<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 2 to
Annual Report on
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, 1997
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
$6.375 on November 25, 1997, and for the purpose of this calculation only, the
assumption that all of the registrant's directors and executive officers are
affiliates) was approximately $26,997,698.
The number of shares outstanding of the registrant's Common Stock, par
value $.001, as of November 25, 1997 was 5,274,403.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into this
report:
None
<PAGE>
The Registrant, pursuant to this Amendment No. 2, hereby amends the Annual
Report on Form 10-K for the fiscal year ended May 31, 1997, as amended in
order to reclassify certain financial information for fiscal 1997. Such
reclassification does not affect gross revenues, operating loss or loss per
share.
<PAGE>
PART II
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, 1997, 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 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 included elsewhere in
this Report.
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED FIVE MONTHS
YEAR ENDED MAY 31, MAY 31, ENDED YEAR ENDED
------------------------------ 1994 MAY 31, DECEMBER 31,
1997 1996 1995 (UNAUDITED) 1994 1993
---------- ---------- --------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C>
Gross revenues (1) $ 42,633 $ 25,489 $ 15,866 $ 8,929 $ 4,255 $ 5,489
Returns, allowances and discounts (1) (13,031) (5,444) (3,633) (1,174) (584) (590)
Allowance for unrecoupable artist advances (855) (2,507) (1,128) (1,219) (433) (1,361)
--------------------------------------------------------------------------
Total net revenues 28,747 17,538 11,105 6,536 3,238 3,538
Gross profit 11,707 4,236 4,204 1,235 490 576
Merger, restructuring and one-time costs (2) 2,231 - - - - -
Operating loss (4,638) (3,937) (4,729) (1,406) (901) (1,766)
Interest and other financing costs (4,918) (570) (157) (48) (27) (33)
Loss from continuing operations (9,354) (4,401) (4,840) (1,454) (928) (1,799)
Loss from discontinued operations - (226) (4,684) (2,050) (755) (1,519)
Net loss (9,354) (4,627) (9,524) (3,504) (1,683) (3,318)
Less-Cumulative preferred dividends (3) (602)
Loss applicable to common shares (5,229)
Per common share:
Loss from continuing operations: $ (1.82) $ (1.71) $ (2.12)
Loss from discontinued operations - (0.08) (2.05)
--------------------------------------
Net loss (4) $ (1.82) $ (1.79) $ (4.17)
--------------------------------------
--------------------------------------
Weighted average number of common
shares outstanding (4) 5,136,830 2,925,987 2,284,090
</TABLE>
(1) During the Company's normal course of business, discounts are extended to
customers on product sales. The operations for the years ended May 31,
1996 and 1995 have been reclassified to conform to the financial statement
presentation for the year ended May 31, 1997. Discounts for the five
months ended may 31, 1994 and the year ended December 31, 1993 were
insignificant.
(2) As a result of the business acquisitions completed by the Company during
fiscal 1997, the Company incurred significant costs to merge and
restructure its business with the acquired companies. Such merger and
restructuring costs include severance costs, relocation costs, lease
commitment write-off's, warehouse closing costs and other costs. Such
costs incurred approximated $1,650,000, of which $315,000 is accrued at
May 31, 1997, relating primarily to severance costs and a distribution
termination fee. The restructuring is expected to be completed by the
end of the second quarter of fiscal 1998. Such restructuring resulted in
shifts in the selling and promotion efforts of the Company's Country
label and in-house sales department and a shift in third-party
fulfillment of Platinum Christian Distribution. One-time costs for
fiscal 1997 include write-offs of artist advances of $581,000 in
areas for which the Company has chosen to redirect its resources.
-13-
<PAGE>
(3) Represents accrued dividends on the Company's Series A-1 Redeemable
Non-Convertible Preferred Stock, which dividends were paid concurrent
with the redemption of the stock during March 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 12-month period prior to the Company's March
12, 1996 initial public offering of Common Stock ("IPO") have been
included in the calculation for fiscal 1996 as if they were outstanding
for that period using the treasury stock method and the IPO price of $13
per share. In addition, all convertible Preferred Stock and convertible
Class A Common Stock and Class B Common Stock are treated as if
converted into shares of Common Stock at the date of issuance. No
effect has been given to common equivalent shares issued for any other
period as the effect would be antidilutive.
A portion of the net proceeds received from the IPO during fiscal 1996
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 for fiscal 1996.
(5) Includes short-term debt for all periods indicated.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND 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 this Report.
OVERVIEW
The Company is a full-service music company that produces, licenses,
acquires, markets and distributes high quality recorded music for a variety of
musical genres. The Company currently produces music in the Gospel, Country,
Adult Contemporary, Blues, Classical, Urban and Compilation genres, primarily
under its CGI Records, River North Records, House of Blues and Intersound
labels. The Company's products include new releases, typically by artists
established in a particular format, as well as compilations and repackaging 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 fiscal 1997,
the Company completed several acquisitions: (i) substantially all of the
assets of R.E.X. Music, Inc. ("REX") during June 1996; (ii) substantially all
of the assets of Double J Music Group ("Double J") during September 1996; (iii)
a 50% interest in the House of Blues Music Company ("HOB Joint Venture") during
November 1996 and (iv) substantially all of the assets of Intersound, Inc.
("Intersound") effective January 1, 1997. See "Significant Matters" below for
more details of these transactions.
In connection with the Intersound Acquisition, the Company obtained a
credit facility totaling $35,000,000 which matures in full on October 31,
1997. The Company obtained stockholder approval during July 1997 to issue
shares of its Preferred Stock the net proceeds of which the Company intends
to primarily use to retire the above referenced credit facility. The Company
has actively pursued the Preferred Stock issuance, but has received no
commitments to date. The Company is currently seeking financing with terms
that may vary from those originally proposed for the Preferred Stock and such
financing may be on terms that are more or less favorable to the Company and
to its common stockholders. There are no assurances that such financing could
be obtained on terms favorable to the Company, or at all. See "Significant
Matters" and "Capital Resources" below for further details.
As a result of the acquisitions discussed above, the Company incurred
significant costs to merge and restructure its business with the acquired
companies. Such merger and restructuring costs include severance costs,
relocation costs, lease commitment write-off's, warehouse closing costs and
other related costs. Such costs approximated $1,650,000, of which $315,000
is accrued at May 31, 1997, relating primarily to severance costs and a
distribution termination fee. The restructuring is expected to be completed
by the end of the second quarter of fiscal 1998. Such restructuring resulted
in shifts in the selling and promotion efforts of the Company's Country label
and in-house sales department and a shift in third-party fulfillment of
Platinum Christian Distribution. In addition, one-time costs for fiscal 1997
include write-offs of artist advances of $581,000 in areas for which the
Company has chosen to redirect its resources.
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 Company's initial public offering of its Common Stock during March 1996
("IPO").
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 returns, SoundScan data and the return rate of the Company's
primary distributor, PGD. As a result of the acquisitions completed during
fiscal 1997, the Company terminated its relationship with Riverside Book and
Bible House, Inc. ("Riverside") for fulfillment of Platinum Christian
Distribution. The acquisitions provided for Platinum Christian Distribution
fulfillment to be handled through the recently acquired Intersound internal
distribution system and the increased volume allowed the Company to negotiate
Christian Bookstore Market distribution through its primary secular market
distributor, PGD. As a result, the Company experienced unusually high returns
of product through the Riverside distribution channel as customers were
allowed a limited time to return products before returns were no longer
accepted from previous Riverside sales. In addition, the Company ceased
relations with certain customers who consistently failed to pay on a timely
basis, prompting an unusually high returns experience from these customers.
Accordingly, the Company's returns experience was 30% for the year ended May
31, 1997, compared to 27% and 26% for the years ended May 31, 1996 and 1995,
respectively. It is the Company's policy to inventory all returned product
and resell such product at market value. The excessive product returns in
fiscal 1997 are primarily "close-out" items. These items have been
inventoried and will be sold slightly above or at cost on a non-returnable
basis.
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 the third
quarter of fiscal 1996, when the Company determined C.O.D. orders would
<PAGE>
no longer be accepted due to the significant cost of television advertising.
Telemarketing revenues were $1,422,000 and $1,949,000 for fiscal 1996
and 1995, respectively.
A significant recurring funding requirement of the Company is for artist
and repertoire ("A&R") 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 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.
The Company primarily distributes internationally by means of licensing
arrangements. The first of these arrangements began during fiscal 1996 with MCA
Records, Ltd. ("MCA"). The Company subsequently terminated this arrangement and
has entered international licensing arrangements on a country-by-country basis.
Revenues derived from the licensing of recording masters 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.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of gross revenues, certain
items which are included in the Company's statements of operations for the
fiscal years reflected below. Operating results for any period are not
necessarily indicative of results for any future periods.
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
--------------------------------------------------------------------------------
1997 1996 1995
--------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total gross revenues . . . . . . . . . . . . $ 42,633 100.0% $ 25,489 100.0% $ 15,866 100.0%
Less: Returns and allowances . . . . . . . . (10,568) -24.8% (4,732) -18.6% (3,126) -19.7%
Less: Discounts. . . . . . . . . . . . . . . (2,463) -5.8% (712) -2.8% (507) -3.2%
Less: Allowance for
unrecoupable
artist advances . . . . . . . . . . . . . (855) -2.0% (2,507) -9.8% (1,128) -7.1%
------------ ------------ ------------
Total net revenues . . . . . . . . . . . . . 28,747 67.4% 17,538 68.8% 11,105 70.0%
Cost of product sales. . . . . . . . . . . . 13,288 31.1% 8,107 31.8% 4,300 27.1%
Cost of artist projects and
other revenues. . . . . . . . . . . . . . 3,752 8.8% 5,195 20.4% 2,601 16.4%
------------ ------------ ------------
Total cost of sales and
services. . . . . . . . . . . . . . . . . 17,040 39.9% 13,302 52.2% 6,901 43.5%
------------ ------------ ------------
Gross profit . . . . . . . . . . . . . . . . 11,707 27.5% 4,236 16.6% 4,204 26.5%
Other operating expenses:
Selling, general and
administrative expenses . . . . . . . . . 13,141 30.8% 8,017 31.5% 8,800 55.5%
Merger, restructuring and
one time costs . . . . . . . . . . . . . 2,231 5.2% - - - -
Depreciation and amortization. . . . . . . . 973 2.3% 156 0.6% 133 0.8%
------------ ------------ ------------
Operating loss . . . . . . . . . . . . . . . (4,638) -10.8% (3,937) -15.5% (4,729) -29.8%
Interest income. . . . . . . . . . . . . . . 154 0.4% 106 0.4% 46 0.3%
Interest expense . . . . . . . . . . . . . . (1,385) -3.2% (570) -2.2% (157) -1.0%
Other financing costs. . . . . . . . . . . . (3,533) -8.3% - - - -
Equity gain. . . . . . . . . . . . . . . . . 48 0.1% - - - -
------------ ------------ ------------
Loss from continuing
operations. . . . . . . . . . . . . . . . (9,354) -21.8% (4,401) -17.3% (4,840) -30.5%
Discontinued operations:
Loss from operations. . . . . . . . . . . - - - - (2,073) -13.1%
Loss on disposal. . . . . . . . . . . . . - - (226) -0.9% (2,611) -16.5%
------------ ------------ ------------
Loss from discontinued
operations. . . . . . . . . . . . . . . . - - (226) -0.9% (4,684) -29.6%
------------ ------------ ------------
Net loss . . . . . . . . . . . . . . . . . . $ (9,354) -21.8% $ (4,627) -18.2% $ (9,524) -60.1%
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
References made in the following discussion include: (i) Gospel format -
activity under the CGI Records, Light Records, Lexicon Music, R.E.X. Music
and Flying Tart labels, as well as Gospel activity under the House of Blues
label; (ii) Country format -activity under the River North Nashville label;
(iii) Adult Contemporary format - activity under the River North Records
label; (iv) Blues format - Blues activity under the House of Blues label,
and all activity from the Intersound Acquisition is referenced "Intersound"
so that the effects of the Intersound Acquisition can more clearly be
understood.
FISCAL YEAR ENDED MAY 31, 1997 COMPARED TO FISCAL YEAR ENDED MAY 31, 1996
Gross revenues increased $17,144,000 or 67.3% to $42,633,000 for fiscal
1997 compared to the prior fiscal year; $13,542,000 or 79.0% of this increase
related to the activities of Intersound since January 1, 1997. Gross
revenues generated from Gospel, Country, Adult Contemporary, Blues and
Intersound activity as a percentage of total gross revenues for fiscal 1997
were 35.0%, 16.1%, 8.3%, 8.8% and 31.8% compared to 57.3%, 21.0%, 16.8%, 4.9%
and 0.0% for the prior fiscal year. Gross revenues generated from Gospel,
Country, Adult Contemporary, Blues and Intersound activity increased
(decreased) for fiscal 1997 compared to the prior fiscal year by $337,000,
$1,528,000, ($748,000), $2,484,000 and $13,543,000, respectively. The
changes in percentages are due principally to the activities of Intersound
since January 1,
<PAGE>
1997 as noted above, and the dollar changes are due principally to the
following significant releases in the following genres: Gospel increased
principally due to National Baptist Convention's LET'S GO TO CHURCH offset by
decreased telemarketing sales, which typically generated Gospel revenues, and
fewer artist project revenues due to the timing of projects; Country
increased principally due to The Beach Boys' STARS AND STRIPES, VOLUME I and
Crystal Bernard's GIRL NEXT DOOR; Adult Contemporary decreased due to fewer
artist project revenues compared to last year, offset by an increase in
product revenues in this genre, principally the continued success of Peter
Cetera's ONE CLEAR VOICE and the fourth quarter release of his A COLLECTION,
and Blues increased principally due to the fourth quarter release of The
Blues Brothers' LIVE FROM CHICAGO'S HOUSE OF BLUES and the current year
release of seven Blues compilations compared to two during the prior fiscal
year. Significant releases under the Intersound label include BOOTY MIX 2:
THE NEXT BOUNCE, Trapp's STOP THE GUNFIGHT, ROMANCE & ROSES and The Taliesin
Orchestra's ORINOCO FLOW: THE MUSIC OF ENYA.
Returns and allowances increased $5,836,000 or 123.3% to $10,568,000 for
fiscal 1997 compared to the prior fiscal year; $3,173,000 of this increase
related to the activities of Intersound since January 1, 1997. Returns and
allowances as a percentage of gross product sales, less discounts, increased
to 30.2% for fiscal 1997 from 26.9% for the prior fiscal year. Management
attributes the increase in current year returns to the effects of the
acquisitions completed during fiscal 1997 as discussed above.
Discounts increased $1,751,000 or 245.9% to $2,463,000 for fiscal 1997
compared to the prior fiscal year; $381,000 or 21.8% of this increase related
to the activities of Intersound since January 1, 1997. Discounts as a
percentage of gross product sales increased to 6.6% for fiscal 1997 from 3.9%
for the prior fiscal year. The increase relates to the Company's more
aggressive utilization of discount plans with retailers and the increase in
new releases volume for which it is industry practice to extend discounts on
new release orders, compared to reorders of previously released albums.
Also, additional discounts were extended to the member churches which
purchased the National Baptist Convention's LET'S GO TO CHURCH release
directly from the Company. The additional discounts allowed were more than
offset by third-party distribution fee savings.
The allowances for unrecoupable artist advances were $1,730,000 for fiscal
1997 compared to $2,507,000 for the prior fiscal year; the current year
balance was not significantly affected by the activities of Intersound since
January 1, 1997. This decrease reflects the overall reduction in artist
project costs of approximately $1,300,000 for fiscal 1997 from fiscal 1996.
Artist project cost reductions are the result of management's implementation
of greater budgeting and cost controls. The allowance for unrecoupable
artist advances as a percentage of artist project costs remained relatively
unchanged at 48.5% for fiscal 1997 compared to 51.5% for fiscal 1996.
$875,000 of the total current year allowance related to radio-driven Country
projects and has been reflected in the merger, restructuring and one-time
costs. See "Overview" above for further details.
Cost of product sales increased $5,181,000 or 63.9% to $13,288,000 for
fiscal 1997 compared to the prior fiscal year; $2,654,000 or 51.2% of this
increase related to the activities of Intersound since January 1, 1997. Cost
of product sales as a percentage of gross revenues decreased slightly to
31.1% for fiscal 1997 from 31.8% for the prior fiscal year. The Company has
been experiencing increased cost of product sales primarily attributable to
increased royalty costs associated with albums featuring established artists
in non-Gospel formats and the reduction in telemarketing sales has negatively
impacted margins due to the lower cost of product sales attributable to
telemarketing sales compared with other distribution channels. However,
these increased costs have been offset by the lower cost of product sales
associated with Intersound activity, which is generally subject to lower
royalty costs and does not incur a third-party distribution fee.
Cost of artist project and other revenues decreased a net $1,443,000 or
27.8% to $3,752,000 for fiscal 1997 compared to the prior fiscal year; this
decrease is net of an increase of $949,000 related to the activities of
Intersound since January 1, 1997. The decrease relates primarily to the
timing of project
<PAGE>
releases and the related costs incurred to complete those projects.
Significant cost of projects released in fiscal 1997, such as albums by The
Beach Boys and Crystal Bernard, were incurred in fiscal 1996. The projects
in production during the current year are less costly relative to the
projects in production during the prior year.
Gross profit increased $7,471,000 or 176.4% to $11,707,000 for fiscal 1997
compared to the prior fiscal year; $6,385,000 or 85.5% of this increase
related to the activities of Intersound since January 1, 1997. As a
percentage of gross revenues, gross profit increased to 27.5% for fiscal 1997
from 16.6% for the prior fiscal year. The increase is attributable both to
the Intersound activity since January 1, 1997 due to lower associated royalty
costs and the lack of a third-party distribution fee and that current year
artist project revenues required less allowances for unrecoupability than in
the prior year.
Selling, general and administrative expenses increased $5,124,000 or 63.9%
to $13,141,000 for fiscal 1997 compared to the prior fiscal year; $3,039,000
or 59.3% of this increase related to the activities of Intersound since
January 1, 1997. Selling general and administrative expenses as a percentage
of gross revenues remained relatively unchanged at 30.8% for fiscal 1997 from
31.5% for the prior fiscal year.
See "Overview" above for details of nonrecurring merger,
restructuring and one-time costs of $2,231,000.
Depreciation and amortization increased to $973,000 for fiscal 1997 from
$156,000 for the prior fiscal year. The increase relates primarily to
amortization expense resulting from approximately $27,000,000 of music
catalog, music publishing rights and goodwill recorded from the acquisitions
completed during the year.
As a result of the factors described above, an operating loss of
$4,638,000 was experienced in fiscal 1997 compared to $3,937,000 in the prior
fiscal year.
No tax expense or benefit has been recorded through May 31, 1997 due to
the Company's net operating loss carryforward and related valuation
allowance, 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 $22,601,000 at May
31, 1997, expiring in years 2007 through 2012, is subject to annual
limitations due to a change in ownership as a result of the IPO in March
1996. Accordingly, approximately $12,349,000 of the net operating loss
carryforward is subject to an annual limitation of approximately $2,200,000.
Interest expense for fiscal 1997 totaled $1,385,000 compared to $570,000
for the prior fiscal year. See "Capital Resources" below for details of the
Company's current debt structures.
Other financing costs of $3,533,000 were incurred during fiscal 1997 due
to the funding of the Intersound Acquisition. These costs include
amortization of debt discount relating to the warrants issued Bank of
Montreal ("BMO") and BMO's financing fees charged the Company during fiscal
1997.
The net loss from continuing operations for fiscal 1997 totaled $9,354,000
compared to $4,401,000 for the prior fiscal year. The increase relates
primarily to financing, merger, restructuring and one-time costs of $6,869,000
and interest expense of $1,385,000 related to the Intersound Acquisition, as
well as a $761,000 increase in depreciation and amortization related to the
acquisitions completed during the current year.
FISCAL YEAR ENDED MAY 31, 1996 COMPARED TO FISCAL YEAR ENDED MAY 31, 1995
<PAGE>
Gross revenues increased $9,623,000 or 60.6% to $25,489,000 for fiscal
1996 compared to $15,866,000 for the prior fiscal year, while net revenues
increased $6,433,000 or 57.9%. Product sales increased $5,747,000 or 45.7%
to $18,322,000 for fiscal 1996 compared to $12,575,000 for the prior fiscal
year. This increase primarily occurred in product sales through PGD and
Platinum Christian Distribution which increased $3,231,000 and $1,439,000,
respectively, for fiscal 1996 compared to the prior fiscal year. Gross
revenues generated in the Adult Contemporary, Gospel and Country markets
increased by $4,305,000, $2,637,000 and $1,686,000, 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 and Witness'
A SONG IN THE NIGHT, 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 Boys' 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,
VOLUME I AND II, and ESSENTIAL GOSPEL, under the House of Blues label during
fiscal 1996. 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, management significantly reduced The Company's
telemarketing efforts due to the increased costs of television advertising.
The increase in other product revenues more than offsets decreased
telemarketing sales, which declined $527,000 or 27.0% 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 51.4% 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, less discounts, remained
relatively unchanged at 26.9% for fiscal 1996 from 25.9% for the prior fiscal
year.
Discounts increased $205,000 or 40.4% to $712,000 for fiscal 1996 compared
to $507,000 for the prior fiscal year. Discounts as a percentage of gross
product sales remained relatively unchanged at 3.9% for fiscal 1996 from 4.0%
for the prior fiscal year.
The allowance for unrecoupable artist advances increased $1,379,000 or
122.2% to $2,507,000 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 31.8% for fiscal 1996 from 27.1% 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 projects 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
<PAGE>
increased to 20.4% for fiscal 1996 compared to 16.4% 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 16.6% for fiscal 1996 compared to 26.5%
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 decreased 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 effect of decreasing fiscal 1996 gross
profit as product sales on these projects will occur in future periods.
Selling, general and administrative expenses decreased $783,000 or 8.9% to
$8,017,000 for fiscal 1996 compared to $8,800,000 for the prior fiscal year.
Selling, general and administrative expenses as a percentage of gross
revenues decreased to 31.5% for fiscal 1996 compared to 55.5% 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.
Depreciation and amortization increased $23,000 to $156,000 for fiscal
1996 from $133,000 for fiscal 1995. The increase is primarily attributable
to increased depreciation from the addition of office equipment, computers,
furniture and fixtures.
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 IPO. 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 fiscal 1996, all
outstanding debt was retired with the net proceeds received from the IPO.
Accordingly, no interest expense was incurred following the closing of the
IPO.
Net loss decreased $4,897,000 to $4,627,000 for fiscal 1996 from
$9,524,000 for fiscal 1995. 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
<PAGE>
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 Platinum's efforts to reduce expense, which included the
implementation of cost controls as discussed above.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 128, EARNINGS PER
SHARE, establishes standards for computing and presenting earnings per share
("EPS") and simplifies the standards for computing EPS currently found in
Accounting Principles Standards Board ("APB") Opinion No. 15, EARNINGS PER
SHARE. Common stock equivalents under APB Opinion No. 15, with the exception
of contingently issuable shares (shares issuable for little or no cash
consideration), are no longer included in the calculation of primary or basic
EPS. Under SFAS No. 128, contingently issuable shares are included in the
calculation of diluted EPS. This Statement is effective for the Company's
fiscal quarter ending February 28, 1998. The impact of SFAS 128 will not be
material to the Company's financial disclosures.
SFAS No. 129, DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE,
establishes standards for disclosing information about an entity's capital
structure. This Statement requires disclosure of the pertinent rights and
privileges of various securities outstanding (stock, options, warrants,
preferred stock, debt and participation rights) including dividend and
liquidation preferences, participant rights, call prices and dates,
conversion or exercise prices and redemption requirements. This Statement is
effective for the Company's fiscal year ending May 31, 1998. The impact of
SFAS 129 is not expected to materially change 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 when such products are shipped to retailers. The Company has
historically experienced a decline in revenues and operating 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. However, the acquisition
of Intersound will help mitigate the seasonality of the third fiscal quarter
in the future due to its history of new releases during January and February.
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 $13.00 per share. In addition, on
March 28, 1996, the Company sold an additional 240,000 shares of Common Stock
to the public at the IPO 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
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 IPO,
approximating $1,170,000. The net proceeds of the IPO were also used in
connection with the HOB Joint Venture and the acquisitions of R.E.X. and
Double J. See "Significant Matters."
SIGNIFICANT MATTERS
During June 1996, the Company acquired substantially all of the assets of
REX for $480,000, which approximated the indebtedness of REX to the Company
(which primarily arose during fiscal 1996)
<PAGE>
and $100,000 in accrued liabilities. REX produces, licenses and markets
recorded music, primarily in the Gospel genre. The acquisition has been
accounted for by the purchase method of accounting and the purchase price of
$580,000 approximates the fair value of the assets acquired. The assets
acquired include accounts receivable, artist advances, inventory, music
publishing rights and artist contracts. The value allocated to music
publishing rights and artist contracts totaled $440,000 and is being
amortized over 15 years using the straight-line method.
During September, 1996, the Company acquired substantially all of the
assets of Double J for 88,000 shares of Common Stock of the Company and the
assumption of approximately $100,000 of debt and $75,000 of accrued
liabilities. Double J develops and acquires ownership of musical
compositions and exploits those compositions by means of recordings,
performances, audio-visual works, print publications and other licenses. The
acquisition has been accounted for by the purchase method of accounting and
the purchase price of $952,000 approximates the fair value of the assets
acquired. The purchase value was primarily allocated to music publishing
rights and is being amortized over 25 years using the straight-line method.
During November 1996, the Company and House of Blues Records, Inc.
("HOB"), formed the HOB Joint Venture. The formation was executed upon the
purchase by the Company of the fifty percent (50%) interest of Private, Inc.,
a subsidiary of Bertelsman Music Group, Inc. ("Seller"), in the joint venture
between Seller and HOB formed pursuant to a prior agreement. The payment for
such 50% interest was made on November 12, 1996 in the cash amount of
approximately $3,100,000, which is deemed a cash capital contribution by the
Company to the Venture. HOB contributed to the Venture a license in HOB's
trademarks, logo and other intellectual property in consideration for their
50% interest in the Venture. HOB is a subsidiary of House of Blues
Entertainment, Inc. The Chairman and Chief Executive Officer of House of
Blues Entertainment, Inc. is also a director of the Company.
Effective January 1, 1997, the Company purchased substantially all of the
assets of Intersound for consideration of $24,000,000 in cash, $5,000,000 in
convertible promissory notes and the assumption of certain liabilities.
Intersound produces, licenses, markets and distributes recorded music for
Compilation, Urban, Gospel, Classical and other genres. The Intersound
Acquisition has been accounted for by the purchase method of accounting and
the purchase price of $41,000,000, including assumed liabilities, exceeds the
fair value of the assets acquired by $6,098,000, which represents goodwill.
The purchase value was allocated to the acquired assets based upon their
estimated respective fair market values; the amounts allocated to music
catalog, music publishing rights and goodwill are being amortized over 25
years using the straight-line method.
On March 3, 1997, the Company and K-tel signed a purchase and sale
agreement (the "K-tel Agreement") pursuant to which the Company may acquire
K-tel's worldwide music business assets, except for K-tel's European and
former Soviet Union music business, through the purchase of the stock of
K-tel (USA) and Dominion, both wholly-owned subsidiaries of K-tel (the "K-tel
Acquisition"). The purchase price is expected to be $35,000,000 subject to
certain adjustments. Subject to satisfaction of the closing conditions
specified in the K-tel Agreement, including the Company obtaining financing,
the transaction is expected to close on or before October 31, 1997.
Pursuant to the K-tel Agreement, the Company deposited $1,750,000 in
escrow which will be applied to the purchase price or paid to K-tel in the
event the transaction is not consummated under certain circumstances,
including the failure of the Company to obtain financing for the transaction.
LIQUIDITY
The Company's cash balances were $53,000 and $8,222,000 at May 31, 1997
and 1996, respectively. Cash balances were higher at the prior fiscal year
end due to the recently completed IPO. Net cash used in operating activities
was $10,573,000 for fiscal 1997. The uses reflect net cash used to fund
trade receivables of $2,753,000, inventories of $1,447,000, artist advances of
<PAGE>
$2,149,000, trade payables of $431,000 and accrued liabilities and other of
$591,000, attributable to releases by such artists as The Beach Boys, Crystal
Bernard, Peter Cetera and National Baptist Convention and scheduled future
releases including numerous Gospel albums, including William Becton and
Vickie Winans. Net cash provided by notes receivable of $1,148,000 results
from an agreement dated May 1996, whereby the Company sold certain video
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. The net cash
provided by royalties payable arose primarily from the current period sales
of albums in the non-Gospel format, which typically command a higher royalty
rate. Royalties are not paid to the artist until all advances made to the
artist have been recouped by the Company. Also, the Company establishes and
maintains reserves relative to royalty payments for a period of approximately
18-24 months to allow for product returns activity as royalties are not owed on
returned product.
Net cash used in investing activities for fiscal 1997 was $29,146,000.
Such activities include $3,063,000 relating to the Company's investment in
the HOB Joint Venture. The Company paid approximately $31,000,000 for the
Intersound Acquisition, funded with outside financing which is further
described below. Approximately $100,000 was paid in connection with the
Company's purchase of Double J, with the remainder of the purchase price paid
in shares of the Company's common stock. In addition, the Company acquired
substantially all of the assets of REX for $480,000 during June 1996. The
purchase price approximated the indebtedness of REX to the Company and cash
payments relating to this purchase during the current period were not
significant. During the fourth fiscal quarter, the Company paid $1,750,000
to an escrow account related to the purchase of K-tel. See "Significant
Matters" section above. Purchases of equipment and leasehold improvements of
$307,000 relate primarily to office equipment, computers and software.
Net cash provided by financing activities for fiscal 1997 was $31,550,000.
Such activities include $25,000,000 in short-term borrowings from BMO for
the Intersound Acquisition; such Acquisition was also financed with
$5,000,000 in convertible debentures and approximately $1,500,000 in
borrowings under the revolving line of credit with BMO. The Company also
borrowed approximately $1,400,000 and $7,000,000 under the revolving line of
credit to fund financing costs to BMO in connection with the Acquisition and
Company operations, respectively. Borrowings from BMO are due in full on
October 31, 1997, at which time the Company intends to refinance the
borrowings either with the net proceeds from an equity offering or other bank
financing, or a combination of such. See "Capital Resources" below for
details of this refinancing. The Company must secure additional equity and/or
debt financing to refinance the loans from BMO when they mature and to fund
its operations. While the Company believes it will be able to secure such
financing, there is no assurance it will be obtained on terms acceptable to
the Company, if at all.
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
$1,927,000 and artist advances of $4,466,000 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. 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 1996 were
funded with the net proceeds from the IPO of $32,127,000 (before $1,170,000
in costs related to the IPO), $4,330,000 of additional related party
financing and $1,980,000 of bank debt. Such related party indebtedness and
bank debt were paid in full at the time of the IPO. Of the net proceeds,
$9,480,000 was used to retire all outstanding bank debt, $4,867,000 was used
to retire all outstanding related party debt and $4,500,000 was used to
redeem 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.
<PAGE>
A significant recurring funding requirement of the Company is for A&R
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
Convertible debentures in the aggregate principal amount of $5,000,000
that were issued to Intersound in connection with the Intersound Acquisition
on January 31, 1997, mature on January 31, 2004 and bear interest at the
seven-year Treasury rate plus one percent per annum (6.975% at May 31, 1997)
and are convertible, in whole or in part, at any time prior to maturity into
the Company's Common Stock at a conversion price of $9.80 per share, subject
to adjustment as provided in the debentures.
On January 31, 1997, the Company entered a Credit Agreement with Bank of
Montreal ("BMO"), individually and as agent, to provide a 90-day term loan in
the amount of $25,000,000 and a 90-day revolving credit facility in the
amount of $10,000,000 (the "BMO Credit Facility"). The BMO Credit Facility
was extended through October 31, 1997. Financing costs associated with the
BMO Credit Facility include 7% of the total facility. The interest incurred
on the BMO Credit Facility was originally Libor plus 6% and was increased to
Libor plus 9% effective August 1, 1997. The BMO Credit Facility is secured
by substantially all of the Company's assets. In addition, the Company
issued warrants to BMO which is discussed further below. As of the date of
this Annual Report, no additional funds are available under the revolving
credit facility. The BMO Credit Facility contains financial and other
covenants applicable to the Company. The BMO Credit Facility is personally
guaranteed for up to $12,500,000 by an officer and director of the Company.
The Company intends to replace the BMO Credit Facility with the net
proceeds from either an offering of the Company's preferred stock ("Preferred
Offering") or Common Stock or a long-term bank facility, or a combination of
such. If the Preferred Offering or other methods of refinancing does not
occur, the consequences could be materially adverse to the Company's
business, results of operations and financial position. While the Company
would pursue alternative methods to refinance the BMO Credit Facility, there
are no assurances that such financing could be obtained on terms favorable to
the Company, or at all. In addition, the Company's failure to consummate the
Preferred Offering or other equity offering could hamper its ability to
obtain long-term bank or other financing for the K-tel Acquisition - see
"Significant Matters" above.
The Company issued to BMO a warrant to purchase 258,571.95 shares of
Common Stock at an exercise price of $.01 per share in connection with the
BMO Credit Facility. The value of the warrants amounted to $1,240,000, the
balance of which is included in additional paid-in capital. The warrants
expire on January 31, 2002 and are subject to antidilution adjustment if,
during the term of the BMO Credit Facility, the Company issues shares of
Common Stock and does not use the proceeds of such issuance to pay borrowings
under the BMO Credit Facility.
On July 30, 1997, the Company's stockholders approved the issuance of up
to $40,000,000 of Preferred Stock, the proceeds from which would be used to
retire the indebtedness incurred under the BMO Credit Facility and for
working capital and general corporate purposes. Such issuance has not
occurred as of the date of this Annual Report and there can be no assurance
it will occur, See "Overview" above.
<PAGE>
Subsequent to the IPO in fiscal 1996, 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
IPO.
In addition to the Company's near term need to refinance the BMO Credit
Facility, the Company's near and 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, as well as other ongoing capital needs,
may be funded with institutional financing, seller financing and/or
additional equity or debt offerings. The Company currently does not have any
material commitments for capital expenditures for the next twelve months;
however, the Company may choose to purchase K-tel as discussed above.
Stockholders' equity at May 31, 1997 totaled $7,866,000 compared to
$15,215,000 at May 31, 1996. This decrease of $7,349,000 or 48.3% is
primarily due to net losses experienced by the Company during fiscal 1997,
offset by a $1,240,000 increase to additional paid-in capital related to
warrants issued in connection with the financing of the Intersound
Acquisition and a $777,000 increase to Common Stock and additional paid-in
capital related to the purchase of Double J.
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 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 1998 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. In addition, the Company
intends to refinance its current credit facility when it becomes due in full
on October 31, 1997. If such refinancing does not occur, the consequences
could be materially adverse to the Company's business, results of operations
and financial position. There are no assurances that such refinancing could
be obtained on terms favorable to the Company, or at all. In addition, the
Company's failure to refinance its current credit facility could hamper its
ability to obtain long-term bank or other financing for the K-tel
Acquisition.
The Company has consolidated indebtedness that is substantial in
relation to its stockholders' equity. As of May 31, 1997, the Company had
outstanding approximately $40 million of total debt and approximately $8
million of stockholders' equity.
The Company's indebtedness has several important consequences, including
but not limited to the following: (i) a substantial portion of the Company's
cash flow from operations must be dedicated to debt service requirements
(principal and interest) on its indebtedness and will not be available for
other purposes; (ii) the Company's ability to obtain additional financing in
the future for working capital, capital expenditures, acquisitions, or for
general corporate purposes may be impaired; (iii) the Company's leverage may
increase its vulnerability to economic downturns and limit its ability to
withstand competitive pressures; and (iv) the Company's ability to capitalize
on significant business opportunities may be limited.
The Company's ability to satisfy its existing debt obligations will depend
in the near term on its ability to sell additional equity and obtain long
term financing to replace its current debt, and its ability to satisfy both
existing and future debt obligations will depend on its future operating
performance, which will be affected by prevailing economic conditions and
financial, business and other factors, certain of which are beyond the
Company's control. If the Company is unable to service its indebtedness, it
will be forced to adopt an alternative strategy that may include actions such
as reducing or delaying capital expenditures, selling assets, or
restructuring its indebtedness. There can be no assurance that any of these
strategies could be effected on satisfactory terms, if at all. In addition,
there can be no assurance that the Company will not increase its leverage to
meet capital requirements in the future. See --"Liquidity" and "Capital
Resources."
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Board of Directors and Stockholders
Platinum Entertainment, Inc.
We have audited the consolidated balance sheets of Platinum Entertainment,
Inc. as of May 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity (net capital deficiency) and cash flows for
each of the three years in the period ended May 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our 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. at May 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for the three years in the period ended May
31, 1997 in conformity with generally accepted accounting principles.
The Company's financial statements have been prepared assuming the Company
will continue as a going concern. As more fully described in Note 8, the
Company, in conjunction with an acquisition as discussed in Note 3, obtained
a term loan in the amount of $25,000,000 and a revolving credit facility in
the amount of $10,000,000 ("New Credit Facility") all of which was
outstanding at August 29, 1997. The New Credit Facility expires on October
31, 1997. The Company is not currently realizing cash flows sufficient from
its operations to retire its outstanding debt obligation due October 31, 1997
and is pursuing alternatives of obtaining additional equity or debt
financing. The failure to repay the New Credit Facility would constitute an
event of default under the New Credit Facility and would allow the lender to
pursue any remedy available to it under the New Credit Facility and
applicable law. This condition raises substantial doubt about the Company's
ability to continue as a going concern. Note 8 discusses management's plans
to address this issue. The financial statements do not include any
adjustments to reflect the classification of assets or the amounts and
classifications of liabilities that may result from the outcome of this
uncertainty.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
August 29, 1997
<PAGE>
PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
MAY 31
----------------------
1997 1996
ASSETS
Current assets:
Cash and cash equivalents $ 53 $ 8,222
Cash in escrow 1,750 -
Accounts receivable, less allowances of
$3,291 and $233, respectively 15,034 4,103
Artist advances 2,444 1,581
Inventories, less allowances of $350
and $100, respectively 5,416 1,538
Notes receivable 50 1,467
Other 1,018 473
----------------------
Total current assets 25,765 17,384
Artist advances, net of current amounts, less
allowances of $9,745 and $4,942, respectively 2,297 2,093
Equipment and leasehold improvements, net 1,185 698
Music catalog, less accumulated amortization of $327 19,277 -
Music publishing rights, less accumulated amortization
of $203 and $90, respectively 3,624 350
Goodwill, less accumulated amortization of $97 6,001 -
Equity investment in joint venture 3,154 -
Other 1,001 19
----------------------
Total assets $ 62,304 $ 20,544
----------------------
----------------------
See accompanying notes to financial statements
<PAGE>
PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MAY 31
---------------------
1997 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ 9,706 $ -
Term loan 25,000 -
Accounts payable 4,038 997
Accrued liabilities and other 2,521 2,104
Reserve for future returns 2,660 800
Royalties payable 5,513 1,428
---------------------
Total current liabilities 49,438 5,329
Convertible subordinated debentures 5,000 -
Stockholders' equity:
Preferred Stock:
Preferred Stock ($.001 par value); 10,000,000 shares
authorized, no shares issued and outstanding
at May 31, 1997 and 1996 - -
Common Stock:
Common Stock ($.001 par value); 40,000,000 shares
authorized, 5,171,439 shares issued and outstanding
at May 31, 1997 and 5,063,207 shares issued and
outstanding at May 31, 1996 5 5
Additional paid-in capital 37,261 35,254
Accumulated deficit (29,400) (20,044)
---------------------
Stockholders' equity 7,866 15,215
---------------------
Total liabilities and stockholders' equity $ 62,304 $20,544
---------------------
---------------------
See accompanying notes to financial statements
<PAGE>
PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31
---------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Gross product sales $ 37,502 $ 18,322 $ 12,575
Less: Returns and allowances (10,568) (4,732) (3,126)
Less: Discounts (2,463) (712) (507)
---------------------------------------
Net product sales 24,471 12,878 8,942
Cost of product sales 13,288 8,107 4,300
---------------------------------------
11,183 4,771 4,642
Gross artist project revenues 3,876 5,368 3,084
Less: Allowance for unrecoupable artist advances (855) (2,507) (1,128)
---------------------------------------
Net artist project revenues 3,021 2,861 1,956
Licensing, publishing and other revenues 1,255 1,799 207
---------------------------------------
Net artist project and other revenues 4,276 4,660 2,163
Cost of artist project and other revenues 3,752 5,195 2,601
---------------------------------------
524 (535) (438)
---------------------------------------
Gross profit 11,707 4,236 4,204
Other operating expenses:
Selling, general and administrative 13,141 8,017 8,800
Merger, restructuring and one-time costs 2,231 - -
Depreciation and amortization 973 156 133
---------------------------------------
16,345 8,173 8,933
---------------------------------------
Operating loss (4,638) (3,937) (4,729)
Interest income 154 106 46
Interest expense (1,385) (570) (157)
Other financing costs (3,533) - -
Equity gain 48 - -
---------------------------------------
Loss from continuing operations (9,354) (4,401) (4,840)
Discontinued operations:
Loss from operations - - (2,073)
Loss on disposal - (226) (2,611)
---------------------------------------
Loss from discontinued operations - (226) (4,684)
---------------------------------------
Net loss (9,354) (4,627) (9,524)
Less - Cumulative preferred dividends - (602) -
---------------------------------------
Loss applicable to common shares $ (9,354) $ (5,229) $ (9,524)
---------------------------------------
---------------------------------------
Per common share:
Loss from continuing operations $ (1.82) $ (1.71) $ (2.12)
Loss from discontinued operations - (0.08) (2.05)
---------------------------------------
Net loss $ (1.82) $ (1.79) $ (4.17)
---------------------------------------
---------------------------------------
Weighted average number of common shares outstanding 5,136,830 2,925,987 2,284,090
</TABLE>
See accompanying notes to financial statements
<PAGE>
PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
----------------------- -----------------------------------------------
Series A-2 No Series Class A Class B No Class
-----------------------
Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1994 $ - $ - $ - $ 1 40 $ -
Proceeds from issuance of Preferred Stock, net
($.69 per share) 18 - - - - -
Net loss for the year ended May 31, 1995 - - - - - -
Other - - - - 10 -
------------------------------------ ------------------------------------
Balance at May 31, 1995 18 - - 1 50 -
Conversion into Common Stock (18) - - (1) 2,050 2
Initial public offering, net ($11.30 per share) - - - - 2,740 3
Exercise of stock options - - - - 22 -
Conversion of Series A-1 Redeemable Preferred Stock - - - - 117 -
Dividends on Series A-1 Redeemable Preferred Stock - - - - - -
Founders' bonus - - - - 65 -
Shares issued in lieu of compensation - - - - 19 -
Net loss for the year ended May 31, 1996 - - - - - -
------------------------------------ ------------------------------------
Balance at May 31, 1996 - - - - 5,063 5
Issuance of Common Stock for business acquisition - - - - 88 -
Issuance of stock warrants for financing costs - - - - - -
Net loss for the year ended May 31, 1997 - - - - - -
Other - - - - 20 -
------------------------------------ ------------------------------------
Balance at May 31, 1997 $ - $ - $ - $ - 5,171 $ 5
------------------------------------ ------------------------------------
------------------------------------ ------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Stockholders'
Additional Equity
Paid-In (Net Capital
Capital Deficit Deficiency )
<S> <C> <C> <C>
Balance at May 31, 1994 $ 1,989 $ (5,292) $ (3,302)
Proceeds from issuance of Preferred Stock, net
($.69 per share) 487 - 505
Net loss for the year ended May 31, 1995 - (9,523) (9,523)
Other - - -
------------------------------------------
Balance at May 31, 1995 2,476 (14,815) (12,320)
Conversion into Common Stock 17 - -
Initial public offering, net ($11.30 per share) 30,953 - 30,956
Exercise of stock options 56 - 56
Conversion of Series A-1 Redeemable Preferred Stock 1,525 - 1,525
Dividends on Series A-1 Redeemable Preferred Stock - (602) (602)
Founders' bonus - - -
Shares issued in lieu of compensation 227 - 227
Net loss for the year ended May 31, 1996 - (4,627) (4,627)
------------------------------------------
Balance at May 31, 1996 35,254 (20,044) 15,215
Issuance of Common Stock for business acquisition 777 - 777
Issuance of stock warrants for financing costs 1,240 - 1,240
Net loss for the year ended May 31, 1997 - (9,354) (9,354)
Other (10) (2) (12)
------------------------------------------
Balance at May 31, 1997 $ 37,261 $ (29,400) $ 7,866
------------------------------------------
------------------------------------------
</TABLE>
See accompanying notes to financial statements
<PAGE>
PLATINUM ENTERTAINMENT, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31
-----------------------------------------
1997 1996 1995
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (9,354) $ (4,627) $ (9,523)
Adjustments to reconcile net loss to net cash used in
continuing operating activities:
Provision for doubtful accounts 300 43 -
Charge to provision for future returns 277 572 513
Charge to provision for co-op advertising 79 83 92
Charge to provision for slow-moving inventory - 100 -
Charge to provision for unrecoupable artist balances 2,039 3,067 1,128
Depreciation and amortization 973 156 133
Common Stock issued in lieu of compensation - 227 -
Amortization of loan discount 1,240 - -
Equity gain from joint venture (48) - -
Changes in operating assets and liabilities:
Accounts receivable (2,753) (1,927) (189)
Inventories (1,447) (186) (892)
Notes receivable 1,148 (1,402) (23)
Artist advances (2,149) (4,466) (3,197)
Accounts payable (431) (822) 1,122
Accrued liabilities and other (591) 1,234 668
Reserve for future returns (1,044) (425) -
Royalties payable 1,405 141 557
Other (217) (523) (129)
-----------------------------------------
Net cash used in continuing operating activities (10,573) (8,755) (9,740)
Discontinued operations:
Depreciation and amortization - - 539
Loss on disposal - 226 2,611
Change in net liabilities - (1,237) -
-----------------------------------------
Net cash used in discontinued operating activities - (1,011) 3,150
-----------------------------------------
Net cash used in operating activities (10,573) (9,766) (6,590)
INVESTING ACTIVITIES
Acquisitions of businesses, net of cash acquired (24,026) - -
Investment in joint venture (3,063) - -
Cash in escrow (1,750) - -
Purchases of equipment and leasehold improvements (307) (574) (238)
-----------------------------------------
Net cash used in investing activities (29,146) (574) (238)
FINANCING ACTIVITIES
Net proceeds from (payment of) related parties - (537) 537
Payment of note payable to related party - - (944)
Net proceeds from (payment of) revolving line of credit 7,106 (3,000) 3,000
Net proceeds from bank term loan 25,000 - 4,500
Payment of bank term loan - (4,500) (4,000)
Payment of long-term debt - - (1,140)
Net proceeds from initial public offering - 30,956 -
Net proceeds from exercise of stock options - 56 -
Net proceeds from issuance of Redeemable Preferred Stock - - 4,953
Redemption of Redeemable Preferred Stock - (4,500) -
Deferred financing costs (556) - -
-----------------------------------------
Net cash provided by financing activities 31,550 18,475 6,906
-----------------------------------------
Net increase (decrease) in cash (8,169) 8,135 78
Cash and cash equivalents, beginning of year 8,222 87 9
-----------------------------------------
Cash and cash equivalents, end of year $ 53 $ 8,222 $ 87
-----------------------------------------
-----------------------------------------
</TABLE>
See accompanying notes to financial statements
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. DESCRIPTION OF BUSINESS
Platinum Entertainment, Inc. (the "Company") is a full-service music company
that produces, licenses, acquires, markets and distributes high quality recorded
music for a variety of musical genres for markets principally in the United
States. The Company currently produces music in the Gospel, Country, Adult
Contemporary, Blues, Classical, Urban and Compilation genres primarily under the
CGI Records, River North Records, House of Blues and Intersound labels. The
Company's products are distributed through PolyGram Group Distribution, Inc.
("PGD") and Platinum Christian Distribution and Intersound, both operating
divisions of the Company.
The Company's total gross product sales by distribution channel as a percentage
of total gross product sales for the fiscal years ended are as follows:
1997 1996 1995
------------------------------------
PGD 47% 58% 59%
Intersound 33% - -
Platinum Christian Distribution 9% 23% 22%
Telemarketing - 8% 16%
Other 11% 11% 3%
Accounts receivable resulting from product sales through PGD and Platinum
Christian Distribution are secured by a distribution agreement (see Note 5).
Gross accounts receivable resulting from product sales outside of this
distribution agreement are unsecured and approximate $14,298 and $3,010 at May
31, 1997 and 1996, respectively, exclusive of reserves and allowances for future
returns, co-op advertising and doubtful accounts (see Note 6).
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: Intersound, Inc. (formerly 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.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are carried at cost, less accumulated
depreciation. Depreciation is computed using accelerated methods over the
estimated useful lives of the assets (5 to 7 years).
ARTIST ADVANCES
In accordance with Statement of Financial Accounting Standards ("SFAS") 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.
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Any portion of such advances not deemed to be recoupable from future royalties
is reserved at the balance sheet date. All other advances which do not meet the
above criteria are fully reserved when incurred.
INVENTORIES
Inventories are valued at the lower of cost, determined on the first-in,
first-out method of accounting, or market. Inventories consist primarily of
finished compact discs and cassette tapes.
ADVERTISING
Promotional costs are capitalized for unreleased projects and expensed when the
related product is released. All other advertising and promotional costs are
fully expensed when incurred. Advertising and promotional expenses were $3,270,
$1,968 and $3,664 for fiscal 1997, 1996 and 1995, respectively.
MUSIC CATALOG AND MUSIC PUBLISHING RIGHTS
Music catalog and music publishing rights represent the value allocated to
master recordings and copyrights recorded through the purchase method of
accounting as a result of the Company's historical acquisitions. The value of
such assets is supported by an independent third party appraisal. Such costs
are amortized using the straight-line method over the estimated period to be
benefited which ranges from 15-25 years. The Company assesses the
recoverability of such assets by determining whether the carrying value of the
net assets over their remaining lives can be recovered through projected
undiscounted future cash flows.
GOODWILL
Goodwill, which represents the excess cost of purchase price over the fair value
of identifiable net assets acquired from Intersound, Inc. ("Intersound"), is
amortized over the expected period to be benefited of 25 years.
REVENUE RECOGNITION
Net product sales represent revenues derived from sales of records, net of
actual returns, discounts and reserves for estimated future returns. Net artist
project revenues represent revenues derived from the production and promotion of
artist records, net of reserves for estimated unrecoupable amounts. Revenues
derived from the licensing of recorded masters 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. Publishing
revenues are recognized by the Company on a cash basis.
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, trade accounts payable, revolving line of credit,
term loan and convertible subordinated debentures. 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 the reserves for doubtful accounts receivable,
unrecoupable artist advances and future returns, at the enacted tax rates at
which the resulting taxes are expected to be paid. See Note 9 for further
details.
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STOCK-BASED COMPENSATION
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, encourages, but does not
require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method as prescribed in
Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES, and related Interpretations, under which no compensation cost
related to stock options has been recognized as the exercise price of each
option at the date of grant was equal to the fair value of the underlying Common
Stock.
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 Company's March 12, 1996 initial public
offering of Common Stock ("IPO") have been included in the calculation for
fiscal 1996 as if they were outstanding for that period using the treasury stock
method and the IPO price of $13 per share. In addition, all convertible
Preferred Stock and convertible Class A Common Stock and Class B Common Stock
are treated as if converted into shares of Common Stock at the date of issuance.
No effect has been given to common equivalent shares issued for any other period
as the effect would be antidilutive.
A portion of the net proceeds received from the IPO during fiscal 1996 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 for fiscal 1996.
SFAS No. 128, EARNING PER SHARE, establishes standards for computing and
presenting earnings per share ("EPS") and simplifies the standards for computing
EPS currently found in APB Opinion No. 15, EARNINGS PER SHARE. Common stock
equivalents under APB Opinion No. 15, with the exception of contingently
issuable shares (shares issuable for little or no cash consideration), are no
longer included in the calculation of primary or basic EPS. Under SFAS No. 128,
contingently issuable shares are included in the calculation of diluted EPS.
This Statement is effective for the Company's fiscal quarter ending February 28,
1998. The impact of SFAS 128 will not be material to the Company's financial
disclosures.
CAPITAL STRUCTURE
SFAS No. 129, DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE, establishes
standards for disclosing information about an entity's capital structure. This
Statement requires disclosure of the pertinent rights and privileges of various
securities outstanding (stock, options, warrants, preferred stock, debt and
participation rights) including dividend and liquidation preferences,
participant rights, call prices and dates, conversion or exercise prices and
redemption requirements. This Statement is effective for the Company's fiscal
year ending May 31, 1998. The impact of SFAS 129 is not expected to materially
change the Company's financial disclosures.
RECLASSIFICATIONS
Certain amounts in the fiscal 1996 and 1995 consolidated financial statements
have been reclassified to conform with the fiscal 1997 presentation.
3. ACQUISITIONS
During June 1996, the Company acquired substantially all of the assets of R.E.X.
Music, Inc. ("REX") for $480, which approximated the indebtedness of REX to the
Company (which primarily arose during fiscal 1996) and $100 in accrued
liabilities. REX produces, licenses and markets recorded music, primarily in
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
the Gospel genre. The acquisition has been accounted for by the purchase method
of accounting and the purchase price of $580 approximates the fair value of the
assets acquired. The assets acquired include accounts receivable, artist
advances, inventory, music publishing rights and artist contracts. The value
allocated to music publishing rights and artist contracts totaled $440 and is
being amortized over 15 years using the straight-line method.
During September, 1996, the Company acquired substantially all of the assets of
Double J Music Group ("Double J") for 88,000 shares of Common Stock of the
Company and the assumption of approximately $100 of debt and $75 of accrued
liabilities. Double J develops and acquires ownership of musical compositions
and exploits those compositions by means of recordings, performances,
audio-visual works, print publications and other licenses. The acquisition has
been accounted for by the purchase method of accounting and the purchase price
of $952 approximates the fair value of the assets acquired. The purchase value
was primarily allocated to music publishing rights and is being amortized over
25 years using the straight-line method.
Effective January 1, 1997, the Company purchased substantially all of the
assets of Intersound for consideration of $24,000 in cash, $5,000 in
convertible subordinated debentures and the assumption of certain
liabilities. See Notes 9 and 16 below for details of the financing.
Intersound produces, licenses, markets and distributes recorded music for
Compilation, Urban, Gospel, Classical and other genres. The Acquisition has
been accounted for by the purchase method of accounting and the purchase
price of $41,000, including assumed liabilities, exceeds the fair value of the
assets acquired by $6,098, which represents goodwill. The purchase value was
allocated to the acquired assets based upon their estimated respective fair
market values; the amounts allocated to music catalog, music publishing
rights and goodwill are being amortized over 25 years using the straight-line
method.
Pro forma results of operations for the acquisitions, as if the acquisitions had
occurred at the beginning of fiscal 1996, for the fiscal years ended are as
follows:
1997 1996
- -----------------------------------------------------------------
(UNAUDITED)
Gross revenues $ 61,332 $ 57,163
Net revenues 42,004 40,327
Gross profit 19,793 17,606
Operating loss (2,959) (2,503)
Net loss from continuing operations (9,858) (10,022)
Net loss per common share from
continuing operations $ (1.92) $ (3.63)
See also Note 18.
4. JOINT VENTURE
The Company and House of Blues Records, Inc. ("HOB") formed the House of
Blues Music Company, a joint venture between HOB and the Company ("Venture"),
effective November 1, 1996. The Company invested approximately $3,100 for a
50% interest in the Venture. HOB contributed to the Venture a license in
HOB's trademarks, logo and other intellectual property in consideration for
its 50% interest in the Venture. HOB is a subsidiary of House of Blues
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Entertainment, Inc. The Chairman and Chief Executive Officer of House of Blues
Entertainment, Inc. is also a director of the Company.
The Venture develops and produces recordings and related film and video
properties featuring primarily Blues and Gospel music. The Venture,
exclusively through the Company, manufactures, distributes, performs,
exhibits and sells sound recordings and related audiovisual works under the
"House of Blues" label. The Company distributes the Venture's products
through its normal distribution channels for a fee to the Venture. The
Company recorded gross revenues and gross profit from the distribution of
Venture products of $3,404 and $368 for fiscal 1997, respectively. In
addition, the Company charged the Venture $125 related to House of Blues
releases for producer and artist and repertoire services.
The Company records the activity of the Venture under the equity method of
accounting for investments in joint ventures. Earnings and distributions of the
Venture are allocated to the Company and HOB in accordance with the Venture
agreement. During fiscal 1997, the Company recorded $48 representing its share
of the earnings in the Venture.
5. DISTRIBUTION AGREEMENT
The Company has an exclusive domestic distribution agreement with PGD ("PGD
Agreement"). The term of the PGD Agreement is through December 31, 2002, unless
extended or terminated under certain provisions of the PGD Agreement. The PGD
Agreement appoints PGD exclusive distributor of the Company's products (other
than Intersound product) 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, inventory control activities and processing
returns. Distribution fees paid by the Company for such services provided by
PGD to secular accounts include 15-18% of net sales generated by PGD and an
additional 2% of the credit price for all product returns. For sales to stores
in the Christian bookstore market, the distribution fee is 12% of net sales.
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. Inventories
held by PGD are $843 and $901 at May 31, 1997 and 1996, respectively. Accounts
receivable due from PGD are $4,027 and $1,326 at May 31, 1997 and 1996,
respectively. Gross product sales distributed through PGD were $17,605, $9,969
and $6,944 for fiscal 1997, 1996 and 1995, respectively.
6. VALUATION AND QUALIFYING ACCOUNTS
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Activity of the Company's valuation and qualifying accounts for the fiscal years
ended are as follows:
<TABLE>
<CAPTION>
Additions
-----------------------------
Balance at Charged to Charged to Balance
Beginning of Costs and Other at End
Year Expenses Accounts Deductions of Year
---- -------- -------- ---------- --------
FISCAL 1997
<S> <C> <C> <C> <C> <C> <C> <C>
Reserve for future returns $ 800 $ - $ 2,904 (1) $ 1,044 (4) $ 2,660
Reserve for co-op advertising 175 79 345 (2) 33 (5) 566
Allowance for doubtful accounts 58 300 2,414 (2) 47 (6) 2,725
Reserve for unrecoupable artist advances 4,942 - 5,128 (3) 325 (7) 9,745
Allowance for slow-moving inventory 100 - 250 (2) - 350
--------------------------------------- ------------- -------------
$ 6,075 $ 379 $ 11,041 $ 1,449 $ 16,046
--------------------------------------- ------------- -------------
--------------------------------------- ------------- -------------
FISCAL 1996
Reserve for future returns $ 653 $ - $ 572 (1) $ 425 (4) $ 800
Reserve for co-op advertising 92 83 - - 175
Allowance for doubtful accounts 30 43 - 15 (6) 58
Reserve for unrecoupable artist advances 3,010 - 3,067 (3) 1,135 (7) 4,942
Allowance for slow-moving inventory - 100 - - 100
--------------------------------------- ------------- -------------
$ 3,785 $ 226 $ 3,639 $ 1,575 $ 6,075
--------------------------------------- ------------- -------------
--------------------------------------- ------------- -------------
FISCAL 1995
Reserve for future returns $ 140 $ - $ 513 (1) $ - $ 653
Reserve for co-op advertising - 92 - - 92
Allowance for doubtful accounts 40 - - 10 (6) 30
Reserve for unrecoupable artist advances 1,882 - 1,128 (3) - 3,010
--------------------------------------- ------------- -------------
$ 2,062 $ 92 $ 1,641 $ 10 $ 3,785
--------------------------------------- ------------- -------------
--------------------------------------- ------------- -------------
</TABLE>
(1) Estimated future sales returns, charged against gross product sales.
Fiscal 1997 amounts includes $2,627 related to acquisitions accounted for
under the purchase method of accounting.
(2) Relates to acquisitions accounted for under the purchase method of
accounting.
(3) Estimated unrecoupable artist advances, charged against gross artist
project revenues. Fiscal 1997 amount includes $3,089 related to
acquisitions accounted for under the purchase method of accounting and $859
charged to merger, restructuring and one-time costs.
(4) Actual sales returns, charged against reserve for future returns.
(5) Actual co-op advertising credits taken by customers, charged against
reserve for co-op advertising.
(6) Write-offs, net of recoveries.
(7) Recoupment of reserved advances and write-offs.
7. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Equipment and leasehold improvements consists of the following:
MAY 31
-----------------------
1997 1996
-----------------------
Office equipment and computers $ 1,041 $ 499
Furniture and fixtures 306 267
Leasehold improvements 217 150
Audio equipment 157 11
Warehouse equipment 44 -
Autos 5 5
-----------------------
1,770 932
Less: Accumulated depreciation 585 234
-----------------------
Equipment and leasehold improvements, net $ 1,185 $ 698
-----------------------
-----------------------
During fiscal 1996, the Company purchased $421 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.
8. DEBT
Convertible subordinated debentures in the aggregate principal amount of
$5,000 were issued to Intersound in connection with the Intersound
Acquisition on January 31, 1997. The debentures mature on January 31, 2004
and bear interest at the seven-year Treasury rate plus one percent per annum
(6.975% at May 31, 1997) and are convertible, in whole or in part, at any
time prior to maturity into the Company's Common Stock at a conversion price
of $9.80 per share, subject to adjustment as provided in the debentures.
On January 31, 1997, the Company entered a Credit Agreement with Bank of
Montreal ("BMO"), individually and as agent, to provide a 90-day term loan in
the amount of $25,000 and a 90-day revolving credit facility in the amount of
$10,000 (the "BMO Credit Facility"). The BMO Credit Facility expires October
31, 1997. The interest incurred on the BMO Credit Facility was originally
Libor plus 6% and was increased to Libor plus 9% effective August 1, 1997.
In addition, the Company issued warrants to BMO (see Note 15 below for
details). As of August 29, 1997, no additional funds are available under the
revolving credit facility. The Company intends to replace the BMO Credit
Facility with the net proceeds from an offering of the Company's preferred
stock ("Preferred Offering") (see Note 14 below for details), other equity,
other long-term bank financing, or a combination of the foregoing. If the
Preferred Offering or other methods of refinancing does not occur, the
consequences would be materially adverse to the Company's business, results
of operations and financial position. While the Company would pursue
alternative methods to refinance the BMO Credit Facility, there are no
assurances that such financing could be obtained on terms favorable to the
Company, or at all. In addition, the Company's failure to consummate the
Preferred Offering could hamper its ability to obtain long-term bank or other
financing for the K-tel Acquisition (see Note 18 for details).
Subsequent to the IPO in fiscal 1996, the Company retired all of its
then-outstanding bank debt, consisting of borrowings against a line of credit
totaling $4,980 and a term loan of $4,000, with net proceeds from the IPO.
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest expense and cash paid for interest for the fiscal years ended are as
follows:
1997 1996 1995
- ----------------------------------------------------------------------------
Interest expense, total $ 1,385 $ 891 $ 597
Interest expense relating to
discontinued operations - 333 447
Cash paid for interest 985 1,022 516
Other financing costs totaled $3,533 for fiscal 1997 and include amortization of
$1,240 for the loan discount related to the warrants issued to BMO and $2,293
for initial closing and subsequent extensions of the BMO Credit Facility.
9. INCOME TAXES
Significant components of deferred income taxes consist of the following:
MAY 31
-----------------------
1997 1996
-----------------------
Net operating loss carryforwards $ 8,083 $ 4,741
Reserve for unrecoupable artist advances 3,703 1,878
Allowance for doubtful accounts 1,036 22
Reserve for future returns 1,011 304
Other (202) 368
-----------------------
13,631 7,313
Less: Valuation allowance 13,631 7,313
-----------------------
Net deferred income tax asset $ - $ -
-----------------------
-----------------------
The valuation allowance increased $6,318 and $1,735 during fiscal 1997 and 1996,
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 $22,601, expiring in
years 2007 through 2012, is subject to annual limitations due to a change in
ownership as a result of the IPO. Accordingly, approximately $12,349 of the net
operating loss carryforward is subject to an annual limitation of approximately
$2,200.
10. MERGER, RESTRUCTURING AND ONE-TIME COSTS
As a result of the acquisitions discussed in Note 3, the Company incurred
significant costs to merge and restructure its business with the acquired
companies. Such merger and restructuring costs include severance costs,
relocation costs, lease commitment write-off's, warehouse closing costs and
other related costs. Such costs incurred approximated $1,650, of which $315
is accrued at May 31, 1997, relating primarily to severance costs and a
distribution termination fee. The restructuring is expected to be completed
by the end of the second quarter of fiscal 1998. Such restructuring resulted
in shifts in the selling and promotion efforts of the Company's Country label
and in-house sales department and a shift in third-party fulfillment of
Platinum Christian Distribution. In addition, one-time costs include
write-offs of artist advances of $581 in areas for which the Company has
chosen to redirect its resources.
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11. RELATED PARTY TRANSACTIONS
During fiscal 1996, the Company retired all of its outstanding related party
debt with net proceeds from the IPO. Principal and interest payments to related
parties during this period totaled $4,867 and $202, 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 and its right to free future studio usage for $850 to a
minority stockholder and former officer of the Company (see Note 13). The
$401 is reflected in licensing, publishing and other revenues in the
accompanying fiscal 1996 statement of operations. The $850 was credited to
deferred revenues and is being amortized to offset cost of artist projects
over a 27-month period. As a result, the notes receivable balance at May 31,
1996 includes $1,058 relating to these transactions.
See also Notes 4, 7, 13 and 14.
12. LEASES
Future minimum rental payments due under noncancelable operating leases having
an initial term of more than one year as of May 31, 1997, are $561 and $225 for
fiscal 1998 and 1999, respectively.
Rent expense for the fiscal years ended is as follows:
1997 1996 1995
- -------------------------------------------------------------------------------
Rent expense, total $ 547 $ 619 $ 583
Rent expense relating to discontinued
operations - 340 309
13. DISCONTINUED OPERATIONS
During fiscal 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 in fiscal 1996 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.
The Company recorded a charge during fiscal 1995 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 disposal date ($1,373
and $1,237, respectively). Included in the operating losses through the
disposal date are rent and utility costs that were incurred subsequent to the
disposal date that were not assumed by the buyer. The fiscal 1996 net loss
includes $226 related to operating costs, including charges for management,
administration and interest, in excess of amounts estimated at the measurement
date.
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.
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Gross revenues of RNS were $183 and $345 for fiscal 1996 and 1995, respectively.
During fiscal 1996, the Company charged the discontinued operations
approximately $302 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.
14. COMMON AND PREFERRED STOCK
The proceeds from issuance of Redeemable Preferred Stock during fiscal 1995 of
$4,953 are net of issuance costs of $97 and proceeds of $975 received prior to
fiscal 1995 by the Company for such issuance.
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 was to a related party.
During March 1996, the Company sold a total of 2,740,000 shares of Common Stock
in an IPO for $13 per share, resulting (after payment of underwriting discounts
and commissions and a financial advisory fee) in net proceeds of $32,127. The
net proceeds were used to: (i) retire outstanding related party debt of
$4,867; (ii) retire outstanding borrowings under the Company's bank line of
credit of $4,980; (iii) retire an outstanding term loan of $4,000; (iv) redeem
a portion of the Company's Series A-1 Non-Convertible Preferred Stock for cash
of $4,500 (along with stock issuance discussed below which, together, included
$602 of cumulative preferred dividends) and (v) pay costs related to the public
sale, approximating $1,170. The remaining net proceeds were used for working
capital and other general corporate purposes, including acquisitions.
Immediately prior to the IPO, 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 restated to $.001). Simultaneous with the closing of
the IPO, 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 IPO, 117,305 shares of Common Stock were
issued in connection with the redemption of the Company's Series A-1
Non-Convertible Stock and 65,000 shares of Common Stock were issued to certain
of the Company's founders.
At May 31, 1997, the following unissued shares of common stock have been
reserved for future issuance:
Stock option plans 1,625,000
Convertible subordinated debentures 510,000
Warrants 259,000
------------
2,394,000
------------
------------
The Company has not paid dividends on its shares of Common Stock to date.
15. WARRANTS
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In January 1997, the Company issued to BMO a warrant to purchase 258,571.95
shares of Common Stock at an exercise price of $.01 per share in connection with
the BMO Credit Facility. The value of the warrants amounted to $1,240, the
balance of which is included in additional paid-in capital. The warrants expire
on January 31, 2002 and are subject to antidilution adjustment if, during the
term of the BMO Credit Facility, the Company issues shares of Common Stock and
does not use the proceeds of such issuance to pay borrowings under the BMO
Credit Facility.
16. RETIREMENT PLAN
Employees of the Company are eligible to participate in a defined-contribution
benefit plan ("Plan") 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. No Company contributions
were made during fiscal 1997, 1996 and 1995, respectively.
17. STOCK-BASED COMPENSATION
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 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% stockholder), 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 Company has reserved 121,800 shares of Common
Stock for issuance under the 1993 Plan. The exercisability of the options is
subject to determination by the Committee.
Under the Platinum Entertainment, Inc. 1995 Directors' Stock Option Plan
("Directors' Plan"), nonqualified stock options may be granted to directors of
the Company who are not employees entitling them to purchase shares of Common
Stock at an option price equal to the fair market value on the date of grant.
The Company has reserved 106,000 shares of Common Stock for issuance under the
Directors' Plan. The exercisability of the options is subject to determination
by the Committee.
Under the Platinum Entertainment, Inc. 1995 Employee Incentive Compensation Plan
("Incentive Plan"), incentive awards in the form of stock options, stock
appreciation rights, deferred stock or other such awards may be granted as
determined by the Committee. The Company has reserved 1,398,000 shares of
Common Stock for issuance under the Incentive Plan. The eligibility of
participants is at the discretion of the Committee and may include nonemployees.
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% stockholder, 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:
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STAEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
- ------------------------------------------------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year 937,800 $ 9.56 399,100 $ 6.16 142,800 $ 2.40
Granted 952,478 6.16 560,900 11.70 256,300 8.25
Exercised - - (22,200) 2.50 - -
Forfeited (265,434) 11.47 - - - -
--------------------------- ---------------------------- ----------------------------
Outstanding - end of year 1,624,844 $ 7.25 937,800 $ 9.56 399,100 $ 6.16
--------------------------- ---------------------------- ----------------------------
--------------------------- ---------------------------- ----------------------------
Exercisable at end of year 1,063,645 $ 6.80 355,567 $ 6.26 366,567 $ 5.97
Weighed average fair value of
options granted during the year $ 4.27 $ 8.03
</TABLE>
Other information regarding options as of May 31, 1997 is as follows:
Weighed Weighted
Average Average
Options Options Exercise Contractual
Outstanding Exercisable Price Life
- ------------------------------ ---------------------------
40,000 40,000 $ 0.25 6.3 years
67,400 67,400 2.50 5.5 years
1,244,544 865,279 6.68 9.1 years
272,900 90,966 12.08 8.9 years
- ------------------------------
1,624,844 1,063,645
- ------------------------------
- ------------------------------
In February 1997, 200,000 options which originally had an exercise price of
$11.625 were repriced to $6.25, representing the market price of the Common
Stock on the date the repricing occurred. In addition, approximately 395,000
options which originally vested in three equal annual increments beginning in
April 1997 were fully vested as of February 1997.
Pursuant to SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS
No. 123"), the Company is required to disclose the pro forma effects on net
loss and earnings per share as if the Company had elected to use the fair value
approach to account for all its stock-based compensation plans. If
compensation cost for the Company's plans had been determined consistent with
the fair value approach set forth in SFAS No. 123, the Company's pro forma
net loss and pro forma net loss per share for the fiscal years ended would be
increased as follows:
1997 1996
- --------------------------------------------------------------------
Net loss applicable to common shares $ (9,354) $ (5,229)
Pro forma net loss (13,839) (5,501)
Net loss per share (1.82) (1.79)
Pro forma net loss per share (2.69) (1.88)
The fair value of each grant is estimated on the date of the grant using the
Black-Scholes option valuation model with the following assumptions:
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997 1996
--------- ---------
Expected dividend yield 0% 0%
Expected stock price volatility 0.59 0.59
Risk-free interest rate 6.54% 6.54%
Weighted-average expected life of options 8 years 8 years
Option valuation models require the input of highly subjective assumptions.
Because the Company's stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate in management's
opinion, the existing model does not necessarily provide a reliable single
measure of the fair value of its stock options.
18. PENDING ACQUISITION
On March 3, 1997, the Company and K-tel signed a purchase and sale agreement
(the "K-tel Agreement") pursuant to which the Company may acquire K-tel's
worldwide music business assets, except for K-tel's European and former
Soviet Union music business, through the purchase of the stock of K-tel (USA)
and Dominion, both wholly-owned subsidiaries of K-tel (the "K-tel
Acquisition"). The purchase price is expected to be $35,000 subject to
certain adjustments. Subject to satisfaction of the closing conditions
specified in the K-tel Agreement, the transaction is expected to close on or
before October 31, 1997.
Pursuant to the K-tel Agreement, the Company deposited $1,750 in escrow which
will be applied to the purchase price or paid to K-tel in the event the
transaction is not consummated under certain circumstances, including the
failure of the Company to obtain financing for the transaction.
19. LITIGATION
The Company is a party in various lawsuits which have arisen in the normal
course of business. In the opinion of management, based on advice of counsel,
the ultimate outcome of these lawsuits will not have a material impact on the
Company's financial position or results of operations.
20. SUBSEQUENT EVENT
On July 30, 1997, the Company's stockholders approved the issuance of up to
$40,000 of Preferred Stock, the proceeds from which the Company intends to
retire the indebtedness incurred under the BMO Credit Facility (see Note 8 above
for details) and for working capital and general corporate purposes. Such
issuance is pending.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. The following Consolidated Financial Statements and Notes thereto,
are included herein:
Report of Independent Auditors
Consolidated Balance Sheets as of May 31, 1997 and 1996
Consolidated Statements of Operations for the Years Ended May 31,
1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity (Net Capital
Deficiency) for the Years Ended May 31, 1997, 1996 and 1995
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.
Exhibit
Number
- -------
3.1 * Third Amended and Restated Certificate of Incorporation of the
Registrant is herein incorporated by reference to the Registrant's
Registration Statement on Form S-1, as amended (File No. 33-80357)
dated March 11, 1996.
3.2 * Amended and Restated Bylaws of the Registrant is herein incorporated
by reference to the Registrant's Registration Statement on Form S-1,
as amended (File No. 33-80357) dated March 11, 1996.
4.1 * Specimen stock certificate representing Common Stock is herein
incorporated by reference to the Registrant's Registration Statement
on Form S-1, as amended (File No. 33-80357) dated March 11, 1996.
4.2 * Amended and Restated Registration Rights Agreement is herein
incorporated by reference to the Registrant's Registration Statement
on Form S-1, as amended (File No. 33-80357) dated March 11, 1996.
4.3 * Amendment No. 1 to Amended and Restated Registration Rights Agreement
is herein incorporated by reference to the Registrant's Registration
Statement on Form S-1, as amended (File No. 33-80357) dated March 11,
1996.
4.4 * Registration Rights Agreement, dated as of January 31, 1997, between
Registrant and Intersound, Inc. is herein incorporated by reference to
the Registrant's Form 8-K filed with the Commission on February 18,
1997 pursuant to Section 13 of the Securities Exchange Act of 1934
(the "Intersound 8-K").
4.5 * Convertible Promissory Note, dated January 31, 1997, issued by the
Registrant in the principal amount of $3,125,000 is herein
incorporated by reference to the Intersound 8-K.
-25-
<PAGE>
4.6 * Convertible Promissory Note, dated January 31, 1997, issued by the
Registrant in the principal amount of $1,875,000 is herein
incorporated by reference to the Intersound 8-K.
4.7 * Warrant to Purchase Shares of Common Stock of the Registrant, dated
January 31, 1997, is herein incorporated by reference to the
Intersound 8-K.
10.1* Letter Agreement by and between House of Blues Records, Inc. and the
Registrant, dated August 26, 1996, is herein incorporated by reference
to the Registrants Form 10-Q filed with the Commission on October 14,
1996 pursuant to Section 13 of the Securities Exchange Act of 1934
(the "First Quarter 10-Q").
10.2* Asset Purchase Agreement by and between Scott Entertainment, Inc.,
shareholders of Scott Entertainment, Inc., as listed in the Asset
Purchase Agreement, and the Registrant, dated September 19, 1996, with
exhibits, is herein incorporated by reference to the First Quarter 10-
Q.
10.3* Amended and Restated Platinum Entertainment, Inc. 1995 Employee
Incentive Compensation Plan is herein incorporated by reference to the
First Quarter 10-Q.
10.4* Agreement for Purchase of Joint Venture Interest by the Registrant
from Private, Inc., dated as of November 12, 1996 is herein
incorporated by reference to the Registrant's Form 8-K filed pursuant
to Section 13 of the Securities Exchange Act of 1934, dated as of
November 12, 1996 (the "HOB 8-K").
10.5* Disclosure Letter to Agreement for Purchase of Joint Venture Interest
by Platinum Entertainment, Inc. from Private, Inc. is herein
incorporated by reference to the HOB 8-K.
10.6* Assignment and Assumption of Joint Venture Interest, by and among the
Registrant, Private, Inc. and Bertelsman Music Group, Inc., dated as
of November 12, 1996 is herein incorporated by reference to the HOB 8-
K.
10.7* Asset Purchase Agreement, by and between River North Studios, Inc.
(subsidiary of the Registrant) and Intersound, Inc., dated as of
November 13, 1996 is herein incorporated by reference to the
Registrant's Form 10-Q filed with the Commission on January 14, 1997
pursuant to Section 13 of the Securities Exchange Act of 1934.
10.8* First Amendment to Asset Purchase Agreement, dated January 31, 1997,
between River North Studios, Inc. and Intersound, Inc. is herein
incorporated by reference to the Intersound 8-K.
10.9* Employment Agreement of Don Johnson, dated February 1, 1997 is herein
incorporated by reference to the Intersound 8-K.
10.10* Amended and Restated Credit Agreement, dated as of January 31, 1997,
among the Registrant, Bank of Montreal and the Banks who are or may
become parties thereto is herein incorporated by reference to the
Intersound 8-K.
10.11* Security Agreement, dated as of January 31, 1997, among the
Registrant, Bank of Montreal and the Banks who are or may become
parties thereto is herein incorporated by reference to the Intersound
8-K.
10.12* Security Agreement re: Intellectual Property, dated as of January 31,
1997, among the Registrant, its subsidiaries and Bank of Montreal is
herein incorporated by reference to the Intersound 8-K.
10.13* Pledge Agreement, dated as of January 31, 1997, between the Registrant
and Bank of Montreal is herein incorporated by reference to the
Intersound 8-K.
10.14* Guaranty, dated as of January 31, 1997, made by Steven Devick is
herein incorporated by reference to the Intersound 8-K.
10.15* Term Credit Note, dated January 31, 1997, issued by the Registrant in
the principal amount of $25,000,000 is herein incorporated by
reference to the Intersound 8-K.
10.16* Revolving Credit Note, dated January 31, 1997, issued by the
Registrant in the principal amount of $10,000,000 is herein
incorporated by reference to the Intersound 8-K.
10.17* Purchase and Sale Agreement, dated March 3, 1997, between Platinum
Entertainment, Inc. and K-tel International, Inc. is herein
incorporated by reference to the Registrant's
-26-
<PAGE>
Form 10-Q filed with the Commission on April 11, 1997 pursuant to
Section 13 of the Securities Exchange Act of 1934 (the "Third Quarter
10-Q").
10.18* Earnest Money Escrow Agreement, dated March 3, 1997, among Platinum
Entertainment, Inc., K-tel Entertainment, Inc. and Midwest Trust
Services, Inc. is herein incorporated by reference to the Third
Quarter 10-Q.
10.19* Voting Agreement, dated March 3, 1997, among Platinum Entertainment,
Inc., Mr. Philip Kives, K-5 Leisure Products, Inc. and National
Development Ltd. is herein incorporated by reference to the Third
Quarter 10-Q.
10.20* First Amendment to Amended and Restated Credit Agreement, dated
April 22, 1997 between Platinum Entertainment, Inc., Bank of Montreal,
individually and as Agent, and PPM America Special Investments Fund
L.P. and the Guarantors' Consent attached thereto.
10.21* Second Amendment to Amended and Restated Credit Agreement, dated
June 12, 1997 between Platinum Entertainment, Inc., Bank of Montreal,
individually and as Agent, and PPM America Special Investments Fund
L.P. and the Guarantors' Consent attached thereto.
10.22* Third Amendment to Amended and Restated Credit Agreement, dated
July 31, 1997 between Platinum Entertainment, Inc., Bank of Montreal,
individually and as Agent, and PPM America Special Investments Fund
L.P. and the Guarantors' Consent attached thereto.
11.* Statement re computation of per share earnings.
27. Financial Data Schedule.
- -----------------
*Previously filed
(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.
-27-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Platinum Entertainment, Inc. has duly caused this Amendment to the Report to
be signed on its behalf by the undersigned, thereunto duly authorized, on
this 25th day of November, 1997.
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 Amendment to the Report has been signed below by the following persons
in the capacities indicated on November 25, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
-------------- ----------------
<S> <C>
/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
/s/ MICHAEL P. CULLINANE
-------------------- Director
Michael P. Cullinane
/s/ ANDREW J. FILIPOWSKI
-------------------- Director
Andrew J. Filipowski
/s/ THOMAS J. SALENTINE
-------------------- Director
Thomas J. Salentine
</TABLE>
-28-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED BALANCE SHEET AT MAY 31, 1997, THE AUDITED CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE YEAR ENDED MAY 31, 1997 AND THE AUDITED NOTES THERETO FOR
PLATINUM ENTERTAINMENT, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> MAY-31-1997
<CASH> 53
<SECURITIES> 0
<RECEIVABLES> 18,375
<ALLOWANCES> 2,725
<INVENTORY> 5,766
<CURRENT-ASSETS> 25,765<F1>
<PP&E> 1,770
<DEPRECIATION> 585
<TOTAL-ASSETS> 62,304<F2>
<CURRENT-LIABILITIES> 49,438
<BONDS> 5,000
0
0
<COMMON> 5
<OTHER-SE> 7,861
<TOTAL-LIABILITY-AND-EQUITY> 62,304
<SALES> 24,471
<TOTAL-REVENUES> 42,633
<CGS> 13,288
<TOTAL-COSTS> 17,040
<OTHER-EXPENSES> 16,345
<LOSS-PROVISION> 300
<INTEREST-EXPENSE> 4,918<F3>
<INCOME-PRETAX> (9,354)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,354)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,354)
<EPS-PRIMARY> (1.82)
<EPS-DILUTED> 0
<FN>
<F1>INCLUDES GROSS ARTIST ADVANCES OF $2,444
<F2>INCLUDES GROSS ARTIST ADVANCES OF $14,486, LESS ALLOWANCE FOR UNRECOUPABLE
ARTIST ADVANCES OF $9,745
<F3>INCLUDES OTHER FINANCING COSTS OF $2,293
</FN>
</TABLE>
