or 240.4% to $4,204,000 for fiscal 1995 from
$1,235,000 for the prior fiscal year. As a percentage of gross revenues, gross
profit increased to 27.4% for fiscal 1995 compared to 13.7% for the prior fiscal
year. This increase was partially attributable to the increase in sales of Adult
Contemporary and Country artist albums. A greater percentage of these products
were sold as compact discs than the Company's Gospel products, generating
greater margins. In addition, these releases also commanded higher wholesale and
retail sales prices than the Gospel releases. Telemarketing sales, which began
in fiscal 1995, also generated higher gross margins due to the lack of third-
party distribution fees and lower royalties attributable to product sold through
this distribution channel.
Selling, general and administrative expenses increased $6,292,000 or 238.2% to
$8,933,000 for fiscal 1995 compared to $2,641,000 for the prior fiscal year.
Selling, general and administrative expenses as a percentage of gross revenues
increased to 58.2% for fiscal 1995 from 29.6% for the prior fiscal year. This
increase reflected an increase in expenses related to additional personnel and
facilities necessary to support the larger volume of sales. In addition, this
increase in costs and expenses reflected substantial one-time investments made
by the Company to develop and promote its Country music label, create a
telemarketing division, establish a mail order distribution center and form its
own sales force for Light Distribution and outbound telemarketing. These
expenditures, which totaled approximately $1,100,000, were fully expensed in
fiscal 1995. The major component of these expenses was $900,000 in advertising
and promotional costs incurred to establish name recognition for the new Country
label. Fiscal 1995 also included $2,200,000 of advertising expenses related to
the Company's new telemarketing operations.
The Company's loss from continuing operations increased $3,386,000 or 232.9%
to $4,840,000 for fiscal 1995 compared to $1,454,000 for the prior fiscal year.
This increase was primarily the result of the one-time investments made by the
Company and fully expensed in fiscal 1995, as discussed above, and other
expenses associated with growth and entry into new markets.
The Company's net loss increased $6,020,000 or 171.8% to $9,524,000 for fiscal
1995 compared to $3,504,000 for the prior fiscal year. The fiscal 1995 loss
included an operating loss of $2,073,000 related to the Studio operations, as
compared to a loss of $2,050,000 for fiscal 1994. In addition, the fiscal 1995
net loss included a reserve of $1,238,000 for anticipated operating costs of the
Studio through the expected disposal date and a charge of $1,373,000 to write
down the Studio assets to their net realizable value. A significant portion of
the fiscal 1995 loss was also attributable to certain one-time investments of
$1,100,000 which were expensed in fiscal 1995.
RECENT DEVELOPMENTS On June 20, 1996, the Company acquired substantially all
of the assets of REX Music, Inc. (REX) for $480,000, which approximated the
indebtedness of REX to the Company. REX produces, licenses and markets
recorded music, primarily in the Gospel format, for markets primarily in the
United States. The acquisition has been accounted for by the purchase method
of accounting and the purchase price of $480,000 approximates the fair value
of the assets acquired.
RECENTLY ISSUED ACCOUNTING STANDARDS In October 1995, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 123, "Accounting for Stock-Based
Compensation"("FAS 123"). This Statement establishes financial accounting and
reporting standards for stock-based employee compensation plans as well as
transactions in which the Company issues its equity instruments to acquire
services from nonemployees. The Statement defines a fair value based method of
measuring compensation costs for such activity, but does not require accounting
compliance under this method and allows compensation costs for such activity to
be measured using the intrinsic value based method prescribed by APB Opinion No.
25, "Accounting for Stock Issued to Employees"("Opinion 25"), the method
currently utilized by the Company. Entities electing to remain with the
accounting method prescribed by Opinion 25 must make pro forma disclosures of
net income and earnings per share as if the fair value based method of
accounting defined in FAS 123 had been applied. This Statement is effective for
the Company's fiscal year ending May 31, 1997. Management intends to continue
accounting for stock options pursuant to Opinion 25 and has not yet determined
what impact this Statement will have on the Company's financial disclosures.
SEASONALITY The Company's results of operations are subject to seasonal
variations. In accordance with industry practice, the Company records revenues
for music product, except those related to the telemarketing C.O.D. sales, when
such products are shipped to retailers. The Company has historically experienced
a decline in revenues and net income in its third fiscal quarter (December,
January and February) due to the fact that retailers purchase products from the
Company in the quarter ending November 30 in anticipation of holiday sales. As a
result, sales are traditionally lower during December and the post holiday
period.
PUBLIC OFFERING On March 12, 1996, the Company sold 2,500,000 shares of Common
Stock to the public at an initial offering price of $13 per share. In addition,
on March 28, 1996, the Company sold an additional 240,000 shares of Common Stock
to the public at the initial offering price, pursuant to an over-allotment
option granted the underwriters of the public offering. These sales (after
payment of underwriting discounts and commissions and a financial advisory fee)
resulted in net proceeds of $32,127,000. The net proceeds were used to: (i)
retire outstanding related party debt of $4,867,000, (ii) retire outstanding
borrowings under the Company's line of credit of $4,980,000, (iii) retire an
outstanding bank term loan of $4,000,000, (iv) redeem a portion of the
<PAGE>
Company's Series A-1 Non-Convertible Preferred Stock, including settlement of
unaccrued dividends, for cash of $4,500,000 (with the remaining redemption
settled with shares of Common Stock) and (v) pay costs related to the Offering,
approximating $1,200,000. The remaining proceeds, approximately $12,600,000, are
being used for working capital and other general corporate purposes, including
potential acquisitions. The Company expects the Offering to have a positive
impact on future operations, including enhancing the ability to fund future
projects and capital requirements, reduce interest expense and increase interest
income earned on excess cash remaining after the Offering.
LIQUIDITY The Company's cash balances were $8,222,000 and $87,000 at May 31,
1996 and 1995, respectively. Net cash used in operating activities was
$8,755,000 for continuing operations and $1,011,000 for discontinued operations
for fiscal 1996. The uses reflect the significant increases in volume for
continuing operations during the period, including net cash used to fund trade
receivables of $1,912,000 and artist advances of $3,331,000, attributable to new
releases by various artists, including Peter Cetera, Steve Azar, Ronna Reeves
and numerous Gospel artists and increased investment in new and future releases
including albums by The Beach Boys, Crystal Bernard and a number of Gospel
artists.
Financing activities to fund the Company's operations for fiscal 1996 were
funded with the net proceeds from the Offering of $32,127,000 (before $1,170,000
in costs related to the Offering), $4,330,000 of additional related party
financing and $1,980,000 of bank debt. This funding was partially offset by
payments of $9,480,000 to retire all outstanding bank debt, $4,867,000 to retire
all outstanding related party debt and $4,500,000 in conjunction with the
mandatory redemption of the Company's Series A-1 Non-Convertible Preferred Stock
(see "Public Offering" above).
Investing activities for fiscal 1996 totaled $574,000 relating primarily to
additions of office equipment and computers and leasehold improvements.
Net cash used in operating activities was $6,590,000 in fiscal 1995. The
uses reflect the significant increases in sales volume during the period,
including an increase in inventory to support greater product sales volume
and increased investment in releases for and subsequent to the period
including albums by Peter Cetera, Holly Dunn and a number of Gospel artists.
Financing activities to fund the Company's operations for fiscal 1995 were
funded with $4,953,000 of equity financing and $1,953,000 of net bank financing.
There was no significant investing activity for this period.
Similarly, the Company experienced net cash uses from operations and
investment activities of $1,543,000 during the five-month period ended May 31,
1994. This cash deficit was fully funded with related party and bank debt. In
calendar year 1993, the Company's net cash uses from operating activities was
$2,973,000. In addition, the Company spent $1,104,000 on property and equipment
and acquired Lexicon Music, Inc. for $700,000. The cash needed for these
activities was obtained primarily from bank financing.
A significant recurring funding requirement of the Company is for repertoire
expenses, which include recording costs and advances to artists. The Company
makes substantial payments each year for recording costs and advances in order
to maintain and enhance its artist roster. These costs are recouped from the
artists' royalties, to the extent possible, from future album sales. Artist
advances are capitalized when the current popularity and past performance of the
artist provides a sound basis for estimating the probable future recoupment of
such advances from earnings otherwise payable to the artist.
CAPITAL RESOURCES The Company retired all of its then outstanding debt with the
net proceeds from the Offering. The Company also redeemed all of the Series A-1
Non-Convertible Preferred Stock outstanding with net proceeds from the Offering
and issuance of shares of Common Stock. See "Public Offering."
During August 1995, the Company entered into a combined debt and letter of
credit facility extending its total facility with American National Bank and
Trust Company of Chicago ("American National") to $9,250,000 from $8,000,000,
which was paid in full with the net proceeds of the Offering and subsequently,
this agreement was terminated. The Company intends to enter into a Revised
Credit Agreement with American National, extending the borrowing facility to
$10,000,000. Pursuant to the Revised Credit Agreement, the Company will be
required to maintain certain financial and other covenants. The Revised Credit
Agreement will have an initial term of one year, subject to annual renewal.
The Company's long-term capital requirements will depend on numerous factors,
including the rate at which the Company grows and acquires new artists and
products. The Company has various ongoing needs for capital, including working
capital for operations, artist advances and project development costs and
capital expenditures to maintain and expand its operations. In addition, as part
of its strategy, the Company evaluates potential acquisitions of music catalogs,
publishing rights and labels. The Company may in the future consummate
acquisitions which may require the Company to make additional capital
expenditures, and such expenditures may be significant. Future acquisitions may
be funded with available cash from the net proceeds of the Offering, seller
financing, institutional financing and/or additional equity or debt offerings.
Stockholders' deficit at May 31, 1996 totaled $18,700,000 compared to
$14,815,000 at May 31, 1995. This increase of $3,885,000 or 26% is primarily due
to the net loss for the year ended May 31, 1996 and preferred dividends of
$602,000 which accrued during fiscal 1996.
INFLATION The impact of inflation on the Company's operating results has been
moderate in recent years, reflecting generally lower rates of inflation in the
economy. While inflation has not had a material impact on operating results,
there is no assurance that the Company's business will not be affected by
inflation in the future.
SAFE HARBOR PROVISION This Annual Report contains certain forward-looking
statements (within the meaning of the Private Securities Litigation Reform Act
of 1995) that involve substantial risks and uncertainties. When used in this
Annual Report, the words "anticipate," "believe," "estimate" and "expect" and
similar expressions as they relate to the Company or its management are intended
to identify such forward-looking statements. A number of important factors could
cause the Company's actual results, performance or achievements for fiscal 1997
and beyond to differ materially from those expressed in such forward-looking
statements. These factors include, without limitation, commercial success of the
Company's repertoire, charges and costs related to acquisitions, relationships
with artists and producers, attraction and retention of key personnel, general
economic and business conditions and enhanced competition and new competitors in
the recorded music industry.
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND STOCKHOLDERS
PLATINUM ENTERTAINMENT, INC. AND SUBSIDIARIES
We have audited the consolidated balance sheets of Platinum Entertainment, Inc.
and Subsidiaries as of May 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity (net capital deficiency) and cash
flows for the years ended May 31, 1996 and 1995, the five-month period ended
May 31, 1994 and the year ended December 31, 1993. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Platinum
Entertainment, Inc. and Subsidiaries at May 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for the years
ended May 31, 1996 and 1995, the five-month period ended May 31, 1994 and the
year ended December 31, 1993, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Ernst & Young LLP
Chicago, Illinois
August 14, 1996
<PAGE>
PLATINUM ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
May 31, 1996 May 31, 1995
- -----------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 8,222,173 $ 87,368
Accounts receivable, less allowances of
$1,033,433 and $775,293, respectively 3,302,803 1,649,327
Artist advances 1,581,390 753,421
Inventories 1,538,108 1,451,685
Notes receivable 1,467,007 65,300
Other 472,457 115,415
- -----------------------------------------------------------------------------
Total current assets 16,583,938 4,122,516
Artist advances, net of current amounts, less
allowances of $4,942,021 and $3,010,141,
respectively 2,093,224 1,522,513
Property and equipment, net 698,251 234,848
Music publishing rights, less accumulated
amortization of $90,443 and $61,111,
respectively 349,557 378,889
Other 18,568 94,220
- -----------------------------------------------------------------------------
Total assets $ 19,743,538 $ 6,352,986
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
Current liabilities:
Revolving line of credit $ - $ 3,000,000
Bank term loan - 4,500,000
Accounts payable 997,378 1,819,173
Accrued liabilities and other 2,104,015 870,110
Due to related parties - 537,000
Royalties payable 1,427,588 1,286,859
Net liabilities of discontinued operations - 1,237,379
- -----------------------------------------------------------------------------
Total current liabilities 4,528,981 13,250,521
Redeemable preferred stock:
Series A-1 preferred stock ($.001 par value
- $6,025,000 liquidation preference); no
shares authorized, issued and outstanding at
May 31, 1996 and 18,257,576 shares
authorized, issued and outstanding at
May 31, 1995 - 5,422,500
Stockholders' equity (net capital deficiency):
Preferred stock:
Series A-2 convertible preferred stock
($.001 par value); no shares authorized,
issued and outstanding at May 31, 1996 and
18,257,576 shares authorized, issued and
outstanding at May 31, 1995 - 18,258
Preferred stock ($.001 par value);
10,000,000 shares authorized, no shares
issued and outstanding at May 31, 1996 and
13,484,848 shares authorized, no shares
issued and outstanding at May 31, 1995 - -
Common stock:
Class A convertible common stock ($.001 par
value); no shares authorized, issued and
outstanding at May 31, 1996 and 240,000
shares authorized, issued and outstanding
at May 31, 1995 - 240
Class B convertible common stock ($.001 par
value); no shares authorized, issued and
outstanding at May 31, 1996 and 1,080,000
shares authorized, issued and outstanding
at May 31, 1995 - 1,080
Common stock ($.001 par value); 40,000,000
shares authorized, 5,063,207 shares issued
and outstanding at May 31, 1996 and
2,480,000 shares authorized, 49,960 shares
issued and outstanding at May 31, 1995 5,063 50
Additional paid-in capital 35,253,724 2,475,431
Accumulated deficit (20,044,230) (14,815,094)
- -----------------------------------------------------------------------------
Stockholders' equity (net capital deficiency) 15,214,557 (12,320,035)
- -----------------------------------------------------------------------------
Total liabilities and stockholders' equity (net
capital deficiency) $ 19,743,538 $ 6,352,986
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
<PAGE>
PLATINUM ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Five
Year ended Year ended months ended Year ended
May 31, 1996 May 31, 1995 May 31, 1994 Dec 31, 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross product sales $ 17,610,121 $ 12,068,358 $ 3,474,456 $ 4,009,801
Less: Returns and allowances (4,732,158) (3,125,918) (584,105) (590,010)
- ---------------------------------------------------------------------------------------------------------
Net product sales 12,877,963 8,942,440 2,890,351 3,419,791
Cost of product sales 8,106,499 4,299,721 1,743,228 1,900,874
- ---------------------------------------------------------------------------------------------------------
4,771,464 4,642,719 1,147,123 1,518,917
Gross artist project revenues 5,367,368 3,083,934 727,691 1,450,535
Less: Allowance for unrecoupable artist
advances (2,506,576) (1,127,718) (433,060) (1,360,483)
- ---------------------------------------------------------------------------------------------------------
Net artist project revenues 2,860,792 1,956,216 294,631 90,052
Licensing, publishing and other revenues 1,798,775 206,570 52,472 28,265
- ---------------------------------------------------------------------------------------------------------
Net artist project and other revenues 4,659,567 2,162,786 347,103 118,317
Cost of artist project and other revenues 5,195,344 2,601,146 1,004,552 1,061,378
- ---------------------------------------------------------------------------------------------------------
(535,777) (438,360) (657,449) (943,061)
- ---------------------------------------------------------------------------------------------------------
Gross profit 4,235,687 4,204,359 489,674 575,856
Selling, general and administrative expenses 8,172,595 8,933,240 1,391,057 2,341,017
- ---------------------------------------------------------------------------------------------------------
Operating loss (3,936,908) (4,728,881) (901,383) (1,765,161)
Interest income 106,447 45,792 - -
Interest expense (570,131) (156,562) (27,685) (33,196)
- ---------------------------------------------------------------------------------------------------------
Loss from continuing operations (4,400,592) (4,839,651) (929,068) (1,798,357)
- ---------------------------------------------------------------------------------------------------------
Discontinued operations:
Loss from operations - (2,073,306) (754,621) (1,519,656)
Estimated loss on disposal (226,044) (2,610,514) - -
- ---------------------------------------------------------------------------------------------------------
Loss from discontinued operations (226,044) (4,683,820) (754,621) (1,519,656)
- ---------------------------------------------------------------------------------------------------------
Net loss (4,626,636) $ (9,523,471) $ (1,683,689) $ (3,318,013)
Less: Cumulative preferred dividends (602,500) -------------------------------------------
-------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Loss applicable to common shares $ (5,229,136)
-------------
-------------
Net loss per common share:
Continuing operations $ (1.71) $ (2.12)
Discontinued operations (0.08) (2.05)
- ---------------------------------------------------------------------------------------------------------
$ (1.79) $ (4.17)
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Weighted average number of common shares
outstanding 2,925,987 2,284,090
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
Preferred Stock Common stock Stockholders'
--------------------- -------------------------- Additional equity
paid-in (net capital
Series A-2 No Series Class A Class B No Class capital Deficit deficiency)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 $ - $ - $ 240 $ 1,200 $ 40 $ 1,988,520 $ (289,921) $ 1,700,079
Net loss for the year ended
December 31, 1993 - - - - - - (3,318,013) (3,318,013)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 - - 240 1,200 40 1,988,520 (3,607,934) (1,617,934)
Net loss for the five months
ended May 31, 1994 - - - - - - (1,683,689) (1,683,689)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1994 - - 240 1,200 40 1,988,520 (5,291,623) (3,301,623)
Proceeds from issuance of
preferred stock, net ($.69
per share) 18,258 - - - - 486,801 - 505,059
Surrender of common stock - - - (120) - 120 - -
Net loss for the year ended
May 31, 1995 - - - - - - (9,523,471) (9,523,471)
Other - - - - 10 (10) - -
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1995 18,258 - 240 1,080 50 2,475,431 (14,815,094) (12,320,035)
Conversion into common stock (18,258) - (240) (1,080) 2,050 17,528 - -
Initial public offering, net
($11.30 per share) - - - - 2,740 30,953,450 - 30,956,190
Exercise of stock options - - - - 22 55,478 - 55,500
Conversion of Series A-1
redeemable preferred stock - - - - 117 1,524,883 - 1,525,000
Dividends on Series A-1
redeemable preferred stock - - - - - - (602,500) (602,500)
Founders bonus - - - - 65 (65) - -
Shares issued in lieu of
compensation - - - - 19 227,019 - 227,038
Net loss for the year ended
May 31, 1996 - - - - - - (4,626,636) (4,626,636)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1996 $ - $ - $ - $ - $ 5,063 $35,253,724 $(20,044,230) $ 15,214,557
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Five
Year ended Year ended months ended Year ended
May 31, 1996 May 31, 1995 May 31, 1994 Dec 31, 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (4,626,636) $ (9,523,471) $ (1,683,689) $ (3,318,013)
Adjustments to reconcile net loss to net cash
used in continuing operating activities:
Provision for (recovery of) doubtful accounts 28,219 (9,998) (2,968) 43,446
Charge for future returns 147,000 513,000 - 140,000
Charge for unrecoupable artist advances 1,931,880 1,127,718 433,060 1,444,482
Charge for distribution fees 82,921 91,813 - -
Charge for slow-moving inventory 100,000 - - -
Depreciation and amortization 155,801 133,482 39,035 54,586
Common stock issued in lieu of compensation 227,038 - - -
Changes in operating assets and liabilities:
Accounts receivable (1,911,616) (179,178) (717,539) (1,277,160)
Royalties receivable - - - 123,387
Inventories (186,423) (892,076) (44,330) (402,946)
Notes receivable (1,401,707) (22,976) - -
Artist advances (3,330,560) (3,197,322) (639,390) (810,863)
Accounts payable (821,795) 1,122,733 442,230 142,395
Accrued liabilities and other 1,233,905 668,663 128,004 31,265
Due to related parties - - - (329,141)
Royalties payable 140,729 557,173 326,242 391,758
Other (523,451) (129,107) (47,778) 144,537
- --------------------------------------------------------------------------------------------------------------
Net cash used in continuing operating activities (8,754,695) (9,739,546) (1,767,123) (3,622,267)
- --------------------------------------------------------------------------------------------------------------
Discontinued operations:
Depreciation and amortization - 539,354 249,388 649,473
Estimated loss on disposal 226,044 2,610,514 - -
Change in net liabilities (1,237,379) - - -
- --------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) discontinued
operating activities (1,011,335) 3,149,868 249,388 649,473
- --------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (9,766,030) (6,589,678) (1,517,735) (2,972,794)
- --------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of property and equipment (573,855) (237,749) (25,613) (1,104,452)
Asset purchase of Lexicon Music, Inc. - - - (700,000)
- --------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (573,855) (237,749) (25,613) (1,804,452)
- --------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net proceeds from (payment of) related parties $ (537,000) $ 537,000 $ 943,819 $ 210,000
Payment of note payable to related party - (943,819) (300,000) -
Net proceeds from (payment of) revolving line of
credit (3,000,000) 3,000,000 - 4,000,000
Net proceeds from bank term loan - 4,500,000 - -
Payment of bank term loan (4,500,000) (4,000,000) - (646,833)
Net proceeds from long-term debt - - - 1,400,000
Payment of long-term debt - (1,139,889) (102,784) (157,327)
Net proceeds from initial public offering 30,956,190 - - -
Net proceeds from exercise of stock options 55,500 - - -
Net proceeds from issuance of preferred stock - 4,952,559 975,000 -
Redemption of preferred stock (4,500,000) - - -
- --------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 18,474,690 6,905,851 1,516,035 4,805,840
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 8,134,805 78,424 (27,313) 28,594
Cash and cash equivalents, beginning of period 87,368 8,944 36,257 7,663
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 8,222,173 $ 87,368 $ 8,944 $ 36,257
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
PLATINUM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Platinum Entertainment, Inc. (the Company) produces, licenses, acquires, markets
and distributes high-quality recorded music for a variety of musical formats for
markets principally in the United States. The Company and its wholly owned
subsidiaries currently produce music in the Gospel, Adult Contemporary, Country
and Blues formats. The Company's activities are primarily in the Gospel and
Adult Contemporary formats. Net revenues, net accounts receivable and net artist
advances generated by these formats as a percentage of total net revenues, net
accounts receivable and net artist advances, respectively, are as follows:
FIVE MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
MAY 31, MAY 31, MAY 31, DEC 31,
1996 1995 1994 1993
- --------------------------------------------------------------------------
Net revenues:
Gospel 55% 82% 87% 95%
Adult contemporary 25 8 4 1
Country 13 8 8 -
Blues and other 7 2 1 4
MAY 31, MAY 31,
1996 1995
- --------------------------------------------------------------------------
Net accounts receivable:
Gospel 67% 82%
Adult Contemporary 24 2
Blues and other 9 -
Country - 16
Net artist advances:
Country 39% 11%
Adult Contemporary 37 37
Gospel 21 50
Blues and other 3 2
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts and transactions of
the Company and its wholly owned subsidiaries, River North Studios, Inc.; River
North Records, Inc.; CGI Records, Inc.; Lexicon Music, Inc.; Light Records,
Inc.; The Recording Experience, Inc.; Just Mike Music, Inc.; Peg Publishing,
Inc. and Royce Publishing, Inc. Significant intercompany accounts and
transactions have been eliminated in consolidation.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost, less accumulated depreciation.
Depreciation is computed using accelerated methods over the estimated useful
lives of the assets (five to seven years).
<PAGE>
ADVANCES
In accordance with FASB Statement No. 50, "Financial Reporting in the Record and
Music Industry," advances to artists and producers are capitalized as an asset
when the current popularity and past performance of the artist or producer
provides a sound basis for estimating the probable future recoupment of such
advances from earnings otherwise payable to the artist or producer. Any portion
of such advances not deemed to be recoupable from future royalties is reserved
at the balance sheet date. All other significant advances which do not meet the
above criteria are fully reserved when paid.
INVENTORIES
Inventories are valued at the lower of cost or market determined on the first
in, first out (FIFO) method of accounting. Inventories consist primarily of
finished goods.
ADVERTISING
Promotional costs are capitalized for unreleased projects and expensed when the
related product is released. All other advertising and promotional costs are
expensed when incurred.
MUSIC PUBLISHING RIGHTS
Music publishing rights are amortized over 15 years using the straight-line
method.
REVENUE RECOGNITION
Net product sales, other than telemarketing C.O.D. sales, represent revenues
derived from sales of records, net of actual returns and reserves for estimated
future returns. Telemarketing C.O.D. sales are recognized upon receipt of cash
from the customer.
Artist project revenues represent revenues derived from the production and
promotion of artist records, net of reserves for estimated unrecoupable costs.
Revenues derived from the licensing of recording masters are recognized upon
notification of retail sales by the licensee. Retail sales, net of returns,
reported to the Company by the licensee, were approximately $3,409,000 for the
year ended May 31, 1996.
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash equivalents, trade accounts
receivable, notes receivable and trade accounts payable. The fair value of the
Company's financial instruments approximates the carrying value of the
instruments.
INCOME TAXES
Deferred income taxes are calculated based on the differences between the bases
of assets and liabilities for financial statement and income tax return
purposes, primarily related to reserves against trade accounts receivable and
artist advances, at the enacted tax rates at which the resulting taxes are
expected to be paid.
STOCK OPTIONS
In October 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). This Statement
establishes financial accounting and reporting standards for stock-based
employee compensation plans as well as transactions in which the Company issues
its equity instruments to acquire services from nonemployees. The Statement
defines a fair value based method of measuring compensation costs for such
activity, but does not require accounting compliance under this method and
allows compensation costs for such activity to be measured using the intrinsic
value-based method prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees," ("Opinion 25") the method currently utilized by the
Company. Entities electing to remain with the accounting method prescribed by
Opinion 25 must make pro forma disclosures of net income and earnings per share
as if the fair value based method of accounting defined in FAS 123 had been
applied. This Statement is effective for the Company's fiscal year ending
May 31, 1997. Management intends to continue accounting for stock options
pursuant to Opinion 25 and has not yet determined what impact this Statement
will have on the Company's financial disclosures.
NET LOSS PER COMMON SHARE
Net loss per common share is computed based upon the weighted average number of
common shares outstanding. Common and common equivalent shares issued during the
12-month period prior to the March 12, 1996 public offering have been included
in the calculation as if they were outstanding for all periods presented using
the treasury stock method and the public offering price of $13 per share. No
effect has been given to common equivalent shares issued for any other period as
the effect would be antidilutive. In addition, all convertible preferred stock
and convertible Class A common stock and Class B common stock are treated as if
converted into common shares at the date of issuance.
A portion of the net proceeds received from the Offering were used to retire
indebtedness of the Company and redeem a portion of the Series A-1 Non-
Convertible Preferred Stock. Supplemental loss per common share, adjusted to
reflect the elimination of interest expense incurred on such borrowings during
fiscal 1996 and the payment of mandatory preferred dividends, is $1.52 per
common share.
RECLASSIFICATIONS
Certain amounts in the year ended May 31, 1995, the five months ended May 31,
1994 and the year ended December 31, 1993 consolidated financial statements have
been reclassified to conform with the year ended May 31, 1996 presentation.
3. DISCONTINUED OPERATIONS
On April 18, 1995, the Board of Directors approved a plan to sell the studio
operations of River North Studios, Inc. (RNS). As part of such plan, the Company
sold RNS to a company which is owned 80% by a minority stockholder and former
officer of the Company. As consideration, the Company, under a five-year
agreement, was entitled to use the recording studio for an amount of recording
time, as defined in the agreement, at no charge. However, as management could
not estimate future usage of the recording studio, the sale was recorded with no
dollar value assigned to this consideration. This agreement was subsequently
terminated.
In fiscal 1995, the Company recorded a charge to write down the assets of RNS
to their estimated net realizable value, which were determined to be zero, and
to accrue for operating losses through the expected disposal date in January
1996 ($1,373,135 and $1,237,379, respectively). Included in the estimate for the
operating losses through the expected disposal date were rent and utilities
costs estimated to be incurred subsequent to the disposal date that were not
assumed by the buyer.
No income tax benefits have been allocated to RNS losses because there are no
realizable taxable benefits available to allocate to the discontinued
operations. RNS losses are included in the Company's net operating loss
carryforwards disclosed in Note 9.
Revenues of RNS are as follows:
Year ended May 31, 1996 $ 183,000
Year ended May 31, 1995 345,000
Five months ended May 31, 1994 165,000
Year ended December 31, 1993 495,000
The accumulated deficit of RNS is as follows:
May 31, 1996 $7,141,000
May 31, 1995 6,958,000
For the year ended May 31, 1996, the Company charged the discontinued operations
approximately $302,000 for management and administrative services and additional
interest cost. The additional interest cost is the interest incurred by the
Company for using its revolving line of credit to fund the working capital
requirements of the discontinued operations. Such allocations were not
applicable for the year ended May 31, 1995 and the five-month period ended May
31, 1994. In the year ended December 31, 1993, charges for such services were
paid to a related party (see Note 10).
The fiscal year ended May 31, 1996 net loss includes $226,000 related to
operating costs in excess of amounts estimated at the measurement date.
4. DISTRIBUTION AGREEMENT
The Company has an exclusive domestic distribution agreement (Agreement) with
PolyGram Group Distribution, Inc. (PGD). The term of the Agreement was extended
during fiscal 1996 through December 31, 2000, unless extended or terminated
under certain provisions of the Agreement. The Agreement appoints PGD exclusive
distributor of the Company's products through normal retail channels, which
excludes certain methods of distribution as defined. The distribution services
rendered by PGD include billing and collecting from customers, bearing bad
debts, distributing promotional items, advertising, undertaking retail marketing
and inventory control activities and processing returns. Distribution fees paid
by the Company for various distribution services provided by PGD include 18% of
net sales generated by PGD and an additional 2% of the credit price for all
product returns. The payment of all such fees owed to PGD by the Company is
secured by all of the Company's inventories in PGD's possession awaiting
distribution. Such inventories are $901,000 and $427,000 at May 31, 1996 and
1995, respectively.
GROSS SALES NET SALES
- -----------------------------------------------------------------
Product sales generated through PGD are as follows:
Year ended May 31, 1996 $9,969,000 $7,226,000
Year ended May 31, 1995 6,944,000 4,926,000
Five months ended May 31, 1994 2,908,000 2,368,000
Year ended December 31, 1993 2,822,000 2,791,000
Accounts receivable include the following net amounts due from PGD:
May 31, 1996 $1,326,000
May 31, 1995 1,885,000
<PAGE>
5. VALUATION AND QUALIFYING ACCOUNTS
Activity of the Company's valuation and qualifying accounts is as follows:
<TABLE>
<CAPTION>
ADDITIONS
---------------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT
PERIOD EXPENSES ACCOUNT DEDUCTIONS END OF PERIOD
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended May 31, 1996:
Reserves and allowances deducted from asset accounts:
Reserve for future returns $ 653,000 $ - $ 572,393(1) $ 425,393(2) $ 800,000
Reserve for distribution fees 91,813 82,921 - - 174,734
Allowance for doubtful accounts 30,480 43,271 - 15,052(3) 58,699
Reserve for unrecoupable artist advances 3,010,141 - 3,066,920(4) 1,135,040(5) 4,942,021
Allowance for slow-moving inventory - 100,000 - - 100,000
- ------------------------------------------------------------------------------------------------------------------------------------
$3,785,434 $ 226,192 $3,639,313 $ 1,575,485 $ 6,075,454
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended May 31, 1995:
Reserves and allowances deducted from asset accounts:
Reserve for future returns $ 140,000 $ - $ 513,000(1) $ - $ 653,000
Reserve for distribution fees - 91,813 - - 91,813
Allowance for doubtful accounts 40,478 - - 9,998(3) 30,480
Reserve for unrecoupable artist advances 1,882,423 - 1,127,718(4) - 3,010,141
- ------------------------------------------------------------------------------------------------------------------------------------
$2,062,901 $ 91,813 $1,640,718 $ 9,998 $ 3,785,434
- ------------------------------------------------------------------------------------------------------------------------------------
Five months ended May 31, 1994:
Reserves and allowances deducted from asset accounts:
Reserve for future returns $ 140,000 $ - $ - $ - $ 140,000
Allowance for doubtful accounts 43,446 - - 2,968(3) 40,478
Reserve for unrecoupable artist advances 1,449,363 - 433,060(4) - 1,882,423
- ------------------------------------------------------------------------------------------------------------------------------------
$1,632,809 $ - $ 433,060 $ 2,968 $ 2,062,901
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1993:
Reserves and allowances deducted from asset accounts:
Reserve for future returns $ - $ - $ 140,000(1) $ - $ 140,000
Allowance for doubtful accounts - 43,446 - - 43,446
Reserve for unrecoupable artist advances 88,880 - 1,360,483(4) - 1,449,363
- ------------------------------------------------------------------------------------------------------------------------------------
$ 88,880 $ 43,446 $1,500,483 $ - $ 1,632,809
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) ESTIMATED FUTURE SALES RETURNS, CHARGED AGAINST GROSS PRODUCT SALES. (2)
ACTUAL SALES RETURNS, CHARGED AGAINST RESERVE FOR FUTURE RETURNS. (3)
WRITE-OFFS, NET OF RECOVERIES. (4) ESTIMATED UNRECOUPABLE ARTIST ADVANCES,
CHARGED AGAINST GROSS ARTIST PROJECT REVENUES. (5) RECOUPMENT OF RESERVED
ADVANCES AND WRITE-OFFS.
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
MAY 31
----------------------------
1996 1995
- ----------------------------------------------------------------
Audio equipment $ 11,432 $ 11,432
Office equipment and computers 498,509 239,986
Furniture and fixtures 267,473 82,701
Leasehold improvements 149,609 19,049
Automobile 5,000 5,000
- ----------------------------------------------------------------
932,023 358,168
Less: Accumulated depreciation 233,772 123,320
- ----------------------------------------------------------------
Net property and equipment $698,251 $234,848
- ----------------------------------------------------------------
- ----------------------------------------------------------------
During fiscal 1996, the Company purchased $421,000 of office equipment,
furniture and fixtures and leasehold improvements from a company that is wholly
owned by a director, officer and stockholder of the Company.
7. ADVERTISING
Advertising expenses are as follows:
Year ended May 31, 1996 $1,968,000
Year ended May 31, 1995 3,664,000
Five months ended May 31, 1994 271,000
Year ended December 31, 1993 195,000
8. DEBT
Subsequent to the offering, the Company retired all of its then-outstanding
bank debt, consisting of borrowings against a line of credit totaling $4,980,000
and a term loan of $4,000,000, with net proceeds from the offering.
Interest expense and cash paid for interest are as follows:
EXPENSE
RELATING TO
TOTAL DISCONTINUED CASH PAID
EXPENSE OPERATIONS FOR INTEREST
- -----------------------------------------------------------------------
Year ended May 31, 1996 $891,000 $333,000 $1,022,000
Year ended May 31, 1995 597,000 447,000 516,000
Five months ended May 31, 1994 173,000 145,000 139,000
Year ended December 31, 1993 247,000 214,000 227,000
9. INCOME TAXES
Significant components of deferred income taxes consist of the following:
MAY 31
-------------------------
1996 1995
- --------------------------------------------------------------------------
Net operating loss carryforwards $4,741,000 $3,653,000
Reserve for unrecoupable artist advances 1,878,000 1,144,000
Reserve for future returns and
doubtful accounts receivable 326,000 254,000
Liabilities of discontinued operations - 470,000
Other 368,000 57,000
- --------------------------------------------------------------------------
7,313,000 5,578,000
Less: Valuation allowance 7,313,000 5,578,000
- --------------------------------------------------------------------------
$ - $ -
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
No tax benefit has been recognized in the accompanying statement of operations
to date due to the valuation allowance. The valuation allowance increased
$1,735,000 and $3,604,000 during the years ended May 31, 1996 and 1995,
respectively, due principally to net operating loss carryforwards and
differences between the book and tax accounting treatment of the reserve for
unrecoupable artist advances.
Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, the
Company's net operating loss carryforward of approximately $12,523,000, expiring
in years 2007 through 2011, is subject to annual limitations due to a change in
ownership as a result of the initial public offering. Accordingly, approximately
$11,521,000 of the net operating loss carryforward is subject to an annual
limitation of approximately $2,200,000.
10. RELATED PARTY TRANSACTIONS
During fiscal 1996, the Company retired all of its outstanding related party
debt with net proceeds from the initial public offering. Principal and interest
payments to related parties during the current fiscal year totaled $4,867,000
and $202,000, respectively. Interest expense incurred due to related parties
approximated interest paid to related parties.
Under an agreement dated May 1996, the Company sold certain audio-visual
rights for $401,000 and its right to free future studio usage for $850,000 to
a minority stockholder and former officer of the Company, who previously
acquired the Studio assets (see Note 3). The $401,000 is reflected in
licensing, publishing and other revenues in the accompanying statements of
operations. The $850,000 is being amortized to offset cost of artist projects
over a twenty-seven month period. As a result, the note receivable balance at
May 31, 1996 includes $1,058,000 relating to these transactions.
Prior to May 31, 1994, the Company incurred operating expenses relating to
sales personnel, management and accounting services which were provided by an
affiliated company. Subsequently, these costs are incurred by the Company and
its personnel. Such costs are as follows:
Year ended May 31, 1996 $ -
Year ended May 31, 1995 -
Five months ended May 31, 1994 156,000
Year ended December 31, 1993 400,000
The Company has two joint venture agreements with subsidiaries of House of Blues
under which the Company produces, markets and distributes compilations of Blues
and Gospel recordings on the House of Blues record label. The Chairman and Chief
Executive Officer of House of Blues is a member of the Company's Board of
Directors. The Company is required to pay royalties to House of Blues based upon
the net profits of each project. No such royalties have been incurred as of May
31, 1996.
See also Notes 3, 6, 11 and 15.
11. LEASES
Future minimum rental payments, excluding adjustments for real estate tax
increases, due under noncancelable operating leases having an initial term of
more than one year as of May 31, 1996, are as follows:
1997 $240,000
1998 53,000
- -----------------
$293,000
- -----------------
- -----------------
Rent expense is as follows:
EXPENSE
RELATING TO
TOTAL DISCONTINUED
EXPENSE OPERATIONS
- -----------------------------------------------------------
Year ended May 31, 1996 $619,000 $340,000
Year ended May 31, 1995 583,000 309,000
Five months ended May 31, 1994 220,000 120,000
Year ended December 31, 1993 329,000 268,000
Rental payments are personally guaranteed by two officers/stockholders of the
Company. Rental payments (which approximated rent expense) totaling $72,000
annually were made to a related party.
12. COMMON AND PREFERRED STOCK
The proceeds from issuance of preferred stock for the year ended May 31, 1995 of
$4,952,559 are net of issuance costs of $97,441 and proceeds of $975,000
received prior to May 31, 1994 by the Company were for such issuance.
<PAGE>
The issuance of 1,515,152 shares of Series A-1 preferred stock and 1,515,152
shares of Series A-2 preferred stock during fiscal 1995 for total proceeds of
$500,000 was to Platinum Venture Partners I, L.P., a limited partnership whose
general partner is majority-owned by stockholders of the Company.
During March 1996, the Company sold a total of 2,740,000 shares of Common
Stock to the public for $13 per share, resulting (after payment of underwriting
discounts and commissions and a financial advisory fee) in net proceeds of
$32,127,000. The net proceeds were used to: (i) retire outstanding related party
debt of $4,867,000; (ii) retire outstanding borrowings under the Company's bank
line of credit of $4,980,000; (iii) retire an outstanding bank term loan of
$4,000,000; (iv) redeem a portion of the Company's Series A-1 Non-Convertible
Preferred Stock for cash of $4,500,000 (along with stock issuance discussed
below which, together, included $602,500 of cumulative preferred dividends) and
(v) pay costs related to the public sale, approximating $1,170,000. The
remaining net proceeds are being used for working capital and other general
corporate purposes, including potential acquisitions.
Immediately prior to the public sale, a one-for-twenty-five reverse split of
the Company's Common Stock, Class A Common Stock and Class B Common Stock
occurred (par value of the shares was restated to $.001). Simultaneous with the
closing of the public sale, each share of the Company's Class A Common Stock and
Class B Common Stock then outstanding converted into one share of Common Stock,
each share of Series A-2 Convertible Preferred Stock then outstanding converted
into one-twenty-fifth of one share of Common Stock and 22,200 shares of Common
Stock were issued to certain stockholders exercising options (having an exercise
price of $2.50 per share). Subsequent to the public sale, 117,305 shares of
Common Stock were issued in connection with the redemption of the Company's
Series A-1 Non-Convertible Preferred Stock (see portion redeemed in cash above)
and 65,000 shares of Common Stock were issued to certain of the Company's
founders.
At May 31, 1996, 922,800 unissued shares of common stock have been reserved
for future issuance under the Company stock option plans (see Note 14).
13. RETIREMENT PLAN
Employees of the Company are eligible to participate in a defined-contribution
benefit plan (Plan) of an affiliated company upon completing six months of
service and attaining age 21. The Company may make a matching contribution and
an additional discretionary contribution as defined by the Plan.
14. STOCK OPTION PLANS
Under the Platinum Entertainment, Inc. 1993 Stock Option Plan (1993 Plan),
incentive and nonqualified stock options may be granted to eligible participants
entitling them to purchase up to 144,000 shares of common stock at an option
price determined by a committee appointed by the Board of Directors (Committee)
to administer the 1993 Plan. The option period is 10 years and 15 years from the
date of grant for incentive stock options and nonqualified stock options,
respectively. The exercise price for incentive options may not be less than fair
market value on the date the option is granted (110% of fair market value in the
case of a greater than 10% shareholder), and at no time shall any one
participant hold options exercisable for more than 30% of the total common stock
reserved for issuance under the 1993 Plan. The exercisability of the options is
subject to determination by the Committee.
Under the provisions of the 1993 Plan, in September 1993 the Company entered
into an agreement with an artist which granted the artist options to purchase
40,000 shares of common stock at $.25 per share. Vesting of the options is
contingent upon certain performance criteria as follows: 1/3 upon signing the
agreement (September 1993) and 2/3 upon delivery of an initial album (May 1995).
Effective June 1, 1994, the Company adopted the Platinum Entertainment, Inc.
1995 Directors' Stock Option Plan (Directors' Plan) which permits the issuance
of 16,000 shares of common stock to directors of the Company who are not
employees. Under the terms of the Directors' Plan, the options granted are
nonqualified and are issued at a price equal to the fair market value on the
date of grant. Fair market value is equal to the closing price reported on the
principal securities exchange on which the common stock is traded, or if the
common stock is not traded, the fair market value is determined by the
Committee. Options granted under the Directors' Plan are fully exercisable on
the date of grant for a period of 10 years.
Effective April 18, 1995, the Company adopted the Platinum Entertainment, Inc.
1995 Employee Incentive Compensation Plan (Incentive Plan) which provides for
incentive awards in the form of stock options, stock appreciation rights,
deferred stock or other such awards as determined by the Committee. The
eligibility of participants is at the discretion of the Committee and may
include nonemployees. The Company has reserved 800,000 shares of common stock
for issuance under the Incentive Plan. Stock options may be either incentive or
nonqualified. The option price and exercisability are determined by the
Committee provided that the option price per share is not less than the fair
value per share on the date the option is granted, and that no option is
exercisable more than 10 years from the date of grant, except in the case of
incentive stock options for a greater than 10% shareholder, in which case the
option period cannot exceed five years.
A summary of the activity of the Company's stock option plans is as follows:
OUTSTANDING EXERCISE
OPTIONS PRICE
- ---------------------------------------------------------
Balance at December 31, 1993 141,200 $ .25-8.25
Granted 1,600 8.25
- ---------------------------------------------------------
Balance at May 31, 1994 142,800 .25-8.25
Granted 256,300 8.25
- ---------------------------------------------------------
Balance at May 31, 1995 399,100 .25-8.25
Granted 545,900 8.25-13.00
- ---------------------------------------------------------
Balance at May 31, 1996 945,000 $ .25-13.00
- ---------------------------------------------------------
- ---------------------------------------------------------
At May 31, 1996, options to purchase 355,567 shares were exercisable.
15. COMMITMENTS
Effective January 1, 1996, and revised May 31, 1996, the Company entered into an
agreement with a minority stockholder and former officer of the Company who will
provide certain services in connection with the production of recording masters.
Among other things, the minority stockholder is entitled to receive an annual
advance of $240,000 against royalties payable under the agreement plus $35,000
per year for business expenses. The term of the agreement is one year with an
option exercisable by the stockholder at any time prior to August 31, 1996 to
extend the term for an additional period of four years.
16. SUBSEQUENT EVENT
On June 20, 1996, the Company acquired substantially all of the assets of REX
Music, Inc. (REX) for $480,000, which approximated the indebtedness of REX to
the Company. REX produces, licenses and markets recorded music, primarily in the
Gospel format, for markets principally in the United States. The acquisition has
been accounted for by the purchase method of accounting and the purchase price
of $480,000 approximates the fair value of the assets acquired.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Form 10-K of Platinum
Entertainment, Inc. and Subsidiaries of our report dated August 14, 1996,
included in the 1996 Annual Report to Shareholders of Platinum Entertainment,
Inc. and Subsidiaries
/s/ ERNST & YOUNG LLP
Chicago, Illinois
August 26, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT MAY 31, 1996, THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE YEAR ENDED MAY 31, 1996 AND THE NOTES THERETO FOR PLATINUM
ENTERTAINMENT, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-01-1995
<PERIOD-END> MAY-31-1996
<CASH> 8,222,173
<SECURITIES> 0
<RECEIVABLES> 5,803,243
<ALLOWANCES> 1,033,433
<INVENTORY> 1,538,108
<CURRENT-ASSETS> 16,583,938<F1>
<PP&E> 932,023
<DEPRECIATION> 233,772
<TOTAL-ASSETS> 19,743,538<F2>
<CURRENT-LIABILITIES> 4,528,981
<BONDS> 0
0
0
<COMMON> 5,063
<OTHER-SE> 15,209,494
<TOTAL-LIABILITY-AND-EQUITY> 19,743,538
<SALES> 12,877,963
<TOTAL-REVENUES> 24,776,264
<CGS> 8,106,499
<TOTAL-COSTS> 13,301,843
<OTHER-EXPENSES> 8,172,595
<LOSS-PROVISION> 43,271
<INTEREST-EXPENSE> 570,131
<INCOME-PRETAX> (4,400,592)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,400,592)
<DISCONTINUED> (226,044)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,626,636)
<EPS-PRIMARY> (1.79)<F3>
<EPS-DILUTED> 0
<FN>
<F1>Includes $1,581,390 of gross artist advances.
<F2>Includes $7,035,245 of gross artist advances, less an allowance for
unrecoupable artist advances of $4,942,021.
<F3>Loss applicable to common shares includes preferred dividends of $602,500.
</FN>
</TABLE>
