<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
PLATINUM ENTERTAINMENT, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
(5) Total fee paid:
-----------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>
PLATINUM ENTERTAINMENT, INC.
2001 BUTTERFIELD ROAD, SUITE 1400
DOWNERS GROVE, ILLINOIS 60515
(630) 769-0033
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 29, 1997
------------------------
To the Stockholders of
Platinum Entertainment, Inc.:
An Annual Meeting of Stockholders of Platinum Entertainment, Inc. (the
"Company") will be held at 10:00 a.m., Chicago time, on Wednesday, October 29,
1997, at the offices of the Company, 2001 Butterfield Road, Suite 1400, Downers
Grove, Illinois 60515, for the following purposes:
(1) To elect two Class II directors to the Company's Board of Directors;
(2) To consider and vote upon a proposal to approve the issuance and sale by
the Company of 20,000 shares of Series B Convertible Preferred Stock (the
"Preferred Stock"), together with warrants (the "Warrants") to purchase
an aggregate 3,600,000 shares of the Company's common stock, par value
$.001 per share (the "Common Stock") (the issuance of the Preferred Stock
together with the issuance of Warrants is referred to as the "The
Preferred Stock with Warrants Issuance"), in a private placement exempt
from registration under Section 4(2) of the Securities Act of 1933, as
amended (the "Private Placement"). The consideration to be paid for the
Preferred Stock and the Warrants will total $20,000,000. On July 30,
1997, the Company's stockholders approved the issuance by the Company of
up to $40 million of convertible preferred stock on the terms described
in the proxy statement mailed to stockholders on July 8, 1997. In such
proxy statement, the Company undertook to resolicit proxies from its
stockholders if the terms of the preferred stock varied materially from
the terms described therein. As the amount of Preferred Stock to be
issued has been reduced from $40 million to $20 million and as other
terms of the Preferred Stock vary from those described in the proxy
statement mailed to stockholders on July 8, 1997, the Company is asking
its stockholders to approve the Preferred Stock with Warrants Issuance.
The Preferred Stock will be redeemable by the Company at any time at a
price equal to the $1,000 per share liquidation value thereof plus
accrued and unpaid dividends. The Preferred Stock will be convertible,
beginning two years from the date of issuance, into shares of Common
Stock at a price per share of $6.60. The Common Stock underlying the
Warrants may be purchased at an exercise price of $6.60 per share;
(3) To approve an amendment to the Platinum Entertainment, Inc. 1995
Directors' Stock Option Plan;
(4) To adopt the Platinum Entertainment, Inc. 1997 Employee Stock Purchase
Plan;
(5) To ratify the appointment by the Board of Directors of Ernst & Young LLP
as the independent auditors of the Company's financial statements for the
fiscal year ending May 31, 1998; and
(6) To transact such other business as may properly come before the meeting
or any adjournments thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
The Board of Directors has fixed the close of business on October 3, 1997 as
the record date for determining stockholders entitled to notice of, and to vote
at, the meeting.
By order of the Board of Directors,
Steven Devick
CHAIRMAN OF THE BOARD
Downers Grove, Illinois
October , 1997
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, SIGN
AND DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE. YOUR STOCK WILL BE VOTED IN ACCORDANCE WITH THE
INSTRUCTIONS YOU HAVE GIVEN IN YOUR PROXY OR, IF NO INSTRUCTIONS ARE GIVEN,
YOUR EXECUTED PROXY WILL BE VOTED FOR EACH OF THE PROPOSALS IN ACCORDANCE WITH
THE RECOMMENDATIONS OF THE BOARD OF DIRECTORS CONTAINED IN THIS PROXY
STATEMENT. IF YOU ATTEND THE ANNUAL MEETING, YOU MAY VOTE IN PERSON IF YOU
WISH, EVEN THOUGH YOU PREVIOUSLY RETURNED YOUR PROXY CARD. YOUR PROMPT
COOPERATION WILL BE GREATLY APPRECIATED.
<PAGE>
PLATINUM ENTERTAINMENT, INC.
2001 BUTTERFIELD ROAD, SUITE 1400
DOWNERS GROVE, ILLINOIS 60515
(630) 769-0033
------------------------
PROXY STATEMENT
---------------------
The accompanying proxy is solicited by the Board of Directors (the "Board of
Directors" or "Board") of Platinum Entertainment, Inc., a Delaware corporation
(the "Company"), for use at an Annual Meeting of Stockholders (the "Annual
Meeting") to be held at 10:00 a.m., Chicago time, on Wednesday, October 29,
1997, at the offices of the Company, 2001 Butterfield Road, Suite 1400, Downers
Grove, Illinois 60515, and any adjournments thereof. This Proxy Statement and
the accompanying form of proxy are intended to be released to stockholders on or
about October 17, 1997.
RECORD DATE AND OUTSTANDING SHARES--The Board of Directors has fixed the
close of business on October 3, 1997 as the record date (the "Record Date") for
the determination of stockholders entitled to notice of, and to vote at, the
Annual Meeting or any adjournments thereof. As of the Record Date, the Company
had outstanding 5,274,403 shares of Common Stock, par value $.001 per share (the
"Common Stock"). Each of the outstanding shares of Common Stock is entitled to
one vote on all matters coming before the Annual Meeting.
VOTING OF PROXIES--Steven Devick and Douglas C. Laux, the persons named as
proxies on the proxy card accompanying this Proxy Statement, were selected by
the Board of Directors of the Company to serve in such capacity. Each of Messrs.
Devick and Laux is an officer and director of the Company. The shares
represented by each executed and returned proxy will be voted and such vote will
be in accordance with the directions indicated thereon or, if no direction is
indicated, in accordance with the recommendations of the Board of Directors
contained in this Proxy Statement. The Board of Directors does not presently
intend to bring any business before the Annual Meeting other than the specific
proposals referred to in this Proxy Statement and specified in the Notice of
Annual Meeting, and so far as is known to the Board of Directors, no other
matters are to be brought before the Annual Meeting. As to any other business
that may properly come before the Annual Meeting, however, it is intended that
proxies, in the form enclosed, will be voted in respect thereof in accordance
with the judgment of the persons voting such proxies. Each stockholder giving a
proxy has the power to revoke it at any time before the shares it represents are
voted. Revocation of a proxy is effective upon receipt by the Secretary of the
Company of either (i) an instrument revoking the proxy or (ii) a duly executed
proxy bearing a later date. Additionally, a stockholder may revoke a previously
executed proxy by voting in person at the Annual Meeting (although attendance at
the Annual Meeting will not, by itself, revoke a proxy).
REQUIRED VOTE--A plurality of the shares voted in person or by proxy is
required to elect the nominees for directors. Stockholders will not be allowed
to cumulate their votes in the election of directors. The affirmative vote of a
majority of the shares of Common Stock entitled to vote thereon that are present
in person or by proxy at the Annual Meeting is required to approve the amendment
to the Platinum Entertainment, Inc. 1995 Directors' Stock Option Plan and the
adoption of the Platinum Entertainment, Inc. 1997 Employee Stock Purchase Plan.
The affirmative vote of a majority of the shares voted affirmatively or
negatively in person or by proxy is required to approve the Preferred Stock with
Warrants Issuance and to ratify the appointment of Ernst & Young LLP as the
independent auditors of the Company's financial statements for the fiscal year
ending May 31, 1998.
QUORUM; ABSTENTIONS AND BROKER NON-VOTES--The required quorum for the
transaction of business at the Annual Meeting will be a majority of the shares
of Common Stock issued and outstanding on the Record Date. Abstentions and
broker non-votes will be included in determining the presence of a quorum.
Abstentions will be considered present and entitled to vote with respect to the
proposals to approve the amendment to the Platinum Entertainment, Inc. 1995
Employee Incentive Compensation Plan and the adoption of the Platinum
Entertainment, Inc. 1997 Employee Stock Purchase Plan, and will have the same
effect as votes against such proposals; broker non-votes will not be considered
present and entitled to vote with respect to such proposals and will have no
effect on the voting on such proposals. Neither abstentions nor broker non-votes
will have any effect on the voting on the proposals to elect directors, to
approve the Preferred Stock with Warrants Issuance, and to ratify the
appointment of the Company's independent auditors since they will not represent
votes cast at the Annual Meeting for the purpose of voting such matters.
ANNUAL REPORT TO STOCKHOLDERS--The Company's Annual Report to Stockholders
for the fiscal year ended May 31, 1997, containing financial and other
information pertaining to the Company, is being furnished to stockholders
separately from this Proxy Statement.
------------------------
THIS PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY THE PREFERRED STOCK OR
WARRANTS AND IS BEING USED SOLELY TO SOLICIT PROXIES
RELATING TO A VOTE ON THE PROPOSALS.
------------------------
THE DATE OF THIS PROXY STATEMENT IS OCTOBER , 1997
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy or information statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy or information statements and other information can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington D.C. 20549, and at the following
Regional Offices of the Commission: Seven World Trade Center, Suite 1300, New
York, New York 10048; and Citicorp Center, Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661. Copies of such materials can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a World
Wide Web site (http://www.sec.gov.) that contains reports, proxy and information
statements and other information regarding registrants, such as the Company,
that submit electronic filings to the Commission. In addition, reports, proxy or
information statements and other information concerning the Company may be
inspected at the offices of the Nasdaq Stock Market, 1735 K Street, N.W.,
Washington, D.C. 20549.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROXY STATEMENT SUMMARY.................................................................................... 4
RISK FACTORS............................................................................................... 11
FORWARD LOOKING INFORMATION................................................................................ 12
PROPOSAL 1--ELECTION OF DIRECTORS.......................................................................... 13
PROPOSAL 2--PROPOSAL TO APPROVE THE ISSUANCE AND SALE OF THE PREFERRED STOCK WITH WARRANTS................. 23
ACQUISITION OF INTERSOUND.................................................................................. 29
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA............................................................ 34
PLATINUM ENTERTAINMENT, INC.
SELECTED CONSOLIDATED FINANCIAL DATA..................................................................... 39
INTERSOUND, INC.
SELECTED FINANCIAL DATA.................................................................................. 41
PLATINUM ENTERTAINMENT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................... 42
INTERSOUND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................... 57
BUSINESS................................................................................................... 61
PRICE RANGE OF COMMON STOCK................................................................................ 70
DIVIDEND POLICY............................................................................................ 70
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS................................................ 71
PROPOSAL 3--PROPOSAL TO APPROVE THE AMENDMENT TO THE 1995 DIRECTORS' STOCK OPTION PLAN..................... 73
PROPOSAL 4--PROPOSAL TO APPROVE THE ADOPTION OF THE 1997 EMPLOYEE STOCK PURCHASE PLAN...................... 75
PROPOSAL 5--RATIFICATION OF INDEPENDENT AUDITORS........................................................... 78
EXPERTS.................................................................................................... 78
MISCELLANEOUS MATTERS...................................................................................... 79
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
</TABLE>
3
<PAGE>
PROXY STATEMENT SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROXY STATEMENT. AS USED IN THIS PROXY STATEMENT, EXCEPT WHERE
THE CONTEXT CLEARLY REQUIRES OTHERWISE, REFERENCES TO "PLATINUM" SHALL MEAN
PLATINUM ENTERTAINMENT, INC. AND ITS SUBSIDIARIES AND THEIR COMBINED OPERATIONS
ON A HISTORICAL BASIS PRIOR TO THE ACQUISITION OF INTERSOUND, INC.; "INTERSOUND"
REFERS TO INTERSOUND, INC. AND ITS OPERATIONS ON A HISTORICAL BASIS PRIOR TO ITS
ACQUISITION BY PLATINUM AND AS A WHOLLY-OWNED SUBSIDIARY OF THE COMPANY
THEREAFTER; AND THE "COMPANY" REFERS TO PLATINUM AND INTERSOUND ON A COMBINED
BASIS AFTER CONSUMMATION OF PLATINUM'S ACQUISITION OF INTERSOUND. STOCKHOLDERS
SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE HEADING "RISK
FACTORS." THIS PROXY STATEMENT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
(WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995)
THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES. SEE "FORWARD LOOKING
INFORMATION."
THE COMPANY
The Company is a full-service music company that produces, licenses,
acquires, markets and distributes high quality recorded music for a variety of
musical formats. Platinum has produced recorded music products in the Gospel,
Classical/Themed, Adult Contemporary, Country, Blues and Urban/Dance music
formats, primarily under its CGI Records, Intersound Classical, River North
Records, Intersound Country, House of Blues and Intersound Urban labels.
Since its inception in 1991, Platinum has sought to expand its catalog of
master recordings and publishing rights through strategic and complementary
acquisitions, as well as through the signing of established artists. One of the
Company's core business activities, and an integral part of the Company's growth
strategy, is the expansion and exploitation of its music catalog. Following the
Intersound acquisition, the Company owns a music catalog with over 10,000 master
recordings.
The Company's music catalog contains master recordings of some of the best
selling Gospel music acts such as The Winans, Andrae Crouch and Walter Hawkins.
According to the Recording Industry Association of America ("RIAA"), Gospel is
the fastest growing music segment, having increased its market share and
revenues by 38% and 30%, respectively in 1996 from 1995. In addition, the
Company, through the Intersound acquisition, expanded its Gospel roster to
include artists such as William Becton, the Mighty Clouds of Joy and Vicki
Winans. The Company believes that it is currently positioned as a market leader
in Gospel music. The Company has also released music by established artists in
other music genres. These artists include The Beach Boys, Peter Cetera, The Alan
Parsons Project and Crystal Bernard. Through the Intersound acquisition, the
Company expanded its roster to include artists such as Kansas, Crystal Gayle,
The Ohio Players, Bellamy Brothers, Eddie Rabbitt, Confunkshun and The Gap Band.
The Company's strategy for growth and expansion of its position in the
recorded music business is based on: (i) selling diversified recorded music
offerings in formats which management believes have growth potential; (ii)
expanding and exploiting its music catalog through the acquisition of master
recordings and music publishing rights from other music companies at attractive
prices; (iii) introducing records by established artists with a history of
successful releases; and (iv) leveraging its unique distribution position
through both independent distribution channels and relationships with certain
larger record companies to provide wider distribution of certain of the
Company's products. The Company believes that this strategy distinguishes the
Company from certain of its larger competitors which have traditionally focused
on the development of new artists with the potential for mass appeal. The
Company intends to remain focused on artists and musical formats characterized
by relatively low development costs and predictable unit sales volumes. This
strategy may also include licensed compilations of previously recorded music,
"Best of" albums, and tribute albums to well known musical artists with a
history of successful releases.
4
<PAGE>
Consistent with the strategy of targeting independently distributed record
companies with large catalogs, Platinum has completed four acquisitions since
the consummation of its initial public offering in March 1996 (the "Offering"):
- R.E.X. MUSIC, INC.--produces, licenses and markets recorded music
primarily in the contemporary Christian format of Gospel music; artists
include Sixpence None the Richer, Whitecross, Six Feet Deep, The Waiting
and Tammy Trent.
- DOUBLE J MUSIC GROUP--develops and acquires ownership of musical
compositions and exploits them by means of recordings and licenses;
controls the copyrights to more than 250 country songs, three of which
reached number one on the Country music charts during 1996 including CHECK
YES OR NO by George Strait.
- HOUSE OF BLUES MUSIC COMPANY (50% INTEREST)--develops and produces
recordings featuring Blues, Gospel and other formats on the "House of
Blues" label; artists on the House of Blues label include Cissy Houston
and The Blues Brothers with Dan Akroyd and Jim Belushi.
- INTERSOUND--produces, licenses, acquires, markets and distributes recorded
music in a variety of formats including Gospel, Country, Classical/Themed
Productions and Urban/Dance.
The completed acquisitions described above, together with internally
generated growth, have contributed to the Company's gross revenues growing from
approximately $25.5 million for the fiscal year ended May 31, 1996 to
approximately $61.3 million for the fiscal year ended May 31, 1997 on the pro
forma basis described herein. See "Unaudited Pro Forma Consolidated Financial
Statements" and "Selected Consolidated Financial Data."
Platinum was incorporated in Delaware in November 1991. Its principal
executive offices are at 2001 Butterfield Road, Suite 1400, Downers Grove,
Illinois 60515, and its telephone number is (630) 769-0033.
INTERSOUND ACQUISITION AND BANK OF MONTREAL FINANCING
Effective January 1, 1997, the Company acquired substantially all of the
assets of Intersound for $24,000,000 in cash, $5,000,000 in convertible
promissory notes and the assumption of certain liabilities for a total purchase
price of $41,000,000. The Company and its subsidiaries entered into the Existing
Credit Facility with Bank of Montreal ("BMO"), individually and as agent for
certain banks (collectively, the "Lenders"), in order to finance the cash
portion of the Intersound consideration, to refinance certain bank debt incurred
by Intersound and to pay fees and expenses associated with the transaction. The
Existing Credit Facility matures on October 31, 1997. As of September 30, 1997,
the amount outstanding under the Existing Credit Facility was approximately
$35,000,000. The Company intends to repay the indebtedness incurred under the
Existing Credit Facility with the net proceeds of the Preferred Stock with
Warrants Issuance and the Proposed Credit Facility (as hereinafter defined) (see
"Proposal 2--Proposal to Approve the Issuance and Sale of Preferred Stock with
Warrants" and "Acquisition of Intersound"). The Company has obtained a
commitment from a bank to provide a $30 million credit facility. Such facility
is contingent upon the Company raising at least $10 million in equity. See
"Acquisition of Intersound--The Proposed Credit Facility."
On July 30, 1997, the Company's stockholders approved the issuance by the
Company of up to $40 million of convertible preferred stock on the terms
described in the proxy statement mailed to stockholders on July 8, 1997. At the
time of such proposal, the Company intended to use the proceeds of such issuance
to repay the Existing Credit Facility and to obtain a bank credit facility in
the amount of $40 million to finance the then-contemplated acquisition by the
Company of the music business of K-tel International, Inc. ("K-tel"). Since such
time, the Company has terminated its agreement with K-tel, as described in the
Company's Current Report on Form 8-K filed with the Commission on September 10,
1997. The Board of Directors has determined, in light of the Company's revised
financing requirements,
5
<PAGE>
that the Preferred Stock with Warrants Issuance is in the best interests of the
Company and its stockholders. Accordingly, the Board does not currently intend
to complete the $40 million preferred stock issuance on the terms previously
approved and is seeking the approval of its stockholders for the Preferred Stock
with Warrants Issuance.
THE ANNUAL MEETING
DATE, TIME AND PLACE
The Annual Meeting will be held on October 29, 1997 at the offices of the
Company, 2001 Butterfield Road, Suite 1400, Downers Grove, Illinois 60515,
commencing at 10:00 a.m., local time, and at any adjournments or postponements
thereof. Only holders of record of the Common Stock at the close of business on
October 3, 1997 (the "Record Date") will be entitled to notice of, and to vote
at, the Annual Meeting or any adjournments thereof. As of the Record Date, the
Company had outstanding 5,274,403 shares of Common Stock. Each of the
outstanding shares of Common Stock is entitled to one vote on all matters coming
before the Annual Meeting.
PURPOSE
At the Annual Meeting, the stockholders of the Company will be asked to
consider and vote upon proposals to (i) elect two Class II Directors, (ii)
approve the Preferred Stock with Warrants Issuance, (iii) approve the amendment
to the Platinum Entertainment, Inc. 1995 Directors' Plan, (iv) adopt the
Platinum Entertainment, Inc. 1997 Employee Stock Purchase Plan, and (v) ratify
the appointment by the Board of Directors of Ernst & Young LLP as the
independent auditors of the Company's financial statements for the fiscal year
ending May 31, 1998. The Board of Directors is not currently aware of any
business to be acted upon at the Annual Meeting other than as described herein.
If, however, other matters are properly brought before the Annual Meeting, or
any adjournments or postponements thereof, the persons appointed as proxies will
have discretion to vote or act thereon according to their judgment.
Under the Delaware General Corporation Law and the Company's Third Amended
and Restated Certificate of Incorporation and Amended and Restated By-laws, no
action or authorization by the Company's stockholders is necessary for the
Preferred Stock with Warrants Issuance. However, because transactions in the
Company's Common Stock are reported on the Nasdaq National Market, the Company
is subject to the rules of the National Association of Securities Dealers, Inc.
(the "NASD"). The NASD requires stockholder approval for the issuance by a
company, in connection with an acquisition, of shares of its common stock (or
securities convertible into or exercisable for common stock) equal to 20% or
more of the voting power of all shares of the company. The Company anticipates
that 20,000 shares of Preferred Stock and Warrants to purchase an aggregate
3,600,000 shares of Common Stock will be issued in the Preferred Stock with
Warrants Issuance for total consideration of $20,000,000. Conversion of the
Preferred Stock and exercise of the Warrants would result in the issuance of
shares of Common Stock in excess of the 20% threshold. See "Risk
Factors--Dilution of Existing Stockholders." Therefore, the Company is asking
its stockholders at this time to approve the Preferred Stock with Warrants
Issuance.
REQUIRED VOTE--A plurality of the shares voted in person or by proxy is
required to elect the nominees for directors. Stockholders will not be allowed
to cumulate their votes in the election of directors. The affirmative vote of a
majority of the shares of Common Stock entitled to vote thereon that are present
in person or by proxy at the Annual Meeting is required to approve the amendment
to the Platinum Entertainment, Inc. 1995 Directors' Stock Option Plan and to
adopt the Platinum Entertainment, Inc. 1997 Employee Stock Purchase Plan. The
affirmative vote of a majority of the shares voted affirmatively or negatively
in person or by proxy is required to approve the Preferred Stock with Warrants
Issuance and to ratify the appointment of Ernst & Young LLP as the independent
auditors of the Company's financial statements for the fiscal year ending May
31, 1998.
6
<PAGE>
QUORUM; ABSTENTIONS AND BROKER NON-VOTES--The required quorum for the
transaction of business at the Annual Meeting will be a majority of the shares
of Common Stock issued and outstanding on the Record Date. Abstentions and
broker non-votes will be included in determining the presence of a quorum.
Abstentions will be considered present and entitled to vote with respect to the
proposals to approve the amendment to the Platinum Entertainment, Inc. 1995
Directors' Plan and the adoption of the Platinum Entertainment, Inc. 1997
Employee Stock Purchase Plan, and will have the same effect as votes against
such proposals; broker non-votes will not be considered present and entitled to
vote with respect to such proposals and will have no effect on the voting on
such proposals. Neither abstentions nor broker non-votes will have any effect on
the voting on the proposals to elect directors, to approve the Preferred Stock
with Warrants Issuance and to ratify the appointment of the Company's
independent auditors since they will not represent votes cast at the Annual
Meeting for the purpose of voting on such matters.
If the Annual Meeting is postponed or adjourned for any reason, at any
subsequent reconvening of the Annual Meeting all proxies will be voted in the
same manner as such proxies would have been voted at the original convening of
the Annual Meeting (except for any proxies that have theretofore effectively
been revoked or withdrawn), notwithstanding that they may have been effectively
voted on the same or any other matter at a previous meeting.
The Company will bear the cost of soliciting proxies from its stockholders.
In addition to solicitation by mail, directors, officers and employees of the
Company may solicit proxies by telephone, telegram or otherwise. Such directors,
officers and employees of the Company will not be additionally compensated for
such solicitation, but may be reimbursed for out-of-pocket expenses incurred in
connection therewith. Brokerage firms, fiduciaries and other custodians who
forward soliciting material to the beneficial owners of shares of Common Stock
held of record by them will be reimbursed for their reasonable expenses incurred
in forwarding such material.
7
<PAGE>
PLATINUM ENTERTAINMENT, INC.
SUMMARY CONSOLIDATED FINANCIAL DATA(1)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
FIVE MONTHS ENDED
YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED AUGUST 31,
DECEMBER 31, MAY 31, MAY 31, MAY 31, MAY 31, 1996
1993 1994 1995 1996 1997 -------------
------------- ----------- ----------- ----------- ----------- (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Gross revenues(3).............................. $ 5,489 $ 4,255 $ 15,866 $ 25,488 $ 42,633 $ 6,968
Returns, allowances and discounts(3)........... (590) (584) (3,633) (5,444) (11,176) (1,517)
Allowance for unrecoupable artist advances..... (1,361) (433) (1,128) (2,506) (855) (150)
------------- ----------- ----------- ----------- ----------- -------------
Total net revenues............................. 3,538 3,238 11,105 17,538 30,602 5,301
Gross profit................................... 576 490 4,204 4,236 12,812 1,656
Merger, restructuring and one-time costs(4).... -- -- -- -- 3,336 --
Operating loss................................. (1,766) (901) (4,729) (3,937) (4,638) (718)
Interest and other financing costs............. (33) (27) (157) (570) (4,918) (3)
Loss from continuing operations................ (1,799) (928) (4,840) (4,401) (9,354) (631)
Loss from discontinued operations.............. (1,519) (755) (4,684) (226) -- --
Net loss....................................... (3,318) (1,683) (9,524) (4,627) (9,354) (631)
Less--Cumulative preferred dividends(5)........ (602)
Loss applicable to common shares............... (5,229)
Per common share:
Loss from continuing operations.............. $ (2.12) $ (1.71) $ (1.82) $ (0.12)
Loss from discontinued operations............ (2.05) (0.08) -- --
----------- ----------- ----------- -------------
Net loss(6).................................... $ (4.17) $ (1.79) $ (1.82) $ (0.12)
----------- ----------- ----------- -------------
----------- ----------- ----------- -------------
Weighted average number of common shares
outstanding(6)............................... 2,284,099 2,925,987 5,136,830 5,063,204
<CAPTION>
AS ADJUSTED
ENDED YEAR ENDED ENDED
AUGUST 31, MAY 31, AUGUST 31,
1997 1997(2) 1997(2)
------------- ----------- -------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Gross revenues(3).............................. $ 13,437 $ 61,332 $ 13,437
Returns, allowances and discounts(3)........... (3,621) (12,959) (3,621)
Allowance for unrecoupable artist advances..... (143) (3,659) (143)
------------- ----------- -------------
Total net revenues............................. 9,673 43,859 9,673
Gross profit................................... 4,925 20,898 4,925
Merger, restructuring and one-time costs(4).... 1,001 3,336 1,001
Operating loss................................. (525) (2,959) (525)
Interest and other financing costs............. (1,659) (1,454) (504)
Loss from continuing operations................ (2,148) (4,211) (993)
Loss from discontinued operations.............. -- -- --
Net loss....................................... (2,148) (4,211) (993)
Less--Cumulative preferred dividends(5)........ (2,400) (600)
Loss applicable to common shares...............
(6,611) (1,593)
Per common share:
Loss from continuing operations.............. $ (0.42) $ (1.29) $ (0.31)
Loss from discontinued operations............ -- -- --
------------- ----------- -------------
Net loss(6).................................... $ (0.42) $ (1.29) $ (0.31)
------------- ----------- -------------
------------- ----------- -------------
Weighted average number of common shares
outstanding(6)............................... 5,174,734 5,136,830 5,174,734
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
AS OF AUGUST 31, 1997
-------------------------
ACTUAL AS ADJUSTED(8)
--------- --------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................................................. $ 8 $ 2,483
Working capital (deficit)(7)........................................................... (27,483) 9,992
Total assets........................................................................... 62,441 65,641
Long-term obligations.................................................................. 5,000 25,000
Total stockholders' equity............................................................. 5,718 23,918
</TABLE>
- ------------------------
(1) The Summary Consolidated Financial Data presented in this table is derived
from the Selected Consolidated Financial Data and the Consolidated Financial
Statements of Platinum Entertainment, Inc. included elsewhere in this Proxy
Statement. The Summary Consolidated Financial Data should be read in
conjunction with the Selected Consolidated Financial Data, the Consolidated
Financial Statements and notes thereto of Platinum Entertainment, Inc. and
the other financial information included in this Proxy Statement. The table
also includes certain unaudited pro forma consolidated statement of
operations data for fiscal 1997 and the three months ended August 31, 1997
which (i) gives pro forma effect to the Intersound Acquisition; (ii)
reflects the refinancing of a portion of the Existing Credit Facility with
the net proceeds of the Preferred Stock Issuance and (iii) reflects the
refinancing of the remaining portion of the Existing Credit Facility with
the proceeds of the Proposed Credit Facility, all as if such transaction and
refinancing had occurred on June 1, 1996. See "Unaudited Pro Forma
Consolidated Financial Data" contained elsewhere in this Proxy Statement.
(2) The unaudited As Adjusted statement of operations data for fiscal 1997 and
the three months ended August 31, 1997 (i) gives pro forma effect to the
Intersound Acquisition; (ii) reflects the refinancing of a portion of the
Existing Credit Facility with the net proceeds of the Preferred Stock
Issuance and (iii) reflects the refinancing of the remaining portion of the
Existing Credit Facility with the proceeds of the Proposed Credit Facility,
all as if such transaction and refinancing had occurred on June 1, 1996. See
"Unaudited Pro Forma Consolidated Financial Data" contained elsewhere in
this Proxy Statement.
(3) During the Company's normal course of business, discounts are extended to
customers on product sales. The gross revenues and returns, allowances and
discounts for the years ended May 31, 1995 and 1996 and the three months
ended August 31, 1996 have been reclassified by $507,000, $712,000 and
$444,000, respectively, to conform to the financial statement presentation
for the fiscal year ended May 31, 1997 and three months ended August 31,
1997. Discounts for the year ended December 31, 1993 and the five months
ended May 31, 1994 were insignificant.
(4) As a result of the 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-offs, warehouse
closing costs and other related costs. Such costs approximated $1,650,000
for fiscal 1997, of which $315,000 and $240,000 were accrued at May 31 and
August 31, 1997, respectively, 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, totaling
$1,686,000, include approximately $1,100,000 of product returns which were
significantly in excess of the Company's historical returns experience due
to the termination of a distribution agreement and the termination of
certain customer relationships. In addition, one-time costs for fiscal 1997
include write-offs of artist advances and accounts receivables in areas from
which the Company has chosen to redirect its resources. One time costs for
the three months ended August 31, 1997 include approximately $155,000 of
product returns which were significantly in excess of the Company's
historical returns experience due to the termination of a distribution
agreement. The shift in third-party
9
<PAGE>
fulfillment of Platinum Christian Distribution was not fully implemented
until September 1, 1997, resulting in negligible revenues for this
distribution channel during the current fiscal quarter. In addition,
one-time costs for the three months ended August 31, 1997 include $775,000
of legal, accounting, and other incremental costs incurred by the Company
associated with the K-tel Acquisition. Such transaction was terminated by
the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Significant Matters."
(5) Represents accrued dividends on the Series A-1 Non-Convertible Preferred
Stock. The Company has never paid a dividend on its Common Stock. See
"Dividend Policy."
(6) 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 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.
(7) Working deficit includes short-term debt under the Existing Credit Facility
of $35,000,000 as of August 31, 1997.
(8) Adjusted to reflect the refinancing of the Existing Credit Facility with (i)
the net proceeds of the Preferred Stock with Warrants Issuance ($20,000,000,
less estimated costs of $1,800,000) and (ii) the proceeds of the Proposed
Credit Facility ($20,000,000, less estimated financing costs of $725,000),
all as if such refinancing occurred on August 31, 1997.
INTERSOUND, INC.
SUMMARY OF OPERATIONS DATA(1)
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-------------------------------
1994 1995 1996
--------- --------- --------- EIGHT MONTHS ENDED
DECEMBER 31,
------------------------
1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Gross revenues........................................ $ 26,504 $ 31,620 $ 31,382 $ 21,661 $ 20,152
Returns, allowances and discounts..................... (6,655) (9,026) (8,886) (6,182) (5,864)
--------- --------- --------- ----------- -----------
Total net revenues.................................... 19,849 22,594 22,496 15,479 14,288
Gross profit.......................................... 10,081 12,580 13,215 9,050 8,771
Operating income...................................... 1,675 2,191 2,311 2,067 2,385
Net income............................................ 1,359 1,946 1,957 1,777 2,169
</TABLE>
- ------------------------
(1) The Summary of Operations Data presented in this table is derived from the
Financial Statements of Intersound, Inc. included elsewhere in this Proxy
Statement. The statement of operations data for the eight months ended
December 31, 1995 and 1996 are derived from unaudited financial statements
and include, in the opinion of management, all adjustments (consisting only
of normal recurring adjustments) necessary to present fairly the data for
the periods presented. The Summary of Operations Data should be read in
conjunction with the Financial Statements and notes thereto of Intersound,
Inc. and other financial information included in this Proxy Statement.
10
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROXY STATEMENT,
STOCKHOLDERS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS BEFORE ACTING ON
THE PROPOSALS TO APPROVE THE PREFERRED STOCK ISSUANCE.
DILUTION OF EXISTING STOCKHOLDERS
The sale of a significant number of securities convertible into Common Stock
could cause substantial dilution to the voting power and interests of current
stockholders and, possibly, lead to a change in control of the Company. Based
upon the 5,274,403 shares of Common Stock outstanding as of October 14, 1997,
the shares of Common Stock issuable upon exercise of the Warrants will
constitute 31.2% of the Common Stock outstanding on a fully diluted basis,
assuming the exercise of currently outstanding vested options and warrants and
the conversion of currently outstanding debt securities; the shares of Common
Stock issuable upon the conversion of the Preferred Stock have been excluded
from this calculation as conversion into Common Stock is not allowed until two
years from date of issue. The ownership interests of directors and executive
officers of the Company and their affiliates would decrease from 32.8% to 22.6%
and the ownership interests of other stockholders would decrease from 67.2% to
46.2%, in each case on the fully diluted basis described above. Assuming the
conversion of the Preferred Stock into shares of Common Stock on the date of
issuance, such shares along with the shares of Common Stock issuable upon
exercise of the Warrants would constitute 45.6% of the Common Stock outstanding
on the fully diluted basis described above; and the ownership interests of
directors and executive officers of the Company and their affiliates would
decrease from 32.8% to 17.9% and the ownership interests of other stockholders
would decrease from 67.2% to 32.8%, in each case on the fully diluted basis
described above.
MARKET VALUE OF COMMON STOCK
The sale of a significant number of securities convertible into shares of
Common Stock could cause a decline in the market value of the Common Stock.
CONSEQUENCES IF THE PREFERRED STOCK WITH WARRANTS ISSUANCE IS NOT APPROVED
If the Preferred Stock with Warrants Issuance is not approved by the
Company's stockholders at the Annual Meeting, the consequences could be
materially adverse to the Company's business, results of operations and
financial condition. First, the failure by the Company to repay the Existing
Credit Facility by October 31, 1997 would constitute an Event of Default under
the Existing Credit Facility. In addition to triggering default interest rate
increases and late charges as described under "Proposal 2--Approval of the
Issuance and Sale of Preferred Stock with Warrants--Intersound
Acquisition--Existing Credit Facility," a default would allow BMO, in its
discretion, to pursue any remedy available to it under the Existing Credit
Facility and applicable law. While the Company would pursue alternative methods
to refinance the Existing Credit Facility, including, without limitation,
obtaining longer term debt with the same or different lenders, there can be no
assurances that such financing could be obtained on terms favorable to the
Company, or at all. Second, failure to consummate the Preferred Stock with
Warrants Issuance would eliminate the Company's ability to execute the Proposed
Credit Facility.
ANTITAKEOVER EFFECT OF CERTAIN PROVISIONS
Certain provisions of the Preferred Stock and the Warrants could render more
difficult or discourage attempts to obtain control of the Company. See "Proposal
2--Proposal to Approve the Issuance and Sale of the Preferred Stock with
Warrants--Terms of the Preferred Stock--Change of Control" and "--Terms of the
Warrants--Put Options."
11
<PAGE>
POTENTIAL CONFLICT OF INTEREST
The Company intends to use the proceeds of the Preferred Stock with Warrants
Issuance to repay the indebtedness incurred by the Company under the Existing
Credit Facility. Steven Devick, who is Chairman of the Board, a Director and
Chief Executive Officer of the Company, has personally guaranteed borrowings
under the Existing Credit Facility up to $12,500,000. If the Preferred Stock
with Warrants Issuance is approved by stockholders and consummated (assuming the
execution of the Proposed Credit Facility), Mr. Devick's obligations under the
Existing Credit Facility guarantee will be discharged. Accordingly, Mr. Devick
may have interests in the Preferred Stock with Warrants Issuance that are in
addition to or different from the interests of the Company's stockholders
generally.
FORWARD LOOKING INFORMATION
This Proxy Statement 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 Proxy Statement, 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 the
Existing Credit Facility when or before it becomes due in full on October 31,
1997. If the Preferred Stock with Warrants Issuance is not consummated or such
refinancing does not occur for any reason, the consequences could be materially
adverse to the Company's business, results of operations and financial position.
The Company has consolidated indebtedness that is substantial in relation to
its stockholders' equity. As of August 31, 1997, the Company had outstanding
approximately $40 million of total debt and approximately $6 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 "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" contained elsewhere in
this Proxy Statement.
12
<PAGE>
PROPOSAL 1--ELECTION OF DIRECTORS
The Company's Board of Directors currently consists of eight directors.
Article Six of the Company's Third Amended and Restated Certificate of
Incorporation (the "Certificate of Incorporation") provides that the Board of
Directors shall be classified with respect to the terms for which its members
shall hold office by dividing the members into three classes. At the Annual
Meeting, two directors of Class II will be elected, each to be elected for a
term of three years expiring at the 2000 Annual Meeting of Stockholders. Both of
the nominees are presently serving as directors of the Company. The Board of
Directors recommends that the stockholders vote in favor of the election of the
nominees named in this Proxy Statement to serve as directors of the Company.
Pursuant to the Investment Agreement (as hereinafter defined), the
purchasers of the Preferred Stock and the Warrants will have the right to
designate four members of the Company's Board of Directors. Immediately
following the closing of the Preferred Stock with Warrants Issuance, the Board
of Directors intends to (i) increase its size from eight to eleven, (ii) accept
the resignation of Mr. Salentine and (iii) appoint four designees of the
purchasers of Preferred Stock and Warrants to fill the resulting four vacancies.
See "Proposal 2--Proposal to Approve the Issuance and Sale of the Preferred
Stock with Warrants--Other--Corporate Governance."
The current directors (other than Mr. Salentine) whose terms of office do
not expire in 1997 will continue to serve after the Annual Meeting until such
time as their respective terms of office expire or their successors are duly
elected and qualified. See "Other Directors" below.
If at the time of the Annual Meeting any of the nominees should be unable or
decline to serve, the persons named in the proxy will vote for such substitute
nominee or nominees as the Board of Directors recommends, or vote to allow the
vacancy created thereby to remain open until filled by the Board, as the Board
recommends. The Board of Directors has no reason to believe that any nominee
will be unable or will decline to serve as a director if elected.
NOMINEES
The names of the nominees for the office of director, together with certain
information concerning such nominees, are set forth below:
<TABLE>
<CAPTION>
SERVED AS
NAME AGE POSITION WITH COMPANY DIRECTOR SINCE
- ------------------------------------------------- --- --------------------- ---------------
<S> <C> <C> <C>
Michael P. Cullinane(1)(2)....................... 47 Director 1992
Andrew J. Filipowski(1).......................... 46 Director 1992
</TABLE>
- ------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Michael P. Cullinane has been a Director of the Company since March 1992.
Mr. Cullinane joined PLATINUM TECHNOLOGY, INC. (Nasdaq: PLAT), a publicly-held
software company not affiliated with the Company ("PTI"), in 1988 as Senior Vice
President and Chief Financial Officer. He has also served as Treasurer of PTI
since 1989, as its Executive Vice President since 1994 and as a Director since
1989. See "Compensation Committee Interlocks and Insider Participation."
Andrew J. Filipowski is a co-founder of the Company and has served as a
Director since January 1992. Mr. Filipowski is also a co-founder of PTI and has
been Chairman of the Board of Directors, President and Chief Executive Officer
of PTI since its formation in April 1987. Mr. Filipowski serves as a director of
Eagle River Interactive (Nasdaq: ERIV) ("Eagle River") and System Software
Associates (Nasdaq: SSAX), both publicly-held companies, and as a director of
several privately-held companies. See "Compensation Committee Interlocks and
Insider Participation."
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR BOTH OF THE
NOMINEES FOR ELECTION AS CLASS II DIRECTORS.
13
<PAGE>
OTHER DIRECTORS
The following persons will continue to serve as directors of the Company
after the Annual Meeting until their terms of office expire (as indicated below)
or until their successors are elected and qualified.
<TABLE>
<CAPTION>
SERVED AS
DIRECTOR TERM
NAME AGE POSITION WITH COMPANY SINCE EXPIRES
- ---------------------------------------- ----------- --------------------------------------------- ----------- -----------
<S> <C> <C> <C> <C>
Steven Devick(1)........................ 45 Chairman of the Board, Chief Executive 1992 1998
Officer and President
Douglas C. Laux......................... 44 Chief Financial Officer, Secretary and 1995 1999
Director
Craig Duchossois(1)(2).................. 52 Director 1994 1998
Rodney L. Goldstein(1).................. 45 Director 1994 1998
Paul L. Humenansky...................... 40 Director 1992 1999
Thomas J. Salentine(2).................. 29 Director 1997 1999
</TABLE>
- ------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Steven Devick is a co-founder of the Company and has served as its Chairman
of the Board and Chief Executive Officer since January 1992. On January 1, 1996,
Mr. Devick assumed the additional office of President. Mr. Devick is also a
director of PTI, and an officer and director of several privately-held
companies. See "Compensation Committee Interlocks and Insider Participation."
Douglas C. Laux has served the Company as Chief Financial Officer and as a
Director since September 1995 and as Secretary since February 1996. From October
1986 until he joined the Company, Mr. Laux was a partner in the accounting firm
of Ernst & Young LLP.
Craig Duchossois has been a Director of the Company since April 1994. Mr.
Duchossois has been President and Chief Executive Officer of Duchossois
Industries, Inc., a privately-held diversified manufacturing and service
organization since 1986. Mr. Duchossois also serves as Chairman of the Board of
Directors of a privately-held company.
Rodney L. Goldstein has been a Director of the Company since June 1994.
Since 1981, Mr. Goldstein has been the managing partner of Frontenac Company
("Frontenac"). Mr. Goldstein currently serves on the boards of Eagle River and a
number of privately-held companies.
Paul L. Humenansky has been a Director of the Company since March 1992. Mr.
Humenansky is a founder and director of PTI and was appointed Chief Operations
Officer of PTI in January 1993. Mr. Humenansky also served as PTI's Executive
Vice President, Product Development from 1987 until 1992. Mr. Humenansky also
serves on the boards of two privately-held companies.
Thomas J. Salentine has been a director of the Company since February 1997.
Mr. Salentine served as an investment analyst at Frontenac from 1993 to 1994,
and returned to Frontenac in 1996 after completing a Masters of Management
degree with distinction from the J.L. Kellogg Graduate School of Management at
Northwestern University. Mr. Salentine previously spent three years as an
analyst and associate with Bear, Stearns & Co., Inc. and also worked with
DreamWorks SKG.
DIRECTOR COMPENSATION
The Company's non-employee Directors do not receive any cash compensation
for their services; however, the Company reimburses such Directors for travel
expenses incurred in connection with their activities on behalf of the Company.
Each of Messrs. Cullinane, Duchossois, and Humenansky has been granted 4,000
shares of Common Stock pursuant to the Company's 1995 Directors' Stock Option
Plan.
14
<PAGE>
Each of Messrs. Filipowski, Humenansky, Cullinane, Duchossois and Goldstein has
been granted options to purchase 19,000 shares of Common Stock pursuant to the
Company's 1995 Employee Incentive Compensation Plan. In addition, the Board has
approved, subject to the approval by the stockholders of the Company of Proposal
No. 3 hereunder, the issuance of options to purchase 15,000 shares of Common
Stock pursuant to the Company's 1995 Directors' Stock Option Plan to each of
Messrs. Filipowski, Humenansky, Cullinane, Duchossois and Goldstein. See
"Proposal 3--Approval of Amendment to the Company's 1995 Directors' Stock Option
Plan."
MEETINGS
During the year ended May 31, 1997, the Board of Directors held eight formal
meetings. Each current Director attended at least 75% of the aggregate of the
number of board meetings held and the total number of meetings of committees on
which he served that were held during the fiscal year ended May 31, 1997.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established an Audit Committee and a Compensation
Committee. The Audit Committee currently consists of Messrs. Cullinane,
Duchossois, Humenansky and Salentine. The Compensation Committee currently
consists of Messrs. Devick, Duchossois, Filipowski and Goldstein. The Board of
Directors may establish such other committees as deemed necessary and
appropriate from time to time, including, but not limited to, an Executive
Committee. The Company does not have a nominating committee.
The Audit Committee makes recommendations concerning the engagement of
independent public accountants, reviews with the independent public accountants
the plans and results of the audit engagement, approves professional services
provided by the independent public accountants, reviews the independence of
public accounts, considers the range of audit and non-audit fees and reviews the
adequacy of the Company's internal accounting controls. The Audit Committee held
one formal meeting in fiscal 1997.
The Compensation Committee determines the compensation of the Company's
executive officers and the members of the Compensation Committee who are not
employees of the Company make determinations as to the grant of options to
purchase shares of the Company's stock under the Company's stock option plans.
The Compensation Committee held three formal meetings in fiscal 1997.
EXECUTIVE OFFICERS
Set forth below is a table identifying the executive officer of the Company
who is not identified in the tables entitled "Directors and Executive Officers
of the Registrant--Directors."
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------------ ----------- ---------------------------------------------------
<S> <C> <C>
Thomas R. Leavens..................................... 49 Chief Operating Officer and General Counsel
Lynne Hoffman-Engel................................... 45 Executive Vice President-Sales and Marketing
</TABLE>
Mr. Leavens has been the General Counsel and Chief Operating Officer of the
Company since September 1992. From December 1986 until he joined the Company,
Mr. Leavens was a partner in the law firm McBride, Baker & Coles.
Ms. Hoffman-Engel joined the Company as its Senior Vice President--Sales and
Marketing in June 1996. In September 1997, Ms. Hoffman-Engel was promoted to
Executive Vice President--Sales and Marketing. Prior to joining the Company,
from 1993 to 1996 Ms. Hoffman-Engel served as Senior Vice President--Sales and
Marketing--Classics and Jazz for PolyGram Inc. ("PolyGram") and from 1987 to
1993 as Vice President for London Records, a PolyGram label.
15
<PAGE>
The Board of Directors elects officers annually and such officers serve at
the discretion of the Board. Each of Messrs. Devick, Laux and Leavens and Ms.
Hoffman-Engel, however, has an employment agreement with the Company. See
"--Executive Compensation--Employment Agreements." There are no family
relationships among any of the directors or officers of the Company.
SECTION 16(A) COMPLIANCE
Section 16 of the Securities Exchange Act of 1934, as amended (the "1934
Act"), requires the Company's officers and directors and persons who own greater
than 10% of a registered class of the Company's equity securities to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission (the "Commission") and The Nasdaq Stock Market. Based solely on a
review of the forms it has received and on written representations from certain
reporting persons that no such forms were required for them, the Company
believes that, during fiscal 1997 all Section 16 filing requirements applicable
to its officers, directors and greater than 10% beneficial owners were complied
with by such persons, except that Mr. Duchossois inadvertently failed to timely
report a purchase of shares of Common Stock of the Company on Form 4, Messrs.
Laux and Leavens inadvertently failed to timely file a Form 5 and Mr. Salentine
inadvertently failed to timely file a Form 3.
EXECUTIVE COMPENSATION.
The following table provides information concerning the annual and long-term
compensation for services rendered to the Company during the fiscal year ended
May 31, 1997 to its chief executive officer and the other executive officers of
the Company whose total annual salary and bonus exceeded $100,000 during such
period (each, a "Named Executive Officer").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
--------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION ($)
- --------------------------------------------------------- ---------- --------------- ------------- ---------------------
<S> <C> <C> <C> <C>
Steven Devick............................................ $ 570,263 -- 200,000(1) --
President and Chief Executive Officer(1) 268,044(2)
Douglas C. Laux.......................................... 252,911 -- 125,000 --
Chief Financial Officer and Secretary(3)
Lynne Hoffman-Engel...................................... 227,884 -- 20,000 --
Executive Vice President--Sales and Marketing
Thomas R. Leavens........................................ 200,483 -- 55,000 --
Chief Operating Officer and General Counsel
</TABLE>
- ------------------------
(1) Such options were granted on February 18, 1997 in connection with an option
repricing transaction in consideration of the Devick Guaranty. See
"Compensation Committee Report on Repricing of Options."
(2) The vesting of such options held by Mr. Devick was accelerated to February
18, 1997 in consideration of the Devick Guaranty (as hereinafter defined).
See "Certain Relationships and Related Transactions."
16
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR--The following table provides information
on grants of stock options during the fiscal year ended May 31, 1997 to the
Named Executive Officers. No stock appreciation rights were granted to the Named
Executive Officers during fiscal 1997.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE
NUMBER OF TOTAL VALUE AT ASSUMED
SECURITIES OPTIONS ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO PRICE APPRECIATION FOR
OPTIONS EMPLOYEES EXERCISE OR OPTION TERM(2)
GRANTED IN FISCAL BASE PRICE EXPIRATION ----------------------
NAME (#)(1) YEAR ($/SH) DATE 5% ($) 10% ($)
- ------------------------------------- ------------ ----------- ------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Steven Devick........................ 200,000(3) 90.5% 6.75 4/29/06 604,674 1,762,491
268,044(4) 6.00 1/13/07 1,011,429 2,563,159
Douglas C. Laux...................... 125,000(5) 24.2% 6.00 1/13/07 471,671 1,195,307
Thomas R. Leavens.................... 55,000(5) 10.6% 6.00 1/13/07 207,535 525,935
Lynne Hoffman-Engel.................. 20,000(5) 3.9% 6.00 1/13/07 75,400 191,200
</TABLE>
- ------------------------
(1) Each of these options was granted pursuant to the Employee Incentive
Compensation Plan and is subject to the terms of such plan. All options were
granted at an exercise price equal to the fair market value of the Company's
Common Stock on the date of grant as determined by the Compensation
Committee of the Board of Directors of the Company.
(2) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), shown are the hypothetical gains or "option spreads" that
would exist for the respective options. These gains are based on assumed
rates of annual compounded stock price appreciation of 5% and 10% from the
date the option was granted over the full option term of ten years. The 5%
and 10% assumed rates of appreciation are mandated by the rules of the
Commission and do not represent the Company's estimate or projection for
future increases in the price of its Common Stock.
(3) Such options were granted on February 18, 1997 in connection with an option
repricing transaction and vested in full on such date in consideration of
the Devick Guaranty. See "Compensation Committee Report on Repricing of
Options."
(4) The vesting of such options held by Mr. Devick was accelerated to February
18, 1997 in consideration of the Devick Guaranty. See "Certain Relationships
and Related Transactions."
(5) One-third of these options become exercisable annually beginning 1/13/98.
FISCAL YEAR-END OPTION VALUES--The following table sets forth for the Named
Executive Officers information concerning the value of unexercised stock options
at May 31, 1997. No stock options were exercised during the fiscal year ended
May 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
YEAR-END AT FISCAL YEAR-END(1)
(#) ($)
----------------------- -----------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- --------------------------------------------------------------- ----------------------- -----------------------
<S> <C> <C>
Steven Devick.................................................. 676,344/676,344 --/--
Douglas C. Laux................................................ 65,100/216,200 --/--(2)
Thomas R. Leavens.............................................. 53,333/81,667 125,000/--
Lynne Hoffman-Engel............................................ --/20,000 --/--
</TABLE>
- ------------------------
(1) The value per option is calculated by subtracting the exercise price from
the closing price of the Common Stock on the Nasdaq National Market on May
31, 1997 of $5.625 per share.
(2) Upon exercise of certain of these options (exercisable for 39,000 shares of
Common Stock at an exercise price of $6.00 per share), Mr. Laux will receive
a cash bonus equal to the exercise price.
17
<PAGE>
EMPLOYMENT AGREEMENTS
On June 1, 1997, the Company entered into a three-year employment agreement
with Steven Devick, for the position of Chief Executive Officer of the Company.
Unless terminated or not renewed by the Company or Mr. Devick, the term of the
agreement will continue after the initial three-year term on a year-to-year
basis. The agreement provides for an annual base salary of $625,000 plus bonus
compensation determined by the Compensation Committee of the Board of Directors.
Mr. Devick's employment agreement also provides for continuation of his salary,
bonus and fringe benefits for three years following termination of employment if
Mr. Devick (i) is terminated by the Company without cause, (ii) terminates his
employment for Good Reason (as defined below) or (iii) is notified by the
Company of its intent not to extend the agreement beyond its initial term. So
long as Mr. Devick does not engage in conduct giving rise to the right to
terminate employment for cause, Good Reason includes (i) the failure to elect
the executive to the office previously held, the removal of the executive from
his position or the assignment to the executive of any additional duties or
responsibilities or a reduction in executive's duties or responsibilities which,
in either case, are inconsistent with those customarily associated with such
position; (ii) a relocation by the Company of the executive's place of
employment beyond a specified area; (iii) material breach by the Company of the
agreement; (iv) a purported termination of executive's employment in
contravention of the notice provisions of the agreement and (v) the occurrence
of a change in control of the Company.
On June 1, 1997, the Company also entered into employment agreements with
Douglas C. Laux, for the position of Chief Financial Officer, and Thomas R.
Leavens, for the position of General Counsel. Each of the agreements is for a
three-year term, subject to renewal on a year-to-year basis unless terminated or
not renewed by the Company or the executive. The agreements provide for annual
salaries of $300,000 for Mr. Laux and $250,000 for Mr. Leavens, plus bonus
compensation determined by the Compensation Committee of the Board of Directors.
The employment agreements contain severance provisions substantially identical
to those contained in Mr. Devick's agreement except that the severance periods
for Messrs. Laux and Leavens extend until the later of (i) the end of the term
of the employment agreement and (ii) the first anniversary of the date of
executive's termination.
In addition, under a previous employment agreement with the Company, Mr.
Laux was granted options to purchase 39,000 shares of Common Stock at an
exercise price of $6.00 per share of Common Stock, with options for 13,000
shares becoming exercisable on each of July 25, 1996, 1997 and 1998. Such
agreement further provides that upon the exercise by Mr. Laux of any of such
options, he will be entitled to receive a cash bonus equal to the exercise
price.
The Company entered into an employment agreement on July 1, 1996 with Lynne
Hoffman-Engel pursuant to which Ms. Hoffman-Engel became the Senior Vice
President--Sales and Marketing of the Company. In September 1997, she was
promoted to Executive Vice President--Sales and Marketing. The term of Ms.
Hoffman-Engel's employment is for a period of three years and four months. The
agreement provides for an annual base salary of $250,000 plus a bonus in the
amount of $25,000 and further incentive compensation (determined and based on an
annual basis) for achieving sales results that meet performance goals
established from time to time by the Company. Under the agreement, the Company
also granted Ms. Hoffman-Engel an option to purchase 20,000 shares of the
Company's Common Stock pursuant to the Company's Employee Incentive Compensation
Plan.
No other Named Executive Officer has an employment agreement with the
Company.
COMPENSATION COMMITTEE REPORT ON REPRICING OF OPTIONS
The Compensation Committee and the Board of Directors approved and ratified
the repricing of certain options to purchase Common Stock for Mr. Devick during
the fiscal year ended May 31, 1997.
On February 18, 1997, in consideration of the Devick Guaranty, the Board of
Directors approved and ratified the repricing by the Company of certain options
to purchase Common Stock granted to Mr. Devick
18
<PAGE>
under the Employee Compensation Plan in fiscal 1997, at the fair market value of
the Company's Common Stock on February 18, 1997, as determined by the
Compensation Committee. See "Certain Relationships and Related Transactions."
The following table provides information on repricing of stock options
granted to Mr. Devick during the fiscal year ended May 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES MARKET PRICE EXERCISE EXPIRATION
UNDERLYING OF STOCK AT PRICE AT NEW DATE OF
OPTIONS TIME OF TIME OF EXERCISE OPTION AT
DATE OF REPRICED REPRICING REPRICING PRICE DATE OF
NAME REPRICING (#) ($) ($) ($) REPRICING
- --------------------------------------------- ----------- ----------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Steven Devick................................ 2/18/97 200,000 6.75 11.625 6.75 4/29/06
</TABLE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors sets and administers
the policies that govern the annual and long-term compensation of executive
officers of the Company. The non-employee members of the Compensation Committee
(the "Incentive Plan Committee"), based in part on recommendations by Mr.
Devick, make all decisions concerning awards of stock options under the
Company's stock option plans, except the plan for non-employee directors. Mr.
Devick does not participate in the Compensation Committee's determinations with
respect to his own compensation.
COMPENSATION POLICIES TOWARD EXECUTIVE OFFICERS
The Compensation Committee aims to provide competitive levels of
compensation that relate compensation with the Company's annual and long-term
performance goals, reward above average corporate performance, recognize
individual initiative and achievements, and assist the Company in attracting and
retaining qualified executives. The Compensation Committee attempts to achieve
these objectives through a combination of base salary, stock options, and cash
bonus awards. In making its determination, the Compensation Committee utilizes
outside information to obtain compensation information concerning comparable
companies in the entertainment industry.
BASE SALARY
The base salaries for Messrs. Devick and Laux and Ms. Hoffman-Engel for
fiscal 1997 were governed by the terms of their then-existing respective
employment agreements with the Company. Messrs. Devick and Laux have executed
new employment agreements in fiscal 1998. See "Executive Compensation--
Employment Agreements." The base salary for fiscal 1997 reported herein for Mr.
Leavens was determined by the Compensation Committee based on subjective
evaluations of his performance, the Company's performance, and a comparison to
salary ranges for executives of other companies in the entertainment industry.
INCENTIVE STOCK OPTIONS
Stock options are granted to executive officers and other employees of the
Company as a means of providing long-term incentives. The Compensation Committee
believes that stock options encourage increased performance by the Company's
employees, including its officers, and align the interests of the Company's
employees with the interests of the Company's stockholders. Stock options were
granted to Messrs. Devick, Laux and Leavens and Ms. Hoffman-Engel utilizing the
same criteria as were used for setting base salaries. During fiscal 1997, the
Company repriced certain stock options and accelerated the vesting of certain
stock options held by Mr. Devick in consideration of the Devick Guaranty, and
not as compensation for Mr. Devick's services. See "Certain Relationships and
Related Transactions" and "Compensation Committee Report on Repricing of
Options."
19
<PAGE>
CASH BONUS AWARDS
The Compensation Committee considers on an annual basis whether to pay cash
bonuses to some or all of the Company's employees, including the Company's
executive officers. None of the Named Executive Officers received cash bonuses
for fiscal 1997.
CHIEF EXECUTIVE OFFICER COMPENSATION
The base salary for Mr. Devick ($575,000) for fiscal 1997 was governed by
the terms of an employment agreement dated January 31, 1997. The Company entered
into a new employment agreement with Mr. Devick on June 1, 1997. Pursuant to
such agreement, Mr. Devick's annual base salary was set at $625,000 plus an
annual bonus subject to the terms of the agreement. See "Executive
Compensation-- Employment Agreements." The Incentive Plan Committee granted
certain stock options to Mr. Devick to recognize fully his contributions,
including the successful acquisition of Intersound, Inc. by the Company on
January 31, 1997, and to provide him with sufficient incentives to continue his
efforts as Chief Executive Officer.
COMPLIANCE WITH SECTION 162(M)
The Compensation Committee currently intends for all compensation paid to
the Named Executive Officers to be tax deductible to the Company pursuant to
Section 162(m) ("Section 162(m)") of the Code. Section 162(m) provides that
compensation paid to the Named Executive Officers in excess of $1,000,000 cannot
be deducted by the Company for Federal income tax purposes unless, in general,
such compensation is performance based, is established by a committee of outside
directors and is objective and the plan or agreement providing for such
performance-based compensation has been approved in advance by stockholders.
Consistent with this intention, the Company submitted the Incentive Plan for
stockholder approval last year, and the Compensation Committee made all stock
option awards to the Named Executive Officers for 1995 pursuant to the Incentive
Plan. In the future, however, the Board may determine to adopt a compensation
program that does not satisfy the conditions of Section 162(m) if in the Board's
judgment, after considering the additional costs of not satisfying 162(m), such
program is appropriate.
COMPENSATION COMMITTEE
Steven Devick
Michael P. Cullinane
Craig Duchossois
Andrew J. Filipowski
Rodney L. Goldstein
20
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Devick, Cullinane, Duchossois, Filipowski and Goldstein are the
members of the Company's Compensation Committee. Mr. Devick serves on the
Compensation Committee of PTI, of which Mr. Filipowski is Chairman and Chief
Executive Officer and Mr. Cullinane is Executive Vice President, Chief Financial
Officer and Treasurer.
PERFORMANCE GRAPH
COMPARISON OF 14 MONTH CUMULATIVE TOTAL RETURN*
AMONG PLATINUM ENTERTAINMENT, INC., THE NASDAQ STOCK MARKET
(U.S.) INDEX AND A PEER GROUP
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
PLATINUM ENTERTAINMENT, INC. PEER GROUP NASDAQ STOCK MARKET (U.S.)
<S> <C> <C> <C>
3/12/96 $100 $100 $100
5/96 $129 $98 $116
8/96 $115 $88 $107
11/96 $65 $91 $121
2/97 $46 $90 $122
5/97 $43 $102 $131
</TABLE>
* $100 invested on 3/12/96 in stock or index - including reinvestment of
dividends. Fiscal year ending May 31.
21
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
DEVICK GUARANTY
In order to fund the cash consideration for the acquisition of Intersound,
Inc. the Company and its subsidiaries entered into that certain Credit
Agreement, dated January 31, 1997, as amended and restated, with Bank of
Montreal, individually and as agent for certain lenders, pursuant to which the
lenders agreed to provide a term loan in the amount of $25,000,000 and a
revolving credit facility in the amount of $10,000,000 (the "Existing Credit
Facility"). Steven Devick, a director and officer of the Company, has personally
guaranteed borrowings under the Existing Credit Facility up to $12,500,000 (the
"Devick Guaranty"). In consideration of the Devick Guaranty, in fiscal 1997 the
Company repriced certain stock options and accelerated the vesting of certain
options held by Mr. Devick. See "--Compensation Committee Report on Repricing of
Options." In addition, in fiscal 1998 the Company issued certain stock options
to Mr. Devick in consideration of the Devick Guaranty.
The Company has adopted a policy that all future transactions with
affiliated entities or persons will be on terms no less favorable than could be
obtained from unrelated parties and all future transactions between the Company
and its officers, directors, principal stockholders and affiliates will be
approved by a majority of the Company's independent directors.
22
<PAGE>
PROPOSAL 2--PROPOSAL TO APPROVE THE ISSUANCE AND SALE OF
THE PREFERRED STOCK WITH WARRANTS
GENERAL
The stockholders of the Company are being asked to approve the Preferred
Stock with Warrants Issuance, the proceeds from which will be used to retire a
portion of the indebtedness incurred under the Existing Credit Facility. The
Company entered into the Existing Credit Facility primarily to fund the cash
consideration for the acquisition of Intersound. See "Acquisition of
Intersound."
The Company has entered into an Investment Agreement, dated as of October
12, 1997 (the "Investment Agreement") with MAC Music LLC, a Delaware limited
liability company ("MAC"), and SK-Palladin Partners, LP, a Delaware limited
partnership ("Palladin" and, together with MAC, the "Purchasers"). Pursuant to
the Investment Agreement, the Company has agreed to issue and sell to the
Purchasers, and the Purchasers have agreed to purchase from the Company, for
aggregate consideration of $20,000,000, 20,000 shares of Preferred Stock and
Warrants to purchase an aggregate 3,600,000 shares of Common Stock. The
consummation of the Preferred Stock with Warrants Issuance is subject to a
number of closing conditions, including without limitation (i) approval by the
Company's stockholders of the Preferred Stock with Warrants Issuance, (ii)
execution of the Proposed Credit Facility, (iii) satisfactory completion by the
Purchasers of their due diligence review of the Company and (iv) other customary
closing conditions.
The following is a summary of the terms of the Preferred Stock and the
Warrants. The Investment Agreement, the Certificate of Designations for the
Preferred Stock and a Form of Warrant have been filed with the Securities and
Exchange Commission as appendices to this Proxy Statement.
TERMS OF THE PREFERRED STOCK
DIVIDENDS
The Preferred Stock will accrue dividends compounded quarterly at an annual
rate of 12% for the first year, 14% for the second year, 16% for the third year,
18% for the fourth and fifth years and 20% at all times thereafter, of the
$1,000 per share liquidation value (the "Liquidation Value") in preference to
any dividend on any other class of capital stock. The Company does not currently
intend to pay dividends accrued on the Preferred Stock in cash.
OPTIONAL REDEMPTION
The Preferred Stock will be redeemable, in whole or part, at the option of
the Company, at any time, on at least 60 days notice, at a redemption price
equal to the Liquidation Value plus accrued and unpaid dividends (the
"Redemption Value").
CONVERSION
A Preferred Stockholder will have the right to convert each share of
Preferred Stock, at the option of the holder, at any time or times, commencing
two years from the date of issuance, into shares of Common Stock at the
Conversion Price. The Conversion Price of the Common Stock will be $6.60 per
share (the "Conversion Price") and will be subject to adjustment as described
under "--Antidilution Protection." The number of shares of Common Stock issuable
upon conversion of a share of Preferred Stock will be such number as is equal to
the quotient obtained by dividing the then applicable Redemption Value of such
share by the Conversion Price. At the Conversion Price of $6.60 per share,
conversion of all of the shares of the Preferred Stock at the two-year and
five-year anniversaries of the date of issuance would result in the issuance of
3,914,000 and 6,511,000 shares of Common Stock, respectively.
CHANGE OF CONTROL
In the event that there is a Change of Control of the Company (as defined
below), the Company will be obligated to offer to purchase all of the
outstanding shares of the Preferred Stock at a price equal to
23
<PAGE>
110% of the then applicable Redemption Value. The Company is obligated to make
such offer as soon as practicable and if possible not less than 60 days prior to
the effective date of the change of control (the "Trigger Date"). Payment for
the Preferred Stock tendered pursuant to such offer will be made on the Trigger
Date. "Change of Control" means (i) the direct or indirect sale, lease, exchange
or other transfer of all or substantially all of the assets of the Company to
any Person or entity or group of Persons or entities acting in concert as a
partnership or other group (a "Group of Persons"), (ii) the merger or
consolidation of the Company with or into another corporation with the effect
that the then existing stockholders of the Company hold less than 50% of the
combined voting power of the then outstanding securities of the surviving
corporation of such merger or the corporation resulting from such consolidation
ordinarily (and apart from rights accruing under special circumstances) having
the right to vote in the election of directors, (iii) the replacement of a
majority of the Board of Directors, over a two-year period, from the directors
who constituted the Board of Directors at the beginning of such period, and such
replacement shall not have been approved by the Board of Directors (or its
replacements approved by the Board of Directors) as constituted at the beginning
of such period, and (iv) a Person or Group of Persons (other than the Purchasers
and their affiliates) shall, as a result of a tender or exchange offer, open
market purchases, privately negotiated purchases or otherwise, have become the
beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of
securities of the Company representing 49% or more of the combined voting power
of the then outstanding securities of the Company ordinarily (and apart from
rights accruing under special circumstances) having the right to vote in the
election of directors.
LIQUIDATION PREFERENCES
In the event of any voluntary or involuntary dissolution, liquidation or
winding up of the Company, the Preferred Stockholders will be entitled to
receive, after payment or provision for payment of the Company's debts and other
obligations, in preference to the holders of any class of stock junior to the
Preferred Stock, an aggregate amount equal to the Liquidation Value plus accrued
and unpaid dividends.
VOTING RIGHTS
Approval by holders of a majority of the outstanding shares of Preferred
Stock, voting as a separate class, will be required for any action which (a)
alters or changes the rights, preferences or privileges of the Preferred Stock,
(b) creates or issues any new class of shares having, or reclassifies any junior
class or series of shares to have, a preference over or parity with the
Preferred Stock, (c) effects any redemption or repurchase of any capital stock
or options of the Company (other than upon the repurchase by the Company of
Common Stock or options issued to employees or others providing services to the
Company up to an aggregate amount of $1 million), or (d) declares or pays any
dividends with respect to any class of stock junior to or on a parity with the
Preferred Stock.
In addition, if any shares of Preferred Stock remain outstanding on the
fifth anniversary of the issuance date, then the number of directors on the
Company's Board of Directors will be increased by four and the holders of the
shares of Preferred Stock, voting separately as a class, will be entitled to
elect eight directors.
LIMITATION ON TRANSACTIONS WITH AFFILIATES
The Company will not directly or indirectly enter into any transaction with
an affiliate including, without limitation, the purchase, sale, lease or
exchange of any property or the rendering of any service, with or to any
affiliate, and investments, loans or advances by or to any affiliate except for
transactions entered into in good faith, on terms substantially no less
favorable to the Company than could be obtained from a third party.
ANTIDILUTION PROTECTION
The Conversion Price and the number of shares issuable upon conversion of
the Preferred Stock will be subject to (i) adjustment in connection with any
stock split or stock dividend and (ii) antidilution
24
<PAGE>
adjustment on a price-based weighted average basis if (x) subject to certain
exceptions, the Company issues Common Stock or common stock equivalents at a
purchase price per share that is less than the greater of the then current
market price of the Common Stock and the Conversion Price of the Common Stock or
(y) the Company purchases or exchanges shares of Common Stock for cash or
Company securities (or any combination thereof) having a value greater than the
then current market price of the Common Stock.
TERMS OF THE WARRANTS
EXERCISE RIGHTS
The Common Stock underlying the Warrants may be purchased at the price of
$6.60 per share (the "Exercise Price"), paid in cash, or equivalent shares. The
Exercise Price will be subject to adjustment as described under "--Antidilution
Protection." The number of shares which may be received upon exercise of the
Warrants will be increased by an amount equal to 12% of the shares initially
underlying the Warrants on each anniversary of the original date of issuance of
the Preferred Stock, so long as any Preferred Stock remains outstanding.
Based upon the 5,274,403 shares of Common Stock outstanding as of October
14, 1997, the shares of Common Stock issuable upon exercise of the Warrants will
constitute 31.2% of the Common Stock outstanding on a fully diluted basis,
assuming the exercise of currently outstanding vested options and warrants and
the conversion of currently outstanding debt securities; the shares of Common
Stock issuable upon the conversion of the Preferred Stock have been excluded
from this calculation as conversion into Common Stock is not allowed until two
years from the date of issue. On the fully diluted basis described above, the
ownership interests of directors and executive officers of the Company and their
affiliates would decrease from 32.8% to 22.6% and the ownership interests of
other stockholders would decrease from 67.2% to 46.2%.
EXERCISE PERIOD
The Warrants will be exercisable by the holders at any time, or from time to
time, until October 31, 2007.
SEPARABILITY
The Warrants may be transferred separately from the Preferred Stock.
PUT OPTIONS
At any time on or after the fifth anniversary of the issue date, any Warrant
holder may require the Company to repurchase all of its Warrants and shares of
Common Stock issued in connection with the exercise of its Warrants at a price
equal to the current market price of the Common Stock less any applicable
exercise price for the Warrants. At or any time after a Change of Control, any
Warrant holder may require the Company to repurchase its Warrants at Fair Market
Value (as defined in the Warrants). In the event that the Company defaults on
its repurchase obligations, the Purchasers may, in addition to any other
remedies available to them, designate a majority of the Board of Directors.
Change of Control under the Warrants is defined in the same manner as such term
is defined in the Certificate of Designations for the Preferred Stock.
ANTIDILUTION PROTECTION
The Exercise Price and the number of shares issuable upon exercise of the
Warrants will be subject to (i) adjustment in connection with any stock split or
stock dividend and (ii) antidilution adjustment on a price-based weighted
average basis if (x) subject to certain exceptions, the Company issues Common
Stock or common stock equivalents at a purchase price per share that is less
than the greater of the then current market price of the Common Stock and the
Exercise Price of the Warrants or (y) the Company purchases
25
<PAGE>
or exchanges shares of Common Stock for cash or Company securities (or any
combination thereof) having a value greater than the then current market price
of the Common Stock.
OTHER
REGISTRATION RIGHTS
REGISTRABLE SECURITIES. All shares of Common Stock issued or issuable upon
conversion of the Preferred Stock or exercise of the Warrants shall be deemed
"Registrable Securities."
DEMAND RIGHTS. Holders of Registrable Securities will be entitled to six
demand registrations beginning 270 days after the closing of the Private
Placement. Demands are exercisable by holders of least 25% of the Registrable
Securities; provided, however, that the Company will not be obligated to effect
more than four registrations on forms other than Form S-3; and provided further
that the Company will not be required to file any registration statement after
the fourth demand unless the anticipated aggregate proceeds to holders of
Registrable Securities participating in such demand registration net of
underwriting discounts and commissions, would exceed $2,500,000. Holders of
Registrable Securities will have priority over the Company or any other person
piggybacking on any demand registration.
PIGGYBACK REGISTRATION. If the Company proposes to register any of its
equity securities other than on Forms S-4 and S-8, it will notify each holder of
Registrable Securities and, if so requested by such holder, will use its best
efforts to register such holder's Registrable Securities. The holders of
Registrable Securities are subject to pro-rata cutback on any piggyback
registration if the underwriters for such offering believe that the offering
cannot support all requested piggyback securities.
REGISTRATION EXPENSES. The registration expenses (exclusive of underwriting
discounts and commissions) will be borne by the Company.
CORPORATE GOVERNANCE
BOARD REPRESENTATION. For so long as the Purchasers (and their affiliates)
hold in the aggregate not less than 35% of the Warrant Shares (as hereinafter
defined), the Company's Board of Directors will consist of not more than eleven
members, four of which will be designated by the Purchasers (the "Purchaser
Directors") and two of which shall be individuals who are neither Purchaser
Directors nor officers or employees of the Company or its affiliates
("Unaffiliated Directors"). During such time as the Purchasers (and their
affiliates) hold in the aggregate at least 15% but less than 35% of the Warrant
Shares, the Purchasers shall be entitled to designate two directors. If (a) the
Company defaults on its obligation to purchase Warrants in accordance with the
terms of the Warrants or (b) an Event of Default occurs under the Company's
senior loan facility and (1) such default continues for at least 30 days after
any applicable notice or grace period or (2) the senior indebtedness is
accelerated, the Purchasers shall be entitled to designate additional directors
such that Purchaser Directors constitute a majority of the Board. If on the
fifth anniversary of the date of issuance any shares of Preferred Stock remain
outstanding, the number of directors will be increased by four, and the
Purchasers will be entitled to designate eight directors. "Warrant Shares" means
shares of Common Stock underlying the Warrants and shares of Common Stock that
were received upon exercise of the Warrants.
COMMITTEES. For so long as the Purchasers (and their affiliates) hold in
the aggregate not less than 35% of the Warrant Shares, any Committees of the
Board of Directors, including the executive, audit and compensation committees,
will have a majority of Purchaser Directors and Unaffiliated Directors. Two
members of each committee shall be Purchaser Directors. If the Purchasers (and
their affiliates) hold at least 15% but less than 35% of the Warrant Shares, one
member of each committee shall be a Purchaser Director.
MAJOR DECISIONS. For so long as the Purchasers (and their affiliates) hold
in the aggregate not less than 35% of the Warrant Shares, certain major
decisions, including (i) subject to certain exceptions, the incurrence of debt
in excess of $1,000,000 or the issuance of securities, (ii) acquisitions or
dispositions of
26
<PAGE>
material assets, (iii) the approval of, and any amendments to, the corporate
budget, (iv) changes in the senior management team or the material terms and
conditions of their employment, and (v) joint ventures or material or
extraordinary licensing agreements, must be approved by two-thirds of the Board
of Directors. For so long as any Warrants or Warrant Shares remain outstanding,
any transactions between the Company and an affiliate (other than transactions
between or among the Company and its subsidiaries in the ordinary course)
including payments, property or assets in excess of $200,000 must be approved by
members of the Board of Directors who constitute a majority of those directors
who are either Unaffiliated Directors or Purchaser Directors.
BYLAW AMENDMENT. The closing of the Preferred Stock with Warrants Issuance
is conditioned upon, among other things, the adoption and approval by the Board
of Directors of an amendment to the Company's Amended and Restated Bylaws
effecting the corporate governance provisions described above. The form of such
amendment has been filed with the Securities and Exchange Commission as an
appendix to this Proxy Statement.
PRINCIPAL STOCKHOLDERS' AGREEMENT. Each of Steven Devick, Frontenac VI
Limited Partnership, Andrew J. Filipowski and Craig Duchossois has agreed with
the Purchasers to (i) vote all shares of Common Stock held by them in favor of
the Preferred Stock with Warrants Issuance, (ii) not grant any proxy to vote any
shares in a manner inconsistent with such agreement and (iii) take such action
as shall be necessary to permit the Company to comply with the corporate
governance provisions set forth above.
TRANSACTION FEE
The Company will pay the Purchasers a Transaction Fee equal to 2% of the
Preferred Stock.
CONSULTING FEE
The Company will enter into a five-year consulting agreement with each
Purchaser (or its affiliate) pursuant to which each Purchaser (or its affiliate)
will provide certain financial and business consulting services to the Company
and will be paid an annual management fee of $200,000. Cash compensation payable
to officers or employees of such consultants serving as Directors of the Company
will be reduced, pro rata, up to the amount of the fee paid to the consultant.
The Company will also indemnify each Purchaser and its affiliates for any
liability it may incur in connection with the performance of the consulting
agreement.
RIGHT OF FIRST REFUSAL
The Company will grant to MAC an exclusive right for 90 days following the
closing of the Preferred Stock with Warrants Issuance to negotiate with the
Company to agree upon terms for granting MAC an exclusive license to distribute
all of the Company's master recordings in China. In addition, the Company will
grant to MAC a similar 90-day exclusive negotiating period when the existing
distribution licenses relating to Indonesia, Malaysia, Thailand or Vietnam
expire, with respect to a distribution license in those countries. If the
parties are unable to agree upon the terms for any such license during any such
exclusive period, the Company may not enter into any license with any third
party to distribute the Company's master recordings in any such country without
first offering MAC an opportunity to enter into a license for such country on
substantially the same terms to which the third party was prepared to agree.
USE OF PROCEEDS
The gross proceeds of $20,000,000 to be received by the Company are expected
to be used as follows: approximately $18,200,000 will be used to repay
indebtedness incurred under the Existing Credit Facility, $900,000 will be paid
to the placement agents as fees for their services, approximately $500,000 will
be used to pay legal and accounting fees and other expenses incurred in
connection with the Private Placement and $400,000 will be paid to the
Purchasers as a transaction fee.
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<PAGE>
DISTRIBUTION
The Preferred Stock will be sold to the Purchasers in a transaction exempt
from registration pursuant to Section 4(2) of the Securities Act. On March 21,
1997, the Company entered into a letter agreement with Donaldson, Lufkin and
Jenrette Securities Corporation ("DLJ"), pursuant to which the Company engaged
DLJ as a placement agent for the private placement of up to $40,000,000 of
securities. The principal terms of the agreement are as follows: As compensation
for its services DLJ is entitled to 4 1/2% of the gross proceeds. In addition,
DLJ is entitled to reimbursement of its out-of-pocket expenses, including fees
and expenses of counsel not in excess of $75,000. If (i) the agreement
terminates prior to the consummation of such financing and (ii) (a) within 12
months after such termination, the Company consummates the proposed or similar
financing with any party or (b) within 18 months after such termination, the
Company consummates a private placement with a party contacted by DLJ during its
engagement, DLJ will be entitled to the compensation described above. The
Company is required under the agreement to prepare and furnish to DLJ a private
placement memorandum, to represent and warrant as to the accuracy and
completeness thereof and to provide such legal opinions, certificates and other
documents at closing as DLJ may reasonably request. The agreement contains
customary disclosure and confidentiality provisions. The Company is required to
indemnify DLJ and affiliates (i) for losses arising from inaccuracies in or
omissions from the offering materials and (ii) otherwise arising from advice or
services rendered by DLJ pursuant to the Agreement, except where such losses
result solely from the gross negligence or willful misconduct of the indemnified
person.
For a period of 18 months from the date of the agreement, DLJ has the
exclusive right (i) to act as lead managing underwriter if the Company makes a
public offering of securities and (ii) if the Company determines to engage a
financial advisor in connection with any acquisition or disposition, to act as
the exclusive advisor.
The agreement provides that Nesbitt Burns Securities, Inc. ("Nesbitt Burns")
will serve as co-placement agent for the transaction. The Company has not
entered into any written agreement with Nesbitt Burns in connection with the
transaction. Pursuant to an expired agreement between the Company and Nesbitt
Burns, the Company paid Nesbitt Burns $50,000 for its services, but Nesbitt
Burns will not receive any further compensation from the Company in connection
with the Private Placement.
Nesbitt Burns is a subsidiary of BMO.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE
PREFERRED STOCK WITH WARRANTS ISSUANCE.
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ACQUISITION OF INTERSOUND
BACKGROUND OF THE INTERSOUND ACQUISITION
Platinum's management was originally contacted by NationsBanc Capital
Markets, Inc. ("NationsBanc") in April 1996 regarding Platinum's interest in
acquiring Intersound. NationsBanc was engaged by the owners of Intersound to
solicit offers for the acquisition of Intersound. NationsBanc identified
Platinum as a potential acquirer of Intersound upon recognizing the significant
similarities in the business plans and musical genres of the two companies, as
well as the potential synergies which would result from the combination of the
two entities.
Management of the two companies met in both Atlanta, Georgia and Chicago,
Illinois in early July 1996 to further explore the benefits of a combination of
the two companies. The terms of a potential acquisition were discussed in mid
July 1996 subject to several contingencies, including due diligence and
financing. Initial due diligence was conducted in late July 1996 and terms of
the acquisition were negotiated in detail during August 1996. Negotiations were
suspended in late August when acquisition terms satisfactory to both parties
could not be reached.
Discussions between Platinum and Intersound resumed in October 1996 and
further due diligence was conducted during early November, resulting in the
signing of the definitive asset purchase agreement (the "Intersound Agreement")
on November 13, 1996. The acquisition of Intersound (the "Intersound
Acquisition") was effective as of January 1, 1997.
REASONS FOR THE INTERSOUND ACQUISITION
In reaching the determination to approve the Intersound Acquisition, the
Board of Directors of Platinum considered, without assigning relative weight to,
the following factors, which include all factors considered to be material:
- The Intersound Acquisition positions the Company as a market leader in
Gospel music.
- The Intersound Acquisition further broadens the Company's distribution
capabilities. Intersound has its own internal proprietary distribution
capabilities, while the Company has historically distributed its products
primarily through PolyGram Group Distribution, Inc. ("PolyGram") to the
major music retail market, and through its Platinum Christian Distribution
division (formerly Light Distribution) to Christian bookstores. The
Intersound Acquisition provides the Company with a third significant
distribution channel for its products, allowing the Company the
flexibility of selecting the distribution channel which provides the
greatest sales potential for its releases in a specific musical genre.
- The Intersound Acquisition is consistent with Platinum's strategy of
growth and expansion of its music catalog through acquisition of master
recordings and music publishing rights from other record companies at
attractive prices.
- The Intersound Acquisition adds to Platinum's management team a group of
seasoned music industry executives with a long history of identifying
marketing opportunities, controlling costs and producing strong cash flow
and earnings.
- The Intersound Acquisition provides the Company with certain economies of
scale which management anticipates will eliminate a number of costs in
areas of sales, marketing, promotion, administration and manufacturing.
- The Intersound Acquisition provides a roster of active artists and
projects which complements Platinum's strategy of developing music
products with artists who have a history of successful releases. In
addition, Intersound's classical and themed music business allows the
Company to
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<PAGE>
supplement its artist driven releases with low cost promotion driven
releases, which management expects to reduce the Company's susceptibility
to the cyclical nature of the business.
THE INTERSOUND AGREEMENT
The Intersound Acquisition was effective as of January 1, 1997. The
following is a brief summary of certain provisions of the Intersound Agreement,
which was executed by Intersound and River North Studios, Inc., a wholly-owned
subsidiary of Platinum ("RNS"). RNS has since changed its name to Intersound,
Inc.
THE TRANSACTION
Pursuant to the Intersound Agreement, Intersound sold and RNS acquired
substantially all of the assets of Intersound for a total consideration of
$41,000,000 which was paid as follows: (a) $24,000,000 in cash, (b) $5,000,000
in convertible promissory notes (the "Notes") and (c) the assumption of certain
liabilities. The Notes mature on January 31, 2004, bear interest at the
seven-year Treasury rate (adjusted as of each quarterly interest payment date)
plus one percent per annum 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 Notes.) The holders of the
Notes were granted certain registration rights with respect to the shares of
Common Stock issuable upon conversion.
In addition, RNS assumed certain liabilities of Intersound (the "Assumed
Liabilities") including the following: (a) liabilities or obligations reflected
or reserved against in Intersound's September 30, 1996 balance sheet (the
"Interim Balance Sheet"), (b) all other liabilities of Intersound incurred in
the ordinary course of business subsequent to the date of the Interim Balance
Sheet and prior to the closing of the transactions contemplated by the
Intersound Agreement (the "Closing") and accrued in accordance with generally
accepted accounting principles, excluding lawsuits or causes of action relating
directly or indirectly to tax, patent, trademark, copyright, labor, employment,
environmental and product liability, (c) liabilities first arising after the
Closing under any contract or permit assumed by RNS pursuant to the Intersound
Agreement and which obligations are to be performed in the ordinary course of
business and (d) all obligations of Intersound, including principal, interest,
premiums or other charges under Intersound's loan agreement with NationsBanc
(the "NationsBanc Loan") as existing at the Closing or to be performed on or
after the Closing. The NationsBanc Loan was paid in full with proceeds from the
New Credit Facility.
EMPLOYMENT AND CONSULTING AGREEMENTS
The Company also entered into an employment agreement with Bryan Hadley,
Intersound's Executive Vice President, on February 1, 1997. This agreement
provides that Mr. Hadley serve in this capacity for a term of three years at an
annual base salary of $150,000. Under the agreement, the Company also granted
Mr. Hadley an option to purchase 20,000 shares of the Company's Common Stock
pursuant to its 1995 Employee Incentive Compensation Plan.
On February 1, 1997 the Company entered into an employment agreement with
Michael Olsen as Intersound's Vice President and General Counsel. This agreement
provides that Mr. Olsen serve in this capacity for a term of three years at an
annual base salary of $150,000. Under the agreement, the Company also granted
Mr. Olsen an option to purchase 20,000 shares of the Company's Common Stock
pursuant to its 1995 Employee Incentive Compensation Plan.
INDEMNIFICATION
The Intersound Agreement provides that all representations and warranties
made therein or in any other certificate or document delivered pursuant thereto
will survive the Closing until January 31, 1998
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<PAGE>
(the "Sunset Period"). Unless a specified period is set forth in the Intersound
Agreement, all agreements and covenants contained therein survived the Closing
and will remain in effect indefinitely.
Intersound's indemnification obligations will only apply if, and to the
extent that, the aggregate Losses (as defined below), incurred by all
indemnified parties exceed $250,000 (the "Basket Threshold"). However, the
Basket Threshold will not apply for certain losses including (i) Losses relating
to the Excluded Liabilities (as defined in the Intersound Agreement), (ii)
Losses relating to third party claims which are excluded liabilities, (iii)
Losses relating to third party claims known by Intersound to be pending or
threatened as of the Closing, (iv) Losses relating to claims for brokers' or
finders' fees, (v) Losses relating to claims by the Harry Fox Agency (except to
the extent specifically assumed by RNS), and (vi) Losses relating to
Intersound's obligations to pay for its own expenses.
Following the Closing, Intersound's liability may not exceed, in the
aggregate, $1,875,000 (the "Cap"). Further, Intersound has no indemnification
obligation to satisfy any claim for Losses other than through recourse against
the $1,875,000 principal amount of Notes (or underlying Common Stock to the
extent converted) held in escrow pursuant to the Intersound Agreement.
The Sunset Period, Basket Threshold and Cap will not apply to limit
Intersound's liability in the event such Losses occur or arise, directly or
indirectly, as a result of (i) any fraudulent acts committed by Intersound or
any of its officers, directors, employees, agents or stockholders, (ii) a breach
of Intersound's representations and warranties concerning its title to, and the
absence of liens on, other than permitted liens, its properties and assets, and
(iii) any claims by any third parties relating to any audit or investigation by
the Harry Fox Agency for any period prior to the Closing Date, except to the
extent specifically assumed by RNS.
Intersound agreed to indemnify RNS and its affiliates and hold each of them
harmless from any and all liabilities, demands, claims, actions, causes of
action, assessments, losses, costs, damages, deficiencies, taxes, fines or
expenses (whether or not arising out of third party claims), including without
limitation, interest, penalties, reasonable attorneys' fees and all amounts paid
in investigation, defense or settlement of any of the foregoing (collectively,
"Losses"), with respect to: (a) any misrepresentation or ommission or breach of
warranty on the part of Intersound; (b) any nonfulfillment or breach of any
covenant or agreement on the part of Intersound; (c) any action, demand,
proceeding, investigation or claim by any third party (including any
governmental body) against or affecting RNS or its affiliates which, if
successful, would give rise to or evidence the existence of or relate to a
misrepresentation or breach of any of the representations, warranties,
agreements or covenants of Intersound; (d) any Losses incurred by RNS arising
out of or relating, directly or indirectly to the Excluded Liabilities; or (e)
any broker's or finder's fees or expenses in connection with the Intersound
Agreement based on any alleged agreement between the claimant and either
Intersound or any Intersound stockholder.
Under a separate agreement, the stockholders of Intersound, at the Closing,
agreed to indemnify RNS and its affiliates for any Losses which arise in
connection with: (a) claims made by the Harry Fox Agency (which are not
specifically accrued in the Interim Balance Sheet); (b) a breach by Intersound
of its representations and warranties in the Intersound Agreement concerning
title to Intersound's assets; (c) a breach by a stockholder of Intersound of
certain securities law representations and warranties made by such stockholder
in connection with the Intersound Acquisition; and (d) any fraudulent act
committed by a stockholder of Intersound against whom indemnification is sought.
RNS agreed to indemnify each of Intersound and its affiliates and hold each
of them harmless for any and all Losses with respect to: (a) any
misrepresentation or breach of warranty on the part of RNS; (b) any
nonfulfillment or breach of any covenant or agreement on the part of RNS; (c)
any action, demand, proceeding, investigation or claim by any third party
(including any governmental body) against or affecting Intersound or its
affiliates which, if successful, would give rise to or evidence the existence of
or relate to a misrepresentation or breach of any of the representations,
warranties, agreements or covenants of RNS; (d) any claim arising out of RNS's
failure to pay, satisfy or discharge the Assumed Liabilities;
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<PAGE>
(e) any broker's or finder's fees or expenses in connection with the Intersound
Agreement based on any alleged agreement between the claimant and RNS; or (f)
any requirement of any federal, state or local taxing authority that Intersound
recognize taxable income for any period prior to the Closing when the income of
Intersound is attributed to RNS.
EXPENSES
Except as paid prior to the date of the Intersound Agreement or otherwise
provided for in the Intersound Agreement, each of RNS and Intersound agreed to
pay their respective costs and expenses incurred in negotiating and preparing
the Intersound Agreement and carrying out the Intersound Acquisition.
AMENDMENT
The Intersound Agreement may not be amended except by a written agreement
executed by the party to be charged with the amendment.
ACCOUNTING TREATMENT
For financial reporting purposes, the Intersound Acquisition was accounted
for by the purchase method of accounting in accordance with generally accepted
accounting principles.
THE EXISTING CREDIT FACILITY
Assuming the Preferred Stock with Warrants Issuance is consummated,
approximately $18,200,000 of the net proceeds ($20,000,000 less estimated
issuance costs of $1,800,000) will be used to repay a portion of the debt
outstanding under the Existing Credit Facility. The remaining portion of the
debt outstanding under the New Credit Facility is to be paid with proceeds from
a credit agreement with a bank ("Proposed Credit Facility"). See "Proposed
Credit Facility" below. In order to fund the cash consideration for the
Intersound acquisition, the Company and its subsidiaries entered into the
Existing Credit Facility with BMO, individually and as agent for Lenders,
pursuant to which the Lenders agreed to provide a term loan in the amount of
$25,000,000 and a revolving credit facility in the amount of $10,000,000.
Proceeds of the term loan, together with approximately $2,900,000 borrowed under
the revolver, were used to finance the cash portion of the Intersound
Acquisition, to refinance certain bank debt incurred by Intersound and to pay
fees and expenses associated with the transaction. In addition, on March 3,
1997, the Company borrowed $1,750,000 under the revolver to pay a deposit
relating to the proposed K-tel Acquisition, which was subsequently terminated.
Since that time, the Company has borrowed approximately $5,000,000 under the
revolver for working capital and approximately $350,000 for various additional
fees and expenses. Borrowings under the Existing Credit Facility bear interest
at LIBOR plus 6.0% per annum (increased to LIBOR plus 9.0% effective August 1,
1997), are secured by substantially all of the assets of the Company and its
subsidiaries and mature on October 31, 1997. Any principal not paid when due
will bear interest at the default rate of LIBOR plus 9% per annum and will
trigger late charges equal to the sum of (i) 1% of such overdue principal as of
the date such payment becomes due plus (ii) one percent of the overdue principal
outstanding one month and two months after the date payment becomes due, plus
(iii) 2% of such overdue principal outstanding on the same day of each month
thereafter. See "Risk Factors-- Consequences If The Preferred Stock with
Warrants Issuance Is Not Approved."
Upon the signing of the Existing Credit Facility, the Company issued to BMO
warrants to purchase 258,571.95 shares of Common Stock at an exercise price of
$.01 per share. The Warrants were valued at $4.80 per share, which is the
closing market price on the day the Existing Credit Facility was executed
discounted by 40% due to the restricted nature and volatility of the stock, for
a total value of $1,240,000. This amount 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 Existing Credit Facility, the Company
issues
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<PAGE>
shares of Common Stock and does not use the proceeds of such issuance to pay
borrowings under the Existing Credit Facility. The holder of the warrants has
been granted certain registration rights with respect to the shares of Common
Stock issuable upon exercise.
The Existing Credit Facility contains financial and other covenants
applicable to the Company and its subsidiaries. Pursuant to the Existing Credit
Facility, the Company may not, so long as the Existing Credit Facility is
outstanding, invest in or acquire a substantial part of the assets of another
business, make loans or guarantee loans made to another business, declare or
distribute dividends, consolidate or merge with another company, sell or lease
any of its assets (except for inventory sold in the ordinary course of business)
or pay any debt that is subordinate to its debt under the Existing Credit
Facility. The Company is currently in compliance with all covenants under the
Existing Credit Facility.
During the term of the Existing Credit Facility, the Company must pay a
commitment fee of 0.5% per annum on the average daily unused amount of the
revolving credit facility. The Company may voluntarily prepay amounts
outstanding under the revolving credit facility and the term loan, and may be
required to make mandatory prepayment upon the occurrence of any of several
conditions, including (i) any breach of the Existing Credit Facility agreement,
(ii) the outstanding principal amount under the revolving credit facility
falling below $2,500,000 (which may trigger payment of the term loan), or
payment of the term loan (which may trigger payment of the revolving credit
facility), or (iii) sale of the Preferred Stock contemplated hereby.
Steven Devick, a director and officer of the Company, has personally
guaranteed borrowings under the Existing Credit Facility up to $12,500,000. The
Proposed Credit Facility will not require such a guaranty.
THE PROPOSED CREDIT FACILITY
The Company has obtained a commitment from a bank to provide a $30,000,000
credit facility. The closing of the Proposed Credit Facility is subject to
negotiation of definitive documentation, including customary closing conditions,
and is contingent upon the Company raising at least $10,000,000 in equity. Under
the terms of the Proposed Credit Facility, the Company will have available a
three year $20,000,000 term loan, due in quarterly installments and bearing
interest at the bank's base rate plus 1.0% per annum, and a $10,000,000
revolving line of credit, due in three years and bearing interest at the bank's
base rate plus 1/2 of 1.0% per annum. Borrowings under the revolving line of
credit are limited to the Borrowing Base, which is based upon eligible accounts
receivable and inventory, as defined. The Proposed Credit Facility will be
secured by sustantially all of the Company's assets.
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<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
Set forth below is the Unaudited Pro Forma Consolidated Statement of
Operations Data for the fiscal year ended May 31, 1997 and the three months
ended August 31, 1997 and the Unaudited Pro Forma Consolidated Balance Sheet
Data at August 31, 1997. The Unaudited Pro Forma Consolidated Statement of
Operations for the fiscal year ended May 31, 1997 and the three months ended
August 31, 1997 (i) gives pro forma effect to the acquisition of Intersound;
(ii) reflects the refinancing of a portion of the Existing Credit Facility with
the net proceeds of the Preferred Stock with Warrants Issuance and (iii)
reflects the refinancing of the remaining portion of the Existing Credit
Facility with the proceeds of the Proposed Credit Facility, all as if such
transaction and refinancing had occurred on June 1, 1996. The Unaudited Pro
Forma Consolidated Balance Sheet at August 31, 1997 reflects the refinancing of
the Existing Credit Facility with the net proceeds of the Preferred Stock with
Warrants Issuance and the proceeds of the Proposed Credit Facility, as if such
refinancing had occurred on August 31, 1997.
The unaudited pro forma consolidated financial data presented herein is
based on the assumptions and adjustments described in the accompanying notes.
The Unaudited Pro Forma Consolidated Statement of Operations does not purport to
represent what the Company's results of operations would have been if the events
described above had occurred as of the date indicated or what such results will
be for any future periods. The unaudited pro forma consolidated financial data
is based upon assumptions and adjustments that the Company believes are
reasonable. The unaudited pro forma consolidated financial data and the
accompanying notes should be read in conjunction with (i) the historical
financial statements of the Company, including the notes thereto, and (ii) the
historical financial statements of Intersound, including the notes thereto,
which are included elsewhere in this Proxy Statement.
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<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS DATA
FISCAL YEAR ENDED MAY 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
INTERSOUND
HISTORICAL AND REFINANCING AS ADJUSTED
PLATINUM INTERSOUND(A) ADJUSTMENTS(B) PLATINUM
------------ ------------- --------------- ------------
<S> <C> <C> <C> <C>
Gross product sales................................. $ 37,502 $ 18,361 $ -- $ 55,863
Less: Returns and allowances........................ (8,713) (4,246) -- (12,959)
Less: Discounts..................................... (2,463) (1,196) -- (3,659)
------------ ------------- ------- ------------
Net product sales................................... 26,326 12,919 -- 39,245
Cost of product sales............................... 14,038 5,019 -- 19,057
------------ ------------- ------- ------------
12,288 7,900 -- 20,188
Gross artist project revenues....................... 3,876 -- -- 3,876
Less: Allowance for unrecoupable artist advances.... (855) -- -- (855)
------------ ------------- ------- ------------
Net artist project revenues......................... 3,021 -- -- 3,021
Licensing, publishing and other revenues............ 1,255 277 61 1,593
------------ ------------- ------- ------------
Net artist project and other revenues............... 4,276 277 61 4,614
Cost of artist project and other revenues........... 3,752 111 41 3,904
------------ ------------- ------- ------------
524 166 20 710
Gross profit........................................ 12,812 8,066 20 20,898
Other operating expenses:
Selling, general and administrative expenses........ 13,141 5,388 2 18,531
Merger, restructuring and one-time costs............ 3,336 -- -- 3,336
Depreciation and amortization....................... 973 371 646(c) 1,990
------------ ------------- ------- ------------
17,450 5,759 648 23,857
------------ ------------- ------- ------------
Operating income (loss)............................. (4,638) 2,307 (628) (2,959)
Interest income..................................... 154 -- -- 154
Interest expense.................................... (1,385) (194) 367(d) (1,212)
Financing costs..................................... (3,533) -- 2,931(e) (242)
Equity gain......................................... 48 -- -- 48
------------ ------------- ------- ------------
Income (loss) before income taxes................... (9,354) 2,113 2,670 (4,211)
Provision for income taxes.......................... -- -- -- --
------------ ------------- ------- ------------
Net income (loss)................................... (9,354) 2,113 2,670 (4,211)
Less: Cumulative preferred dividends................ -- -- (2,400)(f) (2,400)
------------ ------------- ------- ------------
Loss applicable to common shares.................... $ (9,354) $ 2,113 $ 270 $ (6,611)
------------ ------------- ------- ------------
------------ ------------- ------- ------------
Net loss per common share........................... $ (1.82) $ (1.29)
Weighted average number of common shares
outstanding....................................... 5,136,830 5,136,830
</TABLE>
- ------------------------
(a) The historical statement of operations data for Intersound represents the
unaudited results of operations from June 1, 1996 to December 31, 1996. The
operations of Intersound for the months of January through May 1997 are
reflected in the Platinum amounts. The Acquisition has been
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<PAGE>
accounted for as a purchase totaling $41,000,000 which exceeds the fair
value of the assets acquired by $6,098,000, which represents goodwill. See
financial statements and notes thereto of Intersound, Inc. contained
elsewhere in this Proxy Statement.
(b) The pro forma adjustments include the unaudited activities of Red Rewmar
Music, Inc., Rappel Music, Inc. and Spec Twelve Music, Inc. for the six
month period ended December 31, 1996 that were acquired simultaneously with
the Acquisition and not reflected in the historical Intersound amounts. Such
adjustments increased licensing, publishing and other revenues, cost of
artist project and other revenues, and selling, general and administrative
expenses by $61,000, $41,000 and $2,000, respectively.
(c) The adjustment to depreciation and amortization consists of an increase in
amortization of music catalog, music publishing rights and goodwill acquired
from Intersound, Inc. over a 25-year period, as if such purchase had
occurred on June 1, 1996.
(d) The adjustment to interest expense reflects a decrease in interest expense
related to (i) the funding of a portion of the Acquisition with the net
proceeds of a Preferred Stock with Warrants Issuance ($20,000,000, less
estimated issuance costs of $1,800,000) and (ii) a reduction in the interest
rate of the bank debt borrowed necessary to fund the remaining portion of
the Acquisition under the Proposed Credit Facility (9.5% per annum) compared
to the Existing Credit Facility (12.0% per annum), as if such Acquisition
and relating funding occurred on June 1, 1996. In addition, the historical
interest expense incurred by Intersound ($194,000) has been eliminated as
the related debt was paid in full upon the closing of the Acquisition.
(e) The adjustment to financing costs reflects a decrease in such costs related
to the Proposed Credit Facility (estimated $725,000 amortized over three
years, or $242,000 per annum) compared to the financing costs related to the
Existing Credit Facility ($1,385,000).
(f) Reflects dividends accrued on the Preferred Stock with Warrants Issuance of
12.0% per annum.
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UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS DATA
THREE MONTHS ENDED AUGUST 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
REFINANCING AS ADJUSTED
PLATINUM ADJUSTMENTS PLATINUM
------------ ------------- ------------
<S> <C> <C> <C>
Gross product sales.................................................... $ 11,478 $ -- $ 11,478
Less: Returns and allowances........................................... (3,017) -- (3,017)
Less: Discounts........................................................ (604) -- (604)
------------ ----- ------------
Net product sales...................................................... 7,857 -- 7,857
Cost of product sales.................................................. 3,526 -- 3,526
------------ ----- ------------
4,331 -- 4,331
Gross artist project revenues.......................................... 1,290 -- 1,290
Less: Allowance for unrecoupable artist advances....................... (143) -- (143)
------------ ----- ------------
Net artist project revenues............................................ 1,147 -- 1,147
Licensing, publishing and other revenues............................... 669 -- 669
------------ ----- ------------
Net artist project and other revenues.................................. 1,816 -- 1,816
Cost of artist project and other revenues.............................. 1,222 -- 1,222
------------ ----- ------------
594 -- 594
Gross profit........................................................... 4,925 -- 4,925
Other operating expenses:
Selling, general and administrative expenses........................... 3,964 -- 3,964
Merger, restructuring and one-time costs............................... 1,101 -- 1,101
Depreciation and amortization.......................................... 485 -- 485
------------ ----- ------------
5,450 -- 5,450
------------ ----- ------------
Operating loss......................................................... (525) -- (525)
Interest income........................................................ 21 -- 21
Interest expense....................................................... (1,209) 765(a) (444)
Financing costs........................................................ (450) 390(b) (60)
Equity gain............................................................ 15 -- 15
------------ ----- ------------
Income (loss) before income taxes...................................... (2,148) 1,155 (993)
Provision for income taxes............................................. -- -- --
------------ ----- ------------
Net income (loss)...................................................... (2,148) 1,155 (993)
Less: Cumulative preferred dividends................................... -- (600)(c) (600)
------------ ----- ------------
Income (loss) applicable to common shares.............................. $ (2,148) $ 555 $ (1,593)
------------ ----- ------------
------------ ----- ------------
Net loss per common share.............................................. $ (0.42) $ (0.31)
Weighted average number of common shares outstanding................... 5,174,734 5,174,734
</TABLE>
- ------------------------
(a) The adjustment to interest expense reflects a decrease in interest expense
related to (i) the funding of a portion of the Acquisition with the net
proceeds of the Preferred Stock with Warrants Issuance ($20,000,000, less
estimated issuance costs of $1,800,000) and (ii) a reduction in the interest
rate of the bank debt borrowed necessary to fund the remaining portion of
the Acquisition under the Proposed Credit Facility (9.5% per annum) compared
to the Existing Credit Facility (12.0% per annum), as if such Acquisition
and relating funding occurred on June 1, 1996.
(b) The adjustment to financing costs reflects a decrease in such costs related
to the Proposed Credit Facility (estimated $725,000 amortized over three
years, or $242,000 per annum) compared to the financing costs related to the
Existing Credit Facility ($450,000).
(c) Reflects dividends accrued on the Preferred Stock with Warrants Issuance of
12.0% per annum.
37
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET DATA
AUGUST 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
REFINANCING AS ADJUSTED
PLATINUM ADJUSTMENTS (A) PLATINUM
--------- --------------- -----------
<S> <C> <C> <C>
Cash..................................................................... $ 8 $ 2,475 $ 2,483
Cash in escrow........................................................... 1,750 -- 1,750
Accounts receivable, net................................................. 13,778 -- 13,778
Artist advances.......................................................... 2,705 -- 2,705
Inventories, net......................................................... 5,685 -- 5,685
Notes receivable......................................................... 50 -- 50
Other.................................................................... 264 -- 264
--------- --------------- -----------
Total current assets..................................................... 24,240 2,475 26,715
Artist advances, net of current amounts and allowances................... 3,442 -- 3,442
Equipment and leasehold improvements, net................................ 1,123 -- 1,123
Music catalog, net....................................................... 19,081 19,081
Music publishing rights, net............................................. 3,572 -- 3,572
Goodwill, net............................................................ 6,714 -- 6,714
Equity investment in joint venture....................................... 3,169 -- 3,169
Deferred financing costs, net............................................ -- 725 725
Other.................................................................... 1,100 -- 1,100
--------- --------------- -----------
Total assets............................................................. $ 62,441 $ 3,200 $ 65,641
--------- --------------- -----------
--------- --------------- -----------
Bank line of credit...................................................... $ 10,000 $ (10,000) $ --
Term loan................................................................ 25,000 (25,000) --
Accounts payable......................................................... 6,150 -- 6,150
Accrued liabilities and other............................................ 1,997 -- 1,997
Reserve for future returns............................................... 2,710 -- 2,710
Royalties payable........................................................ 5,866 -- 5,866
--------- --------------- -----------
Total current liabilities................................................ 51,723 (35,000) 16,723
Convertible subordinated debentures...................................... 5,000 -- 5,000
Debt..................................................................... -- 20,000 20,000
Stockholders' equity..................................................... 5,718 18,200 23,918
--------- --------------- -----------
Total liabilities and stockholders' equity............................... $ 62,441 $ 3,200 $ 65,641
--------- --------------- -----------
--------- --------------- -----------
</TABLE>
- ------------------------
(a) The refinancing adjustments reflect the refinancing of the Existing Credit
Facility with (i) the net proceeds of the Preferred Stock with Warrants
Issuance ($20,000,000, less estimated issuance costs of $1,800,000) and (ii)
the proceeds of the Proposed Credit Facility ($20,000,000, less estimated
financing costs of $725,000), all as is such refinancing occurred on August
31, 1997
38
<PAGE>
PLATINUM ENTERTAINMENT, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated statement of operations and
consolidated balance sheet data for Platinum as of the dates and for the periods
indicated. The selected consolidated financial data as of and for the year ended
December 31, 1993, the five months ended May 31, 1994 and the years ended May
31, 1995, 1996 and 1997 listed below have been derived from the audited
consolidated financial statements of Platinum. The selected financial data as of
and for the three months ended August 31, 1996 and 1997 have been derived from
the finanical statements for such periods which have not been audited. In the
opinion of management of Platinum, the unaudited interim financial statements
have been prepared on the same basis as necessary for a fair presentation of the
financial position and results of operations for these periods. Operating
results for the three months ended August 31, 1997 are not necessarily
indicative of the results to be expected for the entire fiscal year. The
following data should be read in conjunction with "Platinum Entertainment, Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and related notes of
Platinum Entertainment, Inc. contained elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
THREE
MONTHS
YEAR ENDED ENDED
DECEMBER 31, FIVE MONTHS YEAR ENDED MAY 31, AUGUST 31,
------------- ENDED ---------------------------------- ----------
1993 MAY 31, 1994 1995 1996 1997
------------- ------------- ---------- ---------- ----------
1996
----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Gross product sales(1)............................. $ 4,010 $ 3,474 $ 12,575 $ 18,322 $ 37,502 $ 5,647
Less: Returns and allowances....................... (590) (584) (3,126) (4,732) (8,713) (1,073)
Less: Discounts(1)................................. -- -- (507) (712) (2,463) (444)
------------- ------------- ---------- ---------- ---------- ----------
Net product sales.................................. 3,420 2,890 8,942 12,878 26,326 4,130
Cost of product sales.............................. 1,901 1,743 4,300 8,107 14,038 2,416
------------- ------------- ---------- ---------- ---------- ----------
1,519 1,147 4,642 4,771 12,288 1,714
Gross artist project revenues...................... 1,451 728 3,084 5,368 3,876 1,180
Less: Allowance for unrecoupable artist advances... (1,361) (433) (1,128) (2,507) (855) (150)
------------- ------------- ---------- ---------- ---------- ----------
Net artist project revenues........................ 90 295 1,956 2,861 3,021 1,030
Licensing, publishing and other revenues........... 28 53 207 1,799 1,255 141
------------- ------------- ---------- ---------- ---------- ----------
Net artist project and other revenues.............. 118 348 2,163 4,660 4,276 1,171
------------- ------------- ---------- ---------- ---------- ----------
Cost of artist project and other revenues.......... 1,061 1,005 2,601 5,195 3,752 1,229
------------- ------------- ---------- ---------- ---------- ----------
(943) (657) (438) (535) 524 (58)
------------- ------------- ---------- ---------- ---------- ----------
Gross profit....................................... 576 490 4,204 4,236 12,812 1,656
Other operating expenses:
Selling, general and administrative................ 2,287 1,352 8,800 8,017 13,141 2,304
Merger, restructuring and one-time costs(2)........ -- -- -- -- 3,336 --
Depreciation and amortization...................... 55 39 133 156 133 70
------------- ------------- ---------- ---------- ---------- ----------
2,342 1,391 8,933 8,173 17,450 2,374
------------- ------------- ---------- ---------- ---------- ----------
Operating loss..................................... (1,766) (901) (4,729) (3,937) (4,638) (718)
Interest income.................................... -- -- 46 106 154 90
Interest expense................................... (33) (27) (157) (570) (1,385) (3)
Other financing costs.............................. -- -- -- -- (3,533) --
Equity gain........................................ -- -- -- -- 48 --
------------- ------------- ---------- ---------- ---------- ----------
Loss from continuing operations.................... (1,799) (928) (4,840) (4,401) (9,354) (631)
Discontinued operations:
Loss from operations............................... (1,519) (755) (2,073) -- -- --
Loss on disposal................................... -- -- (2,611) (226) -- --
------------- ------------- ---------- ---------- ---------- ----------
Loss from discontinued operations.................. (1,519) (755) (4,684) (226) -- --
------------- ------------- ---------- ---------- ---------- ----------
Net loss........................................... $ (3,318) $ (1,683) $ (9,524) (4,627) $ (9,354) $ (631)
------------- ------------- ---------- ---------- ---------- ----------
------------- ------------- ---------- ---------- ---------- ----------
Less: Cumulative preferred dividends(3)............ (602)
----------
Loss applicable to common shares................... $ (5,229)
----------
----------
Per common share:
Loss from continuing operations.................... $ (2.12) $ (1.71) $ (2.12) $ (0.12)
Loss from discontinued operations.................. (2.05) (0.08) -- --
---------- ---------- ---------- ----------
Net loss(4)........................................ $ (4.17) $ (1.79) $ (2.12) $ (0.12)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average number of common shares
outstanding(4)................................... 2,284,090 2,925,987 5,136,830 5,063,204
<CAPTION>
1997
----------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Gross product sales(1)............................. $ 11,478
Less: Returns and allowances....................... (3,017)
Less: Discounts(1)................................. (604)
----------
Net product sales.................................. 7,857
Cost of product sales.............................. 3,526
----------
4,331
Gross artist project revenues...................... 1,290
Less: Allowance for unrecoupable artist advances... (143)
----------
Net artist project revenues........................ 1,147
Licensing, publishing and other revenues........... 669
----------
Net artist project and other revenues.............. 1,816
----------
Cost of artist project and other revenues.......... 1,222
----------
594
----------
Gross profit....................................... 4,925
Other operating expenses:
Selling, general and administrative................ 3,964
Merger, restructuring and one-time costs(2)........ 1,001
Depreciation and amortization...................... 485
----------
5,450
----------
Operating loss..................................... (525)
Interest income.................................... 21
Interest expense................................... (1,209)
Other financing costs.............................. (450)
Equity gain........................................ 15
----------
Loss from continuing operations.................... (2,148)
Discontinued operations:
Loss from operations............................... --
Loss on disposal................................... --
----------
Loss from discontinued operations.................. --
----------
Net loss........................................... $ (2,148)
----------
----------
Less: Cumulative preferred dividends(3)............
Loss applicable to common shares...................
Per common share:
Loss from continuing operations.................... $ (0.42)
Loss from discontinued operations.................. --
----------
Net loss(4)........................................ $ (0.42)
----------
----------
Weighted average number of common shares
outstanding(4)................................... $5,174,734
</TABLE>
39
<PAGE>
PLATINUM ENTERTAINMENT, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
MAY 31,
DECEMBER 31, ------------------------------------------
1993 1994 1995 1996 1997
------------- --------- --------- --------- --------- AUGUST 31,
1997
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 36 $ 9 $ 87 $ 8,222 $ 53 $ 8
Working capital (deficit)(5)........................ (3,349) (4,117) (9,128) 12,055 (23,673) (27,483)
Total assets........................................ 4,656 5,385 6,353 19,744 62,304 62,441
Long-term debt (including current portion).......... 1,243 1,140 -- -- 5,000 5,000
Redeemable preferred stock.......................... -- -- 5,423 -- -- --
Stockholders' equity (net capital deficiency)....... (1,618) (3,302) (12,320) 15,215 7,866 5,718
</TABLE>
- ------------------------------
(1) During the Company's normal course of business, discounts are extended to
customers on product sales. The gross revenues and returns, allowances and
discounts for the years ended May 31, 1995 and 1996 and the three months
ended August 31, 1996 have been reclassified by $507,000, $712,000 and
$444,000, respectively, to conform to the financial statement presentation
for the fiscal year ended May 31, 1997 and three months ended August 31,
1997. Discounts for the year ended December 31, 1993 and the five months
ended May 31, 1994 were insignificant.
(2) As a result of the 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 included
severance costs, relocation costs, lease commitment write-offs, warehouse
closing costs and other related costs. Such costs approximated $1,650,000
for fiscal 1997, of which $315,000 and $1,240,000 were accrued at May 31 and
August 31, 1997 respectively, 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, totaling
$1,686,000 for fiscal 1997, include approximately $1,100,000 of product
returns which were significantly in excess of the Company's historical
returns experience due to the termination of a distribution agreement and
the termination of certain customer relationships. In addition, for fiscal
1997, one-time costs include write-offs of artist advances and accounts
receivables in areas from which the Company has chosen to redirect its
resources. One-time costs for the three months ended August 31, 1997,
include approximately $155,000 of product returns which were significantly
in excess of the Company's historical returns experience due to the
termination of a distribution agreement. The shift in third-party
fulfillment of Platinum Christian Distribution was not fully implemented
until September 1, 1997, resulting in negligible revenues for this
distribution channel during the current fiscal quarter. In addition,
one-time costs for the three months ended August 31, 1997 include $775,000
of legal, accounting and other incremental costs incurred by the Company
associated with the K-tel Acquisition. Such transaction was terminated by
the Company--see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Significant Matters."
(3) Represents accrued dividends on the Company's Series A-1 Non-Convertible
Preferred Stock, which dividends were paid concurrent with the redemption of
such stock on March 15, 1996. The Company has never paid a dividend on its
Common Stock. See "Dividend Policy."
(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 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.
40
<PAGE>
INTERSOUND, INC.
SELECTED FINANCIAL DATA
The following table sets forth selected statement of operations and balance
sheet data for Intersound as of the dates and for the periods indicated. The
selected financial data as of and for the years ended April 30, 1994, 1995 and
1996 have been derived from the audited financial statements of Intersound. The
selected financial data as of and for the eight months ended December 31, 1995
and 1996 have been derived from the financial statements for such periods which
have not been audited. In the opinion of Intersound's management, the unaudited
interim financial statements have been prepared on the same basis as
Intersound's audited financial statements and include all adjustments,
consisting only of normal recurring items, necessary for a fair presentation of
the financial position and results of operations for these periods. Operating
results for the eight months ended December 31, 1996 are not necessarily
indicative of the results to be expected for the entire fiscal year. The
following data should be read in conjunction with "Intersound, Inc.'s
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and related notes of Intersound, Inc.
contained elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30, EIGHT MONTHS ENDED
------------------------------- DECEMBER 31,
1994 1995 1996 ------------------------
--------- --------- --------- 1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Gross product sales................................... $ 26,041 $ 31,438 $ 30,753 $ 21,487 $ 19,835
Less: Returns and allowances.......................... (4,999) (6,579) (7,212) (4,939) (4,604)
Less: Discounts....................................... (1,656) (2,447) (1,674) (1,243) (1,260)
--------- --------- --------- ----------- -----------
Net product sales..................................... 19,386 22,412 21,867 15,305 13,971
Cost of product sales................................. 9,583 9,941 9,030 6,360 5,390
--------- --------- --------- ----------- -----------
9,803 12,471 12,837 8,945 8,581
Licensing revenues.................................... 463 182 629 174 317
Cost of licensing revenues............................ 185 73 251 69 127
--------- --------- --------- ----------- -----------
278 109 378 105 190
--------- --------- --------- ----------- -----------
Gross profit.......................................... 10,081 12,580 13,215 9,050 8,771
Other Operating Expenses:
Selling, general and administrative expenses.......... 8,050 9,955 10,324 6,606 5,958
Depreciation and amortization......................... 356 434 580 377 428
--------- --------- --------- ----------- -----------
8,406 10,389 10,904 6,983 6,386
--------- --------- --------- ----------- -----------
Operating income...................................... 1,675 2,191 2,311 2,067 2,385
Interest expense...................................... (184) (245) (354) (290) (216)
--------- --------- --------- ----------- -----------
Income before income taxes............................ 1,491 1,946 1,957 1,777 2,169
Provision for income taxes............................ (132) -- -- -- --
--------- --------- --------- ----------- -----------
Net income............................................ $ 1,359 $ 1,946 $ 1,957 $ 1,777 $ 2,169
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
APRIL 30,
-------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash......................................................................... $ 6 $ 16 $ 17
Working capital (deficit).................................................... 300 (138) 506
Total assets................................................................. 10,851 12,390 15,163
Long-term debt............................................................... 60 -- --
Stockholders' equity......................................................... 2,470 2,652 3,666
</TABLE>
41
<PAGE>
PLATINUM ENTERTAINMENT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE DISCUSSION BELOW CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS (AS SUCH
TERM IS DEFINED IN THE RULES PROMULGATED PURSUANT TO THE SECURITIES ACT) THAT
ARE BASED ON THE BELIEFS OF PLATINUM'S MANAGEMENT, AS WELL AS ASSUMPTIONS MADE
BY, AND INFORMATION CURRENTLY AVAILABLE TO, PLATINUM'S MANAGEMENT. THE COMPANY'S
ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS IN THE FUTURE COULD DIFFER
MATERIALLY FROM THOSE EXPRESSED IN, OR IMPLIED BY, ANY SUCH FORWARD-LOOKING
STATEMENTS. SEE "FORWARD LOOKING INFORMATION." THE OVERVIEW AND LIQUIDITY AND
CAPITAL RESOURCES SECTIONS GIVE EFFECT TO THE INTERSOUND ACQUISITION AND THE
EXISTING CREDIT FACILITY. THIS DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA AND ACCOMPANYING NOTES THERETO
SET FORTH ELSEWHERE IN THIS PROXY STATEMENT.
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,
Classical/Themed, Adult Contemporary, Country, Blues and Urban/Dance genres,
primarily under its CGI Records, Intersound Classical, River North Records,
Intersound Country, House of Blues and Intersound Urban labels. The Company's
products include new releases, typically by artists established in a particular
format, as well as compilations and repackagings of previously recorded music
that enable the Company to exploit its catalog of master recordings.
As an integral part of the Company's growth strategy, during fiscal 1997,
the Company completed several acquisitions: (i) substantially all of the assets
of REX during June 1996; (ii) substantially all of the assets of Double J during
September 1996; (iii) a 50% interest in the HOB Joint Venture during November
1996 and (iv) substantially all of the assets of Intersound effective January 1,
1997. See "Significant Matters" below for more details of these transactions.
In connection with the Intersound Acquisition, the Company obtained the
Existing Credit Facility totaling $35,000,000 which matures in full on October
31, 1997. The Company intends to repay the Existing Credit Facility with the
proceeds of the Preferred Stock with Warrants Issuance and the Proposed Credit
Facility. See "Significant Matters" and "Capital Resources" below for further
details.
As a result of the 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-offs, warehouse
closing costs and other related costs. Such costs approximated $1,650,000 for
fiscal 1997, of which $315,000 and $240,000 were accrued at May 31 and August
31, 1997, respectively, 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, totaling $1,686,000, include
approximately $1,100,000 of product returns which were significantly in excess
of the Company's historical returns experience due to the termination of a
distribution agreement and the termination of certain customer relationships. In
addition, one-time costs for fiscal 1997 include write-offs of artist advances
and accounts receivables in areas from which the Company has chosen to redirect
its resources. One time costs for the three months ended August 31, 1997,
include approximately $155,000 of product returns which were significantly in
excess of the Company's historical returns experience due to the termination of
a distribution agreement. The shift in third-party fulfillment of Platinum
Christian Distribution was not fully implemented until September 1, 1997,
resulting in negligible revenues for this distribution channel during the
current fiscal quarter. In addition, one-time costs for the three months ended
August 31, 1997 include
42
<PAGE>
$775,000 of legal, accounting, and other incremental costs incurred by the
Company associated with the K-tel Acquisition. Such transaction was terminated
by the Company--see "Significant Matters" below.
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
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.
For the three months ended August 31, 1997 and 1996 and the fiscal years ended
1997, 1996 and 1995, the amounts charged against gross revenues for returns and
allowances for future returns were $3,017,000, $1,073,000, $8,713,000,
$4,732,000 and $3,126,000, respectively.
The Company recognizes revenues from the shipment of telemarketing C.O.D.
sales when cash is received from the customer. C.O.D. product shipments began
during the first quarter of fiscal 1995 and were discontinued in the third
quarter of fiscal 1996, when the Company determined C.O.D. orders would 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 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.
43
<PAGE>
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 and quarterly periods reflected below. Operating results for any
period are not necessarily indicative of results for any future periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MAY 31, AUGUST 31,
---------------------------------------------------------------- --------------------
1995 1996 1997 1996
-------------------- -------------------- -------------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total gross revenues................ $ 15,866 100.0% $ 25,489 100.0% $ 42,633 100.0% $ 6,968 100.0%
Less: Returns and allowances........ (3,126) (19.7)% (4,732) (18.6)% (8,713) (20.4)% (1,073) (15.4)%
Less: Discounts..................... (507) (3.2)% (712) (2.8)% (2,463) (5.8)% (444) (6.4)%
Less: Allowance for unrecoupable
artist advances................... (1,128) (7.1)% (2,507) (9.8)% (855) (2.0)% (150) (2.2)%
--------- --------- --------- ---------
Total net revenues.................. 11,105 70.0% 17,538 68.8% 30,602 71.8% 5,301 76.0%
Cost of product sales............... 4,300 27.1% 8,107 31.8% 14,038 32.9% 2,416 34.7%
Cost of artist projects and other
revenues.......................... 2,601 16.4% 5,195 20.4% 3,752 8.8% 1,229 17.6%
--------- --------- --------- ---------
Total cost of sales and services.... 6,901 43.5% 13,302 52.2% 17,790 41.7% 3,645 52.3%
--------- --------- --------- ---------
Gross profit........................ 4,204 26.5% 4,236 16.6% 12,812 30.1% 1,656 23.7%
Other operating expenses:
Selling, general and administrative
expenses.......................... 8,800 55.5% 8,017 31.5% 13,141 30.8% 2,304 33.1%
Merger, restructuring and one-time
costs............................. -- -- -- -- 3,336 7.8% -- --
Depreciation and amortization....... 133 0.8% 156 0.6% 973 2.3% 70 1.0%
--------- --------- --------- ---------
Operating loss...................... (4,729) (29.8)% (3,937) (15.5)% (4,638) (10.8)% (718) (10.4)%
Interest income..................... 46 0.3% 106 0.4% 154 0.4% 90 1.3%
Interest expense.................... (157) (1.0)% (570) (2.2)% (1,385) (3.2)% (3) --
Other financing costs............... -- -- -- -- (3,533) (8.3)% -- --
Equity gain......................... -- -- -- -- 48 0.1% -- --
--------- --------- --------- ---------
Loss from continuing operations..... (4,840) (30.5)% (4,401) (17.3)% (9,354) (21.8)% (631) (9.1)%
Discontinued operations:
Loss from operations.............. (2,073) (13.1)% -- -- -- -- -- --
Loss on disposal.................. (2,611) (16.5)% (226) (0.9)% -- -- -- --
--------- --------- --------- ---------
Loss from discontinued operations... (4,684) (29.6)% (226) (0.9)% -- -- -- --
--------- --------- --------- ---------
Net loss............................ $ (9,524) (60.1)% $ (4.627) (18.2)% $ (9,354) (21.8)% $ (631) (9.1)%
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
1997
--------------------
<S> <C> <C>
Total gross revenues................ $ 13,437 100.0%
Less: Returns and allowances........ (3,017) (22.5)%
Less: Discounts..................... (604) (4.5)%
Less: Allowance for unrecoupable
artist advances................... (143) (1.1)%
---------
Total net revenues.................. 9,673 71.9%
Cost of product sales............... 3,526 26.2%
Cost of artist projects and other
revenues.......................... 1,222 9.1%
---------
Total cost of sales and services.... 4,748 35.3%
---------
Gross profit........................ 4,925 36.6%
Other operating expenses:
Selling, general and administrative
expenses.......................... 3,964 29.5%
Merger, restructuring and one-time
costs............................. 1,001 7.4%
Depreciation and amortization....... 485 3.6%
---------
Operating loss...................... (525) (3.9)%
Interest income..................... 21 0.2%
Interest expense.................... (1,209) (9.0)%
Other financing costs............... (450) (3.3)%
Equity gain......................... 15 0.1%
---------
Loss from continuing operations..... (2,148) (15.9)%
Discontinued operations:
Loss from operations.............. -- --
Loss on disposal.................. -- --
---------
Loss from discontinued operations... -- --
---------
Net loss............................ $ (2,148) (15.9)%
---------
---------
</TABLE>
THREE MONTHS ENDED AUGUST 31, 1997 COMPARED TO THREE MONTHS ENDED AUGUST 31,
1996
Gross revenues increased $6,469,000 or 92.8% to $13,437,000 for the current
fiscal quarter compared to the comparable period of the prior fiscal year. The
increase related to increased revenues in all genres with the exception of
Country, for which the Company experienced a decrease in incremental revenues
recognized in the first quarter of the prior fiscal year from the release of The
Beach Boys' STARS AND STRIPES, VOLUME 1. Significant contributions to revenues
in the current fiscal quarter include Vickie Winan's LIVE IN DETROIT and a
compilation by various artists entitled TODAY'S GOSPEL MUSIC SAMPLER (CGI
Records), The Taliesin Orchestra's ORINCO FLOW: THE MUSIC OF ENYA and numerous
compilation releases (Intersound Classical), Peter Cetera's YOU'RE THE
INSPIRATION (A COLLECTION), including the single YOU'RE THE INSPIRATION with AZ
Yet (River North Records), The Blues Brothers' LIVE FROM CHICAGO'S HOUSE OF
BLUES and several compilations by various artists (House of Blues), and Urban
compilations by various artists BOOTY MIX 2: THE NEXT BOUNCE and BOOTLEG BOOTY
(Intersound Urban).
Returns and allowances increased $1,944,000 or 181.2% to $3,017,000 for the
current fiscal quarter compared to the comparable period of the prior fiscal
year. Returns and allowances as a percentage of
44
<PAGE>
gross product sales, less discounts, increased to 27.7% for the current fiscal
quarter from 20.6% for the comparable period of the prior fiscal year. The
increase is primarily due to increased activity in the Company's
direct-to-retail system which historically has experienced higher returns than
the Company's third-party distributor.
Discounts increased $160,000 or 36.0% to $604,000 for the current fiscal
quarter compared to the comparable period of the prior fiscal year. Discounts as
a percentage of gross product sales decreased to 5.3% for the current fiscal
quarter from 7.9% for the comparable period of the prior fiscal year. The
decrease relates to the Company's more aggressive utilization of discount plans
with retailers through third-party distribution channels compared to the
Company's direct-to-retail system.
The allowance for unrecoupable artist advances remained relatively unchanged
at $143,000 for the current fiscal quarter compared to $150,000 for the
comparable period of the prior fiscal year. The allowance for unrecoupable
artist advances as a percentage of artist project costs remained relatively
unchanged at 11.1% for the current fiscal quarter compared to 12.7% for the
comparable period of the prior fiscal year.
Cost of product sales increased $1,110,000 or 45.9% to $3,526,000 for the
current fiscal quarter compared to the comparable period of the prior fiscal
year. Cost of product sales as a percentage of net product sales decreased to
44.9% for the current fiscal quarter from 58.5% for the comparable period of the
prior fiscal year. The decreased costs are primarily a result of the lower cost
of product sales associated with direct-to-retail activity, which is generally
subject to lower royalty costs and does not incur a third-party distribution
fee. In addition, the Company is experiencing manufacturing cost savings due to
volume discounts as a result of the acquisitions completed during fiscal 1997.
Cost of artist project and other revenues remained relatively unchanged at
$1,222,000 for the current fiscal quarter compared to $1,229,000 for the
comparable period of the prior fiscal. Cost of artist project and other revenues
as a percentage of gross revenues decreased to 9.1% for the current fiscal
quarter from 17.6% for the comparable period of the prior fiscal year primarily
due to an increased revenue base and management's implementation of cost
controls.
Gross profit increased $3,269,000 or 197.4% to $4,925,000 for the current
fiscal quarter compared to the comparable period of the prior fiscal year. As a
percentage of gross revenues, gross profit increased to 36.6% for the current
fiscal quarter from 23.7% for the comparable period of the prior fiscal year.
The increase is primarily a result of the lower cost of product sales associated
with direct-to-retail activity, which is generally subject to lower royalty
costs and does not incur a third-party distribution fee. In addition, the
Company is experiencing manufacturing cost savings due to volume discounts as a
result of the acquisitions completed during fiscal 1997.
Selling, general and administrative expenses increased $1,660,000 or 72.0%
to $3,964,000 for the current fiscal period compared to the comparable period of
the prior fiscal year. Selling general and administrative expenses as a
percentage of gross revenues decreased to 29.5% for the current fiscal quarter
from 33.1% for the comparable period of the prior fiscal year. The percentage
decrease relates to synergies realized from the acquisitions completed during
fiscal 1997 and an increased revenue base.
See "Overview" above for details of nonrecurring merger, restructuring and
one-time costs of $1,001,000.
Depreciation and amortization increased to $485,000 for the current fiscal
quarter from $70,000 for the comparable period of the prior fiscal year. The
increase relates primarily to amortization expense resulting from approximately
$30,000,000 of music catalog, music publishing rights and goodwill assets
recorded from the acquisitions completed during fiscal 1997.
As a result of the factors described above, an operating loss of $525,000
was experienced in the current fiscal quarter compared to $718,000 in the
comparable period of the prior fiscal year.
45
<PAGE>
No tax expense or benefit has been recorded through August 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 "Code"), 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
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 the current fiscal quarter totaled $1,209,000 compared
to $3,000 for the comparable period of the prior fiscal year. See "Capital
Resources" below for details of the Company's current debt structures.
Other financing costs of $450,000 were incurred during the current fiscal
quarter due to the funding of the Intersound Acquisition. These costs represent
extension fees on the Existing Credit Facility. See "Capital Resources" below
for details of the Company's current debt structures.
The net loss for the current fiscal quarter totaled $2,148,000 compared to
$631,000 for the comparable period of the prior fiscal year. The increase
relates primarily to non-recurring financing, merger, restructuring and one-time
costs of $1,451,000 and interest expense of $1,209,000 related to the Intersound
Acquisition, as well as a $415,000 increase in depreciation and amortization
related to the acquisitions completed during fiscal 1997, offset by the increase
in gross profit as discussed above.
REFERENCES MADE IN THE FOLLOWING DISCUSSION FOR FISCAL 1997, 1996 AND 1995
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, 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 a net $3,981,000 or 84.1% to $8,713,000 for
fiscal 1997 compared to the prior fiscal year; $3,173,000 of this net increase
related to the activities of Intersound since January 1, 1997. Returns and
allowances as a percentage of gross product sales, less discounts, decreased to
24.9% for
46
<PAGE>
fiscal 1997 from 26.9% for the prior fiscal year. Management attributes the
decrease in current year returns to a change in buying habits of the Company's
retail customers who have reduced initial order quantities to better manage
their payable and inventory levels.
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 $5,931,000 or 73.2% to $14,038,000 for
fiscal 1997 compared to the prior fiscal year; $2,654,000 or 44.7% of this
increase related to the activities of Intersound since January 1, 1997. Cost of
product sales as a percentage of gross revenues increased slightly to 32.9% 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 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 $8,576,000 or 202.5% to $12,812,000 for fiscal 1997
compared to the prior fiscal year; $6,385,000 or 74.5% of this increase related
to the activities of Intersound since January 1, 1997. As a percentage of gross
revenues, gross profit increased to 30.1% 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.
47
<PAGE>
See "Overview" above for details of nonrecurring merger, restructuring and
one-time costs of $3,336,000.
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 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
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
48
<PAGE>
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 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
decrease is also attributable to increased royalty rates on non-Gospel record
sales, a decrease in telemarketing revenues which provide higher gross margins
due to the lack of a third-party distribution channel and an increase in product
returns. The timing of releases also affects gross profit. The costs of
developing several recently released, or soon to be released, projects at May
31, 1996 have the effect of decreasing fiscal 1996 gross profit as product sales
on these projects will occur in future periods.
49
<PAGE>
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 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
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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) 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.
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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 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 International Inc. ("K-tel") signed
a purchase and sale agreement (the "K-tel Agreement") pursuant to which the
Company agreed to 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 two wholly-owned subsidiaries of K-tel (the "K-tel Acquisition").
The Company deposited $1,750,000 in escrow in accordance with the K-tel
Agreement which is included in current assets at August 31, 1997. On September
10, 1997, the Company terminated the K-tel Agreement due to K-tel's breaches of
the K-tel Agreement. Both the Company and K-tel have filed claim to the escrowed
amount. As of the mailing date of this Proxy Statement, the outcome of such
claims is uncertain.
LIQUIDITY
The Company's cash balances were $8,000 and $53,000 at August 31 and May 31,
1997, respectively. Net cash used in operating activities was $1,081,000 for the
current fiscal quarter. The uses reflect net cash used to fund inventories of
$669,000, artist advances of $1,547,000 and accrued liabilities and other of
$524,000, attributable to releases by such artists as Peter Cetera, The Bellamy
Brothers, several Urban and Blues compilations, and scheduled future releases
including numerous Gospel albums such as William Becton and Cissy Houston. The
net uses were offset by accounts receivable and accounts payable funding of
$1,165,000 and $2,112,000, respectively. 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 to 24 months to allow for
product returns activity as royalties are not owed on returned product.
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Net cash used in investing activities for the current quarter was $33,000
relating to purchases of equipment and leasehold improvements. In addition,
$775,000 of legal, accounting and other incremental costs previously incurred by
the Company associated with the K-tel Acquisition were written-off during the
current fiscal quarter. See "Overview" and "Significant Matters" above.
Net cash provided by financing activities for the current fiscal quarter was
$294,000 in borrowings under the revolving line of credit under the Existing
Credit Facility. Borrowings from the Existing Credit Facility 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 Existing Credit Facility when it matures 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.
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
$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 $24,000,000 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" 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.
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
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<PAGE>
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.
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 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 "Existing Credit Facility"). The Existing Credit Facility was extended
through October 31, 1997. Financing costs associated with the Existing Credit
Facility from January 31, 1997 through August 31, 1997 approximate 8% of the
total facility. The interest incurred on the Existing Credit Facility was
originally LIBOR plus 6% and was increased to LIBOR plus 9% effective August 1,
1997. The Existing Credit Facility is secured by substantially all of the
Company's assets. In addition, the Company issued warrants to BMO as discussed
below. As of the date of this Proxy Statement, no additional funds are available
under the revolving credit facility. The Existing Credit Facility contains
financial and other covenants applicable to the Company. The Existing Credit
Facility is personally guaranteed for up to $12,500,000 by an officer and
director of the Company.
The Company has obtained a commitment from a bank to provide a $30,000,000
credit facility (the "Proposed Credit Facility"). The closing of the Proposed
Credit Facility is subject to negotiation of definitive documentation, including
customary closing conditions, and is contingent upon the Company raising at
least $10,000,000 in equity. Under the terms of the Proposed Credit Facility,
the Company will have available a three year $20,000,000 term loan, due in
quarterly installments and bearing interest at the bank's base rate plus 1.0%
per annum, and a $10,000,000 revolving line of credit, due in three years and
bearing interest at the bank's base rate plus 1/2 of 1.0% per annum. Borrowings
under the revolving line of credit are limited to the Borrowing Base, which is
based upon eligible accounts receivable and inventory, as defined. The Proposed
Credit Facility will be secured by substantially all of the Company's assets.
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<PAGE>
The Company is currently seeking shareholder approval of the Preferred Stock
with Warrants Issuance. The Company anticipates that up to $20,000,000 of
Preferred Stock and Warrants to purchase an aggregate 3,600,000 shares of Common
Stock will be sold in the Preferred Stock with Warrants Issuance. The Preferred
Stock will accrue dividends quarterly at an annual rate of 12.0% for the first
year, 14.0% for the second year, 16.0% for the third year, 18.0% for the fourth
and fifth years and 20% at all times thereafter, of the Liquidation Value in
preference to any dividends on any other class of capital stock. The Preferred
Stock will be redeemable by the Company at any time at a price equal to the
purchase price paid by the Purchasers, plus accrued and unpaid dividends. The
Preferred Stock will be convertible, commencing two years from the date of
issuance, into shares of Common Stock at a price of $6.60 per share. The Common
Stock underlying the Warrants may be purchased at an exercise price of $6.60 per
share.
The Company intends to repay the Existing Credit Facility with the net
proceeds from the Preferred Stock with Warrants Issuance and the Proposed Credit
Facility, or a combination of such. The Company has obtained a commitment from a
bank to provide the Proposed Credit Facility, contingent upon the Company
raising at least $10,000,000 in equity. If the Preferred Stock with Warrants
Issuance, the Proposed Credit Facility or other method 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 Existing Credit Facility, there are no
assurances that such financing could be obtained on terms favorable to the
Company, or at all.
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 Existing
Credit Facility. The value attributed to 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 Existing Credit Facility, the Company issues shares of Common
Stock and does not use the proceeds of such issuance to pay borrowings under the
Existing Credit Facility.
On July 30, 1997, the Company's stockholders approved the issuance by the
Company of up to $40 million of convertible preferred stock on the terms
described in the proxy statement mailed to stockholders on July 8, 1997. At the
time of such proposal, the Company intended to use the proceeds of such issuance
to repay the Existing Credit Facility and to obtain a bank credit facility in
the amount of $40 million to finance the then-contemplated acquisition by the
Company of the music business of K-tel International, Inc. ("K-tel"). Since such
time, the Company has terminated its agreement with K-tel. See "--Significant
Matters." The Board of Directors has determined, in light of the Company's
revised financing requirements, that the Preferred Stock with Warrants Issuance
is in the best interests of the Company and its stockholders. Accordingly, the
Board does not currently intend to complete the $40 million preferred stock
issuance on the terms previously approved and is soliciting stockholder approval
of the Preferred Stock with Warrants Issuance.
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 Existing 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
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Company currently does not have any material commitments for capital
expenditures for the next twelve months.
Stockholders' equity at August 31, 1997 totaled $5,718,000 compared to
$7,866,000 at May 31, 1997. This decrease of $2,148,000 or 27.3% is due to net
losses experienced by the Company during the quarter ended August 31, 1997.
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.
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INTERSOUND, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE DISCUSSION BELOW CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS (AS SUCH
TERM IS DEFINED IN THE RULES PROMULGATED PURSUANT TO THE SECURITIES ACT) THAT
ARE BASED ON THE BELIEFS OF INTERSOUND'S MANAGEMENT, AS WELL AS ASSUMPTIONS MADE
BY, AND INFORMATION CURRENTLY AVAILABLE TO,INTERSOUND'S MANAGEMENT. INTERSOUND'S
ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS IN THE FUTURE COULD DIFFER
MATERIALLY FROM THOSE EXPRESSED IN, OR IMPLIED BY, ANY SUCH FORWARD-LOOKING
STATEMENTS. SEE "FORWARD LOOKING INFORMATION."
OVERVIEW
Intersound produces, licenses, markets and distributes high quality recorded
music for a variety of musical formats. Intersound currently produces music for
Gospel, Country, Classical/Themed Productions and Urban/Dance formats.
Intersound's products include compilations and themed productions of previously
recorded music that enable Intersound to exploit its catalog of master
recordings, as well as new releases typically by artists established in a
particular format.
Intersound records revenues for music products when such products are
shipped to retailers. In accordance with industry practice, Intersound's music
products are sold on a returnable basis. Intersound's allowance for future
returns is based upon its historical results of operations.
Intersound's A&R expenses 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. Intersound capitalizes non-recoupable
costs incurred in connection with the recording and production of recording
projects. These costs are amortized over the estimated useful life of the
individual recording projects.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
derived from Intersound's statements of earnings as a percentage of gross
revenues:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED APRIL 30, EIGHT MONTHS ENDED DECEMBER 31,
---------------------------------------------------------------- -------------------------------
1994 1995 1996 1995 1996
-------------------- -------------------- -------------------- -------------------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGE AMOUNTS)
Total gross revenues......... $ 26,504 100.0% $ 31,620 100.0% $ 31,382 100.0% $ 21,661 100.0% $ 20,152
Less: Returns and
allowances................. (4,999) (18.9) (6,579) (20.8) (7,212) (23.0) (4,939) (22.8) (4,604)
Less: Discounts.............. (1,656) (6.2) (2,447) (7.7) (1,674) (5.3) (1,243) (5.7) (1,260)
--------- --------- --------- --------- ---------
Total net revenues........... 19,849 74.9 22,594 71.5 22,496 71.7 15,479 71.5 14,288
Cost of product sales........ 9,583 36.2 9,941 31.4 9,030 28.8 6,360 29.4 5,390
Cost of other revenues....... 185 0.7 73 0.2 251 0.8 69 0.3 127
--------- --------- --------- --------- ---------
Total cost of sales and
services................... 9,768 36.9 10,014 31.6 9,281 29.6 6,429 29.7 5,517
Gross profit................. 10,081 38.0 12,580 39.9 13,215 42.1 9,050 41.8 8,771
Selling, general and
administrative expenses.... 8,406 31.7 10,389 32.9 10,904 34.7 6,983 32.2 6,386
--------- --------- --------- --------- ---------
Income from operations....... 1,675 6.3 2,191 7.0 2,311 7.4 2,067 9.6 2,385
Interest expense............. (184) (0.7) (245) (0.8) (354) (1.1) (290) (1.3) (216)
--------- --------- --------- --------- ---------
Income before income taxes... 1,491 5.6 1,946 6.2 1,957 6.3 1,777 8.3 2,169
Income tax benefit
(expense).................. (132) (0.5) 0.0 0.0 -- -- --
--------- --------- --------- --------- ---------
Net income................... $ 1,359 5.1% $ 1,946 6.2% 1,957 6.3% $ 1,777 8.3% $ 2,169
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
<CAPTION>
Total gross revenues......... 100.0%
Less: Returns and
allowances................. (22.8)
Less: Discounts.............. (6.3)
Total net revenues........... 70.9
Cost of product sales........ 26.7
Cost of other revenues....... 0.6
Total cost of sales and
services................... 27.3
Gross profit................. 43.6
Selling, general and
administrative expenses.... 31.7
Income from operations....... 11.9
Interest expense............. (1.1)
Income before income taxes... 10.8
Income tax benefit
(expense).................. --
Net income................... 10.8%
<CAPTION>
</TABLE>
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EIGHT MONTHS ENDED DECEMBER 31, 1996 COMPARED TO EIGHT MONTHS ENDED DECEMBER 31,
1995
Gross revenues decreased $1,509,000 or 7.0% to $20,152,000 for the eight
months ended December 31, 1996 compared to $21,661,000 for the comparable period
of the prior fiscal year. The decrease results from the timing of new releases.
Intersound released albums from Kansas and Jefferson Starship in the Adult
Contemporary format, as well as two successful Gospel releases from William
Becton and Mighty Clouds of Joy, during the eight months ended December 31,
1995. Intersound did not have such significant comparable releases during the
eight months ended December 31, 1996.
Returns and allowances decreased $335,000 or 6.8% to $4,604,000 for the
eight months ended December 31, 1996 compared to $4,939,000 for the comparable
period of the prior fiscal year. Returns and allowances as a percentage of gross
product sales, less discounts, remained relatively unchanged at 24.8% for the
eight months ended December 31, 1996 from 24.4% for the comparable period of the
prior fiscal year.
Discounts increased $17,000 or 1.4% to $1,260,000 for the eight months ended
December 31, 1996 compared to $1,243,000 for the comparable period of the prior
fiscal year. Discounts as a percentage of gross product sales remained
relatively unchanged at 6.3% for the eight months ended December 31, 1996 from
5.8% for the comparable period for the prior fiscal year.
Cost of product sales decreased $970,000 or 15.3% to $5,390,000 for the
eight months ended December 31, 1996 compared to $6,360,000 for the comparable
period of the prior fiscal year. Cost of product sales as a percentage of gross
revenues decreased to 26.7% for the eight months ended December 31, 1996 from
29.4% for the comparable period of the prior fiscal year. The decease is
primarily attributable to the decrease in product sales volume. This percentage
decrease also reflects a shift in percentages of compact disc sales compared to
cassettes. Compact disc sales, which yield higher gross margins than cassettes,
are becoming a greater percentage of sales as consumers have upgraded their
music systems. This relationship reflects industry trends and, accordingly,
Intersound primarily offers its new releases only in compact disc format. In
addition, the royalty costs associated with the albums released during the eight
months ended December 31, 1995 were higher than those typically experienced by
Intersound in its Themed Production format. Intersound also negotiated favorable
rates with certain of its vendors, the benefit of which is reflected in lower
manufacturing costs for the eight ended December 31, 1996.
Gross profits decreased $279,000 or 3.1% to $8,771,000 for the eight months
ended December 31, 1996 compared to $9,050,000 for the comparable period of the
prior fiscal year. As a percentage of gross revenues, gross profits increased to
43.6% for the eight months ended December 31, 1996 from 41.8% for the comparable
period of the prior fiscal year. This percentage increase is attributable to the
increasing demand for compact discs versus cassettes, the release of products
with lower royalty rates during the first eight months of fiscal 1996 versus
1995, and the negotiation of more favorable manufacturing rates with certain of
Intersound's vendors.
Selling, general and administrative expenses decreased $597,000 or 8.5% to
$6,386,000 for the eight months ended December 31, 1996 compared to $6,983,000
for the comparable period of the prior fiscal year. Selling, general and
administrative expenses as a percentage of gross revenues remained relatively
unchanged at 31.7% for the eight months ended December 31,1996 from 32.2% for
the comparable period of the prior fiscal year. The dollar decrease is primarily
attributable to a decline in marketing and promotional costs incurred compared
to the prior year's period due to a fewer significant new releases in the
current period.
As a result of the factors described above, operating income for the eight
months ended December 31, 1996 totaled $2,385,000 compared to $2,067,000 for the
comparable period of the prior fiscal year.
Interest expense decreased to $74,000 for the eight months ended December
31, 1996 from $290,000 for the comparable period of the prior fiscal year. This
decrease is due to decreased bank financing.
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<PAGE>
Net income increased to $2,169,000 for the eight months ended December 31,
1996 from $1,777,000 for the comparable period for the prior fiscal year. The
increase is primarily attributable to the decreased marketing and promotional
costs as discussed above.
FISCAL YEAR ENDED APRIL 30, 1996 COMPARED TO FISCAL YEAR ENDED APRIL 30, 1995
Gross revenues remained relatively unchanged totaling $31,382,000 for the
year ended April 30, 1996 compared to $31,620,000 for the prior fiscal year. The
flat sales were primarily attributable to the weak retail music market that
began in 1995.
Returns and allowances increased $633,000 or 9.6% to $7,212,000 for the year
ended April 30, 1996 compared to $6,579,000 for the prior fiscal year. Returns
and allowances as a percentage of gross product sales, less discounts, increased
to 24.8% for the year ended April 30, 1996 from 22.7% for the prior fiscal year.
The increase was attributable primarily to an increase In Intersound's and the
industry's historical return experience rates as a result of the weak music
retail market, which resulted in substantial retail store consolidations.
Discounts decreased $773,000 or 31.6% to $1,674,000 for the year ended April
30, 1996 compared to $2,447,000 for the prior fiscal year. Discounts as a
percentage of gross product sales decreased to 5.4% for the year ended April 30,
1996 from 7.8% for the prior fiscal year. The decrease was primarily the result
of a shift to increased advertising dollars spent compared to discounts offered.
Cost of product sales decreased $911,000 or 9.2% to $9,030,000 for the year
ended April 30, 1996 compared to $9,941,000 for the prior fiscal year. Cost of
product sales as a percentage of gross revenues decreased to 28.8% for the year
ended April 30, 1996 from 31.4% for the prior fiscal year. The decrease is
primarily attributable to favorable vendor rates negotiated by Intersound
compared to the prior year.
Gross profit increased $635,000 or 5.0% to $13,215,000 for the year ended
April 30, 1996 compared to $12,580,000 for the prior fiscal year. As a
percentage of gross revenues, gross profit increased to 42.1% for the year ended
April 30, 1996 from 39.9% for the prior fiscal year. The increase was primarily
attributable to the decreased vendor rates.
Selling, general and administrative expenses increased $515,000 to 5.0% to
$10,904,000 for the year ended April 30, 1996 compared to $10,389,000 for the
prior fiscal year. Selling, general and administrative expenses as a percentage
of gross revenues increased to 34.7% for the year ended April 30, 1996 from
32.9% for the prior fiscal year. The increase was attributable to increased
marketing and promotional costs associated with Gospel, Country and Adult
Contemporary releases, which require more advertising costs than Intersound's
other formats, and higher advertising costs incurred compared to discounts
offered in the prior fiscal year. Intersound also incurred increased operating
costs relating to marketing and promotion of its Enhanced CD division, which was
discontinued subsequent to April 30, 1996 due to weak retail acceptance.
As a result of the factors described above, operating income for the year
ended April 30, 1996 totaled $2,311,000 compared to $2,191,000 for the prior
fiscal year.
Interest expense increased to $354,000 for the year ended April 30, 1996
from $245,000 for the prior fiscal year. This increase was due to increased bank
financing used by Intersound.
Net income increased to $1,957,000 for the year ended April 30, 1996 from
$1,946,000 for the prior fiscal year. The increase was primarily attributable to
decreased vendor rates.
FISCAL YEAR ENDED APRIL 30, 1995 COMPARED TO FISCAL YEAR ENDED APRIL 30, 1994
Gross revenues increased $5,116,000 or 19.3% to $31,620,000 for the year
ended April 30, 1995 compared to $26,504,000 for the prior fiscal year. The
increase was attributable to Intersound's continued expansion into the Gospel,
Country, Adult Contemporary and Urban formats which began during the last
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fiscal 1994. Significant releases during fiscal 1995 included William Becton,
Mighty Clouds of Joy, the Bellamy Brothers, Dan Seals, Kansas and Jefferson
Starship.
Returns and allowances increased $1,580,000 or 31.6% to $6,579,000 for the
year ended April 30, 1995 compared to $4,999,000 for the prior fiscal year.
Returns and allowances as a percentage of gross products sales, less discounts,
were 22.7% for the year ended April 30, 1995 compared to 20.5% for the prior
fiscal year.
Discounts increased $791,000 or 47.8% to $2,447,000 for the year ended April
30, 1995 compare to $1,656,000 for the prior fiscal year. Discounts as a
percentage of gross product sales increased to 7.8% for the year ended April 30,
1995 from 6.4% for the prior fiscal year. The increase was primarily the result
of increased discounts offered compared to advertising dollars spent.
Cost of product sales increased $358,000 or 3.7% to $9,941,000 for the year
ended April 30, 1995 compared to $9,583,000 for the prior fiscal year. Cost of
product sales as a percentage of gross revenues decreased to 31.4% for the year
ended April 30, 1995 from 36.2% for the prior fiscal year. The dollar increase
was attributable to the increased product sales volumes and the percentage
decrease was attributable to favorable manufacturing rates negotiated with
certain of Intersound's vendors and a larger revenue base.
Gross profit increased $2,499,000 or 24.8% to $12,580,000 for the year ended
April 30, 1995 compared to $10,081,000 for the prior fiscal year. As a
percentage of gross revenues, gross profit increased to 39.9% for the year ended
April 30, 1995 from 38.0% for the prior fiscal year. The increase was due to a
shift in product mix from midline, particularly Themed Production product, to
frontline products with Intersound's continued expansion into Gospel, Country,
Adult Contemporary, and Urban formats. Frontline products sell at a higher
retail price and therefore yield a higher gross margin.
Selling, general and administrative expenses increased $1,983,000 or 23.6%
to $10,389,000 for the year ended April 30, 1995 compared to $8,406,000 for the
prior fiscal year. Selling, general and administrative expenses as a percentage
of gross revenues increased to 32.9% for the year ended April 30, 1995 from
31.7% for the prior fiscal year. The increase was attributable to the additional
costs incurred in developing Intersound's Gospel, Country, Adult Contemporary
and Urban formats.
As a result of the factors described above, operating income for the year
ended April 30, 1995 totaled $2,191,000 compared to $1,675,000 for the prior
fiscal year.
Interest expense increased to $245,000 for the year ended April 30, 1995
from $184,000 for the prior fiscal year. The increase was due to increased bank
financings used by Intersound.
As a result of the factors described above, net income increased to
$1,946,000 for the year ended April 30, 1995 from $1,359,000 for the prior
fiscal year.
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BUSINESS
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 formats. Platinum has produced recorded music products in the Gospel,
Classical/Themed, Adult Contemporary, Country, Blues and Urban/Dance music
formats, primarily under its CGI Records, Intersound Classical, River North
Records, Intersound Country, House of Blues and Intersound Urban labels.
Since its inception in 1991, Platinum has sought to expand its catalog of
master recordings and publishing rights through strategic and complementary
acquisitions, as well as through the signing of established artists. One of the
Company's core business activities, and an integral part of the Company's growth
strategy, is the expansion and exploitation of its music catalog. Following the
Intersound acquisition, the Company owns a music catalog with over 10,000 master
recordings.
The Company's music catalog contains master recordings of some of the best
selling Gospel music acts such as The Winans, Andrae Crouch and Walter Hawkins.
According to the RIAA, Gospel is the fastest growing music segment, having
increased its market share and revenues by 38% and 30%, respectively, in 1996
from 1995. In addition, the Company, through the Intersound acquisition,
expanded its Gospel roster to include artists such as William Becton, the Mighty
Clouds of Joy and Vicki Winans. The Company believes that it is currently
positioned as a market leader in Gospel music. The Company has also released
music by established artists in other music genres. These artists include The
Beach Boys, Peter Cetera, The Alan Parsons Project and Crystal Bernard. Through
the Intersound acquisition, the Company expanded its roster to include artists
such as Kansas, Crystal Gayle, The Ohio Players, Bellamy Brothers, Eddie
Rabbitt, Confunkshun and The Gap Band.
STRATEGY
The Company's strategy for growth and expansion of its position in the
recorded music business is based on: (i) selling diversified recorded music
offerings in formats which management believes have growth potential; (ii)
expanding and exploiting its music catalog through the acquisition of master
recordings and music publishing rights from other music companies at attractive
prices; (iii) introducing records by established artists with a history of
successful releases; and (iv) leveraging its unique distribution position
through both independent distribution channels and relationships with certain
larger record companies to provide wider distribution of certain of the
Company's products. The Company believes that this strategy distinguishes the
Company from certain of its larger competitors who have traditionally focused on
the development of new artists with the potential for mass appeal. The Company
intends to remain focused on artists and musical formats characterized by
relatively low development costs and predictable unit sales volumes. This
strategy may also include licensed compilations of previously recorded music,
"Best of" albums, and tribute albums to well known musical artists with a
history of successful releases.
MARKET FOCUS
The Company focuses on artists and musical formats characterized by low
development costs and predictable unit sales volumes. The Company plans to
continue to broaden its musical catalog in order to expand its sales
opportunities in the Gospel, Classical/Themed, Adult Contemporary, Country,
Blues and Urban/Dance markets. Because the recorded music business is
particularly dependent on changing audience tastes and the ability to identify,
attract and sign artists as well as produce compilations of existing recorded
music, the Company believes that a diversification of musical offerings, through
the identification of additional markets with growth potential, reduces revenue
volatility. The Company believes that it can obtain market share in these
markets through the identification, acquisition and exploitation of catalog
items.
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COMPILATIONS
A significant portion of the Company's products are compilations of
previously recorded music that enable the Company to exploit its large catalog
of master recordings. Compilations can be produced at significantly lower cost
than new artist releases and provide the Company with more predictable unit
sales volumes.
INTRODUCE ARTIST-DRIVEN RECORDS
The Company is committed to developing high quality recorded music with
artists with a history of successful releases. The Company does not primarily
focus on developing new acts due to unpredictable sales and high development
costs. The Company believes that its strategy reduces the risks associated with
promoting and sponsoring records because of the artist's existing fan base. In
addition, the recoupment of costs associated with recording and marketing an
album is more predictable with an artist who has a history of sales because the
Company is less involved in selecting producers, recording studios and
additional musicians than would be the case with a new artist.
ACQUIRE MUSIC MASTER RECORDINGS AND PUBLISHING RIGHTS
The Company is committed to developing its music catalog, which has
historically provided a recurring source of sales for the Company. The Company
believes that its success depends significantly on its ability to invest in,
develop and market rights to its catalog of recorded music. The Company plans to
expand its catalog for exploitation (a) through acquisitions and strategic
relationships as long as it is economically feasible to do so and (b) by
re-recording previous hit songs of artists currently on its roster.
DISTRIBUTION
The Company's distribution relationship with PolyGram has represented a
distinguishing aspect of its operations and business strategy compared with
other independent record companies. The Company's recent acquisition of
Intersound, which possesses its own proprietary direct to retail distribution
capabilities, provides the Company with additional retail distribution channels.
As the Company more fully integrates the operations of Intersound, it plans to
utilize its PolyGram distribution relationship for certain "front line" products
from each of the two companies' libraries, which products the Company believes
will receive the best marketing leverage through that channel. "Mid-line"
products, including much of the compilation and "best of" products from each of
the two libraries, are expected to be distributed via the less expensive retail
distribution channels which have been established by Intersound. The Company's
distribution agreement with PolyGram expires in 2002.
RECENT ACQUISITIONS
Consistent with its growth strategy, the Company has completed four
acquisitions since the consummation of its Offering.
On June 20, 1996, the Company acquired substantially all of the assets of
R.E.X. for $480,000, which approximated the indebtedness of R.E.X. to the
Company, and the assumption of $100,000 in liabilities. Prior to the
acquisition, the Company was the primary distributor for R.E.X., which produces,
licenses and markets recorded music, primarily in the contemporary Christian
format of Gospel music, for markets primarily in the United States. R.E.X.'s
artist roster acquired by the Company includes Sixpence None the Richer,
Whitecross, Six Feet Deep, The Waiting and Tammy Trent.
On September 19, 1996, the Company acquired substantially all of the assets
of Double J for 88,000 shares of Common Stock, the assumption of approximately
$100,000 of debt and the assumption of $75,000 in 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
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licenses. Double J controls the copyrights to more than 250 country songs, three
of which reached Number One on the country music charts during the past year.
On November 12, 1996, the Company purchased from Private, Inc., a subsidiary
of BMG, for $3,063,000 in cash, a 50% interest in the HOB Joint Venture. The HOB
Joint Venture was formed to develop and produce recordings featuring Blues,
Gospel and other music formats under the "House of Blues" label. Artists on the
House of Blues record label include Cissy Houston and Blind Boys of Alabama,
each of whom received a Grammy Award in 1997 and 1996, respectively.
Effective January 1, 1997, a subsidiary of the Company purchased
substantially all of the assets of Intersound for a total of consideration
$41,000,000, which was paid as follows: $24,000,000 in cash, $5,000,000 in Notes
and the assumption of certain liabilities. The Notes mature on January 31, 2004,
bear interest at the seven-year Treasury rate plus one percent per annum and are
convertible 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
Notes. The holders of the Notes were granted certain registration rights with
respect to the shares of Common Stock issuable upon conversion. The cash
consideration for the transaction was funded with the Existing Credit Facility.
See "Acquisition of Intersound--Existing Credit Facility."
MARKETS
GOSPEL
The Company owns a catalog of master recordings of some of the best selling
Gospel music acts of all time. These acts include The Winans, Andrae Crouch and
Walter Hawkins. A significant portion of this catalog was acquired by the
Company in 1993 from Lexicon Music, Inc. Consistent with its belief that Gospel
music sales are artist-driven rather than "hit" driven, the Company has
acquired, and continues to pursue the acquisition of, master recordings of
established Gospel artists who have a history of stable base sales. In addition,
the Company has signed established artists, typically artists with a ministry,
for modest advances to produce new recordings. The Company also has an exclusive
contract with the National Baptist Convention USA, Inc., which has 8.5 million
members, to record live gospel music on behalf of the religious denomination for
commercial distribution. Intersound also has a leadership position in Gospel
music. During 1995, Intersound released Gospel artist William Becton's BROKEN
album, which achieved number one status in the BILLBOARD Gospel rankings. With
its acquisition of Intersound, the Company increased its catalog of Gospel
recordings and expanded its artist roster to include artists such as Candi
Staton, the Mighty Clouds of Joy, DeLeon Richards and Vicki Winans.
CLASSICAL/THEMED
Through the Intersound Acquisition, the Company acquired one of the
industry's leading creators of classical and theme-based products, which are
recordings arranged around a specific theme and often targeted to a specific
demographic audience. Intersound develops themed products through new recordings
and by using its existing catalog to release titles in a new format.
Intersound's theme-based products range from the music of Hollywood and Broadway
to recordings with established artists like Peter Nero, Doc Severinsen, and
Dizzy Gillespie. Intersound also creates classical music releases based on
concepts such as "Opera for Orchestra" or a collection of certain works of
Beethoven. Other themed music releases produced and marketed by the Company
include "Best of" decades or genre music, music for various party themes, music
from favorite TV shows and holiday music with Christmas or other holiday
selections. Intersound has significant experience in developing packaging and
promoting themed products. These theme-based releases have been highly
successful, with six releases having been certified gold by the RIAA in 1995. In
addition, at the end of fiscal 1997, Intersound's label had two albums
simultaneously ranked as No. 1 in BILLBOARD--The Taliesen Orchestra's ORNICO
FLOW: THE MUSIC OF ENYA on the Classical Crossover chart and ROMANCE AND ROSES
on the Classical Budget chart.
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ADULT CONTEMPORARY
In 1993, the Company expanded its music offerings to include Adult
Contemporary music with the signing of Peter Cetera, formerly the lead singer of
the rock group Chicago and an established solo artist. Mr. Cetera's first album
by the Company was released in July 1995 and was titled ONE CLEAR VOICE. His
second album, titled YOU'RE THE INSPIRATION (A COLLECTION), includes both new
songs and re-recordings of some of Chicago's former No. 1 hits. Since the
Company's release of YOU'RE THE INSPIRATION (A COLLECTION) in May 1997, it has
charted as one of Billboard's top 200 albums for 10 weeks in a row and the first
single off the album, DO YOU LOVE ME THAT MUCH, has reached No. 6 in BILLBOARD'S
adult contemporary rankings.
In addition, the Company has relationships with other established Adult
Contemporary artists including The Beach Boys, The Alan Parsons Project and
Kansas. These artists, along with Peter Cetera, not only provide the Company
with the ability to produce and market artist-driven records with more
predictable sales, but also, based on the artists' past sales and established
fan base, have the potential to produce a record that charts in the "top ten."
The Company believes that its association with these artists will increase its
ability to sign other established artists. According to R&R magazine, the
Company's River North label was the tenth largest adult contemporary label for
1996.
COUNTRY
During the Company's fiscal year ended May 31, 1995, the Company established
its Country music operations in Nashville, Tennessee. Originally, the Company
targeted established or up and coming country artists, who are heavily dependent
on costly radio promotion for their sales. In 1996 and 1997, the Company shifted
its strategy for its country music operations to sign only country artists with
an established fan base, thereby eliminating high radio promotion expenses.
During fiscal 1997, the Company released THE GIRL NEXT DOOR, the debut album by
Crystal Bernard (a songwriter and actress who starred on NBC's WINGS and the
co-host of the 32nd Annual Academy of Country Music Awards). Also on the
Company's artist roster are country artists Holly Dunn and Ronna Reeves, both
who have been installed on the Country Music Foundation's Walkway of Stars.
With the acquisition of Intersound the Company was able to expand its focus
on predictable sales with Intersound's "Classic Country" concept which produces
"Latest and Greatest" releases for classic country acts. The addition of
Intersound also expanded the Company's artist roster to include country acts
such as The Bellamy Brothers, Exile, Dan Seals, Crystal Gayle and Eddie Rabbitt.
BLUES
The Company produces and markets compilations of Blues recordings, primarily
with music licensed from other companies and signs established artists. The
Company has successfully produced and marketed compilations of Blues recordings
featuring a variety of artists titled ESSENTIAL BLUES, VOLUME I, ESSENTIAL
BLUES, VOLUME II, ESSENTIAL WOMEN IN BLUES, BLUES DOWN DEEP: A TRIBUTE TO JANIS
JOPLIN,and various other compilation albums under its LIVING IN THE HOUSE OF
BLUES series, which are the products of the HOB Joint Venture. The Company's
Blues releases have charted in the Top 15 on the Blues Chart published by
BILLBOARD magazine, including BLUES BROTHERS AND FRIENDS, LIVE FROM CHICAGO'S
HOUSE OF BLUES which has charted in the Top 10 every week since its release in
May 1997. During fiscal 1998, the Company also plans to release new recordings
by The Blues Brothers, featuring Dan Aykroyd and Jim Belushi, and Otis Rush and
a tribute album to the Rolling Stones.
URBAN/DANCE
Intersound's Urban music division focuses on several specialty niches
including classic rhythm and blues ("R&B"), dance and bass music. In classic
R&B, Intersound employs an experienced staff that is well versed in radio and
other promotions for this musical genre. Management believes that Intersound can
increase its classic R&B offerings by signing and producing new recordings from
established artists such as
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Cameo, Confunkshun and The Gap Band. Intersound also focuses on R&B music from
the '60s, '70s and early '80s. The Company also entered into an agreement with
nonviolence rap artist Trapp to release his album STOP THE GUNFIGHT, which
includes two tracks featuring the late rap artists Tupac Shakur and Notorious
B.I.G. This album was released in late April 1997 and reached No. 2 on
BILLBOARD'S Heatseekers chart along with BOOTY MIX 2: THE NEXT BOUNCE which
ranked No. 96 on BILLBOARD'S top 200 Best Selling Album chart.
DISTRIBUTION, SALES AND PROMOTION
The Company distributes its products through a multi-channel system
comprised of (i) PolyGram domestically; (ii) Platinum Christian Distribution
division to the Christian retail market and (iii) under the Intersound label
through the Company's direct sales force. The Company primarily distributes
internationally by means of licensing arrangements. The Company has had an
exclusive domestic retail distribution agreement with PolyGram since 1993. The
Company's Christian distribution company, Platinum Christian Distribution,
distributes the Company's Christian music products as well as recorded music for
artists affiliated with other record companies. The following table sets forth
the percentage of gross product sales by distribution channel:
PERCENTAGE OF TOTAL GROSS PRODUCT SALES
BY DISTRIBUTION CHANNEL
<TABLE>
<CAPTION>
FISCAL
------------------------
1997 1996
----------- -----------
<S> <C> <C>
(1) PolyGram................................................................................ 46.9% 58.2%
(2) Intersound.............................................................................. 32.8 --
(3) Platinum Christian distribution (to Christian bookstores)............................... 9.1 23.2
(4) Record Clubs/Direct Sales............................................................... 11.2 10.8
(5) Telemarketing........................................................................... -- 7.8
</TABLE>
During fiscal 1996, Company management significantly reduced the Company's
telemarketing efforts due to the increased costs of television advertising.
The Company believes that the diversity of its distribution channels, which
was established through substantial investment in fiscal 1995 and 1996 and which
the Company plans to continue to pursue, will help the Company absorb shifts in
audience taste and the economy, and provide the foundation for the Company's
expansion into and exploitation of additional markets.
THIRD PARTIES
In May of 1993, the Company entered an exclusive distribution agreement (the
"Distribution Agreement") with PolyGram, the largest distributor of recorded
music in the world. Under the Distribution Agreement, PolyGram was appointed the
exclusive distributor for the Company's records throughout the United States.
PolyGram does not distribute releases on the Intersound label. In addition, the
Company has retained the right to distribute its records through key-outlet
sales, licenses or sales to record clubs, sales through Christian bookstore
channels and other third party licenses of master recordings. The services
provided by PolyGram include billing and collecting from customers, distributing
promotional copies of records, coordinating and placing advertisements and
undertaking retail marketing and inventory control activities. The Company is
solely responsible for all costs of production and manufacture of the records
including packaging, advertisement, freight and insurance and is obliged to
deliver to PolyGram sufficient records to ensure adequate stock for
distribution. For its services, PolyGram is entitled to a distribution fee based
on sales volume to secular accounts of 15-18% of the net sales for all records
distributed under the agreement, less reserves set aside against returns and
credits, and a monthly fee of
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2% of the aggregate credit price for copies of returned records. For sales to
stores in the Christian bookstore market, the distribution fee is 12% of net
sales. Fees owed by the Company to PolyGram are secured by all Company products
in PolyGram's possession. The terms of the distribution agreement, initially
three years, was extended to December 31, 2002.
PolyGram owns and distributes labels such as Motown Records, A&M Records,
Mercury Records and others. The Company is one of the few record companies not
owned by PolyGram whose products are distributed by PolyGram. The Company's
relationship with PolyGram has provided, and is expected to continue to provide,
the Company with access to distribution channels not readily available to other
independent recorded music companies.
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 has terminated its arrangement with MCA and
entered into 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.
PLATINUM CHRISTIAN DISTRIBUTION
Platinum Christian Distribution, an operating division of the Company,
distributes the Company's Christian music products, as well as recorded music
for artists affiliated with other labels, including Mercury, Motown and PolyGram
into the Christian Bookstore market. Platinum Christian Distribution also
distributes Christmas albums for artists including The Statler Brothers, Donna
Summer and Kathy Mattea.
INTERSOUND DISTRIBUTION AND PROMOTION
Intersound sells many of its products through a salaried direct sales force.
Customer contact is made by the Intersound sales department which is organized
to cover specific regions of the country and Canada. In addition to the sales
operation at the Roswell, Georgia facility, Intersound has regional sales
offices located throughout the United States and Canada. Additionally,
Intersound has sales personnel that cover certain specialty retail sectors,
international customers and record club and catalog customers. The Company's
in-house sales personnel typically provide additional sales coverage to smaller
chains and independent retail stores. Internationally, Intersound sells products
through overseas distributors and currently maintains relationships with ten
distributors worldwide. Additionally, Intersound licenses recordings from its
catalog that is included in recordings produced overseas. These sales are
typically transacted title by title, and are sometimes done in a theme grouping.
Intersound has licensing relationships with various companies in Europe, Asia,
Australia and South America. Other key sales personnel, located primarily at the
Roswell, Georgia facility, play a sales support and retail marketing role. The
principal function of these individuals is to support Intersound's marketing
efforts with its large retail customers.
LIBRARY
The Company owns or controls the copyrights to over 10,000 master
recordings. By combining selections from its library with licensed rights to
certain master recordings and compositions obtained from third parties,
including most major labels, the Company has been successful in creating
compilation products. In addition, with the addition of the Intersound library,
the Company will be able to create more themed products.
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RELATIONSHIP WITH ARTISTS
CONTRACT TERMS
The Company seeks to contract with its artists on an exclusive basis for the
marketing of their recordings in return for a royalty based on the net sales of
the recordings. The Company generally seeks to obtain rights on a worldwide
basis. A typical contract with an artist may provide for a number of albums to
be delivered, with advances against royalties being paid upon delivery of each
album, although advances are often made prior to recording. The Company
generally has an option to take each album that the artist is contracted to
deliver, exercisable within an agreed period of time, usually a few months
following delivery of the previous album. Normally, if an option is not
exercised, the artist has no obligation to deliver additional albums. Provisions
in contracts with established artists vary considerably, and may, for example,
require the Company to release a fixed number of albums and/or contain an option
exercisable by the Company covering more than one album. The Company seeks to
obtain rights to exploit product delivered by the artist for the life of the
product's copyright. Under the contracts, advances are normally recoupable
against royalties paid to the artist. The Company also seeks to recoup a portion
of certain marketing and tour support costs, if any, against artist royalties.
RECORDING
Contracts either provide for the artists to deliver completed recordings or
for the Company to undertake the recording with the artist. If the recording
costs are advanced by the Company, they are added to the advances paid to the
artist and recouped against royalties payable to the artist. The Company's staff
is involved in selecting producers, recording studios, any additional musicians
needed and songs to be recorded, as well as supervising the output of recording
sessions, although for experienced artists, such involvement may be less.
OPTION PROGRAM
The Company has granted and intends to continue to grant stock options to
certain artists ("Artist Options") as an inducement to sign with the Company.
The Company expects that these stock options will have vesting schedules tied to
the achievement of identified sales and other performance milestones. The
Company will evaluate the use of options on a case by case basis based on its
assessment of the cost of making cash advances to the artist, the sales
potential of the artist and the financial impact of granting such options. Under
current industry practice, cash advances to an artist are recouped from
royalties payable to the artist from record sales. Because the Artist Options
would not be subject to recoupment, the Company believes that such options will
provide a valuable method of attracting, signing and retaining artists while
maintaining appropriate economic incentives for the artists. In addition, the
corresponding reduction in cash advances should positively impact the Company's
cash flow.
PRODUCTION AND MANUFACTURING
The Company is a full service record company with an art department that
provides design and finished film for print-ready manufacturing of record cover
design.
The Company's finished music products have historically been manufactured by
wholly-owned subsidiaries of PolyGram. However, through the acquisition of
Intersound, the Company has found more cost effective manufacturing sources, and
intends to coordinate all of its manufacturing through the Roswell, Georgia
facilities. The Company does not believe that termination of the manufacturing
arrangements with the PolyGram subsidiaries will have any material adverse
impact on its distribution arrangements with PolyGram nor the Company's business
or results of operations.
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INTELLECTUAL PROPERTY
COPYRIGHT
The Company's recorded music business, like that of other companies involved
in recorded music, primarily rests on ownership or control and exploitation of
musical works and sound recordings. The Company's music products are protected
under applicable domestic and international copyright laws. In addition, the
Company owns or controls the copyrights to over 10,000 master recordings.
Although circumstances vary from case to case, rights and royalties relating
to a particular recording typically operate as follows: When a recording is
made, copyright in that recording vests either in the recording artist (and is
licensed to the recording company) or in the record company itself, depending on
the terms of the agreement between them. Similarly, when a musical composition
is written, copyright in the composition vests either in the writer (and is
licensed to music publishing company) or in the publishing company itself.
Artists generally record songs that are controlled by music publishers. The
rights to reproduce such songs on soundcarriers are obtained by the Company from
music publishers or collection societies on their behalf. The manufacture and
sale of a soundcarrier results in royalties being payable by the record company
to the publishing company at industry agreed or statutory rates for the use of
the composition (and the publishing company in turn pays a royalty to the
writer) and by the record company to the recording artist for the use of the
recording. The Company operates in an industry in which revenues are adversely
affected by the unauthorized reproduction of recordings for commercial sale,
commonly referred to as "piracy," and by home taping for personal use.
LICENSING
The Company is engaged in licensing activity involving both the acquisition
of rights to certain master recordings and compositions for its own projects and
the granting of rights to third parties in the master recordings and
compositions it owns. The Company typically obtains an ownership or co-ownership
interest in all newly-recorded compositions appearing on albums released by the
Company that are written by the artists performing the compositions. The rights
to use all other compositions appearing on albums or audiovisual works are
obtained from the publishers of those compositions under agreements that, for
albums, are called mechanical licenses, which are often issued through a central
agency, and for audiovisual works are called synchronization licenses. The
mechanical license fee is customarily indexed to a statutory rate established
under the United States Copyright Act, which currently is 6.95 cents for a
performance of up to five minutes and higher for performances of greater length.
Although fees for synchronization licenses vary from set fees to percentages of
sales price, the fee often corresponds to the statutory rate for mechanical
licenses. The Company typically issues its own mechanical and synchronization
licenses to third parties when compositions from its own catalog are used by
others. The availability and terms of such cross-licensing arrangements are
generally made possible by existing industry practices based on reciprocity.
Performance rights in compositions owned by the Company are enforced under
agreements the Company has with the performing rights organizations, American
Society of Composers, Authors and Publishers ("ASCAP"), Broadcast Music, Inc.
("BMI") and SESAC, Inc., which licenses commercial users of music such as radio
and television broadcasters, restaurants and retailers and disburses collected
fees based upon the frequency and type of performances they identify. Print
publishing rights in compositions owned by the Company are either directly
licensed by the Company to third party users or are enforced through an agency
called Christian Copyright Licensing International, which issues print licenses
to churches and other organizations and collects and disburses the fees.
The Company will also, in selected instances, obtain under license
agreements the right to use master recordings owned by others, either in
original album form or for compilation projects. Although the terms of such
agreements vary, they are typically for a period of three to five years and
involve the payment of a royalty in the range of five to eight cents for the use
of individual masters and between 16% and 20% of
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suggested retail price for complete original albums. The company typically
licenses to others only the right to use individual masters for compilation
projects under terms similar to those under which the Company obtains master
license rights. Should such industry practices change, there can be no assurance
that the Company will be able to obtain licenses from third parties on terms
satisfactory to The Company, and the Company's business, particularly with
respect to compilation products, could be materially adversely affected.
COMPETITION
The business success of the Company depends, among other things, on the
skill and creativity of the employees of the Company and on their relationships
with artists. The Company faces intense competition for discretionary consumer
spending from numerous other record companies and other forms of entertainment
offered by film companies, video companies and others. The Company competes
directly with other record companies, including the six major international
recorded music companies, which distribute Gospel, Blues, Adult Contemporary,
Country, Rock, Classical and Urban music, as well as other record and music
publishing companies for signing established and new artists and songwriters and
acquiring music catalogs. Many of the Company's competitors have significantly
longer operating histories, greater financial resources and larger music
catalogs than the Company. The Company's ability to compete successfully will be
largely dependent upon its ability to build upon and maintain its reputation for
quality music products and to introduce music products which are accepted by
consumers.
EMPLOYEES
As of September 30, 1997, Platinum employed 138 employees, of whom 48 were
located in the Company's Downers Grove, Illinois facilities, 73 were located in
the Company's Roswell, Georgia facilities, 14 were located in Nashville,
Tennessee and 3 were located in Ontario, Canada. Of such employees, 74 were
engaged in marketing, sales and related customer services, 35 were engaged in
administration and accounting, 11 were engaged in legal, royalty and publishing
services and 18 were engaged in production.
None of the Company's employees is represented by a labor union. The Company
has not experienced any work stoppage and considers relations with its employees
to be good.
FACILITIES
The Company is headquartered in Downers Grove, Illinois. It currently leases
its 11,200 square foot office facility, which lease expires February 1, 1999.
This facility houses the executive office offices of the Company, as well as the
management, accounting and sales staff. The Company also leases a facility in
Roswell, Georgia which houses the warehouse and distribution centers, production
studios, art departments and marketing and promotion operations. This facility
contains 59,334 square feet in total and has a lease term expiring December 31,
1999. The Company also leases sales offices in Minneapolis, MN, Dallas, TX,
Scarborough, Ontario, Canada, Nashville, TN, Hartford, CT and Annapolis, MD. In
addition, the Company sub-leases 4,267 square feet of office space in Nashville,
Tennessee, pursuant to a lease expiring November 17, 1997, that houses the
promotional staff of River North Records, the staff of Double J and the
administrative and telephone sales staff of the Platinum Christian Distribution;
a 3,300 square foot warehouse, located in Downers Grove, Illinois, that houses
the mail order distribution operations of the Company. Finally, the Company
leases 6,142 square feet of additional space in Nashville, Tennessee, pursuant
to a lease expiring November 17, 1997. This space is currently being sub-leased
to a third party.
The Company believes that its facilities are in good condition and adequate
for its current operations.
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PRICE RANGE OF COMMON STOCK
The Company's Common Stock trades on the Nasdaq National Market under the
symbol "PTET." The following table sets forth the high and low closing prices
for each fiscal quarter since the Company's initial public offering on March 12,
1996, as reported by Nasdaq. Such quotations reflect inter-dealer prices without
markup, markdown or commissions and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
----------------
HIGH LOW
------- -------
<S> <C> <C>
Fiscal Year Ended May 31, 1996:
4th Quarter (from March 12, 1996 to May 31, 1996*)............................. $17 3/4 $11 1/2
Fiscal Year Ended May 31, 1997:
1st Quarter.................................................................... $19 1/4 $13 3/4
2nd Quarter.................................................................... 16 1/4 8 1/2
3rd Quarter.................................................................... 8 1/2 6
4th Quarter.................................................................... 7 5
Fiscal Year Ended May 31, 1998:
1st Quarter.................................................................... $ 7 1/4 $ 5 3/8
2nd Quarter (through October 14, 1997)......................................... 8 1/2 4 7/8
</TABLE>
- ------------------------
* Prior to March 12, 1996, there was no established public trading market for
the Common Stock.
At October 14, 1997, there were approximately 61 stockholders of record and
5,274,403 shares of Common Stock outstanding.
DIVIDEND POLICY
The Company has not paid dividends on its Common Stock, and the Board of
Directors intends to continue a policy of retaining earnings to finance its
growth and for general corporate purposes. The Company does not anticipate
paying any dividends in the foreseeable future.
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SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS
The following table sets forth, as of October 14, 1997, certain information
with respect to the beneficial ownership of the Company's Common Stock by (i)
each person known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each Company director, (iii) each of
the Named Executive Officers and (iv) all Company executive officers and
directors as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT
NAME AND ADDRESS BENEFICIAL OWNERSHIP(1) OF CLASS
- ----------------------------------------------------------- ----------------------- ------------
<S> <C> <C>
Steven Devick (2).......................................... 1,045,617 17.2%
Frontenac VI Limited Partnership (3)....................... 644,522 12.2
Goldman Sachs & Co. (4).................................... 602,306 11.4
Andrew J. Filipowski (5)................................... 554,934 10.5
The Vanguard Explorer Fund, Inc. (6)....................... 400,000 7.6
Wellington Management Company LLP (7)...................... 400,000 7.6
T. Rowe Price Associates, Inc. (8)......................... 350,000 6.6
Wells Fargo Bank, N.A. (9)................................. 342,000 6.5
Craig Duchossois (10)...................................... 249,231 4.7
Douglas C. Laux (11)....................................... 65,200 1.2
Thomas R. Leavens (12)..................................... 53,333 1.0
Paul L. Humenansky (10).................................... 17,667 *
Michael P. Cullinane (10).................................. 17,667 *
Rodney L. Goldstein (13)................................... 7,667 *
Thomas J. Salentine........................................ -- --
Lynne Hoffman-Engel........................................ -- --
All Executive Officers and Directors as a Group
(10 persons)(2)(5)(10)(11)(12)(13)....................... 2,011,316 32.2
</TABLE>
- ------------------------
* Less than one percent
(1) Unless otherwise indicated below, the persons in the above table have sole
voting and investment power with respect to all shares shown as beneficially
owned by them.
(2) Includes 803,078 shares underlying stock options that are currently
exercisable. The address of Mr. Devick is c/o Platinum Entertainment, Inc.,
2001 Butterfield Road, Downers Grove, Illinois 60515.
(3) The address of Frontenac VI Limited Partnership is c/o Frontenac Company,
135 South LaSalle Street, Suite 3800, Chicago, Illinois 60604.
(4) Based on a 13G dated February 10, 1997, Goldman Sachs & Co., The Goldman
Sachs Group, L.P. and Goldman Sachs Equity Portfolios, Inc. on behalf of GS
Small Cap Equity Fund share voting and dispositive power with respect to an
aggregate of 602,306 shares of Common Stock. The address for the foregoing
reporting persons is 85 Broad Street, New York, NY 10004.
(5) Includes 99,067 shares held by Platinum Venture Partners. Mr. Filipowski is
the President, Chief Executive Officer and a stockholder of the general
partner of Platinum Venture Partners and in such capacities may be deemed to
have voting and investment power with respect to shares held by this
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entity. Mr. Filipowski disclaims beneficial ownership of such shares. The
address of Mr. Filipowski is c/o PLATINUM technology, inc., 1815 South
Meyers Road, Oakbrook Terrace, Illinois 60181. Includes 7,667 shares
underlying stock options that are currently exercisable.
(6) Based on a 13G dated February 10, 1997, Vanguard Explorer Fund, Inc.
("Vanguard") has sole voting power, and shared dispositive power, with
respect to 400,000 shares of Common Stock. The address for Vanguard is P.O.
Box 2600, Valley Forge, Pennsylvania 19482.
(7) Based on a 13G dated January 24, 1997, Wellington Management Company, LLP
("WMC"), in its capacity as investment adviser, shares dispositive power
with respect to 400,000 shares of Common Stock owned of record by its
clients. The address for WMC is 75 State Street, Boston, Massachusetts,
02109.
(8) Based on a 13G dated February 14, 1997. These securities are owned by
various individual and institutional investors which T. Rowe Price
Associates, Inc. ("Price Associates") serves as investment adviser with
power to direct investments and/or sole power to vote the securities. For
purposes of the reporting requirements of the Securities Exchange Act of
1934, Price Associates is deemed to be a beneficial owner of such
securities; however, Price Associates expressly disclaims that it is, in
fact, the beneficial owner of such securities. The address for T. Rowe Price
is 100 E. Pratt Street, Baltimore, Maryland 21202.
(9) Based on a 13G dated February 14, 1997, Wells Fargo Bank, N.A. ("Wells
Fargo") has sole voting power with respect to 316,000 of the 342,000 shares
listed in the table, and has shared dispositive power with respect to all
shares. The address for Wells Fargo is 464 California Street, San Francisco,
California 94163.
(10) Includes 11,667 shares underlying stock options that are currently
exercisable.
(11) Includes 65,100 shares underlying stock options that are currently
exercisable.
(12) Such 53,333 shares consist of shares underlying stock options that are
currently exercisable.
(13) Includes 7,667 shares underlying stock options that are currently
exercisable. Excludes 644,522 shares held by Frontenac VI Limited
Partnership. Mr. Goldstein is a general partner of Frontenac Company, the
general partner of Frontenac VI Limited Partnership, and in such capacity
shares voting and investment power with respect to shares held by this
entity.
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PROPOSAL 3--APPROVAL OF AMENDMENT OF
THE COMPANY'S 1995 DIRECTORS' STOCK OPTION PLAN
Subject to approval by the Company's stockholders at the Annual Meeting, the
Board of Directors approved an amendment of the Company's 1995 Directors' Stock
Option Plan (the "Directors' Plan") which increased the number of shares
reserved for issuance under such plan from 16,000 to 500,000. There are
currently options to purchase 16,000 shares of Common Stock outstanding under
the Directors' Plan. The Company has granted options to purchase an aggregate of
75,000 shares of Common Stock to the directors of the Company pursuant to the
Directors' Plan that are conditioned upon the Company's stockholders approving
the amendment proposed hereby. Such options were granted effective January 13,
1997, become exercisable in three annual increments beginning on January 13,
1998 and expire on January 13, 2007.
The following is a brief summary of certain features of the Director's Plan,
as amended.
TERMS OF THE DIRECTORS' PLAN AS AMENDED
GENERAL
The purpose of the Directors' Plan is to promote the overall financial
objectives of the Company and its stockholders by aligning the interests of the
Company's stockholders and its non-employee directors through the grant of
options to acquire shares of the Company's Common Stock.
The Directors' Plan permits grants of non-qualified stock options to
non-employee directors of the Company. The Directors' Plan is administered by
the Compensation Committee, which has broad authority to grant options to
directors of the Company under the Directors' Plan. Pursuant to the amendment
proposed hereby, the Directors' Plan provides that there shall be authorized the
issuance of up to 500,000 shares of Common Stock in connection with such grants.
In the event of certain changes to the capital structure of the Company,
such as a split-up or a spin-off of the Company, a stock dividend or other
corporate transaction, the Compensation Committee may adjust the number of
shares available under the Directors' Plan, the exercise price of outstanding
options or such other features as the Compensation Committee equitably
determines.
The Directors' Plan is of indefinite duration, but the Board of Directors or
the Company may at any time, and from time to time, may amend or discontinue the
Directors' Plan or an option agreement entered into with respect thereto at any
time or from time to time, subject to certain limitations.
Persons eligible to participate in the Directors' Plan are each member of
the Board of Directors of the Company who is not an employee, either full-time
or part-time, of (i) the Company, (ii) any parent of the Company, or (iii) any
subsidiary of the Company.
EXERCISE DATE AND PAYMENT OF PURCHASE PRICE
The exercise price of options issued to Directors under the Directors' Plan
is equal to the fair market value of a share of Common Stock on the date of
grant. Unless the Compensation Committee shall otherwise determine or provide in
an option agreement and subject to the terms and conditions of the Directors'
Plan, options granted under the Directors' Plan shall be fully exercisable on
the date of grant for a period of ten (10) years from such grant date. The
exercise price may be paid in cash, by delivery of Common Stock having a fair
market value equal to the exercise price, by authorizing the Company to retain
shares of Common Stock having a fair market value equal to the exercise price,
or a combination thereof. The Company shall have the right to require, prior to
the issuance or delivery of any shares of Common Stock to a participant, payment
by such participant of any Federal, state, local and other taxes which may be
required to be withheld or paid in connection with the exercise of options.
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TERMINATION OF DIRECTORSHIP
If a non-employee director's directorship terminates by reason of a
disability or death, or by reason of such director's failure to be re-nominated
or re-elected as a director, any option granted under the Directors' Plan and
held by the non-employee director shall be exercisable for a period of two (2)
years from the date of such termination of the non-employee director's
directorship or until the expiration of the option, whichever period is shorter,
and a disabled participant's subsequent death shall not affect the foregoing.
If a non-employee director's directorship terminates for any reason other
than disability, death or failure to be renominated or reelected, all of such
director's options shall be exercisable for a period of six (6) months and one
(1) day from such date or until the expiration of the option, whichever period
is shorter.
ASSIGNMENT OF INTEREST
Except as provided in any option agreement, options may only be transferred
under the laws of descent and distribution or during such participant's
lifetime.
DISCUSSION OF FEDERAL INCOME TAX CONSEQUENCES
The following summary of Federal income tax consequences with respect to
awards under the Directors' Plan is not comprehensive and is based upon laws and
regulations currently in effect. Such laws and regulations are subject to
change.
There are generally no Federal income tax consequences either to the
participant or to the Company upon the grant of a stock option. On exercise of
an incentive stock option, the participant will not recognize any income and the
Company will not be entitled to a deduction for tax purposes, although such
exercise may give rise to liability for the participant under the alternative
minimum tax provisions of the Code. Generally, if the participant disposes of
shares acquired upon exercise of an incentive stock option within two years of
the date of grant or one year of the date of exercise, the participant will
recognize compensation income and the Company will be entitled to a deduction
for tax purposes in the amount of the excess of the fair market value of the
shares on the date of exercise over the option exercise price (or the gain on
sale, if less). Otherwise, the Company will not be entitled to any deduction for
tax purposes upon disposition of such shares, and the entire gain for the
participant will be treated as a capital gain. On exercise of a non-qualified
stock option, the amount by which the fair market value of the shares on the
date of exercise exceeds the option exercise price (the "spread") will generally
be taxable to the participant as compensation income and will generally be
deductible for tax purposes by the Company. In determining the amount of the
spread or the amount of consideration paid to the participant, the fair market
value of the Common Stock on the date of exercise generally is used. However, in
the case of a 16(b) Person, the fair market value will be determined six months
after the date on which the option was granted if such date is later than the
exercise date, unless such participant elects to be taxed based on the fair
market value at the date of exercise. Any such election, a "Section 83(b)
Election", must be made and filed with the IRS within 30 days after exercise in
accordance with the regulations under Section 83(b) of the Code. The Company, in
computing its Federal income tax, will be entitled to a deduction in an amount
equal to the compensation taxable to the participant.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR APPROVAL OF THE
AMENDMENT TO THE COMPANY'S 1995 DIRECTORS' PLAN.
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PROPOSAL 4--APPROVAL AND ADOPTION OF THE COMPANY'S
1997 EMPLOYEE STOCK PURCHASE PLAN
Subject to approval by the Company's stockholders at the Annual Meeting, the
Board of Directors approved the Company's 1997 Employee Stock Purchase Plan (the
"Purchase Plan"). The Purchase Plan grants employees of the Company the right to
acquire stock of the Company under the Purchase Plan pursuant to all of the
terms and conditions of the Purchase Plan. The Purchase Plan will be effective
as of June 1, 1997.
The following is a brief summary of certain features of the Purchase Plan as
approved by the Board.
GENERAL
The purpose of the plan is to promote the overall financial objectives of
the Company and its stockholders by motivating employees of the Company to
achieve long-term growth in the Company's stockholders' equity.
The Purchase Plan is administered by the Compensation Committee. Subject to
the express provisions of the Purchase Plan, the Compensation Committee has
authority to interpret the Purchase Plan, prescribe, amend and rescind the rules
and regulations relating to the Purchase Plan and to make all other
determinations necessary or advisable for the administration of the Purchase
Plan.
The Purchase Plan is of indefinite duration, but the Board of Directors the
Company or the Compensation Committee, subject to Board approval, may at any
time, and from time to time, amend or discontinue the Purchase Plan or an option
agreement entered into with respect thereto at any time or from time to time,
subject to certain limitations.
The Plan is not subject to the provisions of the Employee Retirement Income
Security Act of 1974, and is not qualified under Section 401(a) of the Code.
SECURITIES TO BE OFFERED
The maximum aggregate number of shares available for purchase under the
Purchase Plan is 500,000 shares of Common Stock, subject to certain adjustment
as described in the Purchase Plan. Shares purchased under the Purchase Plan will
be purchased from the Company. In the event of certain changes to the capital
structure of the Company, such as a split-up or a spin-off of the Company, a
stock dividend or other corporate transaction, the Compensation Committee may
adjust the number of shares available under the Purchase Plan, the exercise
price of outstanding options or such other features as the Compensation
Committee equitably determines.
All Eligible Employees of the Company are eligible to participate in the
Purchase Plan. Eligible Employees are defined as all employees of the Company or
its subsidiaries except (a) employees who hold immediately after the option is
granted five percent (5%) or more of the voting power or value of all classes of
stock of the Company (as determined on the grant date); (b) any employee whose
customary employment is 20 hours or less per week; or (c) any employee whose
customary employment is for not more than five months in any calendar year.
ELECTION, PURCHASE OF COMMON STOCK
The Compensation Committee will establish a grant date on which employees
will be granted the option to purchase Common Stock. The Compensation Committee
anticipates there will be two grant dates per year; however, the determination
of grant dates is in the discretion of the Compensation Committee. The grant
date is generally the beginning of the period for which an employee must
indicate whether he or she will participate. The shares offered will be
purchased through payroll deduction. The
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shares are held in an account for a period of time until the exercise date on
which shares of Common Stock are purchased; such period is referred to as the
option period.
WITHDRAWAL FROM THE PURCHASE PLAN
The specified percentage to be withheld each pay period may not be increased
or decreased during the option period. An employee may suspend or completely
cancel his or her election of payroll deduction, and shares of Common Stock will
not be purchased for the withdrawing employee. If an employee suspends his or
her election, all amounts previously withheld will be retained by the Company
until the date shares are purchased or until he or she completely cancels the
election. If the employee completely cancels his or her election, all amounts
previously withheld will be refunded to the employee at such time as determined
by the Compensation Committee.
EXERCISE DATE AND PAYMENT OF PURCHASE PRICE
Shares of Common Stock will be purchased on behalf of each employee on the
exercise date, which date shall be determined by the Compensation Committee.
Unless otherwise specified by the Compensation Committee, the number of shares
purchased shall equal the value in the account for the participant divided by
(1) 85% of the fair market value per share of the Common Stock on the applicable
grant date or (2) 85% of the fair market value per share of the Common Stock on
the applicable exercise date, whichever is lower.
If an eligible employee elects to participate, the participant must file an
agreement with the Company. The Compensation Committee may provide that the
agreement shall specify the percentage or amount of the participant's
compensation determined by the participant to be deducted each pay period. The
Compensation Committee may establish minimum and maximum percentages or amounts
to be contributed and a date by when any agreement must be filed with the
Compensation Committee. In no event, however, may a participant (i) purchase
under the Purchase Plan during any plan year Common Stock having a fair market
value (determined at the grant date) of more than $25,000 or (ii) receive any
right to purchase stock under the Purchase Plan if he or she beneficially owns,
immediately after the option is granted, five percent (5%) or more of the voting
power or value of stock of the Company.
TERMINATION OF ELIGIBILITY OR EMPLOYMENT
Except as otherwise provided by the Compensation Committee, any participant
who incurs a termination of employment for any reason, except death, disability
or retirement, shall cease to be a participant, the option of the participant
shall be null and void on the date of the termination of employment without
notice to the participant and the balance of the account of the participant
shall be distributed to the participant at such time as the Compensation
Committee determines.
If a participant dies or his or her employment terminates as a result of a
disability or retirement, no further payroll deductions my be made under the
Purchase Plan; however, the participant or his representative may make a single
sum payment equal to the amount the participant would have contributed as
determined by the Compensation Committee for the payroll periods remaining to
the exercise date. Alternatively, the participant or his representative may
withdraw the employee's contributions to the Purchase Plan in which case no
shares of Common Stock will be purchased and all withheld amounts will be
distributed at such time as directed by the Compensation Committee. If the
participant or his representative does not withdraw the participant's previous
contributions then such contributions will be used to purchase Common Stock on
the exercise date.
STOCKHOLDER RIGHTS
No person shall have any rights as a stockholder as to shares of Common
Stock subject to an option until, after proper exercise of the option or other
action required, such shares shall have been recorded on
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the Company's official stockholder records as having been issued and
transferred. No adjustment shall be made for cash dividends or other rights for
which the records date is prior to the date such shares are recorded as issued
and transferred in the Company's official stockholder records.
ASSIGNMENT OF INTEREST
The right to purchase shares of Common Stock under the Purchase Plan is not
transferable by any employee other than by will or by the laws of descent and
distribution and is exercisable during an employees lifetime only by the
employee.
CHANGE IN CONTROL
A "change in control" of the Company will generally accelerate the exercise
date. A change in control is generally the purchase by a person or group of
persons or a group of persons of twenty-five percent (25%) or more of the
Company's Common Stock or voting securities, certain changes in the Board of
Directors, certain reorganizations, mergers or consolidations of the Company or
a sale of all or substantially all of the assets of the Company. The term
"change in control" is more fully described in the Purchase Plan.
RESTRICTIONS ON RESALE OF COMMON STOCK
The provisions of the Purchase Plan do not impose restrictions upon the
resale by employees of Common Stock acquired under the Purchase Plan, except
that the Company is entitled to require that, prior to an employee's transfer of
shares, an employee must satisfy tax withholding obligations to the extent
required by the Company.
DISCUSSION OF FEDERAL INCOME TAX CONSEQUENCES
The following summary of Federal income tax consequences with respect to
awards under the Purchase Plan is not comprehensive and is based upon laws and
regulations currently in effect. Such laws and regulations are subject to
change.
The Company believes that the Purchase Plan qualifies under Section 423 of
the Code, as an employee stock purchase plan. Under Section 423 the employee
should not realize any taxable income at the time the option is granted or at
the time shares of Common Stock are purchased under the Purchase Plan is the
employee is (or was in the past three months) employed by the Company. Rather,
tax recognition occurs upon disposition of the shares.
If an employee exercises an option while an employee and disposes (for
example by a sale, exchange, gift or transfer of legal title, subject to narrow
expectations) of the Common Stock purchased under the Purchase Plan either
within two years after the applicable grant date or within one year after the
applicable exercise date (a "disqualifying disposition"), the excess of the fair
market value of the Common Stock on the applicable exercise date over the option
exercise price of the Common Stock under the Purchase Plan will be taxable as
ordinary income (even if there is no gain realized at the time of the
disposition) and, for purposes of computing gain or loss on the disposition, the
employee's cost basis will be increased by the amount of ordinary income. Any
additional gain or loss to be recognized upon disposition will be a capital gain
or loss (presumably short-term).
If an employee exercises an option while an employee of the Company and
disposes of Common Stock purchased under the Purchase Plan two years or more
after the applicable grant date and one year or more after the applicable
exercise date (a "disqualifying disposition"), the tax treatment will be
different. The employee must recognize as ordinary income the lesser of (a) any
excess of the fair market value of the Common Stock on the applicable grant date
over the option exercise price on the applicable grant date; and (b) any excess
of the fair market value of the Common Stock on the date the stock is
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disposed of over the amount paid for the stock. The employees basis in the
Common Stock is increased by the amount of ordinary income recognized. The
difference between the disposition and the adjusted basis (i.e., basis increased
by ordinary income recognized) will be taxable as long-term capital gain. If the
Common Stock is sold at a price below the adjusted basis, the loss will be
treated as a long-term capital loss.
The Company will not be entitled to a deduction for any difference between
the fair market value of the Common Stock and the purchase price for the Common
Stock under the Purchase Plan, except to the extent it is taxed to the employee
as ordinary income upon a disqualifying disposition and the Company makes any
necessary and appropriate tax withholding arrangements. Different dates for
recognizing gain may apply to employees who are subject to Section 16(b) of the
Exchange Act.
Federal employment tax liability, such as that for social security and
unemployment compensation taxes, may apply. The Company reserves the right to
delay transfers of Common Stock until there has been effected any withholding
the Compensation Committee deems necessary to avoid liability or sustain a
deduction. In order to assist the Company in obtaining its deductions, the
Company may require the employee to inform it of any dispositions.
The expenses of the Purchase Plan (such as administrative expenses) will be
paid by the Company. Any fees associated with ownership of the Common Stock or
its disposition after the date the Common Stock is transferred to the employee
for his or her account shall be paid by the employee.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR ADOPTION OF THE
COMPANY'S 1997 EMPLOYEE STOCK PURCHASE PLAN.
PROPOSAL 5--RATIFICATION OF APPOINTMENT OF AUDITORS
The Company's Board of Directors, upon the recommendation of the Company's
Audit Committee, has appointed Ernst & Young LLP, independent certified public
accountants, as auditors of the Company's financial statements for the fiscal
year ending May 31, 1997. Ernst & Young LLP has acted as auditors for the
Company since 1991.
The Board has determined to afford stockholders the opportunity to express
their opinions on the matter of auditors, and, accordingly, is submitting to the
stockholders at the Annual Meeting a proposal to ratify the Board's appointment
of Ernst & Young LLP. If a majority of the shares voted affirmatively or
negatively at the Annual Meeting, in person or by proxy, are not voted in favor
of the ratification of the appointment of Ernst & Young LLP, the Board of
Directors will interpret this as an instruction to seek other auditors.
It is expected that representatives of Ernst & Young LLP will be present at
the meeting and will be available to respond to questions. They will be given an
opportunity to make a statement if they desire to do so.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE
RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS THE INDEPENDENT AUDITORS
OF THE COMPANY'S FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDING MAY 31, 1998.
EXPERTS
The consolidated financial statements of Platinum Entertainment, Inc. as of
May 31, 1997, 1996 and 1995 appearing in this Proxy Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere in the Proxy Statement, and are included in reliance upon
the report given upon the authority of such firm as experts in accounting and
auditing.
The financial statements of Intersound, Inc. as of April 30, 1995 and 1996,
and for the three years ended April 30, 1994, 1995 and 1996 appearing in this
Proxy Statement have been audited by Ernst &
78
<PAGE>
Young LLP, independent auditors, as set forth in their report thereon appearing
elsewhere in the Proxy Statement, and are included in reliance upon the report
given upon the authority of such firm as experts in accounting and auditing.
MISCELLANEOUS MATTERS
SOLICITATION--The cost of this proxy solicitation will be borne by the
Company. The Company has engaged its transfer agent, American Stock Transfer and
Trust Company LLP, to assist in the required search for beneficial owners of the
Company's Common Stock and in the distribution of proxy materials. The Company
may also request banks, brokers, fiduciaries, custodians, nominees and certain
other record holders to send proxies, proxy statements and other materials to
their principals at the Company's expense. Such banks, brokers, fiduciaries,
custodians, nominees and other record holders will be reimbursed by the Company
for their reasonable out-of-pocket expenses of solicitation. The Company does
not anticipate that costs and expenses incurred in connection with this proxy
solicitation will exceed an amount normally expended for a proxy solicitation
for an election of directors in the absence of a contest.
PROPOSALS OF STOCKHOLDERS--Proposals of stockholders intended to be
considered at the 1998 Annual Meeting of Stockholders must be received by the
Secretary of the Company not less than 120 days nor more than 150 days prior to
October 17, 1998.
ADDITIONAL INFORMATION--The Company will furnish, without charge, a copy of
its Annual Report on Form 10-K for its fiscal year ended May 31, 1997, as filed
with the Commission, upon the written request of any person who is a stockholder
as of the Record Date. Requests for such materials should be directed to
Platinum Entertainment, Inc., 2001 Butterfield Road, Suite 1400, Downers Grove,
Illinois 60515, Attention: Douglas C. Laux.
By order of the Board of Directors
Steven Devick
Chairman of the Board
Downers Grove, Illinois
October , 1996
79
<PAGE>
INDEX TO FINANCIAL STATEMENTS TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PLATINUM ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Balance Sheet as of August 31, 1997 (Unaudited)............................................. F-2
Consolidated Statements of Operations for the Three Months Ended August 31, 1997 and 1996 (Unaudited).... F-3
Consolidated Statements of Cash Flows for the Three Months Ended August 31, 1997 and 1996 (Unaudited).... F-4
Notes to Unaudited Consolidated Financial Statements..................................................... F-5
Report of Independent Auditors........................................................................... F-8
Consolidated Balance Sheets as of May 31, 1997 and 1996.................................................. F-9
Consolidated Statements of Operations for the Years Ended May 31, 1997, 1996 and 1995.................... F-10
Consolidated Statements of Stockholders' Equity (Net Capital Deficiency) for the Years Ended May 31,
1995, 1996 and 1997.................................................................................... F-11
Consolidated Statements of Cash Flows for the Years Ended May 31, 1997, 1996 and 1995.................... F-12
Notes to Consolidated Financial Statements............................................................... F-13
INTERSOUND, INC.
Report of Independent Auditors........................................................................... F-28
Balance Sheets as of April 30, 1995, April 30, 1996 and (Unaudited) December 31, 1996.................... F-29
Statements of Income for the Years Ended April 30, 1994, 1995 and 1996 and for the (Unaudited) Eight
Months Ended December 31, 1995 and 1996................................................................ F-30
Statements of Stockholders' Equity for the Years Ended April 30, 1994, 1995 and 1996 and for the
(Unaudited) Eight Months Ended December 31, 1996....................................................... F-31
Statements of Cash Flows for the Years Ended April 30, 1994, 1995 and 1996 and for the (Unaudited) Eight
Months Ended December 31, 1995 and 1996................................................................ F-32
Notes to Financial Statements............................................................................ F-33
</TABLE>
F-1
<PAGE>
PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AUGUST 31,
1997
-----------
(UNAUDITED)
<S> <C>
ASSETS
Current assets:
Cash............................................................................................... $ 8
Cash in escrow..................................................................................... 1,750
Accounts receivable, less allowance of $2,982...................................................... 13,778
Artist advances.................................................................................... 2,705
Inventories, less allowance of $705................................................................ 5,685
Notes receivable................................................................................... 50
Other.............................................................................................. 264
-----------
Total current assets................................................................................. 24,240
Artist advances, net of current amount, less allowance of $9,886..................................... 3,442
Equipment and leasehold improvements, net............................................................ 1,123
Music catalog, less accumulated amortization of $523................................................. 19,081
Music publishing rights, less accumulated amortization of $255....................................... 3,572
Goodwill, less accumulated amortization of $184...................................................... 6,714
Equity investment in joint venture................................................................... 3,169
Other................................................................................................ 1,100
-----------
Total assets......................................................................................... $ 62,441
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit........................................................................... $ 10,000
Term loan.......................................................................................... 25,000
Accounts payable................................................................................... 6,150
Accrued liabilities and other...................................................................... 1,997
Reserve for future returns......................................................................... 2,710
Royalties payable.................................................................................. 5,866
-----------
Total current liabilities............................................................................ 51,723
Convertible subordinated debentures.................................................................. 5,000
Stockholders' equity:
Preferred Stock:
Preferred Stock ($.001 par value); 10,000,000 shares authorized, no shares issued and outstanding.. --
Common Stock:
Common Stock ($.001 par value); 40,000,000 shares authorized, 5,184,474 shares issued and
outstanding...................................................................................... 5
Additional paid-in capital........................................................................... 37,261
Accumulated deficit.................................................................................. (31,548)
-----------
Stockholders' equity................................................................................. 5,718
-----------
Total liabilities and stockholders' equity........................................................... $ 62,441
-----------
-----------
</TABLE>
See accompanying notes to financial statements
F-2
<PAGE>
PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER ENDED AUGUST 31
--------------------------
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
Gross product sales................................................................... $ 11,478 $ 5,647
Less: Returns and allowances.......................................................... (3,017) (1,073)
Less: Discounts....................................................................... (604) (444)
------------ ------------
Net product sales..................................................................... 7,857 4,130
Cost of product sales................................................................. 3,526 2,416
------------ ------------
4,331 1,714
Gross artist project revenues......................................................... 1,290 1,180
Less: Allowance for unrecoupable artist advances...................................... (143) (150)
------------ ------------
Net artist project revenues........................................................... 1,147 1,030
Licensing, publishing and other revenues.............................................. 669 141
------------ ------------
Net artist project and other revenues................................................. 1,816 1,171
Cost of artist project and other revenues............................................. 1,222 1,229
------------ ------------
594 (58)
------------ ------------
Gross profit.......................................................................... 4,925 1,656
Other operating expenses:
Selling, general and administrative................................................. 3,964 2,304
Merger, restructuring and one-time costs............................................ 1,101 --
Depreciation and amortization....................................................... 485 70
------------ ------------
5,450 2,374
------------ ------------
Operating loss........................................................................ (525) (718)
Interest income....................................................................... 21 90
Interest expense...................................................................... (1,209) (3)
Other financing costs................................................................. (450) --
Equity gain........................................................................... 15 --
------------ ------------
Net loss.............................................................................. $ (2,148) $ (631)
------------ ------------
------------ ------------
Per common share...................................................................... $ (0.42) $ (0.12)
Weighted average number of common shares outstanding.................................. 5,174,734 5,063,204
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE>
PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED AUGUST 31
--------------------------
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.............................................................................. $ (2,148) $ (631)
Adjustments to reconcile net loss to net cash used in operating activities:
Charge to provision for future returns.............................................. -- 10
Charge to provision for co-op advertising........................................... 91 --
Charge to provision for unrecoupable artist balances................................ 141 150
Depreciation and amortization....................................................... 485 70
Equity gain from joint venture...................................................... (15) --
Changes in operating assets and liabilities:
Accounts receivable................................................................. 1,165 (1,704)
Inventories......................................................................... (669) (782)
Notes receivable.................................................................... -- 878
Artist advances..................................................................... (1,547) (1,228)
Accounts payable.................................................................... 2,112 154
Accrued liabilities and other....................................................... (524) (581)
Reserve for future returns.......................................................... (350) --
Royalties payable................................................................... 353 841
Other............................................................................... (175) (199)
------------ ------------
Net cash used in operating activities................................................. (1,081) (3,022)
INVESTING ACTIVITIES
Write-off of acquisition costs........................................................ 775 --
Purchases of equipment and leasehold improvements..................................... (33) (90)
------------ ------------
Net cash provided by (used in) investing activities................................... 742 (90)
FINANCING ACTIVITIES
Proceeds from revolving line of credit................................................ 294 --
------------ ------------
Net cash provided by financing activities............................................. 294 --
------------ ------------
Net decrease in cash.................................................................. (45) (3,112)
Cash, beginning of quarter............................................................ 53 8,222
------------ ------------
Cash, end of quarter.................................................................. $ 8 $ 5,110
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
The financial statements included herein are unaudited and have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and Securities and Exchange Commission ("Commission")
regulations. In the opinion of management, the financial statements reflect all
adjustments (of a normal and recurring nature) which are necessary to present
fairly the financial position, results of operations and cash flows for the
interim periods presented. These financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
for the fiscal year ended May 31, 1997 of Platinum Entertainment, Inc.
("Company") included in the Annual Report on Form 10-K. The interim results
presented are not necessarily indicative of the results that may be expected for
the year ending May 31, 1998.
2. NET LOSS PER COMMON SHARE
Net loss per common share is computed based upon the weighted average number
of common shares outstanding.
3. DEBT
Convertible debentures in the aggregate principal amount of $5,000 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 (6.98% at August 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 "Existing Credit Facility"). The Existing Credit Facility was
extended through October 31, 1997. Financing costs associated with the Existing
Credit Facility from January 31, 1997 through August 31, 1997 approximate 8% of
the total facility. The interest incurred on the Existing Credit Facility was
originally LIBOR plus 6% and was increased to LIBOR plus 9% effective August 1,
1997. The Existing Credit Facility is secured by substantially all of the
Company's assets. As of the date of this filing, no additional funds are
available under the revolving credit facility. The Existing Credit Facility
contains financial and other covenants applicable to the Company. The Existing
Credit Facility is personally guaranteed for up to $12,500 by an officer and
director of the Company.
The Company has obtained a commitment from a bank to provide a $30,000
credit facility (the "Proposed Credit Facility"). The closing of the Proposed
Credit Facility is subject to negotiation of definitive documentation, including
customary closing conditions, and is contingent upon the Company raising at
least $10,000 in equity. Under the terms of the Proposed Credit Facility, the
Company will have available a three year $20,000 term loan, due in quarterly
installments and bearing interest at the bank's base rate plus 1.0% per annum,
and a $10,000 revolving line of credit, due in three years and bearing interest
at the bank's base rate plus 1/2 of 1.0% per annum. Borrowings under the
revolving line of credit are limited to the Borrowing Base, which is based upon
eligible accounts receivable and inventory, as defined. The Proposed Credit
Facility will be secured by substantially all of the Company's assets.
The Company has entered into an Investment Agreement dated October 12, 1997
with certain parties (the "Purchasers") whereby the Company has agreed to issue
and sell to the Purchasers, and the
F-5
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. DEBT (CONTINUED)
Purchasers have agreed to purchase from the Company, for aggregate consideration
of $20,000, 20,000 shares of Preferred Stock and Warrants to purchase 3,600,000
shares of Common Stock (collectively, the "Preferred Stock with Warrants
Issuance"). The closing of the Preferred Stock with Warrants Issuance is subject
to a number of closing conditions, including without limitation (i) approval by
the Company's stockholders of the Preferred Stock with Warrants Issuance, (ii)
execution of the Proposed Credit Facility, (iii) satisfactory completion by the
Purchasers of their due diligence review of the Company and (iv) other customary
closing conditions. The Preferred Stock will accrue dividends quarterly at an
annual rate of 12.0% for the first year, 14.0% for the second year, 16.0% for
the third year, 18.0% for the fourth and fifth years and 20% at all times
thereafter, of the purchase price paid by the Purchasers, in preference to any
dividends on any other class of capital stock. The Preferred Stock will be
redeemable by the Company at any time at a price equal to the purchase price
paid by the Purchasers thereof plus accrued and unpaid dividends. The Preferred
Stock will be convertible, commencing two years from the date of issuance, into
shares of Common Stock at a price of $6.60 per share. The Common Stock
underlying the Warrants may be purchased at an exercise price of $6.60 per
share.
The Company intends to repay the Existing Credit Facility with the net
proceeds from the Preferred Stock with Warrants Issuance and the Proposed Credit
Facility, or a combination of such. The Company has obtained a commitment from a
bank to provide the Proposed Credit Facility, contingent upon the Company
raising at least $10,000 in equity. If the Preferred Stock with Warrants
Issuance, the Proposed Credit Facility or other method 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 Existing Credit Facility, there are no
assurances that such financing could be obtained on terms favorable to the
Company, or at all.
On July 30, 1997, the Company's stockholders approved the issuance of up to
$40,000 of convertible preferred stock on the terms described in the proxy
statement mailed to stockholders on July 8, 1997. At the time of such proposal,
the Company intended to use the proceeds of such issuance to repay the Existing
Credit Facility and to obtain a bank credit facility in the amount of $40,000 to
finance the then-contemplated acquisition by the Company of the music business
of K-tel (as hereinafter defined). Since such time, the Company has terminated
its agreement with K-tel, as described in the Company's Current Report on Form
8-K filed with the Commission on September 10, 1997. The Board of Directors has
determined, in light of the Company's revised financing requirements, that the
Preferred Stock with Warrants Issuance is in the best interests of the Company
and its stockholders. Accordingly, the Board does not currently intend to
complete the $40,000 preferred stock issuance on the terms previously approved
and is soliciting stockholder approval of the Preferred Stock with Warrants
Issuance.
4. MERGER, RESTRUCTURING AND ONE-TIME COSTS
As a result of the 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
non-executive severance costs, relocation costs, lease commitment write-offs,
warehouse closing costs and other related costs. Such costs approximated $1,650
for fiscal 1997, of which $315 and $240 were accrued at May 31 and August 31,
1997, respectively, 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
F-6
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. MERGER, RESTRUCTURING AND ONE-TIME COSTS (CONTINUED)
the Company's Country label and in-house sales department and a shift in
third-party fulfillment of Platinum Christian Distribution. One-time costs,
totaling $1,686, include approximately $1,100 of product returns which were
significantly in excess of the Company's historical returns experience due to
the termination of a distribution agreement and the termination of certain
customer relationships. In addition, one-time costs include write-offs of artist
advances and accounts receivables in areas from which the Company has chosen to
redirect its resources. One time costs, include approximately $155 of product
returns which were significantly in excess of the Company's historical returns
experience due to the termination of a distribution agreement. The shift in
third-party fulfillment of Platinum Christian Distribution was not fully
implemented until September 1, 1997, resulting in negligible revenues for this
distribution channel during the current fiscal quarter. In addition, one-time
costs include $775 of legal, accounting, and other incremental costs incurred by
the Company associated with the K-tel Acquisition. Such transaction was
terminated by the Company -- see "Subsequent Event" below.
5. RECLASSIFICATIONS
Certain amounts in the three months ended August 31, 1996 consolidated
statements of operations have been reclassified to conform with the three months
ended August 31, 1997 presentation.
6. SUBSEQUENT EVENT
On March 3, 1997, the Company and K-tel International, Inc. ("K-tel") signed
a purchase and sale agreement (the "K-tel Agreement") pursuant to which the
Company agreed to 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 International (USA), Inc. and Dominion Music, Inc., both
wholly-owned subsidiaries of K-tel ("the K-tel Acquisition"). The Company
deposited $1,750 in escrow in accordance with the K-tel Agreement which is
included in current assets at August 31, 1997. On September 10, 1997, the
Company terminated the K-tel Agreement due to K-tel's breaches of the K-tel
Agreement. Both the Company and K-tel have filed claim to the escrowed amount.
The outcome of such claims is uncertain.
See also Note 3.
F-7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
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
F-8
<PAGE>
PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MAY 31
--------------------
1997 1996
--------- ---------
<S> <C> <C>
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
--------- ---------
--------- ---------
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
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to financial statements
F-9
<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............................................ (8,713) (4,732) (3,126)
Less: Discounts......................................................... (2,463) (712) (507)
------------ ------------ ------------
Net product sales....................................................... 26,326 12,878 8,942
Cost of product sales................................................... 14,038 8,107 4,300
------------ ------------ ------------
12,288 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............................................................ 12,812 4,236 4,204
Other operating expenses:
Selling, general and administrative................................... 13,141 8,017 8,800
Merger, restructuring and one-time costs.............................. 3,336 -- --
Depreciation and amortization......................................... 973 156 133
------------ ------------ ------------
17,450 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
F-10
<PAGE>
PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------------------
PREFERRED STOCK NO CLASS ADDITIONAL
------------------------ ------------------------ PAID-IN
SERIES A-2 NO SERIES CLASS A CLASS B SHARES AMOUNT CAPITAL
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1994......... $ -- $ -- $ -- $ 1 $ 40 $ -- $ 1,989
Proceeds from issuance of
Preferred Stock, net ($.69 per
share)........................ 18 -- -- -- -- -- 487
Net loss for the year ended May
31, 1995...................... -- -- -- -- -- -- --
Other........................... -- -- -- -- 10 -- --
----- ----- ----- ----- ----- ----- -----------
Balance at May 31, 1995......... 18 -- -- 1 50 -- 2,476
Conversion into Common Stock.... (18) -- -- (1) 2,050 2 17
Initial public offering, net
($11.30 per share)............ -- -- -- -- 2,740 3 30,953
Exercise of stock options....... -- -- -- -- 22 -- 56
Conversion of Series A-1
Redeemable Preferred Stock.... -- -- -- -- 117 -- 1,525
Dividends on Series A-1
Redeemable Preferred Stock.... -- -- -- -- -- -- --
Founders' bonus................. -- -- -- -- 65 -- --
Shares issued in lieu of
compensation.................. -- -- -- -- 19 -- 227
Net loss for the year ended May
31, 1996...................... -- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- -----------
Balance at May 31, 1996......... -- -- -- -- 5,063 5 35,254
Issuance of Common Stock for
business acquisition.......... -- -- -- -- 88 -- 777
Issuance of stock warrants for
financing costs............... -- -- -- -- -- -- 1,240
Net loss for the year ended May
31, 1997...................... -- -- -- -- -- -- --
Other........................... -- -- -- -- 20 -- (10)
----- ----- ----- ----- ----- ----- -----------
Balance at May 31, 1997......... $ -- $ -- $ -- $ -- 5,171 $ 5 $ 37,261
----- ----- ----- ----- ----- ----- -----------
----- ----- ----- ----- ----- ----- -----------
<CAPTION>
STOCKHOLDERS'
EQUITY (NET
CAPITAL
DEFICIT DEFICIENCY)
--------- ------------
<S> <C> <C>
Balance at May 31, 1994......... $ (5,292) $ (3,302)
Proceeds from issuance of
Preferred Stock, net ($.69 per
share)........................ -- 505
Net loss for the year ended May
31, 1995...................... (9,523) (9,523)
Other........................... -- --
--------- ------------
Balance at May 31, 1995......... (14,815) (12,320)
Conversion into Common Stock.... -- --
Initial public offering, net
($11.30 per share)............ -- 30,956
Exercise of stock options....... -- 56
Conversion of Series A-1
Redeemable Preferred Stock.... -- 1,525
Dividends on Series A-1
Redeemable Preferred Stock.... (602) (602)
Founders' bonus................. -- --
Shares issued in lieu of
compensation.................. -- 227
Net loss for the year ended May
31, 1996...................... (4,627) (4,627)
--------- ------------
Balance at May 31, 1996......... (20,044) 15,215
Issuance of Common Stock for
business acquisition.......... -- 777
Issuance of stock warrants for
financing costs............... -- 1,240
Net loss for the year ended May
31, 1997...................... (9,354) (9,354)
Other........................... (2) (12)
--------- ------------
Balance at May 31, 1997......... $ (29,400) $ 7,866
--------- ------------
--------- ------------
</TABLE>
See accompanying notes to financial statements
F-11
<PAGE>
PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED 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
F-12
<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:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
PGD...................................................................... 47% 58% 59%
Intersound............................................................... 33% -- --
Platinum Christian Distribution.......................................... 9% 23% 22%
Telemarketing............................................................ -- 8% 16%
Other.................................................................... 11% 11% 3%
</TABLE>
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).
F-13
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. 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.
F-14
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
F-15
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER COMMON SHARE (CONTINUED)
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 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
F-16
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. ACQUISITIONS (CONTINUED)
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:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(UNAUDITED)
<S> <C> <C>
Gross revenues.......................................................... $ 61,332 $ 57,163
Net revenues............................................................ 43,859 40,327
Gross profit............................................................ 20,898 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)
</TABLE>
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 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.
F-17
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
F-18
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. VALUATION AND QUALIFYING ACCOUNTS
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 DEDUCTION OF YEAR
------------- ------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
FISCAL 1997
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.
F-19
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consists of the following:
<TABLE>
<CAPTION>
MAY 31
--------------------
1997 1996
--------- ---------
<S> <C> <C>
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
--------- ---------
--------- ---------
</TABLE>
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).
F-20
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. DEBT (CONTINUED)
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.
Interest expense and cash paid for interest for the fiscal years ended are
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Interest expense, total............................................ $ 1,385 $ 891 $ 597
Interest expense relating to discontinued operations............... -- 333 447
Cash paid for interest............................................. 985 1,022 516
</TABLE>
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:
<TABLE>
<CAPTION>
MAY 31
--------------------
1997 1996
--------- ---------
<S> <C> <C>
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............................................ $ -- $ --
--------- ---------
--------- ---------
</TABLE>
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
F-21
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. MERGER, RESTRUCTURING AND ONE-TIME COSTS (CONTINUED)
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,
totaling $1,686, include approximately $1,100 of product returns which were
significantly in excess of the Company's historical returns experience due to
the termination of a distribution agreement and the termination of certain
customer relationships. In addition, one-time costs include write-offs of artist
advances and accounts receivables in areas for which the Company has chosen to
redirect its resources.
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:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Rent expense, total................................................... $ 547 $ 619 $ 583
Rent expense relating to discontinued operations...................... -- 340 309
</TABLE>
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.
F-22
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
13. DISCONTINUED OPERATIONS (CONTINUED)
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.
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.
F-23
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
14. COMMON AND PREFERRED STOCK (CONTINUED)
At May 31, 1997, the following unissued shares of common stock have been
reserved for future issuance:
<TABLE>
<CAPTION>
<S> <C>
Stock option plans............................................................... 1,625,000
Convertible subordinated debentures.............................................. 510,000
Warrants......................................................................... 259,000
----------
2,394,000
----------
----------
</TABLE>
The Company has not paid dividends on its shares of Common Stock to date.
15. WARRANTS
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.
F-24
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
17. STOCK-BASED COMPENSATION (CONTINUED)
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:
<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:
<TABLE>
<CAPTION>
WEIGHED WEIGHTED
AVERAGE AVERAGE
OPTIONS OPTIONS EXERCISE CONTRACTUAL
OUTSTANDING EXERCISABLE PRICE LIFE
- ----------- ---------- ----------- -----------
<S> <C> <C> <C>
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
- ----------- ----------
- ----------- ----------
</TABLE>
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, ACOUNTING 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
F-25
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
17. STOCK-BASED COMPENSATION (CONTINUED)
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:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
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)
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
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
</TABLE>
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.
F-26
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
F-27
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Platinum Entertainment, Inc.
We have audited the balance sheets of Intersound, Inc. as of April 30, 1995
and 1996, and the related statements of income, stockholders' equity, and cash
flows for the years ended April 30, 1994, 1995 and 1996. 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 financial position of Intersound, Inc. at April
30, 1995 and 1996, and the results of their operations and their cash flows for
the years ended April 30, 1994, 1995 and 1996, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
April 11, 1997
F-28
<PAGE>
INTERSOUND, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
APRIL 30 1996
---------------------------- --------------
1996
1995 ------------- (UNAUDITED)
-------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash............................................................. $ 6,155 $ 16,304 $ 16,762
Accounts receivable, less allowances of $1,563,850, $2,171,080,
and $2,800,671, respectively................................... 5,746,957 6,704,840 8,616,891
Inventories...................................................... 2,445,157 2,292,147 2,627,166
Artist advances.................................................. 295,100 486,831 575,894
Other............................................................ 127,631 99,606 165,752
------------- ------------- --------------
Total current assets............................................... 8,621,000 9,599,728 12,002,465
Artist advances, net of current amounts, less allowances of
$1,932,000, $2,632,000, and $2,782,000, respectively............. 42,900 126,706 481,400
Arts and masters, less accumulated amortization of $1,946,932,
$2,305,635, and $2,583,448, respectively......................... 916,119 1,190,124 1,113,930
Property and equipment, net........................................ 633,770 616,578 502,967
Deposits........................................................... 637,097 856,554 1,062,126
------------- ------------- --------------
Total assets....................................................... $ 10,850,886 $ 12,389,690 $ 15,162,888
------------- ------------- --------------
------------- ------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit......................................... $ 452,346 $ 2,001,966 $ 2,092,213
Accounts payable................................................. 2,770,453 2,571,589 3,471,899
Royalties payable................................................ 2,285,356 2,524,936 2,979,844
Reserve for future returns....................................... 2,342,000 2,327,000 2,427,000
Other liabilities................................................ 470,733 312,560 525,740
------------- ------------- --------------
Total current liabilities.......................................... 8,320,888 9,738,051 11,496,696
Notes payable to stockholders...................................... 60,000 -- --
Stockholders' equity:
Common stock, no par value; 10,000 shares authorized, 940 shares
issued and outstanding......................................... 290,000 290,000 290,000
Retained earnings................................................ 2,179,998 2,361,639 3,376,192
------------- ------------- --------------
Total stockholders' equity......................................... 2,469,998 2,651,639 3,666,192
------------- ------------- --------------
Total liabilities and stockholders' equity....................... $ 10,850,886 $ 12,389,690 $ 15,162,888
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-29
<PAGE>
INTERSOUND, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED DECEMBER
YEAR ENDED APRIL 30 31
------------------------------------------- ----------------------------
1994 1995 1996 1995 1996
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Gross product sales................ $ 26,041,163 $ 31,437,500 $ 30,753,066 $ 21,486,539 $ 19,834,707
Less: Returns and allowances....... (4,999,722) (6,578,813) (7,211,880) (4,938,876) (4,604,408)
Less: Discounts.................... (1,655,902) (2,446,925) (1,673,920) (1,242,783) (1,259,592)
------------- ------------- ------------- ------------- -------------
Net product sales.................... 19,385,539 22,411,762 21,867,266 15,304,880 13,970,707
Cost of goods sold................... 9,582,589 9,941,096 9,029,692 6,360,074 5,389,378
------------- ------------- ------------- ------------- -------------
9,802,950 12,470,666 12,837,574 8,944,806 8,581,329
Licensing revenues................... 463,105 182,226 629,330 174,221 317,180
Cost of licensing revenues........... 185,242 72,890 251,732 69,688 126,872
------------- ------------- ------------- ------------- -------------
277,863 109,336 377,598 104,533 190,308
------------- ------------- ------------- ------------- -------------
Gross profit......................... 10,080,813 12,580,002 13,215,172 9,049,339 8,771,637
Operating expenses................... 8,406,020 10,388,615 10,904,722 6,982,712 6,386,293
------------- ------------- ------------- ------------- -------------
Operating income..................... 1,674,793 2,191,387 2,310,450 2,066,627 2,385,344
Interest expense..................... 184,213 245,076 353,678 289,926 216,419
------------- ------------- ------------- ------------- -------------
Income before income taxes........... 1,490,580 1,946,311 1,956,772 1,776,701 2,168,925
Income tax expense................... 132,000 -- -- -- --
------------- ------------- ------------- ------------- -------------
Net income........................... $ 1,358,580 $ 1,946,311 $ 1,956,772 $ 1,776,701 $ 2,168,925
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-30
<PAGE>
INTERSOUND, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Retained
Stock Earnings Total
---------- ------------- -------------
<S> <C> <C> <C>
Balance at April 30, 1993............................................... $ 290,000 $ 1,826,908 $ 2,116,908
Net income for the year ended April 30, 1994............................ -- 1,358,580 1,358,580
Distributions to stockholders........................................... -- (1,414,535) (1,414,535)
---------- ------------- -------------
Balance at April 30, 1994............................................... 290,000 1,770,953 2,060,953
Net income for the year ended April 30, 1995............................ -- 1,946,311 1,946,311
Distributions to stockholders........................................... -- (1,537,266) (1,537,266)
---------- ------------- -------------
Balance at April 30, 1995............................................... 290,000 2,179,998 2,469,998
Net income for the year ended April 30, 1996............................ -- 1,956,772 1,956,772
Distributions to stockholders........................................... -- (1,775,131) (1,775,131)
---------- ------------- -------------
Balance at April 30, 1996............................................... 290,000 2,361,639 2,651,639
Net income for the eight months ended December 31, 1996 (UNAUDITED)..... -- 2,168,925 2,168,925
Distributions to stockholders (UNAUDITED)............................... -- (1,154,372) (1,154,372)
---------- ------------- -------------
Balance at December 31, 1996 (UNAUDITED)................................ $ 290,000 $ 3,376,192 $ 3,666,192
---------- ------------- -------------
---------- ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-31
<PAGE>
INTERSOUND, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
YEAR ENDED APRIL 30 DECEMBER 31
---------------------------------------- --------------------------
1994 1995 1996 1995 1996
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income............................... $ 1,358,580 $ 1,946,311 $ 1,956,772 $ 1,776,701 $ 2,168,925
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Provision for doubtful accounts........ 300,000 500,000 600,000 100,000 200,000
Charge for (recovery of) future
returns.............................. 785,000 1,200,000 (15,000) 300,000 100,000
Charge for unrecoupable artist
advances............................. 700,233 750,000 700,000 325,000 150,000
Depreciation and amortization.......... 356,478 434,177 580,219 377,455 427,716
Changes in operating assets and
liabilities:
Accounts receivable.................. (1,734,157) (415,756) (1,557,883) (2,330,639) (2,112,050)
Arts and masters..................... (409,570) (466,856) (632,708) (413,004) (201,619)
Inventories.......................... (462,252) 77,566 153,010 (21,011) (335,019)
Artist advances...................... (473,479) (676,287) (975,537) (278,261) (593,757)
Accounts payable..................... 185,300 565,450 (198,864) 261,964 900,310
Accrued liabilities and other........ (8,861) (27,547) (158,173) (167,271) 213,180
Royalties payable.................... 260,210 159,209 239,581 94,595 454,909
Other................................ (203,989) (343,748) (191,433) (384,623) (271,721)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) operating
activities............................... 653,493 3,702,519 499,984 (359,094) 1,100,874
Investing activities:
Purchases of property and equipment...... (294,020) (292,381) (204,324) (159,307) (36,291)
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities...... (294,020) (292,381) (204,324) (159,307) (36,291)
Financing activities:
Payment of note payable to
shareholders........................... -- -- (60,000) (60,000) --
Net proceeds from (payment of) revolving
line of credit......................... 1,053,709 (1,879,066) 1,549,620 1,819,211 90,247
Distributions to shareholders............ (1,414,535) (1,537,266) (1,775,131) (1,235,132) (1,154,372)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities............................. (360,826) (3,416,332) (285,511) 524,079 (1,064,125)
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash.......... (1,353) (6,194) 10,149 5,678 458
Cash, beginning of period................ 13,702 12,349 6,155 6,155 16,304
------------ ------------ ------------ ------------ ------------
Cash, end of period...................... $ 12,349 $ 6,155 $ 16,304 $ 11,833 $ 16,762
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Cash paid during the period for:
Interest............................... $ 172,988 $ 246,254 $ 325,236 $ 257,452 $ 210,381
Income taxes........................... 87,000 -- -- -- --
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-32
<PAGE>
INTERSOUND, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO THE EIGHT-MONTH PERIODS
ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Intersound, Inc. (the Company), a Minnesota corporation, is engaged in the
recording, production, marketing, and distribution of recorded music and video
programs. The Company markets its products both domestically and internationally
through retailers, distributors, and licensees.
Effective January 1, 1997, the shareholders of the Company sold
substantially all of the Company's assets to Platinum Entertainment, Inc.
(Platinum) for consideration of $24,000,000 in cash, $5,000,000 in convertible
promissory notes, and the assumption of certain Company liabilities (Sale).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES
Inventories are valued at the lower of cost or market determined on the
first in, first out (FIFO) method of accounting. Inventories consist primarily
of finished goods.
ARTIST ADVANCES
In accordance with FAS 50, advances to artists and producers are capitalized
as an asset when the current popularity and past performance of the artist or
producer provides a sound basis for estimating the probable future recoupment of
such advances from earnings otherwise payable to the artist or producer. Any
portion of such advances not deemed to be recoupable from future royalties is
reserved at the balance sheet date. All other significant advances which do not
meet the above criteria are fully reserved when paid.
ARTS AND MASTERS
Costs of record masters borne by the Company are capitalized as an asset and
amortized over the estimated useful life of the recorded performance.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost, less accumulated depreciation.
Deprecation is computed using the straight-line method over the estimated useful
lives of the assets (five to seven years).
ADVERTISING
All advertising and promotional costs are expensed when incurred.
REVENUE RECOGNITION
Net product sales represent revenues derived from sales of records, net of
actual returns and reserves for estimated future returns. Revenues derived from
the licensing of recording masters are recognized upon notification of retail
sales by the licensee.
F-33
<PAGE>
INTERSOUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO THE EIGHT-MONTH PERIODS
ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The stockholders of the Company have elected to be taxed as an S corporation
under the provisions of the Internal Revenue Code. Accordingly, the Company is
not generally subject to income taxes as the income of the Company is included
in the taxable income of its stockholders. Therefore, the financial statements
do not include a provision for corporate federal income taxes. In addition, the
Company was taxed as an S corporation for state income tax purposes subsequent
to fiscal 1995, and as such, no state income taxes have been provided in the
fiscal 1995 or 1996 financial statements.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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 trade accounts receivable and
trade accounts payable. The fair value of the Company's financial instruments
approximates the carrying value of the instruments.
3. REVOLVING LINE OF CREDIT
At December 31, 1996, the Company had a revolving line of credit with a bank
for $4,500,000, bearing interest at prime plus 0.75%. Amounts available under
this facility were approximately $2,408,000 and $2,498,000 at December 31, 1996
and April 30, 1996, respectively. The line of credit is guaranteed by the
Company's majority stockholder and is collateralized by substantially all of the
Company's assets. Concurrent with the Sale, this line of credit was paid in
full.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
APRIL 30
-------------------------- DECEMBER 31
1995 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
Office furniture and equipment...................... $ 795,630 $ 933,348 $ 949,343
Audio equipment..................................... 188,735 249,537 266,906
Warehouse equipment................................. 132,463 132,039 133,484
Leasehold improvements.............................. 137,875 139,547 141,029
------------ ------------ ------------
1,254,703 1,454,471 1,490,762
Less: Accumulated depreciation...................... 620,933 837,893 987,795
------------ ------------ ------------
$ 633,770 $ 616,578 $ 502,967
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-34
<PAGE>
INTERSOUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO THE EIGHT-MONTH PERIODS
ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
5. ADVERTISING
Advertising expenses are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ended April 30, 1994............................................. $ 1,416,614
Year ended April 30, 1995............................................. 1,894,623
Year ended April 30, 1996............................................. 2,147,598
Eight months ended December 31, 1995.................................. 1,560,561
Eight months ended December 31, 1996.................................. 1,453,700
</TABLE>
6. NOTES PAYABLE TO STOCKHOLDERS
The Company had unsecured demand notes due to stockholders of $60,000 at
April 30, 1995. These notes payable bore interest at 2% to 2.5% above the bank's
prime rate (11% to 11.5% at April 30, 1995). During 1996, these notes were paid
in full by the Company.
7. COMMITMENTS
Future minimum rental payments, excluding adjustments for real estate tax
increases, due under noncancelable operating leases having an initial term of
more than one year as of December 31, 1996, are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997................................................ $ 345,025
1998................................................ 12,668
1999................................................ 3,180
</TABLE>
Rent expense under operating leases totaled approximately $279,000,
$360,000, $386,000, $292,000, and $283,000 in years ended April 30, 1994, 1995,
and 1996, and the eight months ended December 31, 1995 and 1996, respectively.
8. STOCKHOLDERS' AGREEMENT
The Company and its stockholders have entered into an agreement that
provides, among other items, that in the event any stockholder tenders any
shares for sale, the Company and its remaining stockholders will have certain
preemptive rights to purchase such stock.
Also, the Company may be required to purchase shares upon the death of a
stockholder. The agreement also specifies the terms of payment for shares sold
under the provisions of the agreement.
9. SIGNIFICANT CUSTOMERS
The Company had three customers comprising 28%, 26%, 28%, 27%, and 30% of
net sales for the years ended April 30, 1994, 1995, and 1996, and the
eight-months ended December 31, 1995 and 1996, respectively.
F-35
<PAGE>
INTERSOUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO THE EIGHT-MONTH PERIODS
ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
9. SIGNIFICANT CUSTOMERS (CONTINUED)
The following number of significant customers represented the following
percentages of net accounts receivable:
<TABLE>
<CAPTION>
<S> <C> <C>
April 30, 1995...................................... 1 11%
April 30, 1996...................................... 1 10%
December 31, 1996................................... 2 27%
</TABLE>
10. 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 statements.
F-36
<PAGE>
APPENDIX A
PLATINUM ENTERTAINMENT, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
EFFECTIVE JUNE 1, 1997
<PAGE>
THE PLATINUM ENTERTAINMENT, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE I ESTABLISHMENT.......................................................... A-1
<C> <S> <C>
1.1 Purpose................................................................ A-1
ARTICLE II DEFINITIONS............................................................ A-1
2.1 "Account".............................................................. A-1
2.2 "Agreement" or "Option Agreement"...................................... A-1
2.3 "Beneficiary".......................................................... A-1
2.4 "Board of Directors" or "Board"........................................ A-1
2.5 "Cause"................................................................ A-1
2.6 "Change in Control".................................................... A-2
2.7 "Code" or "Internal Revenue Code"...................................... A-2
2.8 "Commission"........................................................... A-2
2.9 "Committee"............................................................ A-2
2.10 "Common Stock"......................................................... A-2
2.11 "Company".............................................................. A-2
2.12 "Continuous Service"................................................... A-2
2.13 "Contribution Rate".................................................... A-2
2.14 "Disability"........................................................... A-2
2.15 "Effective Date"....................................................... A-3
2.16 "Eligible Employee".................................................... A-3
2.17 "Exercise Date"........................................................ A-3
2.18 "Exchange Act"......................................................... A-3
2.19 "Fair Market Value".................................................... A-3
2.20 "Grant Date"........................................................... A-3
2.21 "Option Period"........................................................ A-3
2.22 "Option Price"......................................................... A-4
2.23 "Participant".......................................................... A-4
2.24 "Plan"................................................................. A-4
2.25 "Plan Year"............................................................ A-4
2.26 "Representative"....................................................... A-4
2.27 "Retirement"........................................................... A-4
2.28 "Rule 16a-1(c)(3)" and "Rule 16b-3".................................... A-4
2.29 "Securities Act"....................................................... A-4
2.30 "Stock Option" or "Option"............................................. A-4
2.31 "Subsidiary"........................................................... A-4
2.32 "Termination of Employment"............................................ A-5
ARTICLE III ADMINISTRATION......................................................... A-5
3.1 Committee Structure and Authority...................................... A-5
ARTICLE IV STOCK SUBJECT TO PLAN.................................................. A-6
4.1 Number of Shares....................................................... A-6
4.2 Release of Shares...................................................... A-7
4.3 Restrictions on Shares................................................. A-7
4.4 Stockholder Rights..................................................... A-7
</TABLE>
i
<PAGE>
<TABLE>
<C> <S> <C>
4.5 Anti-Dilution.......................................................... A-7
4.6 Custodian.............................................................. A-7
ARTICLE V ELIGIBILITY............................................................ A-8
5.1 Eligibility............................................................ A-8
5.2 Grant of Options....................................................... A-8
5.3 Option Period.......................................................... A-8
5.4 Option Price........................................................... A-8
5.5 Contribution Rate...................................................... A-9
5.6 Purchase of Shares..................................................... A-9
5.7 Cancellation of Options................................................ A-10
5.8 Terminated Employees................................................... A-10
5.9 Deceased Employees..................................................... A-10
5.10 Disabled or Retired Employees.......................................... A-10
5.11 Limitations............................................................ A-10
5.12 Nonassignability....................................................... A-10
ARTICLE VI MISCELLANEOUS.......................................................... A-11
6.1 Amendments and Termination............................................. A-11
6.2 Unfunded Status of Plan................................................ A-11
6.3 General Provisions..................................................... A-11
6.4 Mitigation of Excise Tax............................................... A-12
6.5 Rights with Respect to Continuance of Employment....................... A-13
6.6 Options in Substitution for Options Granted by Other Corporations...... A-13
6.7 Delay.................................................................. A-13
6.8 Headings............................................................... A-13
6.9 Severability........................................................... A-13
6.10 Successors and Assigns................................................. A-13
6.11 Entire Agreement....................................................... A-13
</TABLE>
ii
<PAGE>
ARTICLE I
ESTABLISHMENT
1.1 PURPOSE. Platinum Entertainment, Inc. 1997 Employee Stock Purchase
Plan ("Plan") is hereby established by Platinum Entertainment, Inc. ("Company").
The purpose of the Plan is to promote the overall financial objectives of the
Company's stockholders by motivating those persons participating in the Plan to
achieve long-term growth in stockholder equity. The Plan and the grant of awards
thereunder is expressly conditioned upon the Plan's approval by the stockholders
of the Company, and if such approval is not obtained then the Plan and any
Option granted thereunder shall be null and void AB INITIO. The Plan is intended
as an "employee stock purchase plan" within the meaning of Section 423 of the
Internal Revenue Code of 1986, as amended, and Options granted hereunder are
intended to constitute options granted under such a plan, and the Plan document
and all actions taken in connection with the Plan shall be constructed
consistently with such intent. The Plan is adopted effective as of June 1, 1997.
ARTICLE II
DEFINITIONS
For purposes of the Plan, the following terms are defined as set forth
below:
2.1 "ACCOUNT" shall mean the bookkeeping account established on behalf of
a Participant to which shall be credited all contributions paid for the purpose
of purchasing Common Stock under the Plan, and to which shall be charged all
purchases of Common Stock pursuant to the Plan. The Company shall have custody
of such Account.
2.2 "AGREEMENT" OR "OPTION AGREEMENT" means, individually or collectively,
any enrollment, subscription and withholding agreement entered into pursuant to
the Plan. An Agreement shall be the authorization of the Company or a Subsidiary
to withhold from payroll amounts to be applied to purchase Common Stock.
2.3 "BENEFICIARY" means the person or entity which has been designated by
a Participant in his or her most recent written beneficiary designation filed
with the Committee to receive the benefits specified under the Plan upon such
Participant's death or to which Options or other rights are transferred if and
to the extent permitted hereunder (but only to the extent consistent with the
plan's being described in Section 423 of the Code). If, upon a Participant's
death, there is no designated Beneficiary or surviving designated Beneficiary,
then the term Beneficiary means the person or entity entitled by will or the
laws of descent and distribution to receive such benefits.
2.4 "BOARD OF DIRECTORS" OR "BOARD" means the Board of Directors of the
Company.
2.5 "CAUSE" shall mean, for purposes of whether and when a Participant has
incurred a Termination of Employment for Cause, any act or omission which
permits the Company to terminate the written agreement or arrangement between
the Participant and the Company or a Subsidiary for "cause" as defined in such
agreement or arrangement, or in the event there is no such agreement or
arrangement or the agreement or arrangement does not define the term "cause" or
a substantially equivalent term, then Cause shall consist of the following:
Participant's conviction on a felony charge or Participant's commission of any
crime involving moral turpitude; Participant's dishonesty or fraud resulting in
damage to the business of the Company or an Affiliate; Participant's
embezzlement or theft of assets of the Company or an Affiliate; in the sole
discretion of the Company, Participant's grossly negligent conduct,
Participant's course of personal conduct of an illegal or unethical nature which
tends to place the Company or an Affiliate in disrepute, or otherwise negatively
affects the ability of the Company or an Affiliate to conduct its business;
Participant's competition with the Company or aid to a competitor of the Company
to the detriment of the Company; or a breach of this Agreement by Participant,
including failure to perform
A-1
<PAGE>
duties and services to the Company or an Affiliate. In the event Participant is
arrested for any of the types of matters above, the Company may place
Participant on suspension without pay until such matter is dismissed or the
Participant is convicted.
2.6 "CHANGE IN CONTROL" shall be deemed to have occurred if (a) any
corporation, person or other entity (other than the Company, a majority-owned
subsidiary of the Company or any of its subsidiaries, or an employee benefit
plan (or related trust) sponsored or maintained by the Company), including a
"group" as defined in Section 13(d)(3) of the Exchange Act, becomes the
beneficial owner of stock representing more than the greater of (i) fifty
percent (50%) of the combined voting power of the Company's then outstanding
securities or (ii) the percentage of the combined voting power of the Company's
then outstanding securities which equals (A) ten percent (10%) plus (B) the
percentage of the combined voting power of the Company's outstanding securities
held by such corporation, person or entity on the Effective Date; (b)(i) the
stockholders of the Company approve a definitive agreement to merge or
consolidate the Company with or into another corporation other than a
majority-owned subsidiary of the Company, or to sell or otherwise dispose of all
or substantially all of the Company's assets, and (ii) the persons who were the
members of the Board of Directors of the Company prior to such approval do not
represent a majority of the directors of the surviving, resulting or acquiring
entity or the parent thereof; (c) the stockholders of the Company approve a plan
of liquidation of the Company; or (d) within any period of 24 consecutive
months, persons who were members of the Board of Directors of the Company
immediately prior to such 24-month period, together with any persons who were
first elected as directors (other than as a result of any settlement of a proxy
or consent solicitation contest or any action taken to avoid such a contest)
during such 24-month period by or upon the recommendation of persons who were
members of the Board of Directors of the Company immediately prior to such
24-month period and who constituted a majority of the Board of Directors of the
Company at the time of such election, cease to constitute a majority of the
Board.
2.7 "CODE" OR "INTERNAL REVENUE CODE" means the Internal Revenue Code of
1986, as amended, Treasury Regulations (including proposed regulations)
thereunder and any successor thereto.
2.8 "COMMISSION" means the Securities and Exchange Commission or any
successor agency.
2.9 "COMMITTEE" means the Compensation Committee of the Board or such
other Board committee as may be designated by the Board to administer the Plan.
2.10 "COMMON STOCK" means the shares of the regular voting Common Stock,
$.001 par value per share, of the Company, whether presently or hereafter
issued, and any other stock or security resulting from adjustment thereof as
described hereinafter or the common stock of any successor to the Company which
is designated for the purpose of the Plan.
2.11 "COMPANY" means Platinum Entertainment, Inc., a Delaware corporation,
and includes any successor or assignee corporation or corporations into which
the Company may be merged, changed or consolidated; any corporation for whose
securities all or substantially all of the securities of the Company shall be
exchanged; and any assignee of or successor to all or substantially all of the
assets of the Company.
2.12 "CONTINUOUS SERVICE" shall mean, subject to modification by the
Committee, an Eligible Employee's number of full years and completed months of
continuous employment with the Company or a Subsidiary (but only since the date
such entity became a Subsidiary) from the most recent date of hire to the date
of Termination of Employment for any reason. The Committee may provide rules
from time to time regarding the calculation of Continuous Service and the method
for crediting such service.
2.13 "CONTRIBUTION RATE" means the rate determined under Section 5.5
2.14 "DISABILITY" means a mental or physical injury or illness that
entitles the Participant to receive benefits under the long-term disability plan
of the Company or a Subsidiary of the Company, or if the Participant is not
covered by such a plan, a mental or physical injury or illness that renders a
Participant
A-2
<PAGE>
totally and permanently incapable of performing the Participant's duties for the
Company or a Subsidiary of the Company. Notwithstanding the foregoing, a
Disability shall not qualify under this Plan if it is the result of (i) a
willfully self-inflicted injury or willfully self-induced sickness; or (ii) an
injury or disease contracted, suffered, or incurred while participating in a
criminal offense. The determination of Disability shall be made by the
Committee, in its sole discretion. The determination of Disability for purposes
of this Plan shall not be construed to be an admission of disability for any
other purpose.
2.15 "EFFECTIVE DATE" means June 1, 1997.
2.16 "ELIGIBLE EMPLOYEE" means each current, common law employee of the
Company or a Subsidiary (if the Company has extended participation to the
employees of a Subsidiary) on a Grant Date, except that the Committee in its
sole discretion may exclude:
(a) any employee who has accrued less than a minimum period of
Continuous Service established by the Committee (but not to exceed 2 years).
(b) any employee whose customary employment is 20 hours or less per
week;
(c) any employee whose customary employment is for not more than 5
months in any calendar year; and
(d) any employee who is a highly compensated employee of the Company or
Subsidiary within the meaning of Section 414(q) of the Code.
As of the Effective Date and unless and until amended by the Committee,
employees described in Section 2.16(b) and (c) are excluded as Eligible
Employees. Any period of service described in this Section may be decreased in
the discretion of the Committee. Any employee who would directly or indirectly
own or hold (applying the rules of Section 424(d) of the Code to determine stock
ownership) immediately following the grant of an Option hereunder an aggregate
of five percent (5%) or more of the total combined voting power or value of all
outstanding shares of all classes of stock of the Company or any Subsidiary is
excluded as an Eligible Employee.
2.17 "EXERCISE DATE" means such one or more dates determined by the
Committee on which the accumulated value of the Account shall be applied to
purchase Common Stock and unless otherwise specified by the Committee shall be
November 30th and May 31st of each Plan Year. The Committee may accelerate an
Exercise Date in order to satisfy the employment period requirement of Section
423(a)(2), and the date of a Change in Control shall be an Exercise Date.
2.18 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated by the Commission thereunder.
2.19 "FAIR MARKET VALUE" means the fair market value of Common Stock as
determined by the Committee or under procedures established by the Committee.
Unless otherwise determined by the Committee, the Fair Market Value per share of
Common Stock as of any given date shall be the closing sale price per share
reported on a consolidated basis for stock listed on the principal stock
exchange or market on which Common Stock is traded on the date as of which such
value is being determined or, if there is no sale on that date, then on the last
previous day on which a sale was reported.
2.20 "GRANT DATE" means the date or dates established by the Committee on
which one or more Options are granted pursuant to the Plan. The Committee may
determine for any Plan Year that there shall be no Grant Date, in which case no
Options shall be granted for that Plan Year. The terms and conditions of any
Option granted on a particular Grant Date shall be independent of and have no
effect on the terms and conditions of any Option granted on another Grant Date.
2.21 "OPTION PERIOD" means the period beginning on the day next following
an Exercise Date and ending on the next following Exercise Date, as determined
by the Committee, subject to the limitations of Section 5.3.
A-3
<PAGE>
2.22 "OPTION PRICE" means the price at which the Common Stock granted as
of a specific Grant Date may be purchased under an Option. The price shall be
subject to the limitation set forth in Section 5.4.
2.23 "PARTICIPANT" means a person who satisfies the eligibility conditions
of Article V and to whom an Option has been granted by the Committee under the
Plan, and in the event a Representative is appointed for a Participant or
another person becomes a Representative, then the term "Participant" shall mean
such Representative, to the extent consistent with Section 423 of the Code. The
term shall also include a trust for the benefit of the Participant, the
Participant's parents, spouse or descendants, or a custodian under a uniform
gifts to minors act or similar statute for the benefit of the Participant's
descendants, to the extent permitted by the Committee and not inconsistent with
an intended application of Rule 16b-3, the intent to comply with Section 423 of
the Code and the use of Commission Form S-8 (or the Committee's waiver of such).
Notwithstanding the foregoing, the term "Termination of Employment" shall mean
the Termination of Employment of the person to whom the Award was originally
granted.
2.24 "PLAN" means Platinum Entertainment, Inc. Employee Stock Purchase
Plan, as herein set forth and as may be amended from time to time.
2.25 "PLAN YEAR" means the 12 month period commencing on June 1st of each
year and ending the following May 31st. The Committee may at any time in its
discretion designate another period as the Plan Year.
2.26 "REPRESENTATIVE" means (a) the person or entity acting as the
executor or administrator of a Participant's estate pursuant to the last will
and testament of a Participant or pursuant to the laws of the jurisdiction in
which the Participant had the Participant's primary residence at the date of the
Participant's death; (b) the person or entity acting as the guardian or
temporary guardian of a Participant; (c) the person or entity which is the
Beneficiary of the Participant upon or following the Participant's death; or (d)
any person to whom an Option or shares of Common Stock have been transferred
with the permission of the Committee or by operation of law; provided that only
one of the foregoing shall be the Representative at any point in time as
determined under applicable law and recognized by the Committee.
2.27 "RETIREMENT" means the Participant's Termination of Employment after
attaining either the normal retirement age or the early retirement age as
defined in the principal (as determined by the Committee) tax-qualified plan of
the Company, if the Participant is covered by such a plan, and if the
Participant is not covered by such a plan, then age sixty-five (65), or age
fifty-five (55) with the accrual of ten (10) years of service.
2.28 "RULE 16A-1(C)(3)" AND "RULE 16B-3" mean Rule 16a-1(c)(3) and Rule
16b-3, as from time to time in effect and applicable to the Plan and
Participants, promulgated by the Commission under Section 16 of the Exchange
Act.
2.29 "SECURITIES ACT" means the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder.
2.30 "STOCK OPTION" or "OPTION" means the right to purchase the number of
shares of Common Stock s pecified by the Plan at a price and for a term fixed by
the Plan, and subject to such other limitations and restrictions as the Plan and
the Committee may impose.
2.31 "SUBSIDIARY" means any company as currently defined in Section 424(f)
of the Code. Unless otherwise indicated the term "Company" shall hereinafter be
deemed to include all Subsidiaries of the Company having employees to which the
Company has extended participation in the Plan.
A-4
<PAGE>
2.32 "TERMINATION OF EMPLOYMENT" means the occurrence of any act or event,
whether pursuant to an employment agreement or otherwise, that actually or
effectively causes or results in the person's ceasing, for whatever reason, to
be an employee of the Company, including, without limitation, death, Disability,
dismissal, severance at the election of the Participant, Retirement, or
severance as a result of the discontinuance, liquidation, sale or transfer by
the Company of all businesses owned or operated by the Company. A transfer of
employment from the Company to a Subsidiary, or from a Subsidiary to the
Company, will not be a Termination of Employment, unless expressly determined by
the Committee. A Termination of Employment shall occur for an employee who is
employed by a Subsidiary of the Company if the Subsidiary shall cease to be a
Subsidiary and the Participant shall not immediately thereafter become an
employee of the Company or a Subsidiary of the Company.
In addition, certain other terms used herein have definitions given to them
in the first place in which they are used.
ARTICLE III
ADMINISTRATION
3.1 COMMITTEE STRUCTURE AND AUTHORITY. The Plan shall be administered by
the Committee. A majority of the Committee shall constitute a quorum at any
meeting thereof (including by telephone conference) and the acts of a majority
of the members present, or acts approved in writing by a majority of the entire
Committee without a meeting, shall be the acts of the Committee for purposes of
this Plan. The Committee may authorize any one or more of its members or an
officer of the Company to execute and deliver documents on behalf of the
Committee. A member of the Committee shall not exercise any discretion
respecting himself or herself under the Plan. The Board shall have the authority
to remove, replace or fill any vacancy of any member of the Committee upon
notice to the Committee and the affected member. Any member of the Committee may
resign upon notice to the Board. The Committee may allocate among one or more of
its members, or may delegate to one or more of its agents, such duties and
responsibilities as it determines.
Among other things, the Committee shall have the authority, subject to the
terms of the Plan:
(a) to select those persons to whom Options may be granted from time to
time;
(b) to determine whether and to what extent Options are to be granted
hereunder;
(c) to determine the number of shares of Common Stock available as of
any Grant Date;
(d) to determine any Grant Date, Exercise Date and Option Period, and
provide for all aspects of payroll deduction, suspension or withdrawal;
(e) to determine the number of shares of Common Stock to be covered by
each Option;
(f) to determine the terms and conditions of any Option granted
hereunder (including, but not limited to, the Option Price, the Option
Period, any exercise restriction or limitation and any exercise acceleration
or forfeiture regarding any Option and the shares of Common Stock relating
thereto);
(g) to adjust the terms and conditions, at any time or from time to
time, of any Option, subject to the limitations of Section 6.1;
(h) to determine to what extent and under what circumstances Common
Stock and other amounts payable with respect to an Option shall be deferred;
(i) to determine under what circumstances an Option may be settled in
cash or Common Stock;
(j) to provide for the forms of Agreement to be utilized in connection
with this Plan;
(k) to determine whether a Participant has a Disability or reached
Retirement;
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(l) to interpret and make a final determination with respect to the
remaining number of shares of Common Stock available under the Plan;
(m) to determine what securities law requirements are applicable to the
Plan, Options and the issuance of shares of Common Stock, and to require of
a Participant that appropriate action be taken with respect to such
requirements;
(n) to cancel, with the consent of the Participant or as otherwise
provided in the Plan or an Agreement, outstanding Options;
(o) to require as a condition of the exercise of an Option or the
issuance or transfer of a certificate of Common Stock, the withholding from
a Participant of the amount of any Federal, state or local taxes as may be
necessary in order for the Company or any other entity to obtain a deduction
or as may be otherwise required by law;
(p) to determine whether and with what effect an individual has incurred
a Termination of Employment;
(q) to determine whether the Company or any other person has a right or
obligation to purchase Common Stock from a Participant and, if so, the terms
and conditions on which such Common Stock is to be purchased;
(r) to determine the restrictions or limitations on the transfer of
Common Stock or Options;
(s) to determine whether an Option is to be adjusted, modified or
purchased, or is to become fully exercisable, under the Plan or the terms of
an Agreement;
(t) to determine the permissible methods of Option exercise and payment;
(u) to adopt, amend and rescind such rules and regulations as, in its
opinion, may be advisable in the administration of this Plan; and
(v) to appoint and compensate agents, counsel, auditors or other
specialists to aid it in the discharge of its duties.
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall,
from time to time, deem advisable, to interpret the terms and provisions of the
Plan and any Option issued under the Plan (and any Agreement) and to otherwise
supervise the administration of the Plan. The Committee's policies and
procedures may differ with respect to Options granted at different times or to
different Participants. Any determination made by the Committee pursuant to the
provisions of the Plan shall be made in its sole discretion, and in the case of
any determination relating to an Option, may be made at the time of the grant of
the Option or, unless in contravention of any express term of the Plan or an
Agreement, at any time thereafter. All decisions made by the Committee pursuant
to the provisions of the Plan shall be final and binding on all persons,
including the Company and Participants. Any determination shall not be subject
to de novo review if challenged in court.
ARTICLE IV
STOCK SUBJECT TO PLAN
4.1 NUMBER OF SHARES. Subject to the adjustment under Section 4.6, the
total number of shares of Common Stock reserved and available for distribution
pursuant to Options under the Plan shall be 500,000 shares of Common Stock
authorized for issuance on the Effective Date. Such shares shall consist of
authorized and unissued shares.
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4.2 RELEASE OF SHARES. The Committee shall in its sole discretion
determine the number of shares of Common Stock available under the Plan, and may
include, in its sole discretion, any shares of Common Stock that cease to be
subject to an Option or are forfeited, any shares subject to an Option that
terminates without issuance of shares of Common Stock being made to a
Participant, or any shares (whether or not restricted) of Common Stock that are
received by the Company in connection with the exercise of an Option, including
the satisfaction of tax withholding.
4.3 RESTRICTIONS ON SHARES. Shares of Common Stock issued upon exercise of
an Option shall be subject to the terms and conditions specified herein and to
such other terms, conditions and restrictions as the Committee in its discretion
may determine or provide in the Option Agreement with respect to such Option.
The Company shall not be required to issue or deliver any certificates for
shares of Common Stock, cash or other property prior to (i) the listing of such
shares on any stock exchange (or other public market) on which the Common Stock
may then be listed (or regularly traded), (ii) the completion of any
registration or qualification of such shares under Federal or state law, or any
ruling or regulation of any government body which the Committee determines to be
necessary or advisable, and (iii) the satisfaction of any applicable withholding
obligation in order for the Company to obtain a deduction with respect to the
exercise of an Option. The Company may cause any certificate for any shares of
Common Stock to be delivered to be properly marked with a legend or other
notation reflecting the limitations on transfer of such Common Stock as provided
in this Plan or as the Committee may otherwise require. The Committee may
require any person exercising an Option to make such representations and furnish
such information as it may consider appropriate in connection with the issuance
or delivery of the shares of Common Stock in compliance with applicable law or
otherwise. Fractional shares shall not be delivered, but shall be rounded to the
next lower whole number of shares.
4.4 STOCKHOLDER RIGHTS. No person shall have any rights of a stockholder
as to shares of Common Stock subject to an Option until, after proper exercise
of the Option or other action required, such shares shall have been recorded on
the Company's official stockholder records as having been issued and
transferred. Subject to Section 4.3, upon exercise of the Option or any portion
thereof, the Company shall issue the shares of Common Stock at such time as
determined by the Committee, and the Participant will not be treated as a
stockholder for any purpose whatsoever prior to such issuance. No adjustment
shall be made for cash dividends or other rights for which the record date is
prior to the date such shares are recorded as issued and transferred in the
Company's official stockholder records, except as provided in an Agreement.
4.5 ANTI-DILUTION. In the event of any Company stock dividend, stock
split, combination or exchange of shares, merger, recapitalization or other
change in the capital structure of the Company, corporate separation or division
of the Company (including, but not limited to, a split-up, spin-off, split-off
or distribution to Company stockholders other than a normal cash dividend), sale
by the Company of all or a substantial portion of its assets (measured on either
a stand-alone or consolidated basis), reorganization, reclassification, rights
offering, partial or complete liquidation or any other corporate transaction,
Company share offering or other event involving the Company and having an effect
similar to any of the foregoing, then the Committee may adjust or substitute, as
the case may be, the number of shares of Common Stock available for Options
under the Plan, the number of shares of Common Stock covered by outstanding
Options, the exercise price per share of outstanding Options, the Exercise Date,
and any other characteristics or terms of the Options as the Committee shall
deem necessary or appropriate to reflect equitably the effects of such changes
to the Participants; provided, however, that any fractional share resulting from
such adjustment shall be eliminated by rounding to the next lower whole number
of shares with appropriate payment for such fractional share as shall reasonably
be determined by the Committee.
4.6 CUSTODIAN. Shares of Common Stock purchased pursuant to the Plan may
be delivered to and held in the custody of the Company or such investment or
financial firm as shall be appointed by the Committee. The custodian may hold in
nominee or street name certificates for shares purchased pursuant to the Plan,
and may commingle shares in its custody pursuant to the Plan in a single account
without
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identification as to individual Participants. By appropriate instructions to the
custodian on forms to be provided for the purpose, a Participant may from time
to time obtain (a) transfer into the Participant's own name or into the name of
the Participant and another individual of all or part of the whole shares held
by the custodian for the Participant's account; (b) transfer of all or part of
the whole shares held for the Participant's account by the custodian to a
regular individual brokerage account in the Participant's own name or in the
name of the Participant and another individual, either with the firm then acting
as custodian or with another firm, or (c) sell all or part of the whole shares
held by the custodian for the Participant's account at the market price at the
time the order is executed and remittance of the net proceeds of the sale to the
Participant. Upon termination of participation in the Plan, and upon receipt of
instructions from the Participant, the shares held by the custodian for the
account of the Participant will be transferred to the Participant in accordance
with (a) above, transferred to a brokerage account in accordance with (b) above,
or sold in accordance with (c), above.
ARTICLE V
ELIGIBILITY
5.1 ELIGIBILITY. Except as herein provided, the persons who shall be
eligible to participate in the Plan as of any Grant Date shall be those persons
(and only those persons) who are Eligible Employees of the Company or Eligible
Employees of a Subsidiary to whom the Company has extended participation on a
Grant Date.
5.2 GRANT OF OPTIONS. The Committee shall have authority to grant Options
under the Plan at any time or from time to time to all Eligible Employees as of
a Grant Date. (To the extent an Option is granted to any Eligible Employee of an
entity on a relevant date, all Eligible Employees of the entity shall be granted
an Option to the extent required by law.) An Option shall entitle the
Participant to receive shares of Common Stock at the conclusion of the Option
Period, subject to the Participant's satisfaction in full of any conditions,
restrictions or limitations imposed in accordance with the Plan or an Agreement,
including without limitation, payment of the Option Price. Each Option granted
under this Plan shall be evidenced by an Agreement, in a form approved by the
Committee, which shall embody the terms and conditions of such Option and which
shall be subject to the express terms and conditions set forth in this Plan and
to such other terms and conditions as the Committee may deem appropriate. The
grant and exercise of Options hereunder shall be subject to all applicable
Federal, state and local laws, rules and regulations and to such approvals by
any governmental or regulatory agencies as may be required. As of any Grant
Date, each Eligible Employee shall be granted Options with the same rights and
privileges as the Options granted to each other Eligible Employee on that Grant
Date, except the amount of the Common Stock which may be purchased by any
Participant under any Option may bear a uniform relationship to the total
compensation, or the basic or regular rate of compensation (as determined by the
Committee), of all Eligible Employees on that Grant Date, and the Option may
establish a maximum amount of Common Stock which may be purchased.
5.3 OPTION PERIOD. Each Agreement shall specify the period for which the
Option thereunder is granted, which shall be determined by the Committee. In no
event shall the Option Period extend beyond the period permitted under Section
423(b)(7) of the Code.
5.4 OPTION PRICE. Subject to the limits stated herein, the Option Price
per share at which shares of Common Stock may be acquired upon exercise of an
Option shall be determined by the Committee. Unless otherwise specified by the
Committee, with respect to any Exercise Date, the Option Price shall not be less
than the lesser of (a) eighty-five percent (85%) of the Fair Market Value of a
share of Common Stock (averaged over such period as the Committee may determine
and as permitted by law) on the applicable Grant Date and (b) eighty-five
percent (85%) of the Fair Market Value of a share of Common Stock (averaged over
such period as the Committee may determine and as permitted by law) on the
applicable Exercise Date. The Committee reserves the right to increase the
Option Price by the value of
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any accretion to the amounts credited to an Account if the Participant is
credited with such accretion regardless of the method of accounting for such
accretion.
5.5 CONTRIBUTION RATE. If an Eligible Employee elects to participate, the
Participant shall file an Agreement with the Committee within the time period
designated by the Committee. The Committee may provide that the Agreement shall
specify the percentage or amount of the Participant's compensation (as defined
by the Committee) determined by the Participant to be deducted each pay period.
Such amount shall be credited to the Account and shall be the Participant's
Contribution Rate. Such deductions shall begin as of the first regularly
scheduled payroll date on or after the later of the Grant Date and the date
specified by the Committee. Unless otherwise determined by the Committee,
Participants may not make separate cash payments outside payroll deductions
under the Plan, except that, in the event of a Change in Control, the Committee
may permit each Participant to make a single sum payment with respect to the
Option before the Exercise Date equal to the amount the Participant would have
contributed as determined by the Committee for the payroll periods remaining to
the Exercise Date. The Committee may establish minimum and maximum percentages
or amounts to be contributed and a date by when any Agreement must be filed with
the Committee. Unless otherwise permitted by the Committee, such contributions
will be held in the general funds of the Company, and no interest shall accrue
on any amounts held under this Plan, unless expressly determined by the
Committee, and any separate accounting shall not limit the Company's use of the
funds. If payroll deductions are made by a Subsidiary, that corporation will
promptly remit the amount of the deduction to the Company. A Participant's
Contribution Rate, once established, shall remain in effect until the next
following Grant Date unless and until contributions are suspended or fully
discontinued in order to comply with Section 401(k) of the Code or for such
other reasons as the Committee in its sole discretion may determine, or if the
Participant shall request suspension or discontinuance. If a Participant
requests to suspend payroll deductions the Participant may do so at such times
and in such manner as the Committee may permit, and previously deducted amounts
shall be retained until the Exercise Date. A Participant who has suspended
contributions (1) will receive any shares of Common Stock as of the Exercise
Date and (2) may recommence payroll deductions at such time, if at all, as
determined by the Committee. If a Participant requests to cancel and totally
discontinue payroll deductions, the Participant may do so by providing written
notice to the Committee, and there shall be paid to the Participant the value of
the Participant's Account at such time as the Committee directs and the
Participant shall not receive any shares of Common Stock as of the Exercise
Date.
5.6 PURCHASE OF SHARES. Subject to Sections 5.7, 5.8, 5.9, 5.10 and 5.11,
on each Exercise Date, a Participant who has previously executed an Agreement
with respect to a specific Grant Date and made one or more payments described in
Section 5.5 shall be deemed to have exercised the Option to the extent of the
value of the Account, and shall be deemed to have purchased such number of full
shares of Common Stock as equals the value of the Account, subject to the limits
of Sections 423(b)(3) and 423(b)(8) of the Code and the number of shares
available as of the Exercise Date and proportionably allocable to other
Participants for that Grant Date. The number of shares of Common Stock to be
purchased as of any Exercise Date shall be determined by dividing the Option
Price per share of the Common Stock into the Account value and the value of the
shares so purchased shall be charged to the Account. Any value remaining in an
Account of the Participant shall be retained by the Plan as an initial value
credited to the Account of the Participant if there is an effective Agreement
respecting the Participant on the Grant Date immediately following the Exercise
Date, or if there is not an effective Agreement regarding the Participant in the
Grant Date immediately following the Exercise Date, then the remaining value
shall be returned at such time as determined by the Committee to the Participant
and not applied to purchase Common Stock. Certificates of Common Stock purchased
hereunder may be held by the custodian as provided in Section 4.6. The Committee
may determine and designate that any Common Stock issued to the Participant who
is subject to reporting under Section 16 of the Exchange Act must be held for
six (6) months to the extent required by law to avoid liability under the
Exchange Act. The Committee may amend the Plan or any Agreement or provide in
operation for Participants to dispose of shares of Common
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Stock received upon the Exercise Date on or immediately thereafter (which time
may include any period during which the Option is held). If the total number of
shares to be purchased as of any Exercise Date by all Participants exceeds the
number of shares authorized and remaining available under this Plan or made
available by the Committee as to any Exercise Date, a pro rata allocation of the
available shares will be made among all Participants authorizing such payroll
deductions based on the amount of their respective payroll deductions through
the Exercise Date. Any cash remaining will be returned to Participants.
5.7 CANCELLATION OF OPTIONS. Except as otherwise provided in an Agreement,
an Option shall cease to be exercisable and shall be canceled on or after the
expiration of the Option Period.
5.8 TERMINATED EMPLOYEES. Except as otherwise provided by the Committee or
in an Agreement, any Participant who incurs a Termination of Employment for any
reason, except death, Disability or Retirement, during the Option Period shall
cease to be a Participant, the Option of the Participant shall be null and void
on the date of the Termination of Employment without notice to the Participant
and the balance of the Account of the Participant shall be distributed to the
Participant at such time as the Committee determines.
5.9 DECEASED EMPLOYEES. If a Participant shall die during an Option Period
while an Eligible Employee, no further contributions by deduction from regularly
scheduled payments on behalf of the deceased Participant shall be made, except
that unless otherwise determined by the Committee, the Representative of such
Participant may make a single sum payment with respect to the Option of the
Participant at any time on or before the Exercise Date equal to the amount the
Participant would have contributed as determined by the Committee for the
payroll periods remaining to the Exercise Date. The Representative of such
Participant may at any time prior to the Exercise Date request a distribution of
the Account of the Participant. If the Representative does not request a
distribution, the balance accumulated in the deceased Participant's Account
shall be used to purchase shares of Common Stock on the Exercise Date.
5.10 DISABLED OR RETIRED EMPLOYEES. If a Participant incurs a Termination
of Employment due to Disability, or if a Participant incurs a Termination of
Employment due to Retirement, during an Option Period, no further contributions
by deduction from regularly scheduled payments on behalf of the disabled or
retired Participant shall be made, except that unless otherwise determined by
the Committee, the Participant may make a single sum payment with respect to the
Option of the Participant at any time on or before the Exercise Date equal to
the amount the Participant would have contributed as determined by the Committee
for the payroll periods remaining to the Exercise Date. The Participant may at
any time prior to the Exercise Date request a distribution of the Account. If
the Participant does not request a distribution of the Account, the balance
accumulated in the disabled or retired Participant's Account shall be used to
purchase shares of Common Stock on the Exercise Date.
5.11 LIMITATIONS. Notwithstanding any other provision of this Plan, in no
event may a Participant (i) purchase under the Plan during any Plan Year Common
Stock having a fair market value (determined at the Grant Date) of more than
$25,000 or (ii) receive any rights to purchase stock hereunder if he or she
beneficially owns, immediately after the Option is granted, five percent (5%) or
more of the total voting power or value of all classes of stock of the Company.
Subject to the foregoing, as of any Grant Date a Participant may not receive an
Option to purchase a number of shares of Common Stock in excess of the maximum
number of shares of Common Stock determined by the Committee, and in the absence
of a determination, the maximum number shall be determined by dividing $25,000
by the lowest closing price of the Common Stock as reported on the principal
exchange or market on which the Common Stock was traded during the 12-month
period ending immediately prior to the Grant Date.
5.12 NONASSIGNABILITY. Except as provided herein or in an Agreement, no
Option or interest therein shall be transferable by a Participant other than by
will or by the laws of descent and distribution, and all Options shall be
exercisable during the Participant's lifetime only by the Participant or, if
consistent with Section 423 of the Code, by designation of a Beneficiary upon
the death of the Participant.
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ARTICLE VI
MISCELLANEOUS
6.1 AMENDMENTS AND TERMINATION. The Board may amend, alter, or discontinue
the Plan at any time, but no amendment, alteration or discontinuation shall be
made which would impair the rights of a Participant under an Option theretofore
granted without the Participant's consent, except such an amendment made to
cause the Plan to qualify for the exemption provided by Rule 16b-3 or as a Plan
described in Section 423 of the Code. In addition, no amendment shall be made
without the approval of the Company's stockholders to the extent such approval
is required by law or agreement.
The Committee may amend the Plan at any time subject to the same limitations
on its right to amend the Plan as apply to the Board as described in the
preceding paragraph, and any such amendment shall be subject to the approval or
rejection of the Board.
The Committee may amend the terms of any Option theretofore granted,
prospectively or retroactively, but no such amendment shall impair the rights of
any Participant without the Participant's consent, except such an amendment made
to cause the Plan or Option to qualify for the exemption provided by Rule 16b-3
or to qualify as an Option under Section 423 of the Code.
Subject to the above provisions, the Board shall have authority to amend the
Plan to take into account changes in law and tax and accounting rules, as well
as other developments and to grant Options which qualify for beneficial
treatment under such rules without stockholder approval. Notwithstanding
anything to the contrary herein, if any right or action under this Plan or an
Agreement would cause a transaction to be ineligible for pooling of interests
accounting that would, but for the right or action, be eligible for such
accounting treatment, the Committee may modify or adjust the right or action so
that pooling of interest accounting is available.
6.2 UNFUNDED STATUS OF PLAN. It is intended that the Plan be an "unfunded"
plan for incentive and deferred compensation. The Committee may authorize the
creation of trusts or other arrangements to meet the obligations created under
the Plan to deliver Common Stock or make payments; provided, however, that,
unless the Committee otherwise determines, the existence of such trusts or other
arrangements is consistent with the "unfunded" status of the Plan.
6.3 GENERAL PROVISIONS.
(a) REPRESENTATION. The Committee may require each person purchasing or
receiving shares pursuant to an Option to represent to and agree with the
Company in writing that such person is acquiring the shares without a view to
the distribution thereof. The certificates for such shares may include any
legend which the Committee deems appropriate to reflect any restrictions on
transfer.
(b) IMPACT ON OTHER COMPENSATION. Nothing contained in the Plan shall
prevent the Company from adopting other or additional compensation arrangements
for its employees.
(c) WITHHOLDING. No later than the date as of which an amount first
becomes includible in the gross income of the Participant for Federal income tax
purposes with respect to any Option, the Participant shall pay to the Company
(or other entity identified by the Committee), or make arrangements satisfactory
to the Company or other entity identified by the Committee regarding the payment
of, any Federal, state, local or foreign taxes of any kind required by law to be
withheld with respect to such amount required in order for the Company to obtain
a current deduction. Unless otherwise determined by the Committee, withholding
obligations may be settled with Common Stock, including Common Stock that is
part of the Option that gives rise to the withholding requirement, provided that
any applicable requirements under Section 16 of the Exchange Act are satisfied.
The obligations of the Company under the Plan shall be conditional on such
payment or arrangements, and the Company shall, to the extent permitted by law,
have the right to deduct any such taxes from any payment otherwise due to the
Participant. If the Participant
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disposes of shares of Common Stock acquired pursuant to an Option in any
transaction considered to be a disqualifying transaction under the Code, the
Participant must give the Company written notice of such transfer and the
Company shall have the right to deduct any taxes required by law to be withheld
from any amounts otherwise payable to the Participant.
(d) REPRESENTATIVE. The Committee shall establish such procedures as it
deems appropriate for a Participant to designate a Representative to whom any
amounts payable in the event of the Participant's death are to be paid.
(e) CONTROLLING LAW. The Plan and all Options made and actions taken
thereunder shall be governed by and construed in accordance with the laws of the
State of Illinois (other than its law respecting choice of law), except to the
extent that the General Corporation Law of the State of Delaware would be
mandatorily applicable. The Plan shall be construed to comply with all
applicable law, and to avoid liability to the Company or a Participant,
including, without limitation, liability under Section 16(b) of the Exchange
Act.
(f) OFFSET. Any amounts owed to the Company by a Participant of whatever
nature may be offset by the Company from the value of any shares of Common
Stock, cash or other thing of value under the Plan or an Agreement to be
transferred to the Participant, and no shares of Common Stock, cash or other
thing of value under the Plan or an Agreement shall be transferred unless and
until all disputes of any type between the Company and the Participant have been
fully and finally resolved and the Participant has waived all claims to such
against the Company.
(g) FAIL SAFE. With respect to persons subject to Section 16 of the
Exchange Act, transactions under this Plan are intended to comply with all
applicable conditions of Rule 16b-3 or Rule 16a-1(c)(3), as applicable. To the
extent any provision of the Plan or action by the Committee fails to so comply,
it shall be deemed null and void, to the extent permitted by law and deemed
advisable by the Committee. Moreover, in the event the Plan does not include a
provision required by Rule 16b-3 or Rule 16a-1(c)(3) to be stated herein, such
provision (other than one relating to eligibility requirements or the price and
amount of Options) shall be deemed to be incorporated by reference into the Plan
with respect to Participants subject to Section 16.
(h) CAPITALIZATION. The grant of an Award shall in no way affect the right
of the Company to adjust, reclassify, reorganize or otherwise change its capital
or business structure or to merge, consolidation, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
6.4 MITIGATION OF EXCISE TAX. Subject to any agreement between the
Participant and the Company, if any payment or right accruing to a Participant
under this Plan (without the application of this Section 6.4), either alone or
together with other payments or rights accruing to the Participant from the
Company ("Total Payments") would constitute a "parachute payment" (as defined in
Section 280G of the Code and regulations thereunder), such payment or right
shall be reduced to the largest amount or greatest right that will result in no
portion of the amount payable or right accruing under the Plan being subject to
an excise tax under Section 4999 of the Code or being disallowed as a deduction
under Section 280G of the Code. The determination of whether any reduction in
the rights or payments under this Plan is to apply shall be made by the
Committee in good faith after consultation with the Participant, and such
determination shall be conclusive and binding on the Participant. The
Participant shall cooperate in good faith with the Committee in making such
determination and providing the necessary information for this purpose. The
foregoing provisions of this Section 6.4 shall apply with respect to any person
only if after reduction for any applicable Federal excise tax imposed by Section
4999 of the Code and Federal income tax imposed by the Code, the Total Payments
accruing to such person would be less than the amount of the Total Payments as
reduced, if applicable, under the foregoing provisions of the Plan and after
reduction for only Federal income taxes.
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6.5 RIGHTS WITH RESPECT TO CONTINUANCE OF EMPLOYMENT. The Plan does not,
directly or indirectly, create any absolute right for the benefit of any
Employee or class of Employees to purchase any Common Stock under the Plan.
Nothing contained herein shall be deemed to alter the relationship between the
Company and a Participant, or the contractual relationship between a Participant
and the Company if there is a written contract regarding such relationship.
Nothing contained herein shall be construed to constitute a contract of
employment between the Company and a Participant. The Company and each of the
Participants continue to have the right to terminate this employment
relationship at any time for any reason, except as provided in a written
contract. The Company shall have no obligation to retain the Participant in its
employ or service as a result of this Plan. There shall be no inference as to
the length of employment or service hereby, and the Company reserves the same
rights to terminate the Participant's employment or service as existed prior to
the individual becoming a Participant in this Plan.
6.6 OPTIONS IN SUBSTITUTION FOR OPTIONS GRANTED BY OTHER
CORPORATIONS. Options may be granted under the Plan from time to time in
substitution for awards in respect of other plans of other entities. The terms
and conditions of the Options so granted may vary from the terms and conditions
set forth in this Plan at the time of such grant as the majority of the members
of the Committee may deem appropriate to conform, in whole or in part, to the
provisions of the awards in substitution for which they are granted.
6.7 DELAY. Any time period provided for under the Plan or an Agreement, to
the extent necessary to avoid the imposition of liability, shall be suspended or
delayed during the period a Participant would be subject to liability under
Section 16 of the Exchange Act, but not by more than six (6) months and one (1)
day. The Company shall have the right to suspend or delay any time period for an
action described in the Plan or an Agreement if the Committee shall determine
that the action may constitute a violation of any law or result in liability
under any law to the Company or a stockholder of the Company until such time as
the action required or permitted shall not constitute a violation of law or
result in liability to the Company or a stockholder of the Company. The
Committee shall have the discretion to suspend the application of the provisions
of the Plan required solely to comply with Rule 16b-3 if the Committee shall
determine that Rule 16b-3 does not apply to the Plan and may amend the Plan's
provisions or operations to reduce obligations imposed by Rule 16b-3 if Rule
16b-3 is amended to reduce obligations imposed on the Plan and its operations.
6.8 HEADINGS. The headings contained in the Plan are for reference
purposes only and shall not affect the meaning or interpretation of the Plan.
6.9 SEVERABILITY. If any provision of the Plan shall for any reason be
held to be invalid or unenforceable, such invalidity or unenforceability shall
not effect any other provision hereby, and the Plan shall be construed as if
such invalid or unenforceable provision were omitted.
6.10 SUCCESSORS AND ASSIGNS. The Plan shall inure to the benefit of and be
binding upon each successor and assign of the Company. All obligations imposed
upon a Participant, and all rights granted to the Company hereunder, shall be
binding upon or insure to the benefit of the Participant's heirs, legal
representatives and successors.
6.11 ENTIRE AGREEMENT. The Plan and an Agreement constitute the entire
agreement with respect to the subject matter hereof and thereof, provided that
in the event of any inconsistency between the Plan and the Agreement, the terms
and conditions of the Agreement shall control.
Executed effective as of June 1, 1997.
<TABLE>
<S> <C> <C>
PLATINUM ENTERTAINMENT, INC.
By: /s/ STEVEN DEVICK
-----------------------------------------
Steven Devick
CHIEF EXECUTIVE OFFICER
</TABLE>
A-13
<PAGE>
APPENDIX B
PLATINUM ENTERTAINMENT, INC.
1995 DIRECTORS' STOCK OPTION PLAN
AS AMENDED AND RESTATED AS OF
OCTOBER 1, 1997
<PAGE>
PLATINUM ENTERTAINMENT, INC.
AMENDED AND RESTATED 1995 DIRECTORS' STOCK OPTION PLAN
1. GENERAL.
(A) PURPOSE.
The PLATINUM ENTERTAINMENT, INC. 1995 Directors' Stock Option Plan ("Plan")
previously established by Platinum Entertainment, Inc. ("Company") is hereby
amended and restated in its entirety, effective as of October 1, 1997. The
purpose of the Plan is to promote the overall financial objectives of Company
and its stockholders by aligning the interests of the Company's stockholders and
its non-employee directors through the grant of options to acquire shares of the
Company's Common Stock and any other stock or security resulting from the
adjustment thereof or substitution therefor as described in Section 6(b)
("Common Stock"). The Plan is intended to attract and retain well-qualified
persons for service as non-employee directors. The Plan is designed to comply
with the provisions of Rule 16b-3 ("Rule 16b-3") under Section 16 of the
Securities Exchange Act of 1934, as in effect from time to time ("Exchange
Act").
(B) OPTIONS.
For purposes of this Plan, the right to acquire at a stated price a
specified number of shares of Common Stock in accordance with the terms of this
Plan and an Option Agreement (as defined in Section 5(b)) shall be referred to
as an "Option." Options granted under the Plan will be options not qualified as
"Incentive Stock Options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as may be amended ("Code").
(C) EFFECTIVE DATE.
The Plan as amended and restated is adopted, subject to stockholder
approval, effective as of October 1, 1997 ("Effective Date").
2. ADMINISTRATION OF THE PLAN.
(A) COMMITTEE.
The Plan shall be administered by the stock option committee (the
"Committee") appointed by the Board of Directors of the Company (the "Board of
Directors"), which Committee shall consist of not less than three nor more than
seven directors, as determined by the Board of Directors. The members of the
Committee shall be appointed by, and may be changed at any time and from time to
time in the discretion of, the Board of Directors. Notwithstanding anything to
the contrary contained herein, the Board of Directors may, in its sole
discretion, at any time and from time to time, resolve to administer the Plan.
In the event of the foregoing, the term Committee as used herein shall mean the
Board of Directors.
(B) AUTHORITY OF COMMITTEE.
Subject to the provisions of the Plan, the Committee shall have the
authority (i) to exercise all of the powers granted to it under the Plan, (ii)
to construe, interpret and implement the Plan and any option agreements executed
pursuant to the Plan, (iii) to prescribe, amend and rescind rules relating to
the Plan, (iv) to make any determination necessary or advisable in administering
the Plan, and (v) to correct any defect, supply any omission and reconcile any
inconsistency in the Plan. The determination of the Committee on all matters
relating to the Plan or any option agreement shall be conclusive. No member of
the Committee shall be liable for any action or determination made in good faith
with respect to the Plan or any option granted hereunder.
B-1
<PAGE>
3. SHARES SUBJECT TO THE PLAN.
(A) NUMBER OF SHARES.
The stock subject to the Options granted under this Plan shall be the
Company's Common Stock. There shall be 500,000 shares of Common Stock, subject
to adjustment under Section 6(b), reserved and available for purchase upon the
exercise of Options granted under the Plan. The shares issued upon exercise of
an Option may be authorized and unissued shares, or shares issued and reacquired
by the Company.
(B) RELEASE OF SHARES.
If any Option granted hereunder shall be cancelled, expire or terminate for
any reason without having been exercised in full, the shares of Common Stock
subject to such Option shall again be available to be granted under the Plan.
(C) RESTRICTIONS ON SHARES.
Shares of Common Stock issued upon exercise of an Option shall be subject to
the terms and conditions specified herein and applicable Federal and state laws,
rules and regulations. The Company shall not be required to issue or deliver any
certificates for shares of Common Stock prior to (i) the listing of such shares
on any stock exchange on which the Common Stock may then be listed and (ii) the
completion of any required (A) registration or qualification of such shares
under Federal or state law, or (B) ruling or regulation of a governmental body.
The Company may cause any Common Stock to be delivered to be properly marked
with a legend or other notation reflecting any limitations on transfer of such
Common Stock.
(D) STOCKHOLDER RIGHTS.
No person shall have any rights of a stockholder as to shares of Common
Stock subject to an Option until, after proper exercise of the Option, such
shares shall have been recorded on the Company's official stockholder records as
having been issued or transferred to the party exercising the Option. No
adjustment shall be made for cash dividends or other rights for which the record
date is prior to the date such shares are recorded as issued or transferred (to
the party exercising the Option), in the Company's official stockholder records,
except as provided in Section 6(b). The Company shall cause its transfer agent
to record the shares as issued or transferred in an expeditious manner.
(E) STOCK VALUATION.
The option price of each share of Common Stock purchasable under any Option
granted pursuant to the Plan shall be the Fair Market Value (as defined below)
thereof at the time the Option is granted.
For purposes of the Plan, "Fair Market Value" shall mean, with respect to
each share of Common Stock, the closing price reported on the principal
securities exchange on which the Common Stock may then be traded, including the
Nasdaq National Market ("NASDAQ"), if quoted therein, or if there is no such
sale on the relevant date, then on the last previous day on which a sale was
reported. If the Common Stock is not listed or admitted for trading on any
national securities exchange or quoted on NASDAQ or a similar service on such
date, Fair Market Value shall be determined by the Committee in its sole
discretion.
4. ELIGIBILITY.
Each member of the Board of Directors of the Company who is not an employee,
either full-time or part-time, of (i) the Company, (ii) any parent of the
Company, or (iii) any subsidiary of the Company (each a "non-employee director")
may be granted Options to purchase shares of Common Stock in accordance with
Section 5. (A person to whom an Option hereunder is granted shall be referred to
hereinafter as an
B-2
<PAGE>
"Optionee" and such term shall include any person who is appointed as a guardian
of the Optionee's estate, any legal representative of the Optionee's estate and
any person to whom the Option is transferred pursuant to the applicable laws of
descent and distribution.)
5. OPTION PROVISIONS.
(A) GRANTS OF OPTIONS.
(i) INITIAL OPTIONS. On the Effective Date or on the date on which a
person is first elected as a non-employee director, such non-employee director
may be granted an Option to purchase shares of Common Stock at a purchase price
per share equal to the Fair Market Value per share of the Common Stock on the
date of grant of such Option with the number of shares to be determined by the
Committee.
(b) OPTION AGREEMENT. Each Option granted under this Plan shall be
evidenced by an option agreement ("Option Agreement"), which shall embody the
terms and conditions of such Option and which shall be subject to the express
terms and conditions set forth in this Plan.
(c) OPTION PERIOD AND EXERCISABILITY. Subject to the provisions of
Sections 5(f) and 6(b) hereof, each Option granted under the Plan shall be fully
exercisable on the date of its grant for a period of ten (10) years from such
grant date ("Option Period"). An Option, or portion thereof, may be exercised in
whole or in part only with respect to whole shares of Common Stock.
(d) METHOD OF EXERCISE. An Option may be exercised (i) by giving written
notice to the Company, specifying the number of whole shares to be purchased and
accompanied by payment therefor in full in a method provided in Section 5(e)
below, and (ii) by executing such documents as the Company may reasonably
request to satisfy the Optionee's obligations under the Plan and the Option
Agreement. No shares of Common Stock shall be issued until the full purchase
price has been paid.
(e) METHOD OF PAYMENT. The purchase price of the shares of Common Stock as
to which an Option shall be exercised shall be paid to the Company (1) in cash,
(2) in previously owned whole shares of Common Stock (for which the director has
good title free and clear of all liens and encumbrances) having a Fair Market
Value, determined as of the date of exercise, equal to such purchase price, (3)
by authorizing the Company to retain whole shares of Common Stock which would
otherwise be issuable upon exercise of the Option having a Fair Market Value,
determined as of the date of exercise, equal to such purchase price, or (4) by a
combination of (1), (2) and (3).
(f) TERMINATION OF DIRECTORSHIP.
(I) DISABILITY, DEATH OR FAILURE TO BE RENOMINATED OR RE-ELECTED. If a
non-employee director's directorship terminates by reason of Disability (as
defined herein) or death, or by reason of such director's failure to be
renominated or re-elected as a director, any Option granted under the Plan and
held by the non-employee director may thereafter be exercised by such director
(or the duly appointed guardian of the director's estate or the legal
representative of the director's estate or the person to whom the Option is
transferred pursuant to applicable laws of descent and distribution) for a
period of two (2) years from the date of such termination of the non-employee's
director's directorship or until the expiration of the Option Period, whichever
period is shorter. If a non-employee director dies during the two (2) year
period following termination of such director's directorship by reason of
Disability, any Option held by the non-employee director may thereafter be
exercised by the legal representative of the director's estate (or the person to
whom the Option is transferred pursuant to applicable laws of descent and
distribution) for a period of six (6) months from the date of death or until the
second anniversary of the termination of directorship, whichever period is
longer. A Disability shall mean a permanent physical or mental incapacity which,
in the reasonable determination of the Board, renders the Optionee unable to
perform the duties of a director of the Company.
B-3
<PAGE>
(II) OTHER TERMINATION. If a non-employee director's directorship
terminates for any reason other than disability, death or failure to be
renominated or reelected, any Option held by the non-employee director may
thereafter be exercised for a period of six (6) months and one (1) day from such
date or until the expiration of the Option Period, whichever period is shorter.
(g) NONASSIGNABILITY. Except to the extent specifically provided in a
domestic relations order which is determined to be a qualified domestic
relations order described in the Code or in Title I of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), Options are not transferable
otherwise than by will or the laws of descent and distribution, and are
exercisable during an Optionee's lifetime only by the Optionee (including the
duly appointed guardian of the estate of the Optionee); provided, however, that
no Option shall be subject to a qualified domestic relations order unless and
until the Company adopts Rule 16b-3, as promulgated in Securities Exchange Act
Release 34-28869. In the event of the death of an Optionee, any Option
theretofore granted to such Optionee shall be exercisable by the legal
representative of the estate of the Optionee or the person to whom the Option is
transferred pursuant to the applicable laws of descent and distribution.
6. PROVISIONS APPLICABLE TO THE PLAN.
(A) DURATION OF THE PLAN.
The Plan shall continue in effect until it is terminated by action of the
Board, but such termination shall not affect the terms of any then outstanding
Options.
(B) ADJUSTMENTS.
In addition to the other provisions set forth below in this Section 6(b), in
the event of any Company stock dividend, stock split, combination or exchange of
shares, recapitalization or other change in the capital structure of the
Company, corporate separation or division of the Company (including, but not
limited to, a split-up, spin-off, split-off or distribution to Company
stockholders other than a normal cash dividend), sale by the Company of all or a
substantial portion of its assets (if measured on either a stand-alone or
consolidated basis), reorganization, rights offering, partial or complete
liquidation, or any other corporate transaction or event involving the Company
and having an effect similar to any of the foregoing, then the Board shall
adjust or substitute, as the case may be, the number of shares of Common Stock
available for Options under the Plan, the number of shares of Common Stock
covered by outstanding Options, the exercise price per share of outstanding
Options, and any other characteristics or terms of the Options as the Board
shall deem necessary or appropriate to reflect equitably the effects of such
changes to the Optionees; provided, however, that any fractional shares
resulting from such adjustment shall be eliminated by rounding to the next lower
whole number of shares with appropriate payment for such fractional share as
shall reasonably be determined by the Board.
(C) AMENDMENT OF THE PLAN.
The Board may amend this Plan as it shall deem advisable, subject to any
requirement of stockholder approval imposed by applicable law; provided,
however, that this Plan shall not be amended more than once every six (6)
months, other than to comport with changes in the Code, ERISA, or the rules
thereunder. No amendment may impair the rights of a holder of an outstanding
Option without the consent of such holder.
7. WITHHOLDING.
The Company shall have the right to require, prior to the issuance or
delivery of any shares of Common Stock hereunder, payment by the Optionee of any
Federal, state, local and other taxes which may be required to be withheld or
paid in connection with the exercise of an Option hereunder. To the extent such
tax withholding is required, it may be effected in any way permitted under Rule
16b-3.
B-4
<PAGE>
8. PURCHASE FOR INVESTMENT.
Whether or not the Options and shares covered by the Plan have been
registered under the Securities Act of 1933, as amended, each person exercising
an Option under the Plan may be required by the Company to give a representation
in writing that such person is acquiring such shares for investment and not with
a view to, or for sale in connection with, the distribution of any part thereof.
The Company will endorse any necessary legend referring to the foregoing
restriction upon the certificate or certificates representing any shares issued
or transferred to the Optionee upon the exercise of any Option granted under the
Plan.
9. GOVERNMENT AND OTHER REGULATIONS.
The obligation of the Company with respect to Options granted under the Plan
shall be subject to all applicable laws, rules and regulations and such
approvals by any governmental agency as may be required, including, without
limitation, the effectiveness of any registration statement required under the
Securities Act of 1933, as amended, and the rules and regulations of any
securities exchange on which the Common Stock may be listed.
10. SEPARABILITY.
If any part of the Plan is declared by any court or governmental authority
to be unlawful or invalid, such unlawfulness or invalidity shall not invalidate
any portion of the Plan not declared to be unlawful or invalid. Any Section or
part of a Section so declared to be unlawful or invalid shall, if possible, be
construed in a manner which will give effect to the terms of such Section or
part of a Section to the fullest extent possible while remaining lawful and
valid.
11. NON-EXCLUSIVITY OF THE PLAN.
Neither the adoption of the Plan by the Board of Directors nor the
submission of the Plan to the shareholders of the Company for approval shall be
construed as creating any limitation on the power of the Board of Directors to
adopt such other incentive arrangements as it may deem desirable, including,
without limitation, the granting of stock options and the awarding of stock and
cash otherwise than under the Plan, and such arrangements may be either
generally applicable or applicable only in specific cases.
12. EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION.
By acceptance of an Option, each Optionee shall be deemed to have agreed
that such grant is special incentive compensation that will not be taken into
account, in any manner, as salary, compensation or bonus in determining the
amount of any payment under any pension, retirement or other employee benefit
plan of the Company or any of its affiliates. In addition, such Option will not
affect the amount of any life insurance coverage, if any provided by the Company
on the life of the Optionee.
13. INTERPRETATION.
(a) GENDER AND NUMBER. Whenever necessary or appropriate in this Plan and
where the context admits, the singular term and the related pronouns shall
include the plural and the masculine and feminine gender.
(b) GOVERNING LAW. The Plan shall be construed and enforced according to
the laws of the State of Illinois (other than its laws respecting choice of
law).
(c) NO EFFECT ON TERM OF DIRECTORSHIP. Nothing contained herein shall be
construed to constitute a promise or other undertaking that a non-employee
director shall be continued in office as a director.
B-5
<PAGE>
APPENEDIX C
PLATINUM ENTERTAINMENT, INC.
CERTIFICATE OF THE POWERS, DESIGNATIONS,
PREFERENCES AND RIGHTS OF THE
SERIES B CONVERTIBLE PREFERRED STOCK,
PAR VALUE $.001 PER SHARE
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
The following resolution was duly adopted by the Board of Directors of
Platinum Entertainment Inc., a Delaware corporation (the "Corporation"),
pursuant to the provisions of Section 151 of the General Corporation Law of the
State of Delaware, ____________, 1997, by [the unanimous written consent] [vote
at a meeting] of the Board of Directors:
RESOLVED that, pursuant to the authority expressly granted to the
Board of Directors of the Corporation by the Certificate of Incorporation of the
Corporation, and pursuant to Section 151(g) of the General Corporation Law of
the State of Delaware, there be created from the [ ] shares of
Preferred Stock, par value $.001 per share (the "Preferred Stock"), of the
Corporation authorized to be issued pursuant to the Certificate of
Incorporation, a series of Preferred Stock consisting of 20,000 shares of
Series B Convertible Preferred Stock (the "Series B Preferred Stock"), the
voting powers, designations, preferences and relative, participating, optional
or other special rights of which, and qualifications, limitations or
restrictions thereof, shall be as follows:
1. DEFINITIONS. As used herein, the following terms shall have the
following meanings:
1.1 "Affiliate" shall mean, with respect to any Person, any
other Person that, directly or indirectly, controls, is controlled by, or is
under common control with, such first Person. For the purpose of this
definition, "control" shall mean, as to any Person, the power to direct or cause
the direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
<PAGE>
2
1.2 "Board of Directors" shall mean the Board of Directors of
the Corporation or, with respect to any action to be taken by the Board of
Directors, any committee of the Board of Directors duly authorized to take such
action.
1.3 "Business Day" shall mean any day other than a Saturday,
Sunday or other day on which commercial banks in the City of New York are
authorized or required by law or executive order to close.
1.4 "Certificate of Incorporation" shall mean the Certificate of
Incorporation of the Corporation, as amended from time to time.
1.5 "Change of Control" shall mean (i) the direct or indirect
sale, lease, exchange or other transfer of all or substantially all of the
assets of the Corporation to any Person or group of Persons acting in concert as
a partnership or other group within the meaning of Rule 13d-5 under the Exchange
Act (a "GROUP OF PERSONS"), (ii) the merger or consolidation of the Corporation
with or into another corporation with the effect that the then existing
stockholders of the Corporation hold less than 50% of the combined voting power
of the then outstanding securities of the surviving corporation of such merger
or the corporation resulting from such consolidation ordinarily (and apart from
rights accruing under special circumstances) having the right to vote in the
election of directors, (iii) the replacement of a majority of the Board of
Directors, over a two-year period, from the directors who constituted the Board
of Directors at the beginning of such period, and such replacement shall not
have been approved by the Board of Directors (or its replacements approved by
the Board of Directors) as constituted at the beginning of such period, or (iv)
a Person or Group of Persons (other than the Investors and their Affiliates)
shall, as a result of a tender or exchange offer, open market purchases,
privately negotiated purchases or otherwise, have become the beneficial owner
(within the meaning of Rule 13d-3 under the Exchange Act) of securities of the
Corporation representing 49% or more of the combined voting power of the then
outstanding securities of the Corporation ordinarily (and apart from rights
accruing under special circumstances) having the right to vote in the election
of directors.
1.6 "Class A Common Stock" shall mean the class of Class A
Common Stock, par value $.001 per share, of the Corporation or any other class
of stock resulting from successive changes or reclassifications of such Class A
Common Stock consisting solely of changes in par value, or from par value to no
par value, or as a result of a subdivision or combination.
1.7 "Class B Common Stock" shall mean the class of Class B
Common Stock, par value $.001 per share, of the Corporation or any other class
of stock resulting from successive changes or reclassifications of such Class B
Common
<PAGE>
3
Stock consisting solely of changes in par value, or from par value to no par
value, or as a result of a subdivision or combination.
1.8 "Closing Price" of the Common Stock, as of any day, shall
mean (a) the last reported sale price of such stock (regular way), or, in case
no such sale takes place on such day, the average of the closing bid and asked
prices, in either case as reported on the principal national securities exchange
on which such stock is listed or admitted to trading or (b) if the Common Stock
is not listed or admitted to trading on any national securities exchange, the
last reported sale price, or in case no such sale takes place on such day, the
average of the highest reported bid and the lowest reported asked quotation for
the Common Stock, in either case reported on NASDAQ, or a similar service if
NASDAQ is no longer reporting such information.
1.9 "Common Stock" shall mean the class of Common Stock, par
value $.001 per share, of the Corporation or any other class of stock resulting
from successive changes or reclassifications of such Common Stock consisting
solely of changes in par value, or from par value to no par value, or as a
result of a subdivision or combination.
1.10 "Common Stock Conversion Rate" shall mean, as of any date, a
rate for each share of Series B Preferred Stock equal to (i) the Liquidation
Value thereof plus all accrued and unpaid dividends thereon (whether or not
declared), divided by (ii) the Conversion Price in effect as of such date.
1.11 "Conversion Price" shall mean $6.60 per share of Common
Stock.
1.12 "Current Market Price" shall mean, with respect to each
share of Common Stock as of any date, the average of the daily Closing Prices
per share of Common Stock for the 10 consecutive Trading Days commencing 15
Trading Days prior to such date; provided that if on any such date the shares of
Common Stock are not listed or admitted for trading on any national securities
exchange or quoted by NASDAQ or a similar service, the Current Market Price for
a share of Common Stock shall be the fair market value of such share as
determined in good faith by the Board of Directors. If the Board of Directors
is unable to determine the fair market value, or if the holders of a majority-
in-interest of the shares of Series B Preferred Stock disagree with the Board's
determination of fair market value by written notice delivered to the
Corporation within five (5) business days after the Board's determination
thereof is communicated in writing to holders of the Series B Preferred Stock
affected thereby, which notice specifies a majority-in-interest of such holders'
determination of fair market value, then the Corporation and a majority-in-
interest of such holders shall select an Independent Financial Expert which
shall determine such fair market value.
<PAGE>
4
If the Corporation and such holders are unable to agree upon an Independent
Financial Expert within fifteen (15) days after the request of such holders,
each of the Corporation and such holders shall select an Independent Financial
Expert within five (5) days following the expiration of such fifteen (15) day
period, and these Independent Financial Experts shall select a third Independent
Financial Expert. The determination of fair market value by such Independent
Financial Expert shall be final, binding and conclusive on the Corporation and
all holders of the Series B Preferred Stock. All costs and fees of any of the
Independent Financial Experts retained in accordance with the foregoing shall be
borne by the Corporation.
1.13 "Dividend Amount" shall mean an amount per share of Series B
Preferred Stock (rounded to the nearest $ .01) equal to (1) $30 per $1,000
Liquidation Value of Series B Preferred Stock during the first year after the
Issue Date,(2) $35 per $1,000 Liquidation Value of Series B Preferred Stock
during the second year after the Issue Date, (3)$40 per $1,000 Liquidation Value
of Series B Preferred Stock during the third year after the Issue Date,(4) $45
per $1,000 Liquidation Value of Series B Preferred Stock during the fourth and
fifth years after the Issue Date and (5) $50 per $1,000 Liquidation Value of
Series B Preferred Stock at all times after the fifth anniversary of the Issue
Date.
1.14 "Dividend Rate" shall mean (1) 3% per quarter during the
first year after the Issue Date,(2) 3.5% per quarter during the second year
after the Issue Date,(3) 4% per quarter during the third year after the Issue
Date, (4) 4.5% per quarter during the fourth and fifth years after the Issue
Date and (5) 5% per quarter at all times after the fifth anniversary of the
Issue Date.
1.15 "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
1.16 "Excluded Securities" means (a) shares of Common Stock
issued upon conversion or exercise of convertible securities, warrants and
options of the Corporation outstanding on the Issue Date, (b) shares of Common
Stock, and options to purchase such shares, issued to officers, directors,
employees or former employees of, or consultants to, the Corporation or any of
its subsidiaries pursuant to any equity incentive plan, agreement or other
arrangement which has been approved by a vote of at least two-thirds (2/3rds) of
the Board of Directors, (c) shares of Common Stock issued upon conversion of the
shares of Series B Preferred Stock, and (d) shares of Common Stock issued upon
exercise of the warrants issued to the purchasers of the shares of Series B
Preferred Stock pursuant to the Investment Agreement.
1.17 "Independent Financial Expert" means an independent
nationally recognized investment banking firm.
<PAGE>
5
1.18 "Issue Date" shall mean the Closing Date (as defined in the
Investment Agreement).
1.19 "Investment Agreement" shall mean the Investment Agreement,
dated as of October __, 1997, between the Corporation, the Investors and certain
other parties thereto, as amended from time to time.
1.20 "Investors" shall mean MAC Music LLC, a Delaware limited
liability company, and SK-Palladin Partners, LP, a Delaware limited partnership.
1.21 "Junior Stock" shall mean the Common Stock, the Class A
Common Stock, the Class B Common Stock, the Series A-1 Preferred Stock, the
Series A-2 Preferred Stock and the shares of any other class or series of stock
of the Corporation which, by the terms of the Certificate of Incorporation or of
the instrument by which the Board of Directors, acting pursuant to authority
granted in the Certificate of Incorporation, shall fix the relative rights,
preferences and limitations thereof, shall be junior to the Series B Preferred
Stock in respect of the right to receive dividends and to participate in any
distribution of assets other than by way of dividends.
1.22 "Liquidation Value" shall have the meaning assigned to such
term in Section 6.1 hereof.
1.23 "NASDAQ" shall mean the National Association of Securities
Dealers, Inc. Automated Quotation System.
1.24 "Parity Stock" shall mean the shares of any other class or
series of stock of the Corporation which, by the terms of the Certificate of
Incorporation or of the instrument by which the Board of Directors, acting
pursuant to authority granted in the Certificate of Incorporation, shall fix the
relative rights, preferences and limitations thereof, shall, in the event that
the stated dividends thereon are not paid in full, be entitled to share ratably
with the Series B Preferred Stock in the payment of dividends, including
accumulations, if any, in accordance with the sums which would be payable on
such shares if all dividends were declared and paid in full, and shall, in the
event that the amounts payable thereon on liquidation are not paid in full, be
entitled to share ratably with the Series B Preferred Stock in any distribution
of assets other than by way of dividends in accordance with the sums which would
be payable in such distribution if all sums payable were discharged in full;
PROVIDED, HOWEVER, that the term "Parity Stock" shall be deemed to refer (i) in
Section 2.2 hereof, to any stock which is Parity Stock in respect of the right
to receive dividends and (ii) in Section 6 hereof, to any stock which is Parity
Stock in respect of any distribution of assets other than by way of dividends.
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6
1.25 "Person" shall mean any individual, corporation,
partnership, joint venture, association, joint-stock company, trust, limited
liability company, unincorporated organization, estate, other entity or
government or any agency or political subdivision thereof.
1.26 "Pro Rata Repurchase" shall mean any purchase of shares of
Common Stock by the Corporation or by any of its subsidiaries whether for cash,
shares of capital stock of the Corporation, other securities of the Corporation,
evidences of indebtedness of the Corporation or any other Person or any other
property (including, without limitation, shares of capital stock, other
securities or evidences of indebtedness of a subsidiary of the Corporation), or
any combination thereof, effected while any of the shares of Series B Preferred
Stock are outstanding, which purchase is subject to Section 13(e) of the
Exchange Act or is made pursuant to an offer made available to all holders of
Common Stock.
1.27 "Senior Stock" shall mean the shares of any class or series
of stock of the Corporation which, by the terms of the Certificate of
Incorporation or of the instrument by which the Board of Directors, acting
pursuant to authority granted in the Certificate of Incorporation, shall fix the
relative rights, preferences and limitations thereof, shall be senior to the
Series B Preferred Stock in respect of the right to receive dividends or to
participate in any distribution of assets other than by way of dividends.
1.28 "Series A-1 Preferred Stock" shall mean the class of
Series A-1 Non Convertible Preferred Stock, par value $.001 per share, of the
Corporation or any other class of stock resulting from successive changes or
reclassifications of such Series A-1 Non Convertible Preferred Stock consisting
solely of changes in par value, or from par value to no par value, or as a
result of a subdivision or combination.
1.29 "Series A-2 Preferred Stock" shall mean the class of
Series A-2 Convertible Preferred Stock, par value $.001 per share, of the
Corporation or any other class of stock resulting from successive changes or
reclassifications of such Series A-2 Convertible Preferred Stock consisting
solely of changes in par value, or from par value to no par value, or as a
result of a subdivision or combination.
1.30 "Trading Day" shall mean, so long as the Common Stock is
listed or admitted to trading on a national securities exchange, a day on which
the principal national securities exchange on which the Common Stock is listed
is open for the transaction of business, or, if the Common Stock is not so
listed or admitted for trading on any national securities exchange, a day on
which NASDAQ is open for the transaction of business.
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7
2. DIVIDENDS.
2.1 The holders of the outstanding shares of Series B Preferred
Stock shall be entitled to receive quarterly dividends, when, as and if declared
by the Board of Directors out of funds legally available therefor. Each
quarterly dividend shall be an amount per share (rounded to the nearest $.01)
equal to the Dividend Amount and shall be payable on the last Business Day of
August, November, February and May in each year (each a "Dividend Payment
Date"), to the holders of record of Series B Preferred Stock at the close of
business on the preceding Business Day, or such other dates as are fixed by the
Board Directors within ten (10) days prior to the Dividend Payment Date (each a
"Record Date"). Such dividends shall become payable beginning on the first
Dividend Payment Date for which the Record Date is subsequent to the Issue Date.
Dividends on each share of Series B Preferred Stock shall be cumulative and
shall accrue on a day-to-day basis, whether or not earned, from and after the
day immediately succeeding the date on which such share was issued, and shall be
payable in cash (except upon conversion). Dividends on the Series B Preferred
Stock that are not declared and paid when due will compound quarterly on each
Dividend Payment Date at the Dividend Rate. Dividends payable for any partial
dividend period shall be computed on the basis of actual days elapsed over a 360
day year.
2.2 Except as hereinafter provided in this Section 2.2, unless
(a) full cumulative dividends on the outstanding shares of Series B Preferred
Stock and any Parity Stock that shall have accrued and become payable as of any
date shall have been paid, or declared and funds shall have been set apart for
payment thereof, and (b) all applicable redemption, exchange and repurchase
obligations with respect to the outstanding shares of Series B Preferred Stock
and any Parity Stock shall have been satisfied, no dividend or other
distribution (payable other than in shares of Junior Stock) shall be paid to the
holders of Junior Stock or Parity Stock, and no shares of Series B Preferred
Stock, Parity Stock or Junior Stock shall be purchased or redeemed by the
Corporation or any of its subsidiaries (except by conversion into or exchange
for, or out of the net cash proceeds from the concurrent sale of, Junior Stock),
nor shall any monies be paid or made available for a sinking fund for the
purchase or redemption of any Series B Preferred Stock, Junior Stock or Parity
Stock. When dividends are not paid in full upon the shares of Series B
Preferred Stock and any Parity Stock, all dividends declared upon shares of
Series B Preferred Stock and all Parity Stock shall be declared pro rata so that
the amount of dividends declared per share on Series B Preferred Stock and all
such Parity Stock shall in all cases bear to each other the same ratio that
accrued cumulative dividends per share on the shares of Series B Preferred Stock
and all such Parity Stock bear to each other. Holders of shares of Series B
Preferred Stock shall not be entitled to any dividends, whether payable in cash,
property or stock, in excess of full cumulative dividends, as herein provided,
on Series B Preferred Stock.
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8
3. REDEMPTION.
3.1 The Corporation may, at its sole option, subject to the
provisions of Section 2.2, redeem at any time after the Issue Date, out of funds
legally available therefor, all (or, in accordance with Section 3.2, less than
all) of the outstanding shares of Series B Preferred Stock at a redemption price
for each share of Series B Preferred Stock called for redemption pursuant to
this Section 3.1 equal to the Redemption Price (as hereinafter defined). The
term "Redemption Price" shall mean, with respect to each share of Series B
Preferred Stock, an amount equal to the Liquidation Value thereof and all
accrued and unpaid dividends thereon to the redemption date. With respect to
each share of Series B Preferred Stock properly tendered for redemption, if the
Corporation fails to pay the redemption price upon such tender, the Corporation
shall also pay an amount equal to interest on the amount determined in the above
sentence at 12% per annum, compounded on a quarterly basis, from the date fixed
for redemption to the date the Redemption Price is actually paid.
3.2 In the event that fewer than all the outstanding shares of
Series B Preferred Stock are to be redeemed pursuant to Section 3.1 above, the
number of shares to be redeemed shall be redeemed on a pro rata basis based on
the number of shares held by each holder thereof.
3.3 In the event the Corporation shall elect to redeem shares of
Series B Preferred Stock pursuant to Section 3.1, it shall provide notice of
such redemption by first class mail, postage prepaid, mailed not less than sixty
(60) nor more than ninety (90) days prior to the redemption date, to each record
holder of the shares to be redeemed, at such holder's address as the same
appears on the books of the Corporation. Each such notice shall state: (i) the
time and date as of which the redemption shall occur; (ii) the total number of
shares of Series B Preferred Stock to be redeemed and, if fewer than all the
shares held by such holder are to be redeemed, the number of such shares to be
redeemed from such holder; (iii) the Redemption Price; (iv) that shares of
Series B Preferred Stock called for redemption may be converted at any time
prior to the time and date fixed for redemption (unless (x) the Corporation
shall default in the payment of the Redemption Price, in which case such right
shall not terminate at such time and date or (y) the holders of such shares do
not yet have the right to convert such shares under Section 4 below); (v) the
Common Stock Conversion Rate; (vi) the place or places where certificates for
such shares are to be surrendered for payment of the Redemption Price; and
(vii) that dividends on the shares to be redeemed will cease to accrue on such
redemption date.
3.4 If notice of redemption shall have been given by the
Corporation as provided in Section 3.3, dividends on the shares of Series B
Preferred Stock so called for redemption shall cease to accrue, such shares
shall no longer be deemed to be outstanding, and all rights of the holders
thereof as stockholders of the
<PAGE>
9
Corporation with respect to shares so called for redemption (except the right to
receive from the Corporation the Redemption Price without interest and except
the right to convert such shares in accordance with Section 4) shall cease
(including any right to receive dividends otherwise payable on any Dividend
Payment Date that would have occurred after the time and date of redemption)
from and after the time and date fixed in the notice of redemption as the time
and date of redemption (unless the Corporation shall default in the payment of
the Redemption Price, in which case such rights shall not terminate at such time
and date). Upon surrender (in accordance with the notice of redemption) of the
certificate or certificates for any shares to be so redeemed (properly endorsed
or assigned for transfer, if the Corporation shall so require and the notice of
redemption shall so state), such shares shall be redeemed by the Corporation at
the Redemption Price. In case fewer than all the shares represented by any such
certificate are to be redeemed, a new certificate shall be issued representing
the unredeemed shares, without cost to the holder thereof, together with the
amount of cash, if any, in lieu of fractional shares. Subject to applicable
escheat laws, any moneys so set aside by the Corporation and unclaimed at the
end of one year from the redemption date shall revert to the general funds of
the Corporation, after which reversion the holders of such shares so called for
redemption shall look only to the general funds of the Corporation for the
payment of the redemption price without interest. Any interest accrued on funds
so deposited shall be paid to the Corporation from time to time.
4. CONVERSION RIGHTS.
4.1 Each holder of a share of Series B Preferred Stock shall
have the right, at any time after the second anniversary of the Issue Date, or,
as to any share of Series B Preferred Stock called for redemption with a date
fixed for redemption which is after the second anniversary of the Issue Date, at
any time prior to the time and date fixed for such redemption (unless the
Corporation defaults in the payment of the Redemption Price, in which case such
right shall not terminate at such time and date), to convert such share into
fully paid and nonassessable shares of Common Stock at the Common Stock
Conversion Rate as of the date of conversion.
4.2 No fractional shares or scrip representing fractions of
shares of Common Stock shall be issued upon conversion of Series B Preferred
Stock. Instead of any fractional interest in a share of Common Stock that would
otherwise be deliverable upon the conversion of a share of Series B Preferred
Stock, the Corporation shall, subject to Section 4.5(e), make a cash payment
(calculated to the nearest $.01) equal to such fraction multiplied by the
Closing Price of the Common Stock on the last Trading Day prior to the date of
conversion.
4.3 Any holder of shares of Series B Preferred Stock electing to
convert such shares into Common Stock shall surrender the certificate or
certificates for such shares at the offices of the Corporation (or at such other
place as the
<PAGE>
10
Corporation may designate by notice to the holders of shares of Series B
Preferred Stock) during regular business hours, duly endorsed to the Corporation
or in blank, or accompanied by instruments of transfer to the Corporation or in
blank, in form reasonably satisfactory to the Corporation, and shall give
written notice to the Corporation at such offices that such holder elects to
convert such shares of Series B Preferred Stock. As soon as practicable after
any holder deposits certificates for shares of Series B Preferred Stock,
accompanied by the written notice above prescribed, the Corporation shall issue
and deliver at such office to the holder for whose account such shares were
surrendered, or to his nominee, certificates representing the number of shares
of Common Stock and the cash in lieu of fractional shares, if any, to which such
holder is entitled upon such conversion.
4.4 Conversion shall be deemed to have been made as of the date
that certificates for the shares of Series B Preferred Stock to be converted and
the written notice, are received by the Corporation; and the Person entitled to
receive the Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder of such Common Stock on such date. The
Corporation shall not be required to deliver certificates for shares of Common
Stock while the stock transfer books for such stock or for Series B Preferred
Stock are duly closed for any purpose, but certificates for shares of Common
Stock shall be issued and delivered as soon as practicable after the opening of
such books.
4.5 The Common Stock Conversion Rate shall be adjusted from time
to time as follows:
(a) If the Corporation shall, at any time or from time to
time while any shares of the Series B Preferred Stock are outstanding, (i) pay a
dividend on its Common Stock in shares of its capital stock, (ii) combine its
outstanding shares of Common Stock into a smaller number of shares,
(iii) subdivide its outstanding shares of Common Stock or (iv) issue by
reclassification of its shares of Common Stock any shares of capital stock of
the Corporation, then the Common Stock Conversion Rate in effect immediately
before such action shall be adjusted so that the holders of the Series B
Preferred Stock, upon conversion of shares thereof immediately following such
action, shall be entitled to receive the kind and amount of shares of capital
stock of the Corporation which they would have owned or been entitled to receive
upon or by reason of such event if such shares of Series B Preferred Stock had
been converted immediately before the record date or effective date for such
action.
(b) If the Corporation shall, at any time or from time to
time while any of the Series B Preferred Stock is outstanding, issue or sell, or
fix a record date for the issuance of, (A) Common Stock (or securities
convertible or exchangeable into or exercisable for Common Stock) (other than
Excluded Securities) or (B) rights, options or warrants entitling the holders
thereof to subscribe for or
<PAGE>
11
purchase Common Stock (or securities convertible into or exchangeable or
exercisable for shares of Common Stock) (other than Excluded Securities), in any
such case, at a price per share (treating the price per share of securities
convertible into or exchangeable or exercisable for Common Stock as equal to
(x) the sum of (i) the price for a unit of the security convertible into or
exchangeable or exercisable for Common Stock plus (ii) any additional
consideration initially payable upon the conversion of such security into or the
exchange or exercise of such security for Common Stock, divided by (y) the
number of shares of Common Stock initially underlying such exercisable,
convertible or exchangeable security) that is less than the greater of the
Current Market Price of the Common Stock and the Conversion Price on the date of
such issuance or such record date (the "Measuring Price"), then the Common Stock
Conversion Rate shall be adjusted so that it shall equal the rate determined by
multiplying the Common Stock Conversion Rate in effect immediately prior to
giving effect to this Section 4.5 by a fraction, the numerator of which shall be
the number of shares of Common Stock outstanding (calculated to include the
shares of Common Stock underlying the Warrants issued under the Investment
Agreement and all then currently exerciseable, convertible and exchangeable
securities that are "in-the-money") on the date of issuance of such rights,
options or warrants plus the number of additional shares of Common Stock offered
for subscription or purchase (or into or for which the exercisable, convertible
or exchangeable securities so offered are initially exercisable, convertible or
exchangeable), and the denominator of which shall be the number of shares of
Common Stock outstanding (calculated to include the shares of Common Stock
underlying the Warrants issued under the Investment Agreement and all then
currently exerciseable, convertible and exchangeable securities that are "in-
the-money") on the date of issuance of such rights, options or warrants plus the
number of shares which the aggregate offering price of the total number of
shares so offered for subscription or purchase (or the aggregate purchase price
of the exercisable, convertible or exchangeable securities so offered plus the
aggregate amount of any additional consideration initially payable upon
exercise, conversion or exchange for or into Common Stock) would purchase at
such Measuring Price.
(c) If the Corporation shall, at any time or from time to
time while any of the Series B Preferred Stock is outstanding, distribute to all
holders of shares of its Common Stock (including any such distribution made in
connection with a consolidation or merger in which the Corporation is the
continuing or surviving corporation and the Common Stock is not changed or
exchanged) cash, evidences of indebtedness, securities or other assets
(excluding (i) ordinary course cash dividends to the extent such dividends do
not exceed the Corporation's retained earnings and (ii) dividends payable in
shares of Common Stock for which adjustment is made under Section 4.5(a)) or
rights, options or warrants to subscribe for or purchase securities of the
Corporation (excluding those for which adjustment is made under Section 4.5(b)),
then in each such case the Common Stock Conversion Rate shall be adjusted so
that it shall equal the rate determined by multiplying the Common Stock
<PAGE>
12
Conversion Rate in effect immediately prior to the date of such distribution by
a fraction, the numerator of which shall be the Current Market Price of the
Common Stock on the record date referred to below, and the denominator of which
shall be such Current Market Price of the Common Stock less the then fair market
value (as determined by the Board of Directors in good faith or, if requested by
the holders of a majority of the Series B Preferred Stock, by an Independent
Financial Expert selected in the manner described in the definition of the term
"Current Market Price") of the portion of the cash, evidences of indebtedness,
securities or other assets so distributed or of such rights, options or warrants
applicable to one share of Common Stock (provided that such denominator shall
never be less than $.01).
(d) If the Corporation or any subsidiary thereof shall, at
any time or from time to time while any of the Series B Preferred Stock is
outstanding, make a Pro Rata Repurchase, the Common Stock Conversion Rate shall
be adjusted by multiplying the Common Stock Conversion Rate in effect
immediately prior to such action by a fraction (which in no event shall be less
than one (1)), the numerator of which shall be the product of (i) the number of
shares of Common Stock outstanding immediately before such Pro Rata Repurchase
minus the number of shares of Common Stock repurchased in such Pro Rata
Repurchase and (ii) the Current Market Price of the Common Stock as of the day
immediately preceding the first public announcement by the Corporation of the
intent to effect such Pro Rata Repurchase, and the denominator of which shall be
(i) the product of (x) the number of shares of Common Stock outstanding
immediately before such Pro Rata Repurchase and (y) the Current Market Price of
the Common Stock as of the day immediately preceding the first public
announcement by the Corporation of the intent to effect such Pro Rata Repurchase
minus (ii) the aggregate purchase price of the Pro Rata Repurchase (provided
that such denominator shall never be less than $.01).
(e) All calculations under this Section 4.5 shall be made
to the nearest $.01 (with $.005 being rounded upward), one-hundredth of a share
(with .005 being rounded upward) or, in the case of a conversion rate, one ten-
thousandth (with .00005 being rounded upward). Notwithstanding any other
provision of this Section 4.5, the Corporation shall not be required to make any
adjustment of the Common Stock Conversion Rate unless such adjustment would
require an increase or decrease of at least 0.05% of such rate. Any lesser
adjustment shall be carried forward and shall be made at the time of and
together with the next subsequent adjustment which, together with any adjustment
or adjustments so carried forward, shall amount to an increase or decrease of at
least 0.05% in such rate. Any adjustments under this Section 4.5 shall be made
successively whenever an event requiring such an adjustment occurs.
(f) Whenever an adjustment in the Common Stock Conversion
Rate is required, the Corporation shall promptly cause to be mailed (but in
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13
any event not later than five (5) days after the date of the event giving rise
to such adjustment) first-class postage prepaid, to the holders of record of the
outstanding shares of Series B Preferred Stock, notice of such adjustment and a
certificate of a firm of independent public accountants of recognized national
standing selected by the Board of Directors (who shall be appointed at the
Corporation's expense and who may be the independent public accountants
regularly employed by the Corporation) setting forth the adjusted Common Stock
Conversion Rate in effect as of such date determined as provided herein. Such
notice and certificate shall set forth in reasonable detail such facts as shall
be necessary to show the reason for and the manner of computing such adjustment.
(g) In the event that at any time as a result of an
adjustment made pursuant to this Section 4.5, the holder of any share of
Series B Preferred Stock thereafter surrendered for conversion shall become
entitled to receive any shares of stock of the Corporation other than shares of
Common Stock, the conversion rate of such other shares so receivable upon
conversion of any such share of Series B Preferred Stock shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to Common Stock contained in
subparagraphs (a) through (f) and (h) of this Section 4.5, and the provisions of
this Section 4 with respect to the Common Stock shall apply on like or similar
terms to any such other shares and the determination of the Board of Directors
as to any such adjustment shall be conclusive.
(h) No adjustment shall be made pursuant to this Section if
the effect thereof would be to reduce the Conversion Price below the par value
of the Common Stock.
4.6 In case (a) any consolidation or merger to which the
Corporation is a party, other than a merger or consolidation in which the
Corporation is the surviving or continuing corporation and which does not result
in any reclassification of, or change (other than a change in par value or from
par value to no par value or from no par value to par value, or as a result of a
subdivision or combination) in, outstanding shares of Common Stock or (b) any
sale or conveyance of all or substantially all of the property and assets of the
Corporation is effected in such a way that the holders of Common Stock shall be
entitled to receive stock or other securities or assets with respect to or in
exchange for Common Stock, then upon conversion of each share of Series B
Preferred Stock the holder thereof shall be entitled to receive the kind and
amount of shares of stock or other securities and property receivable upon such
consolidation, merger, sale or conveyance by a holder of the number of shares of
Common Stock into which such shares of Series B Preferred Stock could have been
converted immediately prior to such consolidation, merger, sale or conveyance,
subject to adjustments which shall be as nearly equivalent as may be practicable
to the adjustments provided for in this Section 4. The Corporation shall not
<PAGE>
14
enter into any of the transactions referred to in clause (a) or (b) of the
preceding sentence unless provision shall be made so as to give effect to the
provisions set forth in this Section 4.6. The provisions of this Section 4.6
shall apply similarly to successive consolidations, mergers, sales or
conveyances.
4.7 The Corporation shall at all times reserve and keep
available, free from preemptive rights, out of its authorized but unissued
stock, for the purpose of effecting the conversion of the shares of Series B
Preferred Stock, such number of its duly authorized shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding shares of Series B Preferred Stock into such Common Stock at any
time (assuming that, at the time of the computation of such number of shares,
all such Common Stock would be held by a single holder). The Corporation shall
from time to time, in accordance with the laws of the State of Delaware, use its
best efforts to cause the authorized amount of Common Stock to be increased if
the aggregate of the authorized amount of the Common Stock remaining unissued
and the issued shares of such Common Stock in its treasury (other than any
shares of such Common Stock reserved for issuance in any other connection) shall
not be sufficient to permit the conversion of the shares of Series B Preferred
Stock into the Common Stock. The Corporation covenants that any shares of
Common Stock issued upon conversions of the Series B Preferred Stock shall be
validly issued, fully paid and nonassessable.
4.8 If any shares of Common Stock which would be issuable upon
conversion of shares of Series B Preferred Stock hereunder require registration
with or approval of any governmental authority before such shares may be issued
upon conversion, the Corporation will in good faith and as expeditiously as
possible cause such shares to be duly registered or approved, as the case may
be.
4.9 The Corporation shall pay any and all issue or other taxes
that may be payable in respect of any issue or delivery of shares of Common
Stock on conversion of shares of Series B Preferred Stock pursuant hereto. The
Corporation shall not, however, be required to pay any tax which is payable in
respect of any transfer involved in the issue or delivery of Common Stock in a
name other than that in which the shares of Series B Preferred Stock so
converted were registered, and no such issue or delivery shall be made unless
and until the person requesting such issue has paid to the Corporation the
amount of such tax, or has established, to the satisfaction of the Corporation,
that such tax has been paid.
4.10 For purposes of this Section 4, the number of shares of
Common Stock at any time outstanding shall not include any shares of Common
Stock then owned or held by or for the account of the Corporation or any
subsidiary. The Corporation shall not pay a dividend or make any distribution
on shares of Common Stock held in the treasury of the Corporation.
<PAGE>
15
4.11 If any action or transaction would require adjustment of the
Common Stock Conversion Rate pursuant to more than one paragraph of this
Section 4, only one adjustment shall be made and each such adjustment shall be
the amount of adjustment that has the highest absolute value.
4.12 In case:
(a) of a consolidation or merger to which the Corporation
is a party and for which approval of any stockholders of the Corporation is
required; or
(b) of the voluntary or involuntary dissolution,
liquidation or winding up of the Corporation; or
(c) of any Pro Rata Repurchase;
then, in each case, the Corporation shall cause to be mailed, first-class
postage prepaid, to the holders of record of the outstanding shares of Series B
Preferred Stock, at least twenty (20) days prior to the applicable record date
hereinafter specified, a notice stating (x) the date on which a record is to be
taken for the purpose of any distribution or grant of rights or warrants
triggering an adjustment to the Common Stock Conversion Rate pursuant to this
Section 4, or, if a record is not to be taken, the date as of which the holders
of record of Common Stock entitled to such distribution, rights or warrants are
to be determined, or (y) the date on which any reclassification, consolidation,
merger, sale, conveyance, dissolution, liquidation, winding up or Pro Rata
Repurchase is expected to become effective, and the date as of which it is
expected that holders of Common Stock of record shall be entitled to exchange
their Common Stock for securities or other property deliverable upon such
reclassification, consolidation, merger, sale, conveyance, dissolution,
liquidation, winding up or Pro Rata Repurchase. Failure to give the notice
specified hereunder shall have no effect on the status or effectiveness of the
action to which the required notice relates.
5. VOTING.
5.1 The shares of Series B Preferred Stock shall have no voting
rights except as required by law or as set forth below:
(a) If on the fifth anniversary of the Issue Date any
shares of Series B Preferred Stock remain outstanding, then the number of
directors constituting the Board of Directors shall be increased by four (4) (in
addition to any such increase in directorships required by any similar provision
of the Certificate of Incorporation or the certificate of designation in respect
of any other class or series of preferred stock of the Corporation) and the
holders of shares of Series B Preferred
<PAGE>
16
Stock (in addition to all other rights) shall have the exclusive right, voting
separately as a class, to elect eight (8) directors of the Corporation.
(b) Such voting rights may be exercised initially either by
written consent or at a special meeting of the holders of the shares of Series B
Preferred Stock having such voting rights, called as hereinafter provided, or at
any annual meeting of stockholders held for the purpose of electing directors,
and thereafter at each such annual meeting until such time as shares of Series B
Preferred Stock are no longer outstanding, at which time or times such voting
rights and the term of the directors elected pursuant to Section 5.1(a) shall
terminate.
(c) At any time when such voting rights shall have vested
in holders of shares of Series B Preferred Stock described in Section 5.1(a),
and if such rights shall not already have been exercised by written consent, a
proper officer of the Corporation may call, and, upon the written request,
addressed to the Secretary of the Corporation, of the record holders of shares
representing twenty-five percent (25%) of the voting power of the shares then
outstanding of Series B Preferred Stock, shall call, a special meeting of the
holders of shares of Series B Preferred Stock. Such meeting shall be held at
the earliest practicable date upon the notice required for annual meetings of
stockholders at the place for holding annual meetings of stockholders of the
Corporation, or, if none, at a place designated by the Board of Directors.
Notwithstanding the provisions of this Section 5.1(c), no such special meeting
shall be called during a period within 60 days immediately preceding the date
fixed for the next annual meeting of stockholders.
(d) At any meeting held for the purpose of electing
directors at which the holders of shares of Series B Preferred Stock shall have
the right to elect directors as provided herein, the presence in person or by
proxy of the holders of shares representing more than fifty percent (50%) in
voting power of the then outstanding shares of Series B Preferred Stock having
such right shall be required and shall be sufficient to constitute a quorum of
such class for the election of directors by such class.
(e) Any director elected by holders of shares of Series B
Preferred Stock pursuant to the voting right created under this Section 5.1
shall hold office until the next annual meeting of stockholders (unless such
term has previously terminated pursuant to Section 5.1(b)) and any vacancy in
respect of any such director shall be filled only by vote of the remaining
director[s] so elected, or if there be no such remaining director, by the
holders of shares of Series B Preferred Stock by written consent or at a special
meeting called in accordance with the procedures set forth in Section 5.1(c),
or, if no such special meeting is called or written consent executed, at the
next annual meeting of stockholders. Upon any termination of such voting right,
subject to applicable law, the term of office of all directors elected
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17
by holders of shares of Series B Preferred Stock voting separately as a class
pursuant to this Section 5.1 shall terminate.
(f) So long as any shares of Series B Preferred Stock
remain outstanding, unless a greater percentage shall then be required by law,
the Corporation shall not, without the affirmative vote at a meeting or the
written consent with or without a meeting of the holders of shares of Series B
Preferred Stock representing at least a majority of the aggregate voting power
on the matters set forth in this Section 5.1(f) of shares of Series B Preferred
Stock, voting as a separate class, (i) authorize or issue any Senior Stock or
Parity Stock or reclassify any Junior Stock as Parity Stock or Senior Stock or
reclassify any Parity Stock as Senior Stock, (ii) amend, alter or repeal any of
the provisions of the Certificate of Incorporation, so as in any such case to
materially and adversely affect the preferences, special rights, powers or
privileges of the shares of Series B Preferred Stock, (iii) redeem, repurchase,
retire or otherwise acquire any capital stock or options to purchase capital
stock of the Corporation (other than purchases of capital stock or options from
employees of the Corporation or any of its subsidiaries in connection with
termination of employment or from other Persons providing services to the
Corporation or any of its subsidiaries in an amount not to exceed $1,000,000 in
the aggregate for all such purchases after the Issue Date) or (iv) declare or
pay any dividends or other distributions with respect to Junior Stock or Parity
Stock.
(g) In addition to the foregoing, the holders of the Series
B Preferred Stock shall have such other voting, consent and approval rights as
are specified in the Investment Agreement.
(h) In exercising the voting rights set forth in this
Section 5.1, each share of Series B Preferred Stock shall have a number of votes
equal to its Liquidation Value.
5.2 No consent of holders of shares of Series B Preferred Stock
shall be required for (i) the creation of any indebtedness of any kind of the
Corporation or (ii) the authorization or issuance of any class of Junior Stock.
6. LIQUIDATION RIGHTS.
6.1 Upon the dissolution, liquidation or winding up of the
Corporation, whether voluntary or involuntary, the holders of the shares of
Series B Preferred Stock shall be entitled to receive out of the assets of the
Corporation available for distribution to stockholders, in preference to the
holders of, and before any payment or distribution shall be made on, Junior
Stock, the amount of $1,000 per share (the "Liquidation Value"), plus an amount
equal to all accrued and unpaid dividends to the date of final distribution
(whether or not declared).
<PAGE>
18
6.2 Neither the sale, exchange or other conveyance (for cash,
shares of stock, securities or other consideration) of all or substantially all
the property and assets of the Corporation nor the merger or consolidation of
the Corporation into or with any other corporation, or the merger or
consolidation of any other corporation into or with the Corporation, shall be
deemed to be a dissolution, liquidation or winding up, voluntary or involuntary,
for the purposes of this Section 6.
6.3 After the payment to the holders of the shares of Series B
Preferred Stock of full preferential amounts provided for in this Section 6, the
holders of Series B Preferred Stock as such shall have no right or claim to any
of the remaining assets of the Corporation.
6.4 In the event the assets of the Corporation available for
distribution to the holders of shares of Series B Preferred Stock upon any
dissolution, liquidation or winding up of the Corporation, whether voluntary or
involuntary, shall be insufficient to pay in full all amounts to which such
holders are entitled pursuant to Section 6.1, no such distribution shall be made
on account of any shares of any Parity Stock upon such dissolution, liquidation
or winding up unless proportionate distributive amounts shall be paid on account
of the shares of Series B Preferred Stock, ratably, in proportion to the full
distributable amounts for which holders of all Parity Stock are entitled upon
such dissolution, liquidation or winding up.
7. CHANGE OF CONTROL
7.1 In the event that the Corporation becomes aware of a Change
of Control or pending Change of Control, the Corporation shall make an offer
(the "Change of Control Offer") to purchase all of the outstanding shares of
Series B Preferred Stock at a purchase price for each share of Series B
Preferred Stock equal to the Repurchase Price (as hereinafter defined) on the
effective date of such Change of Control (the "Trigger Date"). The term
"Repurchase Price" shall mean, with respect to each share of Series B Preferred
Stock, an amount equal to 110% of the sum of the Liquidation Value thereof and
any accrued and unpaid dividends thereon to the date of such purchase. With
respect to each share of Series B Preferred Stock properly tendered for
repurchase, if the Corporation fails to pay the Repurchase Price upon such
tender, the Corporation shall also pay an amount equal to interest on the amount
determined in the above sentence at 12% per annum, compounded on a quarterly
basis, from the date fixed for repurchase to the date the Repurchase Price is
actually paid. The Change of Control Offer must be made as soon as practicable
and if possible not less than sixty (60) days prior to the Trigger Date, shall
remain open for at least forty (40) and not more than fifty (50) days (or such
longer time as may be required by applicable law or regulation) and shall
comply, to the extent required, with the applicable requirements of Rule 14e-1
under the Exchange Act and any other applicable securities laws and regulations.
<PAGE>
19
7.2 In the event the Corporation is required to make a Change of
Control Offer pursuant to Section 7.1, it shall provide notice of such Change of
Control Offer (the "Notice of Offer") by first class mail, postage prepaid, to
each record holder of the shares of Series B Preferred Stock, at such holder's
address as the same appears on the books of the Corporation. Each such Notice
of Offer shall state: (i) that the Corporation is offering to purchase all
outstanding shares of Series B Preferred Stock and that such offer is
irrevocable; (ii) the Trigger Date, which will be the date on which any such
purchase will be consummated; (ii) the total number of shares of Series B
Preferred Stock which the Corporation is offering to purchase from such holder;
(iii) the Repurchase Price; (iv) the last day on which the Change of Control
Offer may be accepted (the "Expiration Date") and (v) the place or places where
certificates for shares of Series B Preferred Stock are to be surrendered for
payment of the Repurchase Price.
7.3 Any holder of outstanding shares of Series B Preferred Stock
may, at its sole option, elect to accept the Change of Control Offer with
respect to all or less than all of such holder's outstanding Series B Preferred
Stock by delivering written notice of such acceptance to the Corporation on or
before the Expiration Date. On the Trigger Date, the Corporation will pay to
each holder that has accepted the Change of Control Offer the Repurchase Price
for the shares of Series B Preferred Stock which such holder has elected to sell
to the Corporation against delivery (in accordance with the Notice of Offer) of
the certificate or certificates for any shares to so purchased (properly
endorsed or assigned for transfer, if the Corporation shall so require and the
Notice of Offer shall so state). In case fewer than all the shares represented
by any such certificate are to be repurchased, a new certificate shall be issued
representing the shares which are not purchased, without cost of the holder
thereof, together with the amount of cash, if any, in lieu of fractional
shares.
8. TRANSACTIONS WITH AFFILIATES. As long as any shares of Series B
Preferred Stock remain outstanding, the Corporation shall not, and shall not
permit any of its subsidiaries to, enter into any transaction with any Affiliate
of the Corporation or such subsidiary (including, without limitation, the
purchase, sale, lease or exchange of any property or the rendering of any
services, with or to any Affiliate and investments, loans or advances by or to
any Affiliate) except for transactions entered into in good faith pursuant to
the reasonable requirements of the business of the Corporation or such
subsidiary and on terms substantially no less favorable to the Corporation or
such subsidiary than those that the Corporation or such subsidiary would obtain
in a comparable arm's-length transaction with a Person not an Affiliate of the
Corporation or such subsidiary.
<PAGE>
20
9. OTHER PROVISIONS.
9.1 Shares of Series B Preferred Stock issued and reacquired
will, upon compliance with the applicable requirements of Delaware law, have the
status of authorized but unissued shares of Preferred Stock of the Corporation
undesignated as to series and may with any and all other authorized but unissued
shares of Preferred Stock of the Corporation be designated or redesignated and
issued or reissued, as the case may be, as part of any series of Preferred Stock
of the Corporation, except that any issuance or reissuance of shares of Series B
Preferred Stock must be in compliance with this certificate of designation.
9.2 The Corporation shall be entitled to recognize the exclusive
right of a Person registered on its records as the holder of shares of Series B
Preferred Stock, and such record holder shall be deemed the holder of such
shares for all purposes.
9.3 All notice periods referred to herein shall commence on the
date of the mailing of the applicable notice.
IN WITNESS WHEREOF, Platinum Entertainment, Inc. has caused this
certificate to be signed and attested this ___ day of ____________ 1997.
PLATINUM ENTERTAINMENT, INC.
By:_________________________________
Name:
Title:
<PAGE>
APPENDIX D
Form of Warrant
NEITHER THIS WARRANT NOR ANY SECURITIES ACQUIRED UPON THE EXERCISE
OF THIS WARRANT (THE "SECURITIES") HAVE BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS
AND NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD,
TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE
SECURITIES LAWS OR AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER SUCH ACT
AND SUCH LAWS AS EVIDENCED BY AN OPINION OF COUNSEL DELIVERED AND REASONABLY
ACCEPTABLE TO THE COMPANY.
______________________________________________
PLATINUM ENTERTAINMENT, INC.
COMMON STOCK PURCHASE WARRANT
_______________________________________________
This certifies that, for good and valuable consideration, Platinum
Entertainment, Inc., a Delaware corporation (the "Company"), grants to
[MAC Music LLC] [SK-Palladin Partners, LP] its successors and assigns (the
"Warrantholder"), the right to subscribe for and purchase from the Company
________________(________________ ) validly issued, fully paid and
nonassessable shares (the "Warrant Shares") of the Company's Common Stock,
par value $.001 per share (the "Common Stock"), at the purchase price per
share of $6.60 (the "Exercise Price"), at any time prior to 5:00 p.m., New
York City time, on October 31, 2007 (the "Expiration Date"), subject to the
terms, conditions and adjustments herein set forth.
This Warrant is being issued in connection with the issue and sale
by the Company of shares of its Series B Convertible Preferred Stock, par
value $.001 per share (the "Preferred Stock"), pursuant to the terms of an
Investment Agreement, dated as of October __, 1997 (the "Investment
Agreement"), among the Company, the Warrantholder and certain other parties,
and is subject to the terms thereof. This
<PAGE>
2
Warrant is one of the "Warrants" referred to in the Investment Agreement, and
the Warrantholder is entitled to the rights and subject to the obligations
contained in the Investment Agreement.
Capitalized terms used herein and not otherwise defined herein shall
have the meanings ascribed thereto in the Investment Agreement.
1. EXERCISE OF WARRANTS.
1.1 EXERCISE OF WARRANT. This Warrant may be exercised, in
whole or in part, at any time or from time to time prior to the Expiration
Date, by surrendering to the Company at its principal office this Warrant,
with an Exercise Form (as defined herein) duly executed by the Warrantholder
and accompanied by payment of the Exercise Price for the number of shares of
Common Stock specified in such Exercise Form.
1.2 CASHLESS EXERCISE. In lieu of the payment of the Exercise
Price, the Warrantholder shall have the right (but not the obligation) to
require the Company to convert this Warrant, in whole or in part, into
shares of Common Stock (the "Conversion Right") as provided for in this
Section 1.2. Upon exercise of the Conversion Right, the Company shall
deliver to the Warrantholder (without payment by the Warrantholder of any
of the Exercise Price) that number of shares of Common Stock equal to the
quotient obtained by dividing (x) the value of the Warrant or portion
thereof being exercised at the time the Conversion Right is exercised
(determined by subtracting the aggregate Exercise Price in effect
immediately prior to the exercise of the Conversion Right for the number of
shares for which the Warrant is being exercised from the aggregate Current
Market Price (as defined herein) of the shares of Common Stock issuable
upon exercise of the Warrant for the number of shares for which the Warrant
is being exercised immediately prior to the exercise of the Conversion
Right) by (y) the Current Market Price of one share of Common Stock
immediately prior to the exercise of the Conversion Right. The Conversion
Right may be exercised at any time or from time to time prior to the
Expiration Date by surrendering to the Company at its principal office this
Warrant, with an Exercise Form duly executed by the Warrantholder and
indicating that the Warrantholder wishes to exercise the Conversion Right
and specifying the total number of shares of Common Stock for which the
Warrant is being exercised.
1.3 DELIVERY OF WARRANT SHARES; EFFECTIVENESS OF EXERCISE.
(a) DELIVERY OF WARRANT SHARES. A stock certificate or
certificates for the Warrant Shares specified in the Exercise Form along with
a check for the amount of cash to be paid in lieu of fractional shares, if
any, shall be delivered to the Warrantholder within 10 Business Days after
the Exercise Date (as defined
<PAGE>
3
herein); PROVIDED, HOWEVER, that if the Conversion Right is exercised in
accordance with Section 1.2 and a determination by the Board of Directors or
an Independent Financial Expert is required to determine the Current Market
Price of the Common Stock, such delivery shall be made promptly after such
determination is made. If this Warrant shall have been exercised only in
part, the Company shall, at the time of delivery of the stock certificate or
certificates and cash in lieu of fractional shares, if any, deliver to the
Warrantholder a new Warrant evidencing the rights to purchase the remaining
Warrant Shares, which new Warrant shall in all other respects be identical
with this Warrant.
(b) EFFECTIVENESS OF EXERCISE. The exercise of this
Warrant shall be deemed to have been effective immediately prior to the close
of business on the Business Day on which this Warrant is exercised in
accordance with Section 1.1 or 1.2 (the "Exercise Date"). The Person in
whose name any certificate for shares of Common Stock shall be issuable upon
such exercise shall be deemed to be the record holder of such shares of
Common Stock for all purposes on the Exercise Date.
1.4 PAYMENT OF TAXES. The issuance of certificates for Warrant
Shares shall be made without charge to the Warrantholder for any stock
transfer or other issuance tax in respect thereof; PROVIDED, HOWEVER, that
the Warrantholder shall be required to pay any and all taxes that may be
payable in respect of any transfer involved in the issuance and delivery of
any certificate in a name other than that of the then Warrantholder as
reflected upon the books of the Company.
2. RESTRICTIVE LEGENDS.
2.1 WARRANTS. Except as otherwise permitted by this Section 2,
each Warrant (and each Warrant issued in substitution for any Warrant
pursuant to Section 4) shall be stamped or otherwise imprinted with a legend
in substantially the following form:
NEITHER THIS WARRANT NOR ANY SECURITIES ACQUIRED UPON THE EXERCISE OF
THIS WARRANT (THE "SECURITIES") HAVE BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES
LAWS AND NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED,
SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE
STATE SECURITIES LAWS OR AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER
SUCH ACT AND SUCH LAWS AS EVIDENCED BY AN OPINION OF COUNSEL DELIVERED AND
REASONABLY ACCEPTABLE TO THE COMPANY.
<PAGE>
4
2.2 WARRANT SHARES. Except as otherwise permitted by this
Section 2, each stock certificate for Warrant Shares issued upon the exercise
of any Warrant and each stock certificate issued upon the direct or indirect
transfer of any such Warrant Shares shall be stamped or otherwise imprinted
with a legend in substantially the following form:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAWS AND NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE
OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
AND APPLICABLE STATE SECURITIES LAWS OR AN EXEMPTION FROM REGISTRATION
UNDER SUCH ACT AND SUCH LAWS AS EVIDENCED BY AN OPINION OF COUNSEL
DELIVERED AND REASONABLY ACCEPTABLE TO THE COMPANY.
2.3 REMOVAL OF LEGENDS. Notwithstanding the foregoing, the
Warrantholder may require the Company to issue a Warrant or a stock
certificate for Warrant Shares, in each case without a legend, if either (i)
such Warrant or such Warrant Shares, as the case may be, have been registered
for resale under the Securities Act and sold pursuant to such registration or
(ii) if reasonably requested by the Company, the Warrantholder has delivered
to the Company an opinion of legal counsel (from a firm reasonably
satisfactory to the Company) which opinion shall be addressed to the Company
and be reasonably satisfactory in form and substance to the Company's
counsel, to the effect that such registration is not required with respect to
such Warrant or such Warrant Shares, as the case may be.
3. RESERVATION AND REGISTRATION OF SHARES, ETC.
The Company covenants and agrees as follows:
(a) All Warrant Shares that are issued upon the exercise of
this Warrant will, upon issuance, be validly issued, fully paid and
nonassessable, not subject to any preemptive rights, and free from all taxes,
liens, security interests, charges, and other encumbrances with respect to
the issuance thereof, other than taxes in respect of any transfer occurring
contemporaneously with such issue.
(b) During the period within which this Warrant may be
exercised, the Company will at all times have authorized and reserved, and
keep
<PAGE>
5
available free from preemptive rights, a sufficient number of shares of
Common Stock to provide for the exercise of the rights represented by this
Warrant.
4. LOSS OR DESTRUCTION OF WARRANT.
Subject to the terms and conditions hereof, upon receipt by the
Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant and, in the case of loss, theft or
destruction, of such bond or indemnification as the Company may reasonably
require, and, in the case of mutilation, upon surrender and cancellation of
this Warrant, the Company will execute and deliver a new Warrant of like
tenor.
5. OWNERSHIP OF WARRANT.
The Company may deem and treat the Person in whose name this Warrant
is registered as the holder and owner hereof (notwithstanding any notations
of ownership or writing hereon made by anyone other than the Company) for all
purposes and shall not be affected by any notice to the contrary, until
presentation of this Warrant for registration of transfer.
6. CERTAIN ADJUSTMENTS.
6.1 The number of Warrant Shares purchasable upon the exercise
of this Warrant and the Exercise Price shall be subject to adjustment as
follows:
(a) STOCK DIVIDENDS, SUBDIVISION, COMBINATION OR
RECLASSIFICATION OF COMMON STOCK. If at any time after the date of the
issuance of this Warrant the Company shall (i) declare a stock dividend on
the Common Stock payable in shares of its capital stock (including Common
Stock), (ii) increase the number of shares of Common Stock outstanding by a
subdivision or split-up of shares of Common Stock, (iii) decrease the number
of shares of Common Stock outstanding by a combination of shares of Common
Stock or (iv) issue any shares of its capital stock in a reclassification of
the Common Stock, then, on the record date for such dividend or the effective
date of such subdivision or split-up, combination or reclassification, as the
case may be, the number and kind of shares to be delivered upon exercise of
this Warrant will be adjusted so that the Warrantholder will be entitled to
receive the number and kind of shares of capital stock that such Warrantholder
would have owned or been entitled to receive upon or by reason
of such event had this Warrant been exercised immediately prior thereto, and
the Exercise Price will be adjusted as provided below in paragraph (i).
<PAGE>
6
(b) REORGANIZATION, ETC. If at any time after the date of
issuance of this Warrant any consolidation of the Company with or merger of
the Company with or into any other Person (other than a merger or
consolidation in which the Company is the surviving or continuing corporation
and which does not result in any reclassification of, or change (other than a
change in par value or from par value to no par value or from no par value to
par value, or as a result of a subdivision or combination) in, outstanding
shares of Common Stock) or any sale, lease or other transfer of all or
substantially all of the assets of the Company to any other person (each, a
"Reorganization Event"), shall be effected in such a way that the holders of
Common Stock shall be entitled to receive cash, stock, other securities or
assets (whether such cash, stock, other securities or assets are issued or
distributed by the Company or another Person) with respect to or in exchange
for Common Stock, then, upon exercise of this Warrant the Warrantholder shall
have the right to receive the kind and amount of cash, stock, other
securities or assets receivable upon such Reorganization Event by a holder of
the number of shares of Common Stock that such Warrantholder would have been
entitled to receive upon exercise of this Warrant had this Warrant been
exercised immediately before such Reorganization Event, subject to
adjustments that shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 6.1. Notwithstanding the foregoing,
if more than 20% in aggregate value of the cash, stock, other securities or
assets deliverable to such holder in accordance with the foregoing provisions
of this Section 6(b) would consist of cash or debt securities, then the
Warrantholder shall have the right (the "Special Reorganization Right") at
its election, exercisable by giving written notice to the Company prior to
120 days following the consummation of such Reorganization Event to receive
from the Company, and the Company shall pay to the Warrantholder promptly
after the exercise by the Warrantholder of the Special Reorganization Right,
instead of the cash, stock, other securities or assets otherwise deliverable
to such holder, an amount of cash equal to the fair market value of this
Warrant immediately prior to the announcement of such Reorganization Event,
to be determined by an Independent Financial Expert selected by the parties
in accordance with the procedure set forth in the definition of Current
Market Price herein, giving due consideration to such factors as the
financial condition and prospects of the Company, the remaining unexpired
term of the Warrant and the market price of the Common Stock of the Company
after announcement of such Reorganization Event. The Company shall not enter
into any of the transactions referred to in this Section 6.1(b) unless
effective provision shall be made so as to give effect to the provisions set
forth in this Section 6.1(b).
(c) CERTAIN ISSUANCES OF COMMON STOCK. If at any time
after the date of issuance of this Warrant the Company shall issue or sell,
or fix a record date for the issuance of, (A) Common Stock (or securities
convertible into or exchangeable or exercisable for Common Stock) (other than
Excluded Securities) or (B) rights, options or warrants entitling the holders
thereof to subscribe for or purchase Common Stock (or securities convertible
into or exchangeable or exercisable for
<PAGE>
7
Common Stock) (other than Excluded Securities), in any such case, at a
price per share (treating the price per share of the securities convertible
into or exchangeable or exercisable for Common Stock as equal to (x) the sum
of (i) the price for a unit of the security convertible into or exchangeable
or exercisable for Common Stock plus (ii) any additional consideration
initially payable upon the conversion of such security into Common Stock or
the exchange or exercise of such security for Common Stock divided by (y) the
number of shares of Common Stock initially underlying such convertible,
exchangeable or exercisable security) that is less than the greater of the
Current Market Price of the Common Stock and the Exercise Price on the date
of such issuance or such record date (the "Measuring Price") then,
immediately after the date of such issuance or sale or on such record date,
the number of shares of Common Stock to be delivered upon exercise of this
Warrant shall be increased so that the Warrantholder thereafter shall be
entitled to receive the number of shares of Common Stock determined by
multiplying the number of shares of Common Stock such Warrantholder would
have been entitled to receive immediately before the date of such issuance or
sale or such record date by a fraction, the denominator of which shall be the
number of shares of Common Stock outstanding (calculated to include the
shares of Common Stock underlying the Warrants and all then currently
exerciseable, convertible and exchangeable securities that are "in the
money") on such date plus the number of shares of Common Stock that the
aggregate offering price of the total number of shares so offered for
subscription or purchase (or the aggregate purchase price of the convertible,
exchangeable or exercisable securities so offered plus the aggregate of
amount of any additional consideration initially payable upon conversion into
Common Stock or exchange or exercise for Common Stock) would purchase at the
Measuring Price and the numerator of which shall be the number of shares of
Common Stock outstanding (calculated to include the shares of Common Stock
underlying the Warrants and all then currently exerciseable, convertible and
exchangeable securities that are "in the money") on such date plus the number
of additional shares of Common Stock offered for subscription or purchase (or
into or for which the convertible or exchangeable securities or rights,
options or warrants so offered are initially convertible or exchangeable or
exercisable, as the case may be), and the Exercise Price shall be adjusted as
provided below in paragraph (i). "Excluded Securities" means (A) shares of
Common Stock issued upon conversion or exercise of convertible securities,
warrants and options of the Company, outstanding on the date this Warrant is
originally issued, (B) shares of Common Stock, and options to purchase such
shares, issued to officers, directors, employees or former employees of, or
consultants to, the Company or any of its subsidiaries pursuant to any equity
incentive plan, agreement or other arrangement which has been approved by a
vote of at least two-thirds (2/3) of the Board of Directors of the Company,
(C) shares of Common Stock issued upon conversion of the Preferred Stock, and
(D) shares of Common Stock issued upon exercise of the Warrants.
(d) EXTRAORDINARY DISTRIBUTIONS. If at any time after the
date of issuance of this Warrant the Company shall distribute to all holders
of its
<PAGE>
8
Common Stock (including any such distribution made in connection with a
consolidation or merger in which the Company is the continuing or surviving
corporation and the Common Stock is not changed or exchanged) cash, evidences
of indebtedness, securities or other assets (excluding (i) ordinary course
cash dividends to the extent such dividends do not exceed the Company's
retained earnings and (ii) dividends payable in shares of capital stock for
which adjustment is made under Section 6.1(a)) or rights, options or warrants
to subscribe for or purchase securities of the Company (excluding those for
which adjustment is made under Section 6.1(c)), then the number of shares of
Common Stock to be delivered to such Warrantholder upon exercise of this
Warrant shall be increased so that the Warrantholder thereafter shall be
entitled to receive the number of shares of Common Stock determined by
multiplying the number of shares such Warrantholder would have been entitled
to receive immediately before such record date by a fraction, the denominator
of which shall be the Current Market Price per share of Common Stock on such
record date minus the then fair market value (as reasonably determined by the
Board of Directors of the Company in good faith) of the portion of the cash,
evidences of indebtedness, securities or other assets so distributed or of
such rights or warrants applicable to one share of Common Stock (provided
that such denominator shall in no event be less than $.01) and the numerator
of which shall be the Current Market Price per share of the Common Stock, and
the Exercise Price shall be adjusted as provided below in paragraph (i).
(e) PRO RATA REPURCHASES. If at any time after the date of
issuance of this Warrant, the Company or any subsidiary thereof shall make a
Pro Rata Repurchase, then the number of shares of Common Stock to be
delivered to such Warrantholder upon exercise of this Warrant shall be
increased so that the Warrantholder thereafter shall be entitled to receive
the number of shares of Common Stock determined by multiplying the number of
shares of Common Stock such Warrantholder would have been entitled to receive
immediately before such Pro Rata Repurchase by a fraction (which in no event
shall be less than one) the denominator of which shall be (i) the product of
(x) the number of shares of Common Stock outstanding immediately before such
Pro Rata Repurchase and (y) the Current Market Price of the Common Stock as
of the day immediately preceding the first public announcement by the Company
of the intent to effect such Pro Rata Repurchase minus (ii) the aggregate
purchase price of the Pro Rata Repurchase (provided that such denominator
shall never be less than $.01), and the numerator of which shall be the
product of (i) the number of shares of Common Stock outstanding immediately
before such Pro Rata Repurchase minus the number of shares of Common Stock
repurchased in such Pro Rata Repurchase and (ii) the Current Market Price of
the Common Stock as of the day immediately preceding the first public
announcement by the Company of the intent to effect such Pro Rata Repurchase.
(f) OTHER ADJUSTMENTS (CONDITIONAL ANNUAL INCREASE IN
WARRANT SHARES). On each anniversary of the date of the issuance of this
Warrant, if any
<PAGE>
9
shares of Preferred Stock remain outstanding, then as of each such
anniversary the number of shares of Common Stock to be delivered upon
exercise of the Warrant shall be increased by an amount equal to 12% of the
Warrant Shares issuable upon the exercise of this Warrant (calculated without
giving effect to any prior adjustment pursuant to this section 6(f)).
(g) FRACTIONAL SHARES. No fractional shares of Common
Stock or scrip shall be issued to any Warrantholder in connection with the
exercise of this Warrant. Instead of any fractional shares of Common Stock
that would otherwise be issuable to such Warrantholder, the Company will pay
to such Warrantholder a cash adjustment in respect of such fractional
interest in an amount equal to that fractional interest of the then Current
Market Price per share of Common Stock.
(h) CARRYOVER. Notwithstanding any other provision of this
Section 6.1, no adjustment shall be made to the number of shares of Common
Stock to be delivered to the Warrantholder (or to the Exercise Price) if such
adjustment represents less than .05% of the number of shares to be so
delivered, but any lesser adjustment shall be carried forward and shall be
made at the time and together with the next subsequent adjustment that
together with any adjustments so carried forward shall amount to .05% or more
of the number of shares to be so delivered.
(i) EXERCISE PRICE ADJUSTMENT. Whenever the number of
Warrant Shares purchasable upon the exercise of the Warrant is adjusted as
provided pursuant to this Section 6.1 (other than any adjustment made
pursuant to Section 6.1(f) hereunder), the Exercise Price per share payable
upon the exercise of this Warrant shall be adjusted by multiplying such
Exercise Price immediately prior to such adjustment by a fraction, of which
the numerator shall be the number of Warrant Shares purchasable upon the
exercise of the Warrant immediately prior to such adjustment, and of which
the denominator shall be the number of Warrant Shares purchasable immediately
thereafter; PROVIDED, HOWEVER, that the Exercise Price for each Warrant Share
shall in no event be less than the par value of such Warrant Share.
(j) MULTIPLE ADJUSTMENTS. If any action or transaction
would require adjustment of the number of shares of Common Stock to be
delivered to the Warrantholder upon exercise of this Warrant pursuant to more
than one paragraph of this Section 6.1, only one adjustment shall be made and
each such adjustment shall be the amount of adjustment that has the highest
absolute value.
6.2 NOTICE OF ADJUSTMENT. Whenever the number of Warrant Shares
or the Exercise Price of such Warrant Shares is adjusted, as herein provided,
the Company shall promptly mail by first class mail, postage prepaid, to the
Warrantholder, notice of such adjustment or adjustments and a certificate of
a firm of independent public accountants of recognized national standing
selected by the Board of Directors of the
<PAGE>
10
Company (who shall be appointed at the Company's expense and who may be the
independent public accountants regularly employed by the Company) setting
forth the number of Warrant Shares and the Exercise Price of such Warrant
Shares after such adjustment, setting forth a brief statement of the facts
requiring such adjustment and setting forth the computation by which such
adjustment was made.
7. PUT RIGHTS. The Warrantholder shall have the following Put
Rights:
(a) At the earlier of (i) the fifth anniversary of the date
hereof and (ii) a Change of Control, the Warrantholder may notify the Company
in writing (the "PUT NOTICE") of the Warrantholder's desire to cause the
Company to repurchase, in the case of clause (i) above, all (but not less
than all) of the Warrant Shares (issued or represented by the Warrant) at a
price per share equal to the Repurchase Price (the "Five-Year Put"), or, in
the case of clause (ii) above, the Warrant at the Change of Control
Repurchase Price (the "Change of Control Put").
(b) If the Company receives a Put Notice pursuant to
Section 7(a), it shall deliver to the Warrantholder, by first class mail,
postage prepaid, mailed as soon as practicable and if possible within thirty
(30) days of the receipt by the Company of the Put Notice, a notice stating:
(i) the date as of which such repurchase shall occur (which date (the "Put
Closing") shall be not less than ten (10) nor more than thirty (30) days
following the date of such notice, but in any event prior to the Expiration
Date); (ii) in the case of a Five-Year Put, the number of Warrant Shares
(issued or represented by this Warrant) to be purchased from the
Warrantholder and the Repurchase Price (which shall be calculated as of the
date of the Put Notice) or, in the case of a Change of Control Put, the
Change of Control Repurchase Price; and (iii) the place or places where
certificate or certificates representing this Warrant or Warrant Shares are
to be surrendered for payment.
(c) With respect to Warrants and Warrant Shares properly
tendered for repurchase, if the Company fails to pay the Repurchase Price or
the Change of Control Repurchase Price on the date fixed for repurchase, the
Corporation shall also pay interest thereon at the rate of 12% per annum,
compounded on a quarterly basis, until such time as such satisfaction shall
have occurred. In addition, the Warrantholder shall be entitled to the
rights and remedies provided in Section 6.2 of the Investment Agreement.
(d) At the Put Closing, the Warrantholder shall deliver to
the Company the certificate or certificates representing the Warrantholder's
Warrant or Warrant Shares and the Company shall deliver to the Warrantholder
an amount equal to, in the case of a Five-Year Put, the product obtained by
multiplying (i) the number of such Warrant Shares (issued or represented by
this Warrant) by (ii) the Repurchase Price
<PAGE>
11
or, in the case of a Change of Control Put, the Change of Control Repurchase
Price, by cashier's or certified check payable to the Warrantholder or by
wire transfer of immediately available funds to an account designated by the
Warrantholder.
(e) The Company shall not (and shall not permit any
Affiliate of the Company to) enter into any contract or other consensual
arrangement that by its terms restricts the Company's ability to honor the
Put.
8. AMENDMENTS. Any provision of this Warrant may be amended and the
observance thereof waived only with the written consent of the Company and
the Warrantholder.
9. NOTICES OF CORPORATE ACTION. So long as this Warrant has not
been exercised in full, in the event of:
(a) any consolidation or merger involving the Company and
any other party or any transfer of all or substantially all the assets of the
Company to any other party, or
(b) any voluntary or involuntary dissolution, liquidation
or winding-up of the Company,
the Company will mail, by first class mail, postage prepaid, to the
Warrantholder a notice specifying (i) the date or expected date on which any
such record is to be taken for the purpose of a dividend, distribution or
right and the amount and character of any such dividend, distribution or
right and (ii) the date or expected date on which a reorganization,
reclassification, recapitalization, consolidation, merger, transfer,
dissolution, liquidation or winding-up is to take place and the time, if any
such time is to be fixed, as of which the holders of record of Common Stock
(or other securities) shall be entitled to exchange their shares of Common
Stock (or other securities) for the securities or other property deliverable
upon such reorganization, reclassification, recapitalization, consolidation,
merger, transfer, dissolution, liquidation or winding-up. Such notice shall
be delivered as soon as practicable and if possible at least 20 days prior to
the date therein specified in the case of any date referred to in the
foregoing subdivisions (i) and (ii). Failure to give the notice specified
hereunder shall have no effect on the status or effectiveness of the action
to which the required notice relates.
10. DEFINITIONS.
As used herein, unless the context otherwise requires, the following
terms have the following meanings:
<PAGE>
12
"AFFILIATE" means, with respect to any Person, any other Person that,
directly or indirectly, controls, is controlled by, or is under common
control with such first Person. For the purpose of this definition,
"control" shall mean, as to any Person, the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"BUSINESS DAY" means any day other than a Saturday, Sunday or a day on
which national banks are authorized by law or executive order to close in the
State of New York.
"CHANGE OF CONTROL" shall mean (i) the direct or indirect sale,
lease, exchange or other transfer of all or substantially all of the assets
of the Company to any Person or entity or group of Persons or entities acting
in concert as a partnership or other group within the meaning of Rule 13d-5
under the Exchange Act (a "GROUP OF PERSONS"), (ii) the merger or
consolidation of the Company with or into another corporation with the effect
that the then existing stockholders of the Company hold less than 50% of the
combined voting power of the then outstanding securities of the surviving
corporation of such merger or the corporation resulting from such
consolidation ordinarily (and apart from rights accruing under special
circumstances) having the right to vote in the election of directors, (iii)
the replacement of a majority of the Board of Directors of the Company, over
a two-year period, from the directors who constituted the Board of Directors
at the beginning of such period, and such replacement shall not have been
approved by the Board of Directors of the Company (or its replacements
approved by the Board of Directors of the Company) as constituted at the
beginning of such period, (iv) a Person or Group of Persons (other than the
Investors and their Affiliates) shall, as a result of a tender or exchange
offer, open market purchases, privately negotiated purchases or otherwise,
have become the beneficial owner (within the meaning of Rule 13d-3 under the
Exchange Act) of securities of the Company representing 49% or more of the
combined voting power of the then outstanding securities of the Company
ordinarily (and apart from rights accruing under special circumstances)
having the right to vote in the election of directors.
"CHANGE OF CONTROL REPURCHASE PRICE" means an amount of cash equal to
the fair market value of this Warrant immediately prior to the announcement
of a Change of Control, to be determined by an Independent Financial Expert
selected by the parties in accordance with the procedure set forth in the
definition of Current Market Price herein, giving due consideration to such
factors as the financial condition and prospects of the Company, the
remaining unexpired term of this Warrant and the market price of the Common
Stock of the Company after announcement of such Change of Control.
"CLOSING PRICE" of the Common Stock as of any day, means (a) the last
reported sale price of such stock (regular way) or, in case no such sale
takes place on such day, the average of the closing bid and asked prices, in
either case as reported on
<PAGE>
13
the principal national securities exchange on which the Common Stock is
listed or admitted to trading or (b) if the Common Stock is not listed or
admitted to trading on any national securities exchange, the last reported
sale price or, in case no such sale takes place on such day, the average of
the highest reported bid and lowest reported asked quotation for the Common
Stock, in either case reported on the National Association of Securities
Dealers, Inc. Automated Quotation System ("NASDAQ"), or a similar service if
NASDAQ is no longer reporting such information.
"COMMON STOCK" has the meaning specified on the cover of this Warrant.
"COMPANY" has the meaning specified on the cover of this Warrant.
"CURRENT MARKET PRICE" means, with respect to each share of Common
Stock as of any date, the average of the daily Closing Prices per share of
Common Stock for the 10 consecutive trading days commencing 15 trading days
prior to such date; provided that if on any such date the shares of Common
Stock are not listed or admitted for trading on any national securities
exchange or quoted by NASDAQ or a similar service, the Current Market Price
for a share of Common Stock shall be the fair market value of such share as
determined in good faith by the Board of Directors of the Company. If the
Board of Directors is unable to determine the fair market value, or if the
holders of a majority in interest of the Warrant Shares issued or issuable
upon conversion of the Warrants issued pursuant to the Investment Agreement
disagree with the Board's determination of fair market value by written
notice delivered to the Company within five (5) business days after the
Board's determination thereof is communicated in writing to such holders,
which notice specifies a majority-in-interest of such holders' determination
of fair market value, then the Company and a majority-in-interest of such
holders shall select an Independent Financial Expert which shall determine
such fair market value. If the Company and such holders are unable to agree
upon an Independent Financial Expert within fifteen (15) days after the
request by such holders, each of the Company and such holders shall select an
Independent Financial Expert within five (5) days following the expiration of
such fifteen (15) day period, and these Independent Financial Experts shall
select a third Independent Financial Expert. The determination of fair
market value by such Independent Financial Expert shall be final, binding and
conclusive on the Company and all holders of the Warrants and Warrant Shares.
All costs and fees of any of this Independent Financial Experts retained in
accordance with the foregoing shall be borne by the Company.
"EXERCISE FORM" means an Exercise Form in the form annexed hereto as
Exhibit A.
"EXERCISE PRICE" has the meaning specified on the cover of this
Warrant.
"EXPIRATION DATE" has the meaning specified on the cover of this
Warrant.
<PAGE>
14
"INDEPENDENT FINANCIAL EXPERT" means an independent nationally
recognized investment banking firm.
"INVESTORS" means MAC Music LLC, a Delaware limited liability company,
and SK-Palladin Partners, LP, a Delaware limited partnership.
"PERSON" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, limited liability company,
unincorporated organization, estate, other entity or government or any agency
or political subdivision thereof.
"PRO RATA REPURCHASE" means any purchase of shares of Common Stock by
the Company or by any of its subsidiaries whether for cash, shares of capital
stock of the Company, other securities of the Company, evidences of
indebtedness of the Company or any other Person or any other property
(including, without limitation, shares of capital stock, other securities or
evidences of indebtedness of a subsidiary of the Company), or any combination
thereof, which purchase is subject to Section 13(e) of the Securities
Exchange Act of 1934, as amended, or is made pursuant to an offer made
available to all holders of Common Stock.
"REPURCHASE PRICE" means, on any date, the Current Market Price per
share of Common Stock as of such date, less the per share Exercise Price;
PROVIDED, that if at the time of determination of the Repurchase Price, the
Warrantholder shall be entitled to receive any securities or property other
than Common Stock, the Repurchase Price shall include a cash amount per
Warrant Share equal to that portion of the fair value of such securities or
property allocable to each Warrant Share.
"SECURITIES ACT" has the meaning specified on the cover of this
Warrant.
"WARRANTHOLDER" has the meaning specified on the cover of this Warrant.
"WARRANT SHARES" has the meaning specified on the cover of this
Warrant; provided, however, that Warrant Shares shall not include shares sold
to the public pursuant to Rule 144 under the Securities Act of 1933, as
amended, or pursuant to an effective registration statement under the
Securities Act.
11. MISCELLANEOUS.
11.1 ENTIRE AGREEMENT. This Warrant together with the Investment
Agreement constitute the entire agreement between the Company and the
Warrantholder with respect to this Warrant.
<PAGE>
15
11.2 BINDING EFFECT; BENEFITS. This Warrant shall inure to the
benefit of and shall be binding upon the Company and the Warrantholder and
their respective successors and assigns. Nothing in this Warrant, expressed
or implied, is intended to or shall confer on any person other than the
Company and the Warrantholder, or their respective successors or assigns, any
rights, remedies, obligations or liabilities under or by reason of this
Warrant.
11.3 SECTION AND OTHER HEADINGS. The section and other headings
contained in this Warrant are for reference purposes only and shall not be
deemed to be a part of this Warrant or to affect the meaning or
interpretation of this Warrant.
11.4 NOTICES. All notices and other communications required or
permitted hereunder shall be in writing and shall be delivered personally,
telecopied or sent by certified, registered or express mail, postage prepaid.
Any such notice shall be deemed given when so delivered personally,
telecopied or sent by certified, registered or express mail, as follows:
(a) if to the Company, addressed to:
Platinum Entertainment, Inc.
2001 Butterfield Road
Downers Grove, Illinois 60515
Telecopy: (630) 769-0049
Attention: Chief Executive Officer
with a copy to:
Katten, Muchin & Zavis
525 West Monroe Street, Suite 1600
Chicago, Illinois 60661
Telecopy: (312) 902-1061
Attention: Matthew S. Brown, Esq.
(b) if to the Warrantholder, addressed to:
[MAC Music LLC] [SK-Palladin Partners, LP]
1285 Avenue of the Americas, 21st Floor
New York, New York 10019
Attention:
--------------------------------------------
Telecopy:
--------------------------------------------
<PAGE>
16
Any party may by notice given in accordance with this Section 12.4 designate
another address or person for receipt of notices hereunder.
11.5 SEVERABILITY. Any term or provision of this Warrant which
is invalid or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the terms and
provisions of this Warrant or affecting the validity or enforceability of any
of the terms or provisions of this Warrant in any other jurisdiction.
11.6 GOVERNING LAW. This Warrant shall be deemed to be a
contract made under the laws of the State of Delaware and for all purposes
shall be governed by and construed in accordance with the laws of such State
applicable to such agreements made and to be performed entirely within such
State.
11.7 CERTAIN REMEDIES. The Warrantholder shall be entitled to an
injunction or injunctions to prevent breaches of the provisions of this
Warrant and to enforce specifically the terms and provisions of this Warrant
in any court of the United States or any court of any state having
jurisdiction, this being in addition to any other remedy to which the
Warrantholder may be entitled at law or in equity.
11.8 NO RIGHTS OR LIABILITIES AS STOCKHOLDER. Nothing contained
in this Warrant shall be deemed to confer upon the Warrantholder any rights
as a stockholder of the Company or as imposing any liabilities on the
Warrantholder to purchase any securities whether such liabilities are
asserted by the Company or by creditors or stockholders of the Company or
otherwise.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed
by its duly authorized officer.
PLATINUM ENTERTAINMENT, INC.
By:
-----------------------------------
Name:
Title:
Dated: _________, 1997
<PAGE>
17
EXHIBIT A
EXERCISE FORM
(To be executed upon exercise of this Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant, to purchase __________ of the Warrant Shares and
[herewith tenders payment for such Warrant Shares to the order of Platinum
Entertainment, Inc. in the amount of $__________] [hereby exercises its
Conversion Right] in accordance with the terms of this Warrant. The undersigned
requests that a certificate for [such Warrant Shares] [that number of Warrant
Shares to which the undersigned is entitled as calculated pursuant to
Section 1.2] be registered in the name of the undersigned and that such
certificates be delivered to the undersigned's address below.
Dated:
--------------------------
Signature -----------------------------
-----------------------------
(Print Name)
-----------------------------
(Street Address)
-----------------------------
(City) (State) (Zip Code)
<PAGE>
APPENDIX E
FORM OF
BY-LAW
AMENDMENT
Article III of the Amended and Restated By-laws of the corporation is
amended by adding a new Section 3.13 as set forth below:
"SPECIAL PROVISIONS
SECTION 3.13. The provisions of this Section 3.13, when applicable in
accordance with their terms, shall supersede any other provisions set forth
in these By-laws to the extent that such other provisions are inconsistent
with the terms or requirements of this Section 3.13.
(a) As used in this Section 3.13, the following terms shall have
the respective meanings set forth below:
An "Affiliate" of, or a person affiliated with, a specified
Person, means a Person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control
with, the Person specified. The term "control" (including the terms
"controlling," "controlled by" and "under common control with") means the
possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of a person, whether through the
ownership of voting securities, by contract, or otherwise. No member of,
or owner of a limited partnership interest in, any Purchaser shall be
deemed to be an affiliate of, or a person "affiliated" with, such Purchaser
solely by reason of such membership or ownership.
"Change of Control" means (i) the direct or indirect sale, lease,
exchange or other transfer of all or substantially all of the assets of the
corporation to any Person or group of Persons acting in concert as a
partnership or other group within the meaning of Rule 13d-5 under the
Exchange Act (a "GROUP OF PERSONS"), (ii) the merger or consolidation of
the corporation with or into another corporation with the effect that the
then existing stockholders of the corporation hold less than 50% of the
combined voting power of the then outstanding securities of the surviving
corporation of such merger or the corporation resulting from such
consolidation ordinarily (and apart from rights accruing under special
circumstances) having the right to vote in the election of directors, (iii)
the replacement of a majority of the board of directors, over a two-year
period, from the directors who constituted the board of directors at the
beginning of such period, and such replacement shall not have been approved
by the board of directors (or its replacements approved by the board of
directors) as constituted at the beginning of such period, or (iv) a Person
or Group of Persons (other than the Purchasers and their Affiliates) shall,
as a result of a tender or exchange offer, open market purchases, privately
<PAGE>
2
negotiated purchases or otherwise, have become the beneficial owner
(within the meaning of Rule 13d-3 under the Exchange Act) of securities of
the corporation representing 49% or more of the combined voting power of
the then outstanding securities of the corporation ordinarily (and apart
from rights accruing under special circumstances) having the right to vote
in the election of directors.
"Closing" means the closing of the sale of the and purchase of
the Warrants as contemplated by the Investment Agreement.
"Closing Date" means the date of the Closing.
"Credit Agreement" has the meaning set forth in the Investment
Agreement.
"Common Stock" means the corporation's Common Stock, par value
$.001 per share.
"Investment Agreement" means the Investment Agreement, dated as
of October 12, 1997, by and among the corporation, MAC Music LLC and
SK-Palladin Partners, LP.
"Option" means any option, warrant, conversion privilege or
other right to purchase or otherwise acquire any authorized but unissued
or treasury shares of the corporation's capital stock.
"Person" means any individual, firm, corporation, partnership,
limited liability company or partnership, trust, incorporated or
unincorporated association, joint venture, joint stock company, government
(or an agency or political subdivision thereof) or other entity of any
kind, and shall include any successor (by merger or otherwise) of such
entity.
"Purchaser Director" means any person nominated for election to
the board of directors or serving as a member of the board of directors
who has been designated by the Purchasers in accordance with the
Investment Agreement.
"Purchasers" mean MAC Music LLC and SK-Palladin Partners, LP.
"Subsidiary" means any corporation, limited or general
partnership, joint venture, association, limited liability company or
partnership, joint stock company, trust, unincorporated organization, or
other entity
<PAGE>
3
analogous to any of the foregoing of which 50% or more of the equity
ownership is, at the time, owned, directly or indirectly by the
corporation.
"Unaffiliated Director" means a director who is not a Purchaser
Director and who is not an officer or employee of the corporation or of
any Affiliate of the corporation.
"Warrant" means a Warrant issued by the corporation pursuant to
the Investment Agreement.
"Warrant Shares" means shares of Common Stock underlying the
Warrants and shares of Common Stock which were received by upon exercise
of a Warrant.
(b) So long as the Purchasers, or the Affiliates, employees,
partners or members of any Purchaser, hold, in the aggregate, not less
than 35% of the Warrants Shares represented immediately following the
Closing by the Warrants sold pursuant to the Investment Agreement (with
appropriate adjustment made for any stock dividend, split-up or
subdivision or any combination or reclassification made or effected
subsequent to the Closing Date): (i) the board of directors shall consist
of not more than eleven (11) members, four (4) of which shall be Purchaser
Directors and two (2) of which shall be Unaffiliated Directors, (ii) not
less than two (2) members of each Committee of the board of directors
(including, without limitation, the executive, audit and compensation
committees) shall be Purchaser Directors and the Purchasers Directors and
Unaffiliated Directors who are members of such Committee shall together
constitute not less than a majority of the members thereof, and (iii) each
of the following corporate actions shall be required to be approved by not
less than two-thirds of the directors then in office (unless the Purchaser
Directors constitute a majority of the members of the board of directors,
in which event, such action shall be required to be approved by a majority
of the directors then in office):
(1) any incurrence of indebtedness by the corporation
or any Subsidiary in excess of $1,000,000, other than draw-downs
under the revolving credit facility contained in the Credit Agreement
(as defined in the Investment Agreement) or in another loan agreement
approved in the manner set forth in this Section 3.13(b)(iii); any
refinancing of the corporation's or any Subsidiary's indebtedness;
any amendment to the terms of any instrument evidencing or governing
any indebtedness of the corporation or a Subsidiary; any issuance of
debt or equity securities by the corporation or any Subsidiary (other
than securities issued by a Subsidiary to the corporation); and the
grant of any Options by the corporation; PROVIDED, HOWEVER, that the
provisions of
<PAGE>
4
this Section 3.13(b)(iii) shall not apply to (x) any issuance by the
corporation of debt or equity securities having financial terms which
are more favorable to the corporation than the financial terms of the
Preferred Stock where the proceeds from the issuance of such debt or
equity securities are to be used by the corporation solely to redeem
the Preferred Stock or prepay the subordinated notes issued in
connection with the acquisition by the corporation of Intersound,
Inc., (y) borrowing funds under the Credit Agreement for the purpose
of prepaying of the subordinated notes issued in connection with the
acquisition by the corporation of Intersound, Inc., or (z) the grant
of any employee stock options issued pursuant to any plan or
arrangement which has been approved by a majority of the Unaffiliated
Directors;
(2) any acquisition or disposition of material assets
of the corporation or any Subsidiary; entering into any joint
business venture or material licensing arrangement involving the
corporation or any Subsidiary, or any licensing arrangement involving
the corporation or its Subsidiaries outside the ordinary course of
business; or entering into any transaction which will result in a
Change of Control;
(3) approval or amendment of or change to the
corporation's annual budget; and
(4) the hiring, dismissal, election or removal of any
members of the senior management team of the corporation (including,
without limitation, the chief executive officer, chief operating
officer, chief financial officer and President of any Subsidiary of
the corporation) or any material change to the terms and conditions
of employment of any such Person.
(c) So long as the Purchasers, or the Affiliates, employees,
partners or members of any Purchaser, hold, in the aggregate, not less
than 15% of the Warrants Shares represented immediately following the
Closing by the Warrants sold pursuant to the Investment Agreement (with
appropriate adjustment made for any stock dividend, split-up or
subdivision or any combination or reclassification made or effected
subsequent to the Closing Date), (i) two (2) member of the board of
directors shall be Purchaser Directors, and (ii) not less than one member
of each Committee shall be a Purchaser Director.
(d) In the event that either (i) the corporation defaults in
its obligation to purchase the Warrants in accordance with Section 7 of
the Warrants, or (ii) an Event of Default exists and is continuing (and
has not been
<PAGE>
5
waived) under the Credit Agreement (as the same may be amended from time
to time subsequent to the date hereof) or any successor debt instrument
thereto and such Event of Default has either (1) continued for a period of
not less than 30 days following the expiration of any applicable notice
and cure period under such Credit Agreement or successor debt instrument
or (2) resulted in the acceleration of the indebtedness outstanding
thereunder, the Purchasers shall be entitled to designate, and the
corporation shall cause to be elected, an additional number of Purchaser
Directors which, when added to the number of Purchaser Directors then
serving on the board of directors, shall constitute a majority of the
members of the board of directors. If the size of the board of directors
cannot be expanded in order to accomplish the result set forth in the
first sentence of this Subsection (d), the corporation shall cause such
number of directors who are not Purchaser Directors to be removed and
replaced by Purchaser Directors as may be necessary to accomplish such
result.
(e) So long as any Warrants or Warrant Shares remain
outstanding, the corporation shall not enter into any transaction with an
Affiliate of the corporation (other than transactions between or among the
corporation and its Subsidiaries in the ordinary course) involving the
payment or receipt of amounts in excess of $200,000, or the transfer of
any property or assets having a fair market value in excess of $200,000,
unless such transaction has been approved by members of the board of
directors who constitute a majority of the Purchaser Directors and the
Unaffiliated Directors.
(f) Notwithstanding anything to the contrary set forth in this
Section 3.13:
(1) the provisions of Sections 3.13(b)(i),
3.13(b)(ii), 3.13(c) and 3.13(d) shall be suspended during any period
in which the holders of the corporation's Series B Convertible
Preferred Stock, par value $.001 per share (the "Series B Convertible
Preferred Stock"), are entitled pursuant to Section 5.10 the
Certificate of the Powers, Designations, Preferences and Rights of
the Series B Convertible Preferred Stock (the "Certificate of
Designation") to elect eight directors to the corporation's board of
directors, and during such period the directors elected by the
holders of the Series B Convertible Preferred Stock shall be deemed
to be "Purchaser Directors" for purposes of Sections 3.13(b)(iii) and
3.13(e); and
(2) the provisions of Sections 3.13(b)(ii),
3.13(b)(iii) and 3.13(e) shall terminate on the later of (x) 66
months from the Closing Date and (y) the date on which all
outstanding shares of Series B Convertible Preferred Stock are
redeemed by the corporation pursuant to Section 3 of the Certificate
of Designation.
<PAGE>
6
(g) The provisions of Section this Section 3.13 may not be
amended except by unanimous action of the board of directors."
<PAGE>
APPENDIX F
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INVESTMENT AGREEMENT
AMONG
PLATINUM ENTERTAINMENT, INC.,
MAC MUSIC LLC
AND
SK-PALLADIN PARTNERS, LP
---------------------------------------------------------------
Dated as of October 12, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
----
1. DEFINITIONS...............................................................1
2. CLOSING...................................................................7
2.1 Time and Place of the Closing........................................7
2.2 Transactions at the Closing..........................................8
2.3 Transaction Fee; Transaction Expenses................................8
3. CONDITIONS TO THE CLOSING.................................................8
3.1 Conditions Precedent to the Obligations of the Purchasers............8
3.1.1 Compliance by the Company.....................................8
3.1.2 Stockholder Approval..........................................9
3.1.4 Board of Directors............................................9
3.1.5 Absence of Material Adverse Effect............................9
3.1.6 Credit Agreement..............................................9
3.1.7 Purchase Permitted by Applicable Laws; Legal Investment.......9
3.1.8 Opinion of Counsel...........................................10
3.1.9 Approval of Counsel to the Purchasers........................10
3.1.10 Consents....................................................10
3.1.11 Due Diligence...............................................10
3.1.12 Market Conditions...........................................10
3.1.13 No Litigation...............................................11
3.1.14 No Default or Breach........................................11
3.1.15 Officer's Certificate.......................................11
3.1.16 Secretary's Certificate.....................................11
3.1.17 No Injunction...............................................11
3.2 Conditions Precedent to Obligations of the Company..................12
3.2.1 Compliance by the Purchasers.................................12
3.2.2 Stockholder Approval.........................................12
3.2.3 Consents.....................................................12
3.2.4 Purchaser's Certificate......................................12
3.2.5 No Injunction................................................12
3.2.6 Issuance Permitted by Law....................................13
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................13
4.1 Corporate Existence and Power.......................................13
4.2 Power and Authority.................................................13
4.3 Affiliate Transactions..............................................14
4.4 No Contravention, Conflict, Breach, Etc.............................14
4.5 Consents............................................................14
4.6 Capitalization......................................................15
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4.7 No Rights Plan......................................................15
4.8 Registration Rights.................................................15
4.9 Subsidiaries........................................................15
4.10 SEC Documents.......................................................16
4.11 Financial Statements................................................17
4.12 No Existing Violation, Default, Etc.................................17
4.13 Licenses and Permits................................................18
4.14 Title to Properties.................................................18
4.15 Rights to Catalogue.................................................19
4.16 Intellectual Property...............................................21
4.17 Environmental Matters...............................................22
4.18 Taxes...............................................................23
4.19 Litigation..........................................................24
4.20 Labor Relations.....................................................24
4.21 Employee Benefits...................................................24
4.22 Contracts...........................................................26
4.23 Contingent Liabilities..............................................26
4.24 No Material Adverse Change..........................................26
4.25 Broker's Fees.......................................................26
4.26 Investment Company..................................................27
4.27 Exemption from Registration; Restrictions on Offer and Sale of
Same or Similar Securities..........................................27
4.28 Loan Documents......................................................27
5. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS.........................27
5.1 Existence and Power.................................................27
5.2 Power and Authority.................................................27
5.3 No Contravention, Conflict, Breach, Etc.............................28
5.4 Consents............................................................28
5.5 Acquisition for Own Account.........................................28
5.6 Available Funds.....................................................28
5.7 Interested Stockholder..............................................29
6. CERTAIN COVENANTS AND AGREEMENTS.........................................29
6.1 Pre-Closing Covenants...............................................29
6.1.1 Stockholder Meeting; Proxy Material.......................29
6.1.2 Delivery of Schedules.....................................29
6.1.3 Conduct of Business.......................................29
6.1.4 Inspection................................................31
6.1.5 Publicity.................................................32
6.2 Post-Closing Covenants..............................................32
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6.2.1 Use of Proceeds...........................................32
6.2.2 Financial Statements......................................32
6.2.3 Inspections...............................................33
6.2.4 Restrictions on Transfer; Legends.........................34
6.2.5 Board of Directors........................................34
6.2.6 Series A Preferred Stock..................................37
6.3 Principal Shareholders Agreement....................................37
7. SURVIVAL OF REPRESENTATIONS, WARRANTIES
AND COVENANTS............................................................38
8. INDEMNIFICATION..........................................................38
9. REGISTRATION RIGHTS......................................................39
9.1 Securities Subject to this Agreement................................39
9.2 Demand Registration.................................................39
9.3 Piggy-Back Registration.............................................41
9.4 Holdback Agreements.................................................42
9.5 Registration Procedures.............................................43
9.6 Registration Expenses...............................................46
9.7 Indemnification; Contribution.......................................47
9.8 Rule 144............................................................49
10. TERMINATION..............................................................50
10.1 Termination........................................................50
10.2 Effect of Termination..............................................51
11. MISCELLANEOUS............................................................51
11.1 Performance; Waiver...............................................51
11.2 Successors and Assigns............................................51
11.3 Notices...........................................................51
11.4 Transaction Expenses..............................................53
11.5 Governing Law.....................................................53
11.6 Severability......................................................53
11.7 Headings; Interpretation..........................................53
11.8 Entire Agreement..................................................53
11.9 No Third Party Rights.............................................54
11.10 Remedies for Breach...............................................54
11.11 Counterparts......................................................55
iii
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EXHIBITS
A. Form of Certificate of Designation
B. Form of Warrant Certificate
C. Form of By-law Amendment
D. Form of Consulting Agreement
E. Form of Right of First Refusal
SCHEDULES
2.2 Purchase of Securities
4.3 Affiliate Transactions
4.6 Capitalization
4.8 Registration Rights
4.9 Subsidiaries
4.13 Licenses and Permits
4.15(a) Masters
4.15(c) Rights - Masters
4.15(d) Licensees
4.15(e) Significant Compositions and Recordings
4.15(f) Music Contracts
4.15(g) Encumbrances
4.16 Intellectual Property
4.18 Closed Tax Year
4.20 Labor Relations
4.21 Benefit Plans
iv
<PAGE>
INVESTMENT AGREEMENT
INVESTMENT AGREEMENT ("AGREEMENT"), dated as of October 12, 1997,
among Platinum Entertainment, Inc., a Delaware corporation (the "Company"), MAC
Music LLC, a Delaware limited liability company ("MAC"), and SK-Palladin
Partners, LP, a Delaware limited partnership ("Palladin" and, together with MAC,
the "Purchasers").
WHEREAS, the Company desires to sell to the Purchasers, and the
Purchasers desire to purchase from the Company, (i) an aggregate of 20,000
shares (the "Shares") of the Company's Series B Convertible Preferred Stock, par
value $.001 per share, having the terms and conditions set forth in a
Certificate of Designation substantially in the form attached hereto as Exhibit
A (the "Preferred Stock"), and (ii) warrants to purchase an aggregate of
3,600,000 shares of the Company's Common Stock, at the prices per share set
forth in the form of Warrant Certificate attached hereto as Exhibit B (the
"Warrants" and together with the shares of Preferred Stock, the "Securities"),
upon the terms and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the respective
representations, warranties, covenants, agreements and conditions contained
herein, each of the Company and the Purchasers agrees as follows:
1. DEFINITIONS.
The terms defined in this Section 1 shall have the following
meanings for all purposes of this Agreement:
"Act" means the Securities Act of 1933, as amended, or any superseding
Federal statute, and the rules and regulations promulgated thereunder, all as
the same shall be in effect from time to time. References to a particular
section of the Securities Act of 1933, as amended, shall include a reference to
the comparable section, if any, of any such superseding Federal statute.
An "Affiliate" of, or a person "affiliated" with, a specified Person,
means a Person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, the Person
specified. The term "control" (including the terms "controlling," "controlled
by" and "under common control with") means the possession, direct or indirect,
of the power to direct or cause the direction of the management and policies of
a Person, whether through the ownership of voting securities, by contract, or
otherwise. No member of MAC and no owner of a limited partnership interest of
Palladin shall be deemed an affiliate of, or a Person "affiliated" with, such
Purchaser solely by reason of such membership or ownership.
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2
"Annual Reports" means the Company's Annual Reports on Form 10-K for
the years ended May 31, 1997 and 1996, each as filed with the SEC (including, in
each case, all amendments thereto filed with the SEC prior to the date of this
Agreement, all exhibits and schedules thereto and documents incorporated by
reference therein, but excluding any amendments thereto made subsequent to the
date hereof).
"Artist" means (i) any artist or producer who participated in the
recording of any Master (or any portion thereof) or (ii) any author or writer of
any Musical Composition.
"Benefit Plans" has the meaning set forth in Section 4.21.
"Board of Directors" means the Board of Directors of the Company, as
constituted from time to time.
"By-laws" means the By-laws of the Company, as amended through the
date hereof.
"By-law Amendment" means an amendment to the By-laws giving effect to
the requirements of Section 6.2.5, in substantially the form of Exhibit C
hereto.
"Certificate of Incorporation" means the Certificate of Incorporation
of the Company, as amended through the date hereof.
"Certificate of Designation" means the Certificate of The Powers
Designations, Preferences and Rights of the Preferred Stock substantially in the
form of Exhibit A hereto.
"Change of Control" means (i) the direct or indirect sale, lease,
exchange or other transfer of all or substantially all of the assets of the
Company to any Person or group of Persons acting in concert as a partnership or
other group within the meaning of Rule 13d-5 under the Exchange Act (a "GROUP OF
PERSONS"), (ii) the merger or consolidation of the Company with or into another
corporation with the effect that the then existing stockholders of the Company
hold less than 50% of the combined voting power of the then outstanding
securities of the surviving corporation of such merger or the corporation
resulting from such consolidation ordinarily (and apart from rights accruing
under special circumstances) having the right to vote in the election of
directors, (iii) the replacement of a majority of the Board of Directors, over a
two-year period, from the directors who constituted the Board of Directors at
the beginning of such period, and such replacement shall not have been approved
by the Board of Directors (or its replacements approved by the Board of
Directors) as constituted at the beginning of such period, or (iv) a Person or
Group of Persons (other than the Purchasers and their Affiliates) shall, as a
result of a tender or exchange offer, open
<PAGE>
3
market purchases, privately negotiated purchases or otherwise, have become the
beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of
securities of the Company representing 49% or more of the combined voting power
of the then outstanding securities of the Company ordinarily (and apart from
rights accruing under special circumstances) having the right to vote in the
election of directors.
"Closing" has the meaning set forth in Section 2.1.
"Code" means the Internal Revenue Code of 1986, as amended.
"Closing Date" has the meaning set forth in Section 2.1.
"Common Stock" means a share of the Company's Common Stock, par value
$.001 per share.
"Company" has the meaning set forth in the preamble to this Agreement.
"Credit Agreement" means the credit agreement to be entered into prior
to the Closing, among the Company, Intersound, Inc., Bank of Montreal as
Administrative Agent and as Syndication Agent, and the several lenders from time
to time parties thereto.
"Disclosure Schedules" has the meaning set forth in Section 6.1.2.
"Encumbrance" means any mortgage, pledge, lien, security interest,
restriction upon voting or transfer, claim or other encumbrance of any kind.
"Environmental Laws" means all federal, state, local and foreign laws,
principles of common law, regulations, codes and ordinances, as well as orders,
decrees, judgments or injunctions issued, promulgated, approved or entered
thereunder relating to pollution, protection of the environment, or health and
safety, as in effect on the date hereof.
"ERISA" has the meaning set forth in Section 4.21.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any superseding Federal statute, and the rules and regulations promulgated
thereunder, all as the same shall be in effect at the time. Reference to a
particular section of the Securities Exchange Act of 1934, as amended, shall
include a reference to the comparable section, if any, of such superseding
Federal statute.
<PAGE>
4
"Existing Credit Agreement" shall mean the Amended and Restated Credit
Agreement, dated as of January 31, 1997, among the Company, Bank of Montreal and
the several lenders from time to time party thereto, as amended through the date
hereof.
"Governmental Authority" means the government of any nation or state,
or other political subdivision thereof, any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government, and any corporation or other entity owned or controlled, through
stock or capital ownership or otherwise, by any of the foregoing.
"Intellectual Property" has the meaning set forth in Section 4.16(a).
"IP Licenses" has the meaning set forth in Section 4.16(b).
"Knowledge of the Company" means the knowledge, after due inquiry, of
any of the following officers of the Company: Steven Devick, Doug Laux, Thomas
Levens, Michael Olsen, Lynne Hoffman-Engle, Bryan Hadley, Jena Finley, William
Gilbert, George Collier, Leighton Singelton, Edward A. Mascolo, Juan Contreas
and Angel Sanchez.
"Law" means any law, treaty, rule or regulation of a Governmental
Authority or judgment, order, writ, injunction or determination of an arbitrator
or a court or other Governmental Authority as in effect on the date hereof.
"Litigation Claims" has the meaning set forth in Section 4.19.
"Licenses" means any certificates, permits, licenses, franchises,
consents, approvals, orders, authorizations and clearances from appropriate
Governmental Authorities.
"Loan Documents" has the meaning set forth in Section 4.28.
"Losses" has the meaning set forth in Section 8.
"Master" means any Master Recording in or to which the Company or any
of its Subsidiaries shall have any Rights.
"Master Recording" means every form of recording (whether now known or
unknown), embodying sound alone, which may be used in the recording, production
or manufacture of Records.
<PAGE>
5
"Material Adverse Effect" means a material adverse effect on the
assets, results of operations, business or condition (financial or otherwise) of
the Company and its Subsidiaries, taken as a whole.
"Musical Composition" means any musical composition in or to which the
Company or any of its Subsidiaries have any Rights.
"Music Contracts" shall mean all contracts relating to the Company's
and its Subsidiaries compositions and Masters, including without limitation,
contracts relating to mechanical rights, synchronization rights, broadcasting
rights, television rights, film rights, small performing rights, grand
performing rights, printing and publication rights, administration rights,
foreign rights of whatsoever kind and nature, audio-visual rights and rights for
all use in all media and to all royalties and other payments with respect
thereto, or relating to the services of any Person or group of Persons that
performs compositions on Masters and/or composes words and/or music and/or
receives credit for doing so.
"1997 Audited Financial Statements" has the meaning set forth in
Section 4.11.
"NYSE" means the New York Stock Exchange, Inc.
"Options" has the meaning set forth in Section 4.6.
"Person" means any individual, firm, corporation, partnership, limited
liability company or partnership, trust, incorporated or unincorporated
association, joint venture, joint stock company, government (or an agency or
political subdivision thereof) or other entity of any kind, and shall include
any successor (by merger or otherwise) of such entity.
"Preferred Stock" has the meaning set forth in the first recital of
this Agreement.
"Proposal" has the meaning set forth in Section 6.1.1.
"Proxy Statement" means the proxy statement of the Company on
Schedule 14A to be filed with the SEC in connection with the Stockholder
Meeting, as amended or supplemented (including all exhibits and schedules
thereto and documents incorporated by reference therein).
"Purchaser Director" means any person nominated for election to the
Board of Directors or serving as a member of the Board of Directors who has been
designated by the Purchasers in accordance with this Agreement.
<PAGE>
6
"Purchasers" has the meaning set forth in the preamble to this
Agreement.
"Quarterly Reports" means the Company's Quarterly Reports on Form 10-Q
for the quarters ended February 28, 1997, November 30, 1996 and August 31, 1996,
each as filed with the SEC and, when filed, the Company's Quarterly Report on
Form 10-Q for the quarter ended August 31, 1997.
"Record" means every form of reproduction (whether now known or
unknown), embodying sound alone, or sound accompanied by visual images,
including, without limitation, discs of any speed or size, reel-to-reel tapes,
cartridges, cassettes, other pre-recorded tapes, compact discs, digital audio
tapes, digital compact cassettes or any other digital device.
"Representatives" shall mean the officers and partners of the
Purchasers and the employees, counsel, accountants and other authorized
representatives of the Purchasers or any of their respective Affiliates.
"Rights" shall mean any rights, title, interest or benefit of whatever
kind and nature.
"Registrable Securities" shall mean the shares of Common Stock issued
or issuable upon conversion or exercise of the Securities.
"Restricted Securities" shall mean the Securities and shares of Common
Stock issued or issuable upon conversion or exercise of the Securities.
"SEC" means the Securities and Exchange Commission.
"SEC Documents" means the Annual Reports, the Quarterly Reports and
all other documents filed by the Company with the SEC pursuant to Sections 13 or
15(d) of the Exchange Act (including all exhibits and schedules thereto and
documents incorporated by reference therein) since June 1, 1996, but shall not
include any portion of any document which is not deemed to be filed under
applicable SEC rules and regulations.
"Securities" has the meaning set forth in the first recital of this
Agreement.
"Significant Compositions" shall mean the 300 highest earning
compositions of the Company and its Subsidiaries as measured by the net revenues
for the year ended May 31, 1997 (giving pro forma effect to the Company's
acquisition of Intersound, Inc.).
<PAGE>
7
"Stockholder Meeting" has the meaning set forth in Section 6.1.
"Subsidiary" means, with respect to any Person, any corporation,
limited or general partnership, joint venture, association, limited liability
company or partnership, joint stock company, trust, unincorporated organization,
or other entity analogous to any of the foregoing of which 50% or more of the
equity ownership is, at the time, owned, directly or indirectly by such Person.
"Tax" or "Taxes" has the meaning set forth in Section 4.18.
"Transaction Documents" has the meaning set forth in Section 4.29.
"Transaction Expenses" means, with respect to the Company or the
Purchasers and their Affiliates, the expenses of such Person or Persons (whether
or not incurred prior to the date hereof) arising out of, relating to or
incidental to the discussion, evaluation, negotiation, documentation and closing
or potential closing of the transactions contemplated hereby (including, without
limitation, the reasonable fees, disbursements and other expenses of lawyers,
accountants, actuaries, investment bankers and any other advisors thereto) and
any filing fees incurred in connection with such transactions.
"Transfer" means, with respect to any Securities, any sale,
assignment, transfer or disposition by gift or otherwise, including without
limitation, any distribution in liquidation or otherwise by a corporation or
partnership or other Person.
"Unaffiliated Director" means a director who is not a Purchaser
Director and who is not an officer or employee of the Company or of any
Affiliate of the Company.
2. CLOSING.
2.1 TIME AND PLACE OF THE CLOSING. Subject to the terms and
conditions of this Agreement, the closing of the sale and purchase of the
Securities contemplated hereby (the "Closing") shall take place at the offices
of Paul, Weiss, Rifkind, Wharton & Garrison, 1285 Avenue of the Americas, New
York, New York 10019-6064, at 10:00 A.M., New York time, on a date to be
mutually agreed upon by the parties, which date shall be no later than the later
of (i) October 28, 1997, (ii) the first business day following the tenth day
after the date on which the Company delivers the last of the Disclosure
Schedules to each Purchaser, and (iii) the first business day after the
satisfaction of the condition set forth in Section 3.1.2, assuming that all of
the other conditions to Closing in Section 3 shall have been satisfied or
waived. The "Closing Date" shall be the date the Closing occurs.
<PAGE>
8
2.2 TRANSACTIONS AT THE CLOSING. At the Closing, subject to the
terms and conditions of this Agreement, the Company shall issue and sell to each
of the Purchasers, and each of the Purchasers severally (and not jointly) shall
purchase, such number of shares of Preferred Stock and the number of Warrants as
are set forth opposite such Purchaser's name on Schedule 2.2 for an aggregate
purchase price of $20,000,000 (the "Purchase Price"). At the Closing, the
Company shall deliver to each of the Purchasers certificates representing such
number of shares of Preferred Stock and a Warrant Certificate representing the
number of Warrants as are set forth opposite such Purchaser's name on
Schedule 2.2, each registered in the name of such Purchaser or its nominees,
against payment by each Purchaser of the portion of the Purchase Price payable
by such Purchaser in respect thereof as set forth beside such Purchaser's name
on Schedule 2.2 by wire transfer of immediately available funds to an account or
accounts previously designated by the Company. The portion of the Purchase
Price payable by each Purchaser shall be allocated to the Securities purchased
by such Purchaser as set forth on Schedule 2.2.
2.3 TRANSACTION FEE; TRANSACTION EXPENSES. At the Closing,
subject to the terms and provisions of this Agreement, the Company shall pay
(i) to each Purchaser or its designee a transaction fee in an amount equal to 2%
of the amount paid by such Purchaser for the Securities purchased pursuant
hereto, and (ii) to the Purchasers or their designee an amount equal to the
Transaction Expenses of the Purchasers and their Affiliates, in each case, by
wire transfer of immediately available funds to an account or accounts
designated by the Persons entitled to receive such payment.
3. CONDITIONS TO THE CLOSING.
3.1 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE PURCHASERS.
The obligations of each of the Purchasers to purchase its Securities, pay its
portion of the Purchase Price therefor at the Closing and perform any of its
obligation hereunder are subject to satisfaction of the following conditions at
or prior to the Closing (unless expressly waived in writing by each of the
Purchasers at or prior to the Closing):
3.1.1 COMPLIANCE BY THE COMPANY. All of the terms,
covenants and conditions of this Agreement to be complied with and performed by
the Company at or prior to the Closing shall have been complied with and
performed by it in all material respects, and the representations and warranties
made by the Company in this Agreement shall be true and correct in all material
respects at and as of the Closing, with the same force and effect as though such
representations and warranties had been made at and as of the Closing, except
for (i) changes expressly contemplated by this Agreement and
(ii) representations and warranties that are made as of a specific time, which
shall be true and correct only as of such time.
<PAGE>
9
3.1.2 STOCKHOLDER APPROVAL. The sale of the Securities to
the Purchasers pursuant to this Agreement shall have been duly approved by the
holders of the Common Stock at the Stockholder Meeting.
3.1.3 BY-LAW AMENDMENT. The By-law Amendment shall have
been duly adopted and approved by the Board of Directors and shall be in full
force and effect on the Closing Date.
3.1.4 BOARD OF DIRECTORS. The Board of Directors shall
consist of eleven members, four of whom shall be the Purchaser Designees and not
less than two of whom shall be Unaffiliated Directors.
3.1.5 ABSENCE OF MATERIAL ADVERSE EFFECT. No event or
events shall have occurred after May 31, 1997 that individually or in the
aggregate has had or would reasonably be expected to have a material adverse
effect on the assets, results of operations, business, prospects or condition
(financial or otherwise) of the Company and its Subsidiaries, taken as a whole,
other than events affecting the record industry generally.
3.1.6 CREDIT AGREEMENT. The Company and the other parties
thereto shall have entered into the Credit Agreement, which shall be in a form
reasonably satisfactory to the Purchasers. The Company shall have satisfied all
(and the lenders shall not have waived any) conditions to the obligation of the
lenders under the Credit Agreement to make the initial loans thereunder (other
than the condition that the Company has completed the sale of the Securities
contemplated by this Agreement) and no event shall have occurred and be
continuing, the occurrence or continuance of which would relieve the lenders
under the Credit Agreement of their obligations to advance funds, or would
preclude them from advancing funds, to the Company; and the lenders under the
Credit Agreement shall simultaneously with the purchase of the Securities
hereunder advance funds under the Credit Agreement in the amount which, when
combined with the proceeds from the sale of the Securities pursuant hereto will
permit the Company to repay all indebtedness under the Existing Credit
Agreement, pay all Transaction Expenses and pay all Company broker fees and
expenses. The Company shall have provided to the Purchasers true and complete
copies of the Credit Agreement and all closing documents delivered to the
parties to the Credit Agreement.
3.1.7 PURCHASE PERMITTED BY APPLICABLE LAWS; LEGAL
INVESTMENT. The acquisition of and payment for the Securities and the
consummation of the transactions contemplated hereby (a) shall not be prohibited
by any applicable law or governmental regulation, (b) shall not subject any
Purchaser to any penalty or, in the reasonable judgment of any Purchaser, other
onerous condition under or pursuant to any applicable law or governmental
regulation and (c) shall be permitted by the laws and regulations of the
jurisdictions to which it is subject.
<PAGE>
10
3.1.8 OPINION OF COUNSEL. Each Purchaser shall have
received the opinion of Katten, Muchin & Zavis, counsel to the Company, dated
the Closing Date, addressing the due authorization, execution and delivery by
the Company of this Agreement, and such other matters as the Purchasers may
reasonably request, in form and substance reasonably acceptable to the
Purchasers.
3.1.9 APPROVAL OF COUNSEL TO THE PURCHASERS. All actions
and proceedings hereunder and all documents required to be delivered by the
Company hereunder or in connection with the consummation of the transactions
contemplated hereby, and all other related matters, shall have been reasonably
acceptable to Paul, Weiss, Rifkind, Wharton & Garrison, counsel to the
Purchasers, as to their form and substance.
3.1.10 CONSENTS. All material consents, approvals,
authorizations, orders, registrations, filings and qualifications of or with any
Governmental Authority and other Persons (whether acting in an individual,
fiduciary or other capacity) necessary or required to be made or obtained by the
Company for the consummation of the transactions contemplated by this Agreement,
shall have been made or obtained, as the case may be, and shall be in full force
and effect, and each of the Purchasers shall have been furnished with
appropriate evidence thereof.
3.1.11 DUE DILIGENCE. Each Purchaser shall have completed
and be reasonably satisfied with the results of its due diligence review of the
assets, business, properties and financial and other condition of the Company
and its Subsidiaries. This condition shall be deemed satisfied unless prior to
5:00 p.m. on the later of (i) October 27, 1997 and (ii) the tenth day after the
day on which the Company delivers to each Purchaser the last of the Disclosure
Schedules, a Purchaser provides written notice to the Company that it has not
been satisfied.
3.1.12 MARKET CONDITIONS. Prior to the Closing Date,
(a) trading in securities generally on the NYSE shall not have been suspended or
limited or minimum or maximum prices shall not have been generally established
on such exchange, or additional material governmental restrictions, not in force
on the date of this Agreement, shall not have been imposed upon trading in
securities generally by such exchange or by order of the SEC or any court or
other Governmental Authority, (b) a general banking moratorium shall not have
been declared by either federal or New York State authorities or (c) any
material adverse change in the financial or securities markets in the United
States or in political, financial or economic conditions in the United States or
any outbreak or material escalation of hostilities or declaration by the United
States of a national emergency or war or other calamity or crisis shall not have
occurred.
<PAGE>
11
3.1.13 NO LITIGATION. No action, suit, proceeding, claim
or dispute shall have been brought or otherwise arisen at law, in equity, in
arbitration or before any Governmental Authority against the Company or any of
its Subsidiaries which would, if adversely determined, in the reasonable
judgment of the Purchasers, (a) after giving effect to the transactions
contemplated hereby, have a material adverse effect on the assets, results of
operations, business, prospects or condition (financial or otherwise) of the
Company and its Subsidiaries, taken as a whole, or (b) materially adversely
effect the ability of the Company to perform its obligations under this
Agreement.
3.1.14 NO DEFAULT OR BREACH. The Company shall not have
been in default under or with respect to this Agreement and, after giving effect
to the transactions contemplated hereby and thereby, the Company will not be in
default under any of its obligations or any covenant contained in this
Agreement, the Warrant or the Credit Agreement.
3.1.15 OFFICER'S CERTIFICATE. The Purchasers shall have
received a certificate, dated the Closing Date and signed by the Chairman of the
Board of Directors or the President of the Company on behalf of the Company,
certifying that the conditions set forth in Sections 3.1.1 through 3.1.6,
3.1.10, 3.1.14 and 3.1.17 have been satisfied on and as of such date.
3.1.16 SECRETARY'S CERTIFICATE. The Purchasers shall have
received a certificate, dated the Closing Date and signed by the secretary or an
assistant secretary of the Company on behalf of the Company, certifying the
truth and correctness of attached copies of the Certificate of Incorporation
(including amendments thereto), the By-laws (including amendments thereto), and
resolutions of the Board of Directors and the holders of the Common Stock
approving the sale of the Securities to the Purchasers and the other
transactions contemplated hereby.
3.1.17 NO INJUNCTION. There shall be no judgment,
injunction, order or decree enjoining the Company or the Purchasers from
consummating the transactions contemplated by this Agreement to be consummated
at or before the Closing.
3.1.18 CONSULTING AGREEMENT. The Company shall have
executed and delivered to each of the Purchasers (or their respective designees)
a Consulting Agreement substantially in the form of Exhibit D hereto.
3.1.19 RIGHT OF FIRST REFUSAL. The Company shall have
executed and delivered to MAC an agreement substantially in the form of Exhibit
E.
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12
3.1.20 DISCLOSURE SCHEDULES. The Disclosure Schedules shall
have been delivered to each of the Purchasers and shall be in form and substance
satisfactory to each Purchaser. This condition shall be deemed satisfied unless
prior to 5:00 p.m. on the tenth day after the day on which the Company delivers
to each of the Purchasers the last of the Disclosure Schedules, a Purchaser
provides written notice to the Company that this condition has not been
satisfied.
3.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY. The
obligations of the Company to be discharged under this Agreement on or prior to
the Closing are subject to satisfaction of the following conditions at or prior
to the Closing (unless expressly waived in writing by the Company at or prior to
the Closing):
3.2.1 COMPLIANCE BY THE PURCHASERS. All of the terms,
covenants and conditions of this Agreement to be complied with and performed by
the Purchasers in all material respects at or prior to the Closing, shall have
been complied with and performed in all material respects by the Purchasers and
the representations and warranties made by the Purchasers in this Agreement,
shall be true and correct in all material respects at and as of the Closing,
with the same force and effect as though such representations and warranties had
been made at and as of the Closing, except for changes contemplated by this
Agreement.
3.2.2 STOCKHOLDER APPROVAL. The sale of the Securities to
the Purchasers shall have been duly approved by the holders of the Common Stock
at the Stockholder Meeting.
3.2.3 CONSENTS. All material consents, approvals,
authorizations, orders, registrations, filings and qualifications of or with any
Governmental Authority and other Persons (whether acting in an individual,
fiduciary or other capacity) necessary or required to be made or obtained by the
Purchasers for the consummation of the transactions contemplated by this
Agreement, shall have been made or obtained, as the case may be, and shall be in
full force and effect, and the Company shall have been furnished with
appropriate evidence thereof.
3.2.4 PURCHASER'S CERTIFICATE. The Company shall have
received from each Purchaser a certificate of such Purchaser, dated the Closing
Date and signed by such Purchaser's general partner or managing member as the
case may be, certifying that the conditions set forth in Sections 3.2.1 and
3.2.3, insofar as they relate to such Purchaser, have been satisfied on and as
of such date.
3.2.5 NO INJUNCTION. There shall be no judgment,
injunction, order or decree enjoining the Company or the Purchasers from
<PAGE>
13
consummating the transactions contemplated by this Agreement to be consummated
at or before the Closing.
3.2.6 ISSUANCE PERMITTED BY LAW. The issuance and sale by
the Company to the Purchasers pursuant hereto of the Securities shall not be
prohibited by applicable law or governmental regulation.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company hereby represents and warrants to each Purchaser as
follows:
4.1 CORPORATE EXISTENCE AND POWER. (a) The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. The Company has the corporate power and authority to
own, lease and operate its properties and to conduct its business as described
in the SEC Documents filed with the SEC prior to the date of this Agreement and
as currently conducted. The Company is duly qualified to transact business as a
foreign corporation and is in good standing (if applicable) in each jurisdiction
in which the conduct of its business or its ownership, leasing or operation of
property requires such qualification, other than any failure to be so qualified
or in good standing as would not singly or in the aggregate with all such other
failures reasonably be expected to have a Material Adverse Effect.
(b) True and complete copies of the Certificate of
Incorporation and the By-Laws as in effect on the date hereof have been provided
by the Company to the Purchasers. The minute books of the Company contain in
all material respects true and complete records of all meetings and consents in
lieu of meetings of the Board of Directors (and any committees thereof) and of
the stockholders of the Company.
4.2 POWER AND AUTHORITY. The Company has the full corporate
power and authority to execute and deliver this Agreement and to perform its
obligations under this Agreement. The execution, delivery and performance by
the Company of this Agreement and each of the Transaction Documents and the
consummation by the Company of the transactions contemplated hereby have been
duly authorized and approved by the Board of Directors and no further corporate
action on the part of the Company (other than the actions described in Sections
3.1.2 and 3.1.4 and the filing of the Certificate of Designation under the
Delaware General Corporation Law) is necessary to authorize the execution,
delivery and performance by the Company of this Agreement or the consummation by
the Company of the transactions contemplated hereby. Subject to stockholder
approval of the Proposal, the Board of
<PAGE>
14
Directors shall have duly adopted the Certificate of Designation and the
Certificate Amendment. The Board of Directors has approved the By-law Amendment
and effective upon the Closing the By-laws will contain the By-law Amendment.
By approving the issue of the Securities the foregoing authorization and
approval by the Board of Directors constitutes prior approval by the Board of
Directors of the transaction which resulted in the Purchasers becoming
"interested stockholders" within the meaning of Section 203 of the Delaware
General Corporation Law if the Purchasers, or any one of them, become
"interested stockholders" within the meaning of paragraph (a)(1) of Section 203
of the Delaware General Corporation Law as a result of the conversion of the
Preferred Shares into shares of Common Stock in accordance with the terms of the
Certificate of Designation and/or as a result of the exercise of the Warrants.
This Agreement has been duly executed and delivered by the Company and is a
valid and binding obligation of the Company, enforceable against the Company in
accordance with its terms.
4.3 AFFILIATE TRANSACTIONS. Except as disclosed in the Proxy
Statement in the form first mailed to the Company's stockholders or in Schedule
4.3, since June 1, 1996, the Company and its Subsidiaries have not entered into
or continued any material transaction or material series of transactions with
any stockholder, officer, director, employee or Affiliate of the Company, other
than transactions between or among the Company and its Subsidiaries in the
ordinary course of business of the Company and its Subsidiaries.
4.4 NO CONTRAVENTION, CONFLICT, BREACH, ETC. The execution,
delivery and performance of this Agreement and each Transaction Document to
which it is a party by the Company and the consummation of the transactions
contemplated hereby and thereby will not conflict with, contravene or result in
a breach or violation of any of the terms and provisions of, or constitute a
default under, or result in the creation or imposition of any Encumbrance upon
any assets or properties of the Company or any of its Subsidiaries or cause the
Company or any of its Subsidiaries to be required to redeem, repurchase or offer
to repurchase any of their respective indebtedness under (i) the certificate of
incorporation, the by-laws or other organizational document of the Company or
any of its Subsidiaries, (ii) any material Law of any Governmental Authority
having jurisdiction over the Company or any of its Subsidiaries or any of their
respective assets, properties or operations or (iii) any indenture, mortgage,
loan agreement, note or other agreement or instrument for borrowed money, any
guarantee of any agreement or instrument for borrowed money or any material
lease, permit, license or other agreement or instrument to which the Company or
any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound or to which any of the assets, properties or operations of
the Company or any of its Subsidiaries is subject.
<PAGE>
15
4.5 CONSENTS. No consent, approval, authorization, order,
registration, filing or qualification of or with any (i) Governmental Authority,
(ii) stock exchange on which the securities of the Company are traded or (iii)
other Person (whether acting in an individual, fiduciary or other capacity) is
required to be made or obtained by the Company or any of its Subsidiaries for
the execution, delivery and performance by the Company of this Agreement and
each Transaction Document to which it is a party and the consummation of the
transactions contemplated hereby and thereby, except the actions described in
Section 3.1.2 and such approvals as may be required under the Act and state
securities laws in connection with the performance by the Company of its
obligations under Section 9 hereof and except consents which are not material to
the business or operations of the Company and its Subsidiaries, taken as a
whole.
4.6 CAPITALIZATION. Set forth on Schedule 4.6 is a true and
complete description of (i) the authorized capital stock of the Company, (ii)
the issued and outstanding capital stock of the Company and (iii) all
outstanding options, warrants, conversion privileges or other rights to purchase
or otherwise acquire any authorized but unissued or treasury shares of capital
stock (collectively, "Options") of the Company. No shares of the Company's
Series A-1 Preferred Stock, par value $.001 per share (the "Series A-1 Preferred
Stock), or Series A-2 Preferred Stock, par value $.001 per share (the "Series
A-2 Preferred Stock") are issued and outstanding, and no Options to acquire any
such shares are outstanding. Schedule 4.6 sets forth the number of shares of
Common Stock reserved for (a) issuance upon exercise of all outstanding Options,
(b) issuance upon conversion of the Preferred Stock, and (c) issuance upon
exercise of the Warrants. No other shares of the Company's capital stock are
reserved for future issuance. The shares of Preferred Stock and the shares of
Common Stock issuable upon conversion of the shares of Preferred Stock, and the
Warrants and the shares of Common Stock issuable upon exercise of the Warrants,
when issued and paid for in compliance with the provisions of this Agreement,
the Certificate of Designation, the Warrants and the Certificate of
Incorporation, will be duly authorized, validly issued, fully paid and
nonassessable. The issued and outstanding shares of capital stock of the
Company are duly authorized, validly issued, fully paid and nonassessable, and
were issued in compliance with the registration and qualification requirements
of all applicable federal securities laws or an exemption therefrom.
4.7 NO RIGHTS PLAN. The Company has not adopted a stockholders
rights plan, poison pill or similar arrangement.
4.8 REGISTRATION RIGHTS. Except as set forth on Schedule 4.8,
neither the Company nor any of its Subsidiaries has previously entered into any
agreement granting any registration rights to any Person, whether consistent or
inconsistent with the rights to be granted to the Purchasers in this Agreement.
<PAGE>
16
4.9 SUBSIDIARIES. Schedule 4.9 sets forth a complete and
accurate list of all of the Subsidiaries of the Company together with their
respective jurisdictions of incorporation or organization. Except for its
Subsidiaries, the Company holds no equity, partnership, joint venture or other
interest in any Person. True and complete copies of the certificate of
incorporation, by-laws and other organizational documents of the Subsidiaries of
the Company as in effect on the date hereof have been provided by the Company to
the Purchasers. Each Subsidiary of the Company has been duly incorporated or
organized and is validly existing as a corporation or other legal entity in good
standing under the laws of the jurisdiction of its incorporation or
organization, has the corporate or other organizational power and authority to
own, lease and operate its properties and to conduct its business as currently
conducted and is duly qualified to transact business as a foreign corporation or
other legal entity and is in good standing (if applicable) in each jurisdiction
in which the conduct of its business or its ownership, leasing or operation of
property requires such qualification, other than any failure to be so qualified
or in good standing as would not singly or in the aggregate with all such other
failures reasonably be expected to have a Material Adverse Effect. All of the
outstanding capital stock of each Subsidiary of the Company has been duly
authorized and validly issued, is fully paid and nonassessable and is owned by
the Company, directly or through other Subsidiaries of the Company (other than
directors' qualifying shares), free and clear of any Encumbrance (other than the
pledge of capital stock of Subsidiaries of the Company under the Existing Credit
Agreement or the Credit Agreement and such transfer restrictions as may exist
under federal and state securities laws or any Encumbrances between or among the
Company and/or any Subsidiary of the Company), and there are no rights granted
to or in favor of any third party (whether acting in an individual, fiduciary or
other capacity), other than the Company or any Subsidiary of the Company, to
acquire any such capital stock, any additional capital stock or any other
securities of any such Subsidiary. There exists no restriction, other than
those pursuant to applicable law or regulation, on the payment of cash dividends
by any Subsidiary.
4.10 SEC DOCUMENTS.
(a) The Company has delivered true and complete copies of
all SEC Documents to the Purchasers.
(b) As of its filing date, each SEC Document filed, and each
SEC Document that will be filed by the Company prior to the Closing Date, as
amended or supplemented prior to the Closing Date, if applicable, pursuant to
the Exchange Act (i) complied or will comply in all material respects with the
applicable requirements of the Exchange Act and (ii) did not or will not contain
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading.
<PAGE>
17
(c) Each final registration statement filed with the SEC,
and each final registration statement that will be filed with the SEC by the
Company prior to the Closing Date, as amended or supplemented prior to the
Closing Date, if applicable, pursuant to the Act, as of the date such statement
or amendment became or will become effective (i) complied or will comply in all
material respects with the applicable requirements of the Act and (ii) did not
or will not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading (in the case of any prospectus, in light of the
circumstances under which they were made).
(d) At the time the Proxy Statement is first mailed to the
stockholders of the Company, and at the time such stockholders vote on approval
of the transactions contemplated hereby, the Proxy Statement, as then amended or
supplemented, will not contain any untrue statement of a material fact or omit
to state a material fact necessary in order to make the statements therein, in
the light of circumstances under which they were made, not misleading; provided
that the Company makes no representation or warranty with respect to (i) any
statement or omissions included in the Proxy Statement based upon information
furnished in writing to the Company by the Purchasers specifically for use
therein or (ii) any portion thereof which is not deemed to be filed under
applicable SEC rules and regulations.
4.11 FINANCIAL STATEMENTS. The audited consolidated financial
statements and related schedules and notes included in the SEC Documents comply
in all material respects with the requirements of the Exchange Act and the Act
and the rules and regulations of the SEC thereunder, were prepared in accordance
with generally accepted accounting principles consistently applied throughout
the period involved except as noted therein, and fairly present in all material
respects the financial condition, results of operations, cash flows and changes
in stockholders' equity of the Company and its Subsidiaries at the dates and for
the periods presented. The Company previously delivered true and complete
copies of the audited consolidated financial statements and related schedules
and notes of the Company as of May 31, 1997 and May 31, 1996, and for each of
the three years in the period ended May 31, 1997 (the "1997 Audited Financial
Statements"). The unaudited quarterly consolidated financial statements and the
related notes included in the SEC Documents, and the unaudited quarterly
consolidated financial statements and related notes for the three month period
ended August 31, 1997 previously delivered by the Company to the Purchasers,
fairly present in all material respects the financial condition, results of
operations and cash flows of the Company and its Subsidiaries at the dates and
for the periods to which they relate, subject to normal year-end adjustments,
and have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis except as otherwise stated therein and
have been prepared on a basis consistent with that of the audited financial
statements referred to above except as otherwise stated therein.
<PAGE>
18
4.12 NO EXISTING VIOLATION, DEFAULT, ETC. None of the Company or
any of its Subsidiaries is (i) in violation of any provision of its certificate
of incorporation, by-laws or other organizational documents or (ii) in violation
of any applicable Law, stock exchange rule or regulation, which violation has or
would reasonably be expected to have a Material Adverse Effect. No breach,
event of default or event that, but for the giving of notice or the lapse of
time or both, would constitute an event of default exists under any indenture,
mortgage, loan agreement, note or other agreement or instrument for borrowed
money, any guarantee of any agreement or instrument for borrowed money or any
lease, permit, license or other agreement to which the Company or any of its
Subsidiaries is a party or by which the Company or any such Subsidiary is bound
or to which any of the properties, assets or operations of the Company or any
such Subsidiary is subject, which breach, event of default, or event that, but
for the giving of notice or the lapse of time or both, would constitute an event
of default, has or would reasonably be expected to have a Material Adverse
Effect. Without giving effect to any waiver previously granted, (1) no event of
default, (2) no event that, but for the giving of notice or the lapse of time or
both, would constitute an event of default and (3) no event that would require
the Company to prepay, redeem, repurchase or offer to repurchase any of its
indebtedness exists under the Existing Credit Agreement.
4.13 LICENSES AND PERMITS. The Company and its Subsidiaries have
such Licenses as are necessary to own, lease or operate their properties and to
conduct their businesses in the manner described in the SEC Documents and as
currently owned or leased and conducted and all such Licenses are valid and in
full force and effect except such Licenses that the failure to have or to be in
full force and effect individually or in the aggregate has not had, and would
not reasonably be expected to have, a Material Adverse Effect. None of the
Company or any of its Subsidiaries has received any written notice that any
violations are being or have been alleged in respect of any such License and no
proceeding is pending or, to the Knowledge of the Company, threatened, to
suspend, revoke or limit any such License the effect of which would reasonably
be expected to have a Material Adverse Effect. The Company and its Subsidiaries
are in compliance with their respective obligations under such Licenses, with
such exceptions as individually or in the aggregate have not had, and would not
reasonably be expected to have, a Material Adverse Effect, and no event has
occurred that allows, or after notice or lapse of time would allow, revocation,
suspension, limitation or termination of such Licenses, except such events as
have not had, or would not reasonably be expected to have, a Material Adverse
Effect. Without limiting the foregoing, except as set forth on Schedule 4.13,
the Company and its Subsidiaries have all Licenses that are necessary to allow
the Company and its Subsidiaries to release substantially on schedule each
recording scheduled to be released by the Company or any of its Subsidiaries as
shown on the Release Schedule previously delivered by the Company to the
Purchasers.
<PAGE>
19
4.14 TITLE TO PROPERTIES. The Company and its Subsidiaries have
sufficient title to all material properties (real and personal) owned by the
Company and any such Subsidiary that are necessary for the conduct of the
business of the Company and any such Subsidiary as described in the SEC
Documents filed with the SEC prior to the date of this Agreement and as
currently conducted, free and clear of any Encumbrance that may materially
interfere with the conduct of its business, and all material properties held
under lease by the Company and the Subsidiaries are held under valid, subsisting
and enforceable leases except for such leases the loss of which would not
reasonably be expected to have a Material Adverse Effect.
4.15 RIGHTS TO CATALOGUE. (a) Schedule 4.15(a) sets forth all of
the Masters. Except as set forth on Schedule 4.15(a), neither the Company nor
any Subsidiary of the Company has received any written notice of (i) any
asserted present or past failure of the Masters to comply with all applicable
laws and regulations or (ii) any asserted present or past violation, breach or
infringement relating to the Masters of any contractual Right, common law Right
or statutory Right of any living or deceased Person whatsoever, including,
without limitation, Rights with respect to patents, trademark, trade names,
copyrights, defamation, and rights of privacy and publicity. To the Knowledge
of the Company, all costs of recording the Masters which have become due and
payable in the ordinary course of business consistent with past practice have
been paid in full. To the Knowledge of the Company, all costs of manufacturing
all Records embodying any Master which have become due and payable in the
ordinary course of business consistent with past practice have been paid in
full. All of the performers, Artists and other Persons whose services were
furnished in connection with recording the Masters (and each selection thereon)
were free to furnish such services, without violation of any contract,
contractual restriction or duty owed to any Person. With respect to each and
all Records (in all configurations) embodying any Master, the Company has all
Rights and licenses necessary to reproduce mechanically all compositions
embodied in such Records, including all copyrighted compositions.
(b) To the Knowledge of the Company, all AFTRA members
whose performances are embodied on Masters have been paid not less than the
minimum rates specified in the applicable AFTRA collective bargaining agreements
and all payments due to the AFTRA pension and welfare funds have been made. To
the Knowledge of the Company, the Masters have been recorded in accordance with
the rules and regulations of all unions having jurisdiction over the recording
thereof.
(c) Except as set forth on Schedule 4.15(c), with respect
to each Master, the Company or a Subsidiary of the Company is the sole owner
throughout the universe of: (i) such Master, (ii) all performances embodies in
such Master, (iii) the right to make and distribute records derived from such
Master and (iv) all applicable sound recording copyrights in such Master. The
Company has the
<PAGE>
20
exclusive and perpetual Right to use, solely in connection with the packaging,
advertising, distribution or sale of Records embodying any Master, all artwork
and other graphic materials heretofore used by the Company for such purposes.
Except as set forth on Schedule 4.15(c), the Company and its Subsidiaries have
complete ownership of the copyrights in and to the Masters and control, directly
or indirectly, all Rights relative to the exploitation of the Masters.
(d) The Artists, music publishing licensors and the other
royalty participants or Persons listed on Schedule 4.15(d) hereto are the only
parties to whom royalties may be payable by the Company or any of its
Subsidiaries in connection with the exploitation of the Masters. To the
Knowledge of the Company, no Persons other than the Persons identified on
Schedule 4.15(d) as licensees under the license agreements now have, or
hereafter shall have in accordance with the terms and provisions of such license
agreements, any licensee rights in or to any Master.
(e) Schedule 4.15(e) sets forth a complete list of all
Significant Compositions, indicating with respect to each, the title, the
writer, the nature and extent of any share controlled, the extent and territory
of the Rights controlled by the Company or any Subsidiary of the Company, the
original copyright date, the copyright expiration date, the status of all
applicable renewal and/or extended renewal periods.
(f) Schedule 4.15(f) sets forth, as of May 31, 1997, a
complete list of (i) all Music Contracts pursuant to which future payments of
advances are required to be made to writers of compositions, joint owners of
Rights, co-publishers or subpublishers, indicating, with respect to each, the
date, the parties, the compositions covered, the acquisition term, the retention
term, any required annual payment and the extent of any unrecouped capitalized
advances and provisions relating thereto as at May 31, 1997; and (ii) all Music
Contracts with any licensee, administrator or subpublisher where any Rights
thereunder may revert to the Company or any Subsidiary of the Company,
indicating, with respect to each, the date, the parties, the compositions
covered, the territory covered, the acquisition term and the retention term
(specifying the date on which all Rights of such licensor, administrator or
subpublisher in the compositions covered thereby shall revert to the Company or
any Subsidiary of the Company.)
(g) Except as disclosed on Schedule 4.15(g), (i) the
Company and each of its Subsidiaries owns the Rights in the compositions
purported to be granted to the Company or such Subsidiary under the terms of the
Music Contracts that relate thereto; (ii) the Company's and its Subsidiaries'
interest in such composition is not subject to any Encumbrance, adverse claim,
royalty or other audit claim, suit, action, proceeding, or to the Knowledge the
Company, any written threat thereof, and (iii) no written notice of any
infringement or conflict with the asserted rights of others,
<PAGE>
21
or of any royalty or other audit sought to be commenced by any Person has been
received. Each Music Contract relating to a Significant Composition or a
Significant Recording is a valid and binding agreement and in full force and
effect. Neither the Company nor any of its Subsidiaries is in default in any
material respect under any Music Contract relating to a Significant Composition
or a Master, nor does any condition exist that with notice or lapse of time or
both would constitute a default thereunder, and to the Knowledge of the Company,
no other party thereto is in default in any material respect under any such
Music Contract nor does any condition exist that with notice or lapse of time or
both would constitute a material default by such party thereunder. Without
limiting the generality of the foregoing sentence, the Company and each of its
Subsidiaries have in all material respects complied with and fulfilled all of
its obligations under each Music Contract, including, without limitation, its
obligation to make payment of all royalties or other amounts due pursuant
thereto in respect of all periods of time to the date hereof, and the Company
and each Subsidiary will continue in all material respects to comply with and
fulfill its obligations under each such Music Contract in respect of the period
from the date hereof to the Closing Date. Neither the Company nor any of its
Subsidiaries has received any written notice of termination pursuant to
copyright Law.
4.16 INTELLECTUAL PROPERTY. (a) The Company and each of its
Subsidiaries owns or is licensed to use all (i) patents, trademarks, trade
names, service marks, copyrights and any applications therefor and (ii) trade
secrets, know-how, computer software programs and proprietary information, in
each case, that are material to the conduct of the business of the Company and
the Subsidiaries as described in the SEC Documents and as currently conducted,
free and clear of any Encumbrance that may materially interfere with the conduct
of their business ("Intellectual Property").
(b) Schedule 4.16 lists (a) all registered trademark,
registered copyrights and patents owned by the Company or any of its
Subsidiaries, specifying as to each item, as applicable: (1) the category of
Intellectual Property, (2) the owner of the item; (3) the jurisdictions in which
the item is recognized or registered, or in which any application for
registration has been filed, including the registration or application number;
(4) the issue date and expiration date of the item, and (5) with respect to any
trademarks or service marks, the type of goods or services on which such mark is
or is intended to be used; and (b) all material licenses, sublicenses and other
agreements ("IP Licenses") under which the Company or any of its Subsidiaries is
either a licensor or licensee of any Intellectual Property. True and complete
copies of all material documents evidencing Intellectual Property as in effect
on the date hereof have been delivered by the Company to the Purchasers.
(c) None of the Company or any of its Subsidiaries nor, to
the Knowledge of the Company, any other party is in breach of or default under
<PAGE>
22
any IP License. Each IP License is now, and immediately following the
consummation of the transactions herein contemplated will be, valid and in full
force and effect.
(d) Except as set forth in the SEC Documents filed by the
Company with the SEC prior to the date of this Agreement, no Litigation Claim is
pending or, to the Knowledge of the Company, threatened, that challenges the
validity, enforceability or ownership of, or right to use or license, any
Intellectual Property that could reasonably be expected to have a Material
Adverse Effect, nor to the knowledge of the Company do any valid grounds for any
such claim exist.
(e) No item of Intellectual Property is subject to any
outstanding order, ruling, judgment, decree or agreement restricting the use
thereof by the Company or Subsidiaries except for agreements made in the
ordinary course of business of the Company or its Subsidiaries. None of the
Company or any Subsidiary has agreed to indemnify any person against any charge
of infringement or other violation with respect to any Intellectual Property
owned or used by the Company or any Subsidiary except in the ordinary course of
business.
(f) To the Knowledge of the Company, none of the Company or
its Subsidiaries has infringed upon or otherwise violated the intellectual
property rights of third parties which would reasonably be expected to have a
Material Adverse Effect. None of the Company or any of its Subsidiaries has
received any written complaint or notice alleging any such infringement or other
violation.
(g) To the Company's knowledge, no third party is
infringing upon or otherwise violating the Intellectual Property rights of the
Company or any Subsidiary.
(h) All material patents and registered trademarks and
copyrights held by the Company or any Subsidiary are valid and subsisting. The
Company and its Subsidiaries have taken all necessary action to maintain and
protect the Intellectual Property that they own or use other than as would not
reasonably be expected to have a Material Adverse Effect.
(i) To the Knowledge of the Company, all material trade
secrets of the Company and its Subsidiaries are protected against the use of
such trade secrets by other persons to an extent and in a manner customary in
the industry in which the Company and its Subsidiaries operate.
4.17 ENVIRONMENTAL MATTERS. Subject to such disclosures as are
contained in SEC Documents filed prior to the date of this Agreement:
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23
(a) the Company and its Subsidiaries and their respective
operations and properties, are and have been in compliance with all applicable
Environmental Laws except for such failures which, individually and in the
aggregate, have not had, and would not reasonably be expected to have, a
Material Adverse Effect.
(b) There is no civil, criminal or administrative judgment,
action, suit, demand, claim, hearing, notice of violation, investigation,
proceeding, notice or demand letter pending or, to the Knowledge of the Company,
threatened against the Company or any of its Subsidiaries pursuant to
Environmental Laws which could reasonably be expected to result in a fine,
penalty or other obligation, cost or expense, except such obligations, costs or
expenses which, individually or in the aggregate, have not had, and would not
reasonably be expected to have, a Material Adverse Effect.
(c) There are no past or present events, conditions,
circumstances, activities, practices, incidents, agreements, actions or plans
which may prevent compliance by the Company or its Subsidiaries with, or which
have given rise to, or will give rise to, material liability to the Company or
any of its Subsidiaries under Environmental Laws, except any such events,
conditions, circumstances, activities, practices, incidents, agreements, actions
or plans which, individually or in the aggregate, have not had and would not
reasonably be expected to have a Material Adverse Effect.
4.18 TAXES. The Company and its Subsidiaries have filed or
caused to be filed, or have properly filed extensions for, all material Tax
returns that are required to be filed and have paid or caused to be paid all
material Taxes as shown on said returns and on all material assessments received
by it to the extent that such Taxes have become due, except Taxes the validity
or amount of which is being contested in good faith by appropriate proceedings
and with respect to which adequate reserves, in accordance with generally
accepted accounting principles, have been set aside. The Company and its
Subsidiaries have paid or caused to be paid, or have established reserves that
the Company or such Subsidiaries reasonably believe to be adequate in all
material respects, for all Tax liabilities applicable to the Company and its
Subsidiaries for all fiscal years that have not been examined and reported on by
the taxing authorities (or closed by applicable statutes). Schedule 4.18 sets
forth the tax year through which United States Federal income tax returns of the
Company and its Subsidiaries have been examined and closed. For purposes of
this Section 4.18, "Tax" or "Taxes" means any federal, state, county, local,
foreign and other taxes (including, without limitation, income, profits,
premium, estimated, excise, sales, use, occupancy, gross receipts, franchise, ad
valorem, severance, capital levy, production, transfer, withholding, employment,
unemployment compensation, payroll and property taxes, import duties and other
governmental charges and assessments), whether or not
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24
measured in whole or in part by net income, and including deficiencies,
interest, additions to tax or interest, and penalties with respect thereto, and
including expenses associated with contesting any proposed adjustments related
to any of the foregoing.
4.19 LITIGATION. Except as set forth in SEC Documents filed with
the SEC prior to the date of this Agreement, there are no pending actions,
suits, proceedings, arbitrations or investigations, royalty or other audits,
complaints, against or affecting the Company or any of its Subsidiaries or any
of their respective properties, assets or operations, or with respect to which
the Company or any such Subsidiary is responsible by way of indemnity or
otherwise (together "Litigation Claims"), that are required under the Exchange
Act to be described in such SEC Documents or that could singly, or in the
aggregate, with all such other Litigation Claims, reasonably be expected to
have, a Material Adverse Effect and, to the Knowledge of the Company, no such
Litigation Claims are threatened.
4.20 LABOR RELATIONS. Neither the Company nor any of its
Subsidiaries is engaged in any unfair labor practice. Except as disclosed in
the SEC Documents filed with the SEC prior to the date of this Agreement or as
set forth on Schedule 4.20, (a) no grievance or arbitration proceeding arising
out of or under collective bargaining agreements is pending or, to the Knowledge
of the Company, threatened against the Company or any of its Subsidiaries;
(b) no strike, labor dispute, slowdown or stoppage has occurred within the past
36 months or is pending or, to the Knowledge of the Company, threatened against
the Company or any of its Subsidiaries; (c) neither the Company nor any of its
Subsidiaries is a party to any collective bargaining agreement or contract; and
(d) to the Knowledge of the Company, no union organizing activities are taking
place that affect the employees of the Company or any Subsidiary.
4.21 EMPLOYEE BENEFITS. (a) Except for the plans described in
the SEC Documents filed with the SEC prior to the date of this Agreement, or on
Schedule 4.21 (the "Benefit Plans"), there are no employee benefit plans or
arrangements of any type (including, without limitation, plans described in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
and the regulations thereunder ("ERISA")), under which the Company or any of its
Subsidiaries has or in the future could have directly, or indirectly through a
Commonly Controlled Entity (within the meaning of Sections 414(b), (c), (m) and
(o) of the Code), any material liability with respect to any current or former
employee of the Company or any of its Subsidiaries or any Commonly Controlled
Entity. No such Benefit Plan is a "multiemployer plan" (within the meaning of
ERISA Section 4001(a)(3)) or subject to Title IV of ERISA.
(b) With respect to each Benefit Plan, the Company has
delivered or made available to the Purchasers complete and accurate copies of
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25
(i) all plan texts and agreements (as amended or modified to date), (ii) all
summary plan descriptions and similar material employee communications,
(iii) the most recent annual report (Form 5500 including, if applicable,
Schedule B thereto), (iv) the most recent annual and periodic accounting of plan
assets, (v) the most recent determination letter received from the Internal
Revenue Service and (vi) the most recent actuarial valuation.
(c) With respect to each Benefit Plan: (i) such Benefit
Plan has been maintained and administered at all times in material compliance
with its terms and applicable law and regulation; (ii) to the Knowledge of the
Company, no event has occurred and there exists no circumstance under which the
Company or any of its Subsidiaries could directly, or indirectly through a
Commonly Controlled Entity, incur any material liability under ERISA, the Code
or otherwise (other than routine claims for benefits); (iii) there are no
actions, suits or claims (other than routine claims for benefits) pending or, to
the Knowledge of the Company, threatened, with respect to any Benefit Plan or
against the assets of any Benefit Plan with respect to which suits the Company
or any of its Subsidiaries could incur any material liability; (iv) all
contributions and premiums due and owing to any Benefit Plan have been made or
paid on a timely basis and no "accumulated funding deficiency", as defined in
Code Section 412, has been incurred, whether or not waived; and (v) if such
Benefit Plan is intended to be qualified under Section 401(a) of the Code, such
Benefit Plan has been determined to be so qualified and each trust created under
such Benefit Plan has been determined to be exempt from tax under Section 501(a)
of the Code and no event has occurred since the date of such determinations,
including effective changes in laws or regulations or modifications to the
Benefit Plans, that would adversely affect such qualification or tax exempt
status.
(d) The Company has no Postretirement Benefit Obligation
(as defined in Statement of Financial Accounting Standards No. 106) in respect
of post-retirement health and medical benefits for current and former employees
of the Company and its Subsidiaries. No condition exists that would prevent the
Company or any of its Subsidiaries from amending or terminating any plan
providing health or medical benefits in respect of current or former employees
of the Company or its Subsidiaries.
(e) There is no contract, plan or arrangement (written or
otherwise) covering any employee or former employee of the Company or its
Subsidiaries that, individually or collectively, could give rise to the payment
by the Company or its Subsidiaries of any amount that would not be deductible
pursuant to the terms of Section 280G of the Code.
(f) No employee or former employee of the Company or its
Subsidiaries will become entitled to any bonus, retirement, severance, job
<PAGE>
26
security or similar benefit or enhanced such benefit (including acceleration of
vesting or exercise of an incentive award) as a result of the transactions
contemplated hereby.
4.22 CONTRACTS. All of the material contracts of the Company or
any of its Subsidiaries that are required to be described in the SEC Documents
or to be filed as exhibits thereto are described in SEC Documents filed with the
SEC prior to the date of this Agreement or filed as exhibits thereto and are in
full force and effect. True and complete copies of all such material contracts
have been delivered by the Company to the Purchasers. Neither the Company nor
any of its Subsidiaries nor, to the Knowledge of the Company, any other party is
in breach of or in default under any such contract except for such breaches and
defaults as in the aggregate have not had, and would not reasonably be expected
to, have a Material Adverse Effect.
4.23 CONTINGENT LIABILITIES. Except as fully reflected or
reserved against in the 1997 Audited Financial Statements for the year ended May
31, 1997 or disclosed in the footnotes contained in such financial statements,
the Company and its Subsidiaries had no liabilities (including tax liabilities)
at the date of such financial statements, absolute or contingent, that were
required to be reflected or disclosed in such financial statement in accordance
with generally accepted accounting principles.
4.24 NO MATERIAL ADVERSE CHANGE. Since May 31, 1997: (a) the
Company and its Subsidiaries have not incurred any material liability or
obligation (indirect, direct or contingent), or entered into any material oral
or written agreement or other transaction, that is not in the ordinary course of
business or that would reasonably be expected to result in a Material Adverse
Effect; (b) the Company and its Subsidiaries have not sustained any loss or
interference with its business or properties from fire, flood, windstorm,
accident or other calamity (whether or not covered by insurance) that has had or
that would reasonably be expected to have a Material Adverse Effect; (c) there
has been no material change in the indebtedness of the Company and its
Subsidiaries (except as contemplated by Section 3.1.6 and except for changes
relating to intercompany indebtedness of the Company and/or its Subsidiaries);
(d) there has been no dividend or distribution of any kind declared, paid or
made by the Company or any of its Subsidiaries on any class of its capital
stock; (e) neither the Company nor any of its Subsidiaries has made (nor does it
propose to make) (i) any material change in its accounting methods or practices
or (ii) any material change in the depreciation or amortization policies or
rates adopted by it, in either case, except as may be required by law or
applicable accounting standards; and (f) there has been no event causing a
Material Adverse Effect, nor any development that would, singly or in the
aggregate, reasonably be expected to result in a Material Adverse Effect.
<PAGE>
27
4.25 BROKER'S FEES. Except for Donaldson, Lufkin & Jenrette
Securities Corporation, and except for fees payable to the Purchasers, no
broker, finder or other party is entitled to receive from the Company or any of
its Subsidiaries any brokerage or finder's fee for the transactions contemplated
by this Agreement as a result of the actions of the Company, any of its
Subsidiaries, or any of its Affiliates.
4.26 INVESTMENT COMPANY. The Company is not an "investment
company" within the meaning of the Investment Company Act of 1940, as amended.
4.27 EXEMPTION FROM REGISTRATION; RESTRICTIONS ON OFFER AND SALE
OF SAME OR SIMILAR SECURITIES. Assuming the representations and warranties of
the Purchasers set forth in Section 5.5 hereof are true and correct in all
material respects, the offer and sale of the Securities made pursuant to this
Agreement will be exempt from the registration requirements of the Act. Neither
the Company nor any Person acting on its behalf has, in connection with the
offering of the Securities engaged in (a) any form of general solicitation or
general advertising (as those terms are used within the meaning of Rule 502(c)
under the Act), (b) any action involving a public offering within the meaning of
Section 4(2) of the Act, or (c) any action that would require the registration
under the Act of the offering and sale of the Securities pursuant to this
Agreement or that would violate applicable state securities or "blue sky" laws.
The Company has not made and will not prior to the Closing make, directly or
indirectly, any offer or sale of shares of its capital stock, or any Options, if
as a result the offer and sale of the Securities contemplated hereby, or any of
them, could fail to be entitled to exemption from the registration requirements
of the Act. As used herein, the terms "offer" and "sale" have the meanings
specified in Section 2(3) of the Act.
4.28 LOAN DOCUMENTS. Each representation and warranty of the
Company or any Subsidiary of the Company made in the Credit Agreement or in any
other agreement or document executed and delivered by the Company or any of its
Subsidiaries in connection with the Credit Agreement (the "Loan Documents"),
will be true and correct in all respects when made and are hereby incorporated
into this Agreement as if set forth in full herein.
5. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS.
Each Purchaser, solely as to itself, hereby represents and warrants to
the Company that:
5.1 EXISTENCE AND POWER. Such Purchaser is a limited
partnership or limited liability company duly organized, validly existing and in
good standing under the laws of the State of Delaware and has all requisite
power and
<PAGE>
28
authority to own, lease and operate its properties and to conduct its business
as currently conducted.
5.2 POWER AND AUTHORITY. Such Purchaser has the full power and
authority to execute and deliver this Agreement and to perform its obligations
hereunder. The execution, delivery and performance by such Purchaser of this
Agreement and the consummation by such Purchaser of the transactions
contemplated hereby have been duly authorized by such Purchaser. This Agreement
has been duly executed and delivered by such Purchaser and is a valid and
binding agreement of such Purchaser, enforceable against such Purchaser in
accordance with its terms.
5.3 NO CONTRAVENTION, CONFLICT, BREACH, ETC. The execution,
delivery and performance of this Agreement by such Purchaser and the
consummation of the transactions contemplated hereby will not conflict with,
contravene or result in a breach or violation of any of the terms and provisions
of, or constitute a default under, (i) the partnership agreement, limited
liability company agreement, or other organizational documents of such
Purchaser, (ii) any Law of any Governmental Authority having jurisdiction over
such Purchaser, or (iii) any material agreement to which such Purchaser is a
party.
5.4 CONSENTS. No consent, approval, authorization, order,
registration, filing, or qualification of or with any Governmental Authority or
other Person (whether acting in an individual, fiduciary or other capacity) is
required to be made or obtained by such Purchaser for the consummation of the
transactions contemplated hereby.
5.5 ACQUISITION FOR OWN ACCOUNT. The Securities to be acquired
by such Purchaser pursuant to this Agreement are being acquired by such
Purchaser for its own account and with no intention of distributing or reselling
the Securities in any transaction that would be in violation of the Act or the
securities laws of any state, without prejudice, however, to the rights of such
Purchaser at all times to sell or otherwise dispose of all or any part of the
Securities under an effective registration statement under the Act, under an
exemption from such registration available under the Act, and subject,
nevertheless, to the disposition of the Purchaser's property being at all times
within its control. Such Purchaser (a) is an "accredited investor," as defined
in Regulation D promulgated by the SEC under the Act, (b) has such knowledge,
sophistication and experience in business and financial matters that it is
capable of evaluating the merits and risks of an investment in the Securities,
and (c) can bear the economic risk of an investment in the Securities and can
afford a complete loss of such investment. Such Purchaser acknowledges that it
has been afforded the opportunity to ask such questions as it deemed necessary,
and to receive answers from, representatives of the Company concerning the
merits and risks of investing in the Securities. Notwithstanding the foregoing,
nothing contained in this
<PAGE>
29
Section 5.5 shall affect or be deemed to modify any representation or warranty
made by the Company.
5.6 AVAILABLE FUNDS. Such Purchaser has committed capital that
is sufficient to purchase the Securities pursuant to this Agreement.
5.7 INTERESTED STOCKHOLDER. Prior to the consummation of the
Transactions contemplated hereby, such Purchaser was not an "interested
Stockholder" of the Company within the meaning of Section 203 of the Delaware
General Corporation Law.
6. CERTAIN COVENANTS AND AGREEMENTS.
6.1 PRE-CLOSING COVENANTS.
6.1.1 STOCKHOLDER MEETING; PROXY MATERIAL. The Company
shall cause a meeting of its stockholders to be duly called and held as soon as
reasonably practicable, for the purpose of voting on a proposal for the approval
of sale of the Securities as contemplated by this Agreement (the "Proposal") and
transacting such other business as may properly come before the meeting or any
adjournment thereof (the "Stockholder Meeting"). The Board of Directors shall
recommend approval and adoption of the Proposal. In connection with the
Stockholder Meeting, the Company: (a) shall promptly prepare and file with the
SEC in accordance with the Exchange Act the Proxy Statement, shall use all
reasonable efforts to have the Proxy Statement and/or any amendment or
supplement thereto cleared by the SEC and shall thereafter mail to its
stockholders as promptly as practicable the Proxy Statement; (b) shall use all
reasonable efforts to obtain the necessary approvals by its stockholders of the
Proposal; and (c) shall otherwise comply with all legal requirements applicable
to such meeting. The Company shall make available to the Purchasers prior to
the filing thereof with the SEC copies of the preliminary Proxy Statement and
any amendments or supplements thereto and shall make any changes therein
reasonably requested by the Purchasers insofar as such changes relate to any
matters relating to the Purchasers or the description of the transactions
contemplated by this Agreement.
6.1.2 DELIVERY OF SCHEDULES. Not later than ten days
following the date of this Agreement, the Company shall deliver to each
Purchaser a copy of Schedules 4.3, 4.6, 4.8, 4.9, 4.13, 4.15(a), 4.15(c),
4.15(d), 4.15(e), 4.15(f), 4.15(g), 4.16, 4.18, 4.20 and 4.21 (the "Disclosure
Schedules").
6.1.3 CONDUCT OF BUSINESS. From and after the date of
this Agreement until the Closing, each of the Company and the Purchasers shall
act with good faith towards, and shall use its reasonable efforts to consummate,
the transactions contemplated by this Agreement, and neither the Company nor the
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30
Purchasers will take any action that would prohibit or impair its ability to
consummate the transactions contemplated by this Agreement. From the date
hereof until the Closing, the Company shall conduct the business of it and its
Subsidiaries in the ordinary course and shall use all reasonable efforts to
preserve intact its business organizations and relationships with third parties
and to keep available the services of the present directors, officers and key
employees. Without limiting the generality of the foregoing, from the date
hereof until the Closing, except as contemplated by this Agreement, without the
Purchasers' prior written consent:
(a) the Company shall not adopt or propose (or agree to commit
to) any change in the Certificate of Incorporation or its By-Laws, except
for the By-law Amendment;
(b) except as contemplated by Section 3.1.6, the Company shall
not, and shall cause each of its Subsidiaries not to, (i) enter into any
loan agreement or other agreement pursuant to which the Company or such
Subsidiary incurs indebtedness for borrowed money (other than any such
agreement among the Company and its wholly owned Subsidiaries or among the
Company's wholly owned Subsidiaries) or (ii) amend any such existing
agreement;
(c) other than in the ordinary course of business of the Company
or any Subsidiary consistent with past practice, the Company shall not, and
shall cause each of its Subsidiaries not to, sell any of the assets of the
Company or such Subsidiaries (or the securities of entities holding the
same) in one transaction or a series of related transactions;
(d) other than in the ordinary course of business of the Company
consistent with past practice, the Company shall not, and shall cause each
of its Subsidiaries not to, acquire any assets of any other Person or
Persons or acquire any equity, partnership or other interests in any other
Person or Persons, in one transaction or series of related transactions;
(e) except as contemplated by Section 3.1.6 and repayments of the
Existing Creditor Agreement, the Company shall not, and shall cause each of
its Subsidiaries not to, repay, redeem or repurchase any indebtedness of
the Company or any of the Subsidiaries or any shares of capital stock of
the Company;
(f) the Company shall not, and shall cause each of its
Subsidiaries not to, enter into any transaction with any director,
executive officer or Affiliate (other than any transaction among the
Company and its wholly-owned Subsidiaries or among any wholly-owned
Subsidiaries of the
<PAGE>
31
Company) of the Company out of the ordinary course of its business
consistent with past practice;
(g) the Company shall not, and shall cause each of its
Subsidiaries not to, (i) grant to any employee any increase in salary or
other remuneration not consistent with past practices or any increase in
severance or termination pay; (ii) grant or approve any general increase in
salaries of all or a substantial portion of its employees not consistent
with past practice; (iii) pay or award any bonus, incentive, compensation,
service award or other like benefit for or to the credit of any employee
except in accordance with written policy or consistent with past practice;
or (iv) enter into any employment contract or severance arrangement with
any employee except in accordance with written policy or consistent with
past practice or adopt or amend in any material respect any of its employee
benefit plans except as required by law;
(h) the Company shall, and shall cause each of its Subsidiaries
to, not take or agree to commit to take any action that would make any
representation or warranty of the Company hereunder required to be true at
and as of the Closing as a condition to the Purchasers' obligations to
consummate the transactions contemplated hereby, inaccurate at the Closing;
(i) the Company shall not, and shall cause its Subsidiaries not
to, agree to expend, commit or otherwise obligate itself to make any
capital expenditures except in the ordinary course of business, consistent
with past practice; and
(j) the Company shall not, and shall cause each of its
Subsidiaries not to, agree or commit to do any of the foregoing.
6.1.4 INSPECTION.
(a) The Company will permit, and will cause each of its
Subsidiaries to permit, the Purchasers and their respective Representatives to
visit and inspect any of its properties, to examine its corporate, financial and
operating records and make copies thereof or abstracts therefrom, and to discuss
its affairs, business practices, finances and accounts with their respective
directors, officers and independent public accountants, as often as may be
reasonably requested, upon reasonable advance notice to the Company.
(b) Each Purchaser will utilize reasonable good faith efforts to
maintain, and cause its Representatives to maintain, as confidential any
information obtained from the Company pursuant to Section 6.1.4(a) (other than
information which (i) at the time of disclosure or thereafter is generally
available to and known by the
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32
public (other than as a result of a disclosure directly or indirectly by such
Purchaser or any of its representatives), (ii) is available to such Purchaser on
a non-confidential basis from a source other than the Company or its
Subsidiaries, provided that such source was not known by such Purchaser to be
bound by a confidentiality agreement with the Company or any of its
Subsidiaries, or (iii) has been independently developed by such Purchaser), and
shall not disclose any information obtained from the Company pursuant to
Section 6.1.4(a) and required to be maintained as confidential pursuant hereto,
except (1) to the respective Representatives, agents, partners and employees of
such Purchaser, (2) to any bona fide prospective transferee of any of the
Securities or the shares of Common Stock issued upon the exercise of the
Warrants or of an interest in such Purchaser or in a successor fund sponsored by
such Purchaser or its Affiliates, (3) as may be required by law (including a
court order, subpoena or other administrative order or process) or applicable
regulations to which such Purchaser is or becomes subject, (4) in connection
with any litigation arising out of or related to this Agreement, (5) to the
executive officers of the Company or any of its Subsidiaries, or (6) with the
written consent of the Company. Each Purchaser shall be responsible for
breaches of this Section 6.1.4(b) by such Purchaser's Representatives.
6.1.5 PUBLICITY. Except as required by law, regulation
or stock exchange requirements, neither (a) the Company or any of its Affiliates
nor (b) the Purchasers or any of their respective Affiliates shall, without the
consent of the other, make any public announcement or issue any press release
with respect to the transactions contemplated by this Agreement. In no event
will either (i) the Company or any of its Affiliates or (ii) the Purchasers or
any of their respective Affiliates make any public announcement or issue any
press release without consulting with the other party, to the extent feasible,
as to the content of such public announcement or press release.
6.2 POST-CLOSING COVENANTS.
6.2.1 USE OF PROCEEDS. The proceeds of from the sale of
Securities, together with the Company's initial borrowings under the Credit
Agreement, shall be used by the Company to repay the Existing Credit Agreement,
to pay Transaction Expenses and for general corporate purposes.
6.2.2 FINANCIAL STATEMENTS. So long as any Purchaser or
its Affiliate continues to hold any Securities or any shares of Common Stock,
the Company shall deliver to such Purchaser:
(a) as soon as available, but not later than 90 days
after the end of each fiscal year of the Company, a copy of the audited
consolidated balance sheet of the Company and its Subsidiaries as of the end of
such year and the related consolidated statements of income and cash flows for
such fiscal
<PAGE>
33
year, setting forth in each case in comparative form the figures for the
previous year, all in reasonable detail and accompanied by a management summary
and analysis of the operations of the Company and its Subsidiaries for such
fiscal year and by the opinion of a nationally recognized independent public
accounting firm which report shall state that such consolidated financial
statements present fairly the financial position for the periods indicated in
conformity with generally accepted accounting principles applied on a basis
consistent with prior years;
(b) as soon as available, but not later than 45 days
after the end of each of the first three fiscal quarters of each fiscal year of
the Company commencing with the fiscal quarter ended November 30, 1997, the
unaudited consolidated balance sheet of the Company and its Subsidiaries, and
the related consolidated statements of income and cash flow for such quarter and
for the period commencing on the first day of the fiscal year and ending on the
last day of such quarter, all certified by an appropriate officer of the
Company;
(c) as soon as available, but not later than 30 days
after the end of each month commencing with the month of November, 1997, monthly
financial information in a form reasonably acceptable to the Purchasers,
certified by an appropriate officer of the Company;
(d) simultaneously with the delivery thereof to
any of the Company's lenders (including but not limited to the lenders under the
Credit Agreement) or other holders of the Company's indebtedness, such other
financial and operating data of the Company and its Subsidiaries as the Company
is required to deliver to such lenders or other debt holders (any such
information to be subject to the provisions of Section 6.1.4(b));
(e) promptly after the same are filed with the SEC,
copies of all reports, statements and other documents filed with the SEC
pursuant to the Act or the Exchange Act; and
(f) promptly following receipt thereof, a copy of any
communication received by the Company from any holder of the Company's
outstanding indebtedness notifying the Company that a default or event of
default exists under the terms of the instruments governing such indebtedness.
6.2.3 INSPECTIONS. So long as any Purchaser or its
Affiliates, employees, partners or members, holds any shares of Preferred Stock,
or such Purchaser or its Affiliates, employees, partners or members hold any
Warrant Shares (as defined in Section 6.2.5 hereof), and all Purchasers,
together with their Affiliates, employees, partners or members, hold, in the
aggregate not less than 25% of the Warrant Shares (as defined in
Section 6.2.5(a) hereof) represented immediately
<PAGE>
34
after the Closing by the Warrants sold pursuant hereto (with appropriate
adjustment made for any stock dividend, split-up or subdivision or any
combination or reclassification made or effected, subsequent to the Closing
Date), such Purchaser shall continue to have the inspection rights set forth in
Section 6.1.4(a); PROVIDED, HOWEVER, that the provisions of Section 6.1.4(b)
shall be applicable with respect to any information obtained as a result of the
exercise by such Purchaser of its inspection rights hereunder.
6.2.4 RESTRICTIONS ON TRANSFER; LEGENDS. (a) Each of
the Purchasers agrees that it will not Transfer, pledge, mortgage, hypothecate
or grant a security interest in any of the Restricted Securities, except
pursuant to an effective registration statement under the Act or an applicable
exemption from registration under the Act.
(b) So long as the Restricted Securities are not sold
pursuant to an effective registration statement under the Act or pursuant to
Rule 144 under the Act, the Restricted Securities shall be subject to a
stop-transfer order and the certificates therefor shall bear the following
legend by which each holder thereof shall be bound:
"THE [WARRANTS EVIDENCED BY THIS WARRANT CERTIFICATE/SHARES
REPRESENTED BY THIS CERTIFICATE] MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933, OR AN APPLICABLE EXEMPTION FROM REGISTRATION THEREUNDER
AS EVIDENCED BY AN OPINION OF COUNSEL DELIVERED AND REASONABLY
ACCEPTABLE TO THE COMPANY."
(c) After the termination of the legend requirements of
Section 6.2.4(b), the Company shall, upon the written request of the holder of
the Restricted Securities and receipt by the Company of evidence reasonably
satisfactory to it that such requirement has terminated (including, with respect
to the legend required by the Section 6.2.4(b), a written opinion of outside
counsel), issue certificates for such Restricted Securities that do not bear all
or part of the legend described in Section 6.2.4(b).
6.2.5 BOARD OF DIRECTORS.
(a) For purposes of this Section 6.2.5, "Warrant
Shares" shall mean shares of Common Stock underlying the Warrants and shares of
Common Stock which were received upon exercise of a Warrant.
<PAGE>
35
(b) So long as the Purchasers, or the Affiliates,
employees, partners or members of any Purchaser, hold, in the aggregate, not
less than 35% of the Warrants Shares represented immediately following the
Closing by the Warrants being sold pursuant hereto (with appropriate adjustment
made for any stock dividend, split-up or subdivision or any combination or
reclassification made or effected subsequent to the Closing Date): (i) the
Company's Board of Directors shall consist of not more than eleven (11) member,
four (4) of which shall be Purchaser Directors and two (2) of which shall be
Unaffiliated Directors, (ii) not less than two (2) members of each Committee of
the Company's Board of Directors (including, without limitation, the executive,
audit and compensation committees) shall be Purchaser Directors and the
Purchasers Directors and Unaffiliated Directors who are members of such
Committee shall together constitute not less than a majority of the members
thereof, and (iii) each of the following corporate actions shall be required to
be approved by not less than two-thirds of the directors then in office (unless
the Purchaser Directors constitute a majority of the members of the Board of
Directors, in which event, such action shall be required to be approved by a
majority of the directors then in office):
(1) any incurrence of indebtedness by the
Company or any Subsidiary in excess of $1,000,000, other than draw-downs
under the revolving credit facility contained in the Credit Agreement or in
another loan agreement approved in the manner set forth in this Section
6.2.5(b)(iii); any refinancing of the Company's or any Subsidiary's
indebtedness; any amendment to the terms of any instrument evidencing or
governing any indebtedness of the Company or a Subsidiary; any issuance of
debt or equity securities by the Company or any Subsidiary (other than
securities issued by a Subsidiary to the Company); and the grant of any
Options by the Company; PROVIDED, HOWEVER, that the provisions of this
Section 6.2.5(b)(iii) shall not apply to (x) any issuance by the Company of
debt or equity securities having financial terms which are more favorable
to the Company than the financial terms of the Preferred Stock where the
proceeds from the issuance of such debt or equity securities are to be used
by the Company solely to redeem the Preferred Stock or prepay the
subordinated notes issued in connection with the acquisition by the Company
of Intersound, Inc., (y) borrowing funds under the Credit Agreement for the
purpose of prepaying the subordinated notes issued in connection with the
acquisition by the Company of Intersound, Inc. or (z) the grant of any
employee stock options issued pursuant to any plan or arrangement which has
been approved by a majority of the Unaffiliated Directors;
(2) any acquisition or disposition of material
assets of the Company or any Subsidiary; entering into any joint business
venture or material licensing arrangement involving the Company or
<PAGE>
36
any Subsidiary, or any licensing arrangement involving the Company or its
Subsidiaries outside the ordinary course of business; or entering into any
transaction which will result in a Change of Control;
(3) approval or amendment of or changes to the
Company's annual budget; and
(4) the hiring, dismissal, election or removal of
any members of the senior management team of the Company (including,
without limitation, the chief executive officer, chief operating officer,
chief financial officer and President of any Subsidiary of the Company) or
any material change to the terms and conditions of employment of any such
Person.
(c) So long as the Purchasers, or the Affiliates,
employees, partners or members of any Purchaser, hold, in the aggregate, not
less than 15% of the Warrants Shares represented immediately following the
Closing by the Warrants being sold pursuant hereto (with appropriate adjustment
made for any stock dividend, split-up or subdivision or any combination or
reclassification made or effected subsequent to the Closing Date): (i) two (2)
member of the Company's Board of Directors shall be Purchaser Directors, and
(ii) not less than one member of each Committee shall be a Purchaser Director.
(d) In the event that either (i) the Company defaults
in its obligation to purchase the Warrants in accordance with Section 7 of the
Warrants, or (ii) an Event of Default exists and is continuing (and has not been
waived) under the Credit Agreement (as the same may be amended from time to time
subsequent to the date hereof) or any successor debt instrument thereto and such
Event of Default has either (1) continued for a period of not less than 30 days
following expiration of any applicable notice and cure period under such Credit
Agreement or successor debt instrument or (2) resulted in the acceleration of
the indebtedness outstanding thereunder, the Purchasers shall be entitled to
designate, and the Company shall cause to be elected, an additional number of
Purchaser Directors which, when added to the number of Purchaser Directors then
serving on the Board of Directors of the Company, shall constitute a majority of
the members of the Board of Directors of the Company. If the size of the Board
of Directors cannot be expanded in order to accomplish the result set forth in
the first sentence of this Subsection (d), the Company shall cause such number
of directors who are not Purchaser Directors to be removed and replaced by
Purchaser Directors as may be necessary to accomplish such result.
(e) So long as any Warrants or Warrant Shares remain
outstanding, the Company shall not enter into any transaction with an Affiliate
of the Company (other than transactions between or among the Company and its
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37
Subsidiaries in the ordinary course) involving the payment or receipt of amounts
in excess of $200,000, or the transfer of any property or assets having a fair
market value in excess of $200,000, unless such transaction has been approved by
members of the Board of Directors who constitute a majority of the Purchaser
Directors and the Unaffiliated Directors.
(f) Notwithstanding anything to the contrary set forth
in this Section 6.2.5:
(1) the provisions of Sections 6.2.5(b)(i),
6.2.5(b)(ii), 6.2.5(c) and 6.2.5(d) shall be suspended during any period in
which the holders of the Preferred Stock are entitled pursuant to Section
5.10 the Certificate of Designation to elect eight directors to the
Company's Board of Directors, and during such period the directors elected
by the holders of the Preferred Stock shall be deemed to be "Purchaser
Directors" for purposes of Sections 6.2.5(b)(iii) and 6.2.5(e); and
(2) the provisions of Sections 6.25(b)(ii),
6.2.5(b)(iii) and 6.2.5(e) shall terminate on the later of (x) 66 months
from the Closing Date and (y) the date on which all outstanding shares of
Preferred Stock are redeemed by the Company pursuant to Section 3 of the
Certificate of Designation.
(g) The Company shall cause provisions of Section this
Section 6.2.5 to be incorporated into the By-laws by adoption of the By-law
Amendment and once adopted, such By-law provisions may not be amended except by
unanimous action of the Company's Board of Directors.
6.2.6 SERIES A PREFERRED STOCK. So long as the
Purchasers, or any Affiliate, employee, partner or member of any Purchaser,
holds any shares of Preferred Stock or any Warrants, the Company shall not issue
any shares of its Series A-1 Preferred Stock or its Series A-2 Preferred Stock.
6.3 PRINCIPAL SHAREHOLDERS AGREEMENT. Each of Steven Devick,
Frontenac VI Limited Partnership, Andrew J, Filipowski and Craig Duchossois
hereby agree with the Purchasers that they shall vote all shares Common Stock
held by them for the Proposal, that they shall not grant any proxy to vote any
such shares of Common Stock or preferred stock in a manner inconsistent with
their agreement set forth herein, and that so long as they retain record and
beneficial ownership of their shares of Company capital stock they shall take
such action as shall be necessary to permit the Company to comply with its
obligations under Section 6.2.5 hereof.
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38
7. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS.
The representations and warranties, covenants and agreements contained
herein shall survive the execution and delivery of this Agreement and the
Closing hereunder. The foregoing notwithstanding, the Company's liability to
the Purchasers for breaches of, or inaccuracies in, any of the Company's
representations and warranties contained in Section 4 (other than Sections 4.2,
4.6, 4.17, 4.18 and 4.21), shall expire 18 months following the Closing Date
(unless any Purchaser shall have given notice to the Company claiming a breach
thereof prior to such date); liability for any breach of or inaccuracy or
misrepresentation in Section 4.17 shall expire following the fifth anniversary
of the Closing Date (unless any Purchaser shall have given notice to the Company
claiming a breach thereof prior to such date), liability in respect of the
breach of or inaccuracy or misrepresentation in Sections 4.18 and 4.21 shall
expire following the expiration of the statute of limitation (after giving
effect to any extensions granted thereof) for any governmental authority or
beneficiary to make any claim with respect to the matters set forth in such
Sections (unless any Purchaser shall have given notice to the Company claiming a
breach thereof prior to such time); and there shall be no expiration of the time
when a claim may be made by Purchasers for breach of or any inaccuracy or
misrepresentation in Sections 4.2 and 4.6.
8. INDEMNIFICATION.
Except as otherwise provided in this Section 8, the Company
agrees to indemnify, defend and hold harmless each Purchaser and its Affiliates
and their respective officers, directors, agents, employees, subsidiaries,
partners, members and controlling persons to the fullest extent permitted by law
from and against any and all claims, losses, liabilities, damages, deficiencies,
judgements, assessments, fines, settlements, costs or expenses (including
interest, penalties and reasonable fees, disbursements and other charges of
counsel) (collectively, "Losses") (a) based upon, arising out of or otherwise in
respect of any inaccuracy in or any breach of any representation, warranty,
covenant or agreement of the Company contained in this Agreement or any other
Transaction Document, or (b) resulting from any legal, administrative or other
actions brought by any Person or entity (including actions brought by the
Company or any equity or debt holders of the Company or derivative actions
brought by any Person claiming through the Company or in the Company's name),
proceedings or investigations (whether formal or informal), or written threats
thereof, based upon, relating to or arising out of this Agreement, the
transactions contemplated hereby, or any indemnified party's role therein or in
the transactions contemplated hereby; PROVIDED, HOWEVER, that the Company shall
not be liable under this Section 8 to an indemnified party to the extent that it
is finally judicially determined that such Losses resulted primarily from the
gross negligence or willful malfeasance of such indemnified party. In
connection with the obligation of the
<PAGE>
39
Company to indemnify for Liabilities as set forth above, the Company further
agrees to reimburse each indemnified party for all such expenses (including
reasonable fees, disbursements and other charges of counsel) as they are
incurred by such indemnified party.
Notwithstanding anything to the contrary in this Section 8, the
indemnification and contribution provisions of Section 9 shall govern any claim
made with respect to registration statements filed pursuant thereto or sales
made thereunder.
9. REGISTRATION RIGHTS.
The Company hereby agrees to provide registration rights with respect
to the Registrable Securities as set forth below.
9.1 SECURITIES SUBJECT TO THIS AGREEMENT.
(a) REGISTRABLE SECURITIES. For the purposes of this
Section 9, Registrable Securities will cease to be Registrable Securities when
such Registrable Securities are sold pursuant to Rule 144 under the Act or a
registration statement covering such Registrable Securities has been declared
effective under the Securities Act by the SEC and such Registrable Securities
have been disposed of pursuant to such effective registration statement.
(b) HOLDERS OF REGISTRABLE SECURITIES. A Person is deemed
to be a holder of Registrable Securities whenever such Person owns of record
Registrable Securities, or holds a warrant to purchase, or a security
convertible into or exercisable or exchangeable for, Registrable Securities
whether or not such acquisition or conversion has actually been effected and
disregarding any legal restrictions upon the exercise of such rights. If the
Company receives conflicting instructions, notices or elections from two or more
persons with respect to the same Registrable Securities, the Company may act
upon the basis of the instructions, notice or election received from the
registered owner of such Registrable Securities. Registrable Securities
issuable upon exercise of an option or upon conversion of another security shall
be deemed outstanding for the purposes of this Section 9.
9.2 DEMAND REGISTRATION.
(a) REQUEST FOR DEMAND REGISTRATION. At any time after the
date that is 270 days after the Closing Date, the holders of 25% of the
outstanding Registrable Securities may make a written request for registration
of Registrable Securities under the Act, and under the securities or blue sky
laws of any jurisdiction designated by such holder or holders (a "Demand
Registration"); provided, that the Company will not be required to effect more
than six Demand Registrations in
<PAGE>
40
the aggregate at the request of the holders of Registrable Securities pursuant
to this Section 9.2(a) and provided, further, that the Company will not be
required to effect more than four Demand Registrations pursuant to this Section
9.2(a) using a registration form other than a Form S-3 Registration Statement;
and provided, further, that the Company shall not be required to complete any
Demand Registration after the fourth Demand Registration unless the anticipated
aggregate proceeds to the selling shareholders would exceed $2,500,000. Each
such request for a Demand Registration shall specify the amount of the
Registrable Securities proposed to be sold, the intended method of disposition
thereof and the jurisdictions in which registration is desired. Upon a request
for a Demand Registration, the Company shall promptly take such steps as are
necessary or appropriate to prepare for the registration of the Registrable
Securities to be registered. Within fifteen (15) days after the receipt of such
request, the Company shall give written notice thereof to all holders holding
Registrable Securities and include in such registration all Registrable
Securities held by a holder thereof with respect to which the Company has
received written requests for inclusion therein at least ten (10) days prior to
the filing of the registration statement. Each such request will also specify
the number of Registrable Securities to be registered, the intended method of
disposition thereof and the jurisdictions in which registration is desired.
Except with respect to Persons who as of the date of this Agreement have the
contractual right to piggy-back on a Demand Registration pursuant to
registration rights agreements identified on Schedule 4.8, unless holders of a
majority of the Registrable Securities to be included in the Demand Registration
consent in writing, no other Person (other than the Company and any other holder
of Registrable Securities), shall be permitted to offer securities under any
such Demand Registration. Subsequent to the date hereof, the Company shall not
grant to any Person who does not presently have such right, the right to
piggy-back on a Demand Registration.
(b) EFFECTIVE DEMAND REGISTRATION. A registration shall
not constitute a Demand Registration until it has become effective under the Act
and remains effective until the earlier of the completion of any offering of
securities thereunder and the expiration of 135 days from date on which it first
became effective under the Act (unless withdrawn upon request of the holders).
The Company shall use reasonable efforts to cause any such Demand Registration
to become effective under the Act not later than ninety (90) days after it
receives a request under Section 9.2(a) hereof.
(c) EXPENSES. In any registration initiated as a Demand
Registration, the Company shall pay all Registration Expenses (as defined in
Section 9.6) in connection therewith, whether or not such Demand Registration
becomes effective.
(d) UNDERWRITING PROCEDURES. If holders of a majority of
the Registrable Securities included in the Demand Registration so elect, the
offering
<PAGE>
41
of such Registrable Securities pursuant to such Demand Registration shall be in
the form of a firm commitment underwritten offering and the managing underwriter
or underwriters selected for such offering shall be the Approved Underwriter
selected in accordance with Section 9.2(e). In such event, if the Approved
Underwriter advises the Company in writing that in its opinion the aggregate
amount of such Registrable Securities requested to be included in such offering
is sufficiently large to have a material adverse effect on the success of such
offering, the Company shall include in such registration only the aggregate
amount of Registrable Securities that in the opinion of the Approved Underwriter
may be sold without any such material adverse effect and shall first reduce (to
zero, if necessary) the amount of Securities sought to be included therein by
the Company and any other Person who wishes to participate through the exercise
of piggy-back registration rights and, if such reduction is not sufficient,
reduce, pro rata based on the amounts included in the request for Demand
Registration, the amount of Registrable Securities to be included by each
holder. To the extent Registrable Securities so requested to be registered are
excluded from the offering, then the holders of such Registrable Securities
shall have the right to one additional Demand Registration under this Section
9.2 with respect to such Registrable Securities.
(e) SELECTION OF UNDERWRITERS. If any Demand Registration
of Registrable Securities is in the form of an underwritten offering, the
holders holding a majority of the Registrable Securities to which the Demand
Registration relates shall select and obtain an investment banking firm of
national reputation to act as the managing underwriter of the offering (the
"Approved Underwriter"); provided, that the Approved Underwriter shall, in any
case, be acceptable to the Company in its reasonable judgment.
9.3 PIGGY-BACK REGISTRATION.
(a) PIGGY-BACK RIGHTS. If the Company proposes to file a
registration statement under the Act with respect to an offering by the Company
for its own account or for the account of any other holder of registration
rights exercising demand registration rights (such other holder or registration
rights being "Demand Holder") of any class of equity securities (other than a
registration statement on Form S-4 or S-8 or any successor or other forms not
available for registering equity securities for sale to the public), then the
Company shall give written notice of such proposed filing to each holder of
Registrable Securities at least thirty (30) days before the anticipated filing
date, and such notice shall describe in detail the proposed registration and
distribution (including those jurisdictions where registration under the
securities or blue sky laws is intended) and offer such holders the opportunity
to register such number of Registrable Securities as each such holder may
request. The Company shall use its best efforts (within ten (10) days of the
notice provided for in the preceding sentence) to cause the managing underwriter
or underwriters of a proposed underwritten offering (the "Underwriter") to
permit the holders of Registrable
<PAGE>
42
Securities that have requested to participate in the registration for such
offering to include such Registrable Securities in such offering on the same
terms and conditions as the securities of the Company or the Demand Holder, as
the case may be, included therein. Notwithstanding the foregoing, if in the
opinion of the Underwriter the total amount or kind of securities which the
holders of Registrable Securities, the Company and any other persons or entities
intend to include in such offering (the "Total Securities") is sufficiently
large so as to have a material adverse effect on the distribution of the Total
Securities, then the amount or kind of securities to be offered for the account
of such holders of Registrable Securities and such other persons or entities
other than (i) the Company, if such registration is being filed for the
Company's own account, or (ii) the Demand Holders, if such registration is being
made at the demand of a Demand Holder, shall be reduced pro rata (to zero, if
necessary) to the extent necessary to reduce the Total Securities to the amount
recommended by the Underwriter.
(b) EXPENSES. The Company shall bear all Registration
Expenses in connection with any registration pursuant to this Section 9.3.
9.4 HOLDBACK AGREEMENTS.
(a) RESTRICTIONS ON PUBLIC SALE BY HOLDERS OF REGISTRABLE
SECURITIES. To the extent not inconsistent with applicable law, each holder of
Registrable Securities participating in such registration agrees not to effect
any public sale or distribution of any Registrable Securities being registered
or of any securities convertible into or exchangeable or exercisable for such
Registrable Securities, including a sale pursuant to Rule 144 under the
Securities Act, during the ten (10) Business Days prior to, and during the
ninety (90) days beginning on, the effective date of such registration statement
(except as part of such registration), if and to the extent requested by the
Company in the case of a non-underwritten public offering or if and to the
extent requested by the Underwriter in the case of an underwritten public
offering.
(b) RESTRICTIONS ON PUBLIC SALE BY THE COMPANY. The
Company agrees not to effect any public sale or distribution of any of its
equity securities, or any securities convertible into or exchangeable or
exercisable for such equity securities (except pursuant to registrations on
Form S-4 or S-8 or any successor or other forms not available for registering
equity securities for sale to the public) during the ten (10) Business Days
prior to, and during the ninety (90) day period beginning on, the later of (i)
the effective date of any registration statement in which the holders of
Registrable Securities are participating and (ii) the commencement of a public
distribution of the Registrable Securities pursuant to such registration
statement.
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43
9.5 REGISTRATION PROCEDURES.
(a) OBLIGATIONS OF THE COMPANY. Whenever registration of
Registrable Securities has been requested pursuant to Section 9.2 or 9.3 of this
Agreement, the Company shall use reasonable efforts to effect the registration
and sale of such Registrable Securities in accordance with the intended method
of distribution thereof, and in connection with any such request, the Company
shall, as soon as reasonably practicable:
(i) prepare and file with the SEC (in any event not
later than thirty (30) business days after receipt of a request to file a
registration statement with respect to Registrable Securities) a
registration statement on any form for which the Company then qualifies
which counsel for the Company shall deem appropriate and which form shall
be available for the sale of such Registrable Securities in accordance with
the intended method of distribution thereof, and use its best efforts to
cause such registration statement to become effective under the Act;
provided, however, that before filing a registration statement or
prospectus or any amendments or supplements thereto, the Company shall
(A) provide counsel selected by the holders of a majority of the
Registrable Securities being registered in such registration ("Holders'
Counsel") with an opportunity to participate in the preparation of such
registration statement and each prospectus included therein (and each
amendment or supplement thereto) to be filed with the SEC, which documents
shall be subject to the review of Holders' Counsel, and (B) notify the
Holders' Counsel and each seller of Registrable Securities of any stop
order issued or threatened by the SEC and take all reasonable action
required to prevent the entry of such stop order or to remove it if
entered;
(ii) prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective for a period which will terminate when all Registrable
Securities covered by such registration statement have been sold (but not
before the expiration of the ninety (90) day period referred to in
Section 4(3) of the Act and Rule 174 thereunder, if applicable), and comply
with the provisions of the Act with respect to the disposition of all
securities covered by such registration statement during such period in
accordance with the intended methods of disposition by the sellers thereof
set forth in such registration statement;
(iii) furnish to each seller of Registrable
Securities, prior to filing a registration statement, copies of such
registration statement as is proposed to be filed, and thereafter such
number of copies of such registration statement, each amendment and
supplement thereto (in each case including all
<PAGE>
44
exhibits thereto), the prospectus included in such registration statement
(including each preliminary prospectus) and such other documents as each
such seller may reasonably request in order to facilitate the disposition
of the Registrable Securities owned by such seller;
(iv) use reasonable efforts to register or qualify
such Registrable Securities under such other securities or blue sky laws of
such jurisdictions as any seller of Registrable Securities requests, and to
continue such qualification in effect in such jurisdiction for as long as
is permissible pursuant to the laws of such jurisdiction, or for as long as
any such seller requests or until all of such Registrable Securities are
sold, whichever is shortest, and do any and all other acts and things which
may be reasonably necessary or advisable to enable any such seller to
consummate the disposition in such jurisdictions of the Registrable
Securities owned by such seller; provided, however, that the Company shall
not be required to (A) qualify generally to do business in any jurisdiction
where it would not otherwise be required to qualify but for this Section
9.5(a)(iv), (B) subject itself to taxation in any such jurisdiction or (C)
consent to general service of process in any such jurisdiction;
(v) use reasonable efforts to cause the Registrable
Securities covered by such registration statement to be registered with or
approved by such other governmental agencies or authorities as may be
necessary by virtue of the business and operations of the Company to enable
the seller or sellers of Registrable Securities to consummate the
disposition of such Registrable Securities;
(vi) notify each seller of Registrable Securities at
any time when a prospectus relating thereto is required to be delivered
under the Act, upon discovery that, or upon the happening of any event as a
result of which, the prospectus included in such registration statement
contains an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances under which
they were made, and the Company shall promptly prepare a supplement or
amendment to such prospectus and furnish to each seller a reasonable number
of copies of a supplement to or an amendment of such prospectus as may be
necessary so that, after delivery to the purchasers of such Registrable
Securities, such prospectus shall not contain an untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading in light
of the circumstances under which they were made;
<PAGE>
45
(vii) enter into and perform customary agreements
(including an underwriting agreement in customary form with the Approved
Underwriter or Underwriter, if any, selected as provided in Sections 9.2 or
9.3) and take such other actions as are reasonably required in order to
facilitate the disposition of such Registrable Securities;
(viii) make available for inspection by any seller of
Registrable Securities, any managing underwriter participating in any
disposition pursuant to such registration statement, Holders' Counsel and
any attorney, accountant or other agent retained by any such seller or any
managing underwriter (each, an "Inspector" and collectively, the
"Inspectors"), all financial and other records, pertinent corporate
documents and properties of the Company and its subsidiaries (collectively,
the "Records") as shall be reasonably necessary to enable them to exercise
their due diligence responsibility, and cause the Company's and its
subsidiaries' officers, directors and employees, and the independent public
accountants of the Company, to supply all information reasonably requested
by any such Inspector in connection with such registration statement;
(ix) if such sale is pursuant to an underwritten
offering, obtain a "cold comfort" letter from the Company's independent
public accountants in customary form and covering such matters of the type
customarily covered by "cold comfort" letters as Holders' Counsel or the
managing underwriter reasonably requests;
(x) furnish, at the request of any seller of
Registrable Securities on the date such securities are delivered to the
underwriters for sale pursuant to such registration or, if such securities
are not being sold through underwriters, on the date the registration
statement with respect to such securities becomes effective, an opinion,
dated such date, of counsel representing the Company for the purposes of
such registration, addressed to the underwriters, if any, and to the seller
making such request, covering such legal matters with respect to the
registration in respect of which such opinion is being given as such seller
may reasonably request and are customarily included in such opinions;
(xi) otherwise use reasonable efforts to comply with
all applicable rules and regulations of the SEC, and make available to its
security holders, as soon as reasonably practicable but no later than
fifteen (15) months after the effective date of the registration statement,
an earnings statement covering a period of twelve (12) months beginning
after the effective date of the registration statement, in a manner which
satisfies the provisions of Section 11(a) of the Act;
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46
(xii) cause all such Registrable Securities to be
listed on each securities exchange on which similar securities issued by
the Company are then listed (including NASDAQ), provided, that the
applicable listing requirements are satisfied;
(xiii) provide officers' certificates and other
customary closing documents;
(xiv) cooperate with each seller of Registrable
Securities and each underwriter participating in the disposition of such
Registrable Securities and their respective counsel in connection with any
filings required to be made with the National Association of Securities
Dealers, Inc. (the "NASD"); and
(xv) use reasonable efforts to take all other steps
necessary to effect the registration of the Registrable Securities
contemplated hereby.
(b) NOTICE TO DISCONTINUE. Each holder of Registrable
Securities agrees that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 9.5(a)(vi), such holder
shall forthwith discontinue disposition of Registrable Securities pursuant to
the registration statement covering such Registrable Securities until such
holder's receipt of the copies of the supplemented or amended prospectus
contemplated by Section 9.5(a)(vi) and, if so directed by the Company, such
holder shall deliver to the Company (at the Company's expense) all copies, other
than permanent file copies then in such holder's possession, of the prospectus
covering such Registrable Securities which is current at the time of receipt of
such notice. If the Company shall give any such notice, the Company shall
extend the period during which such registration statement shall be maintained
effective pursuant to this Agreement (including without limitation the period
referred to in Section 9.5(a)(ii)) by the number of days during the period from
and including the date of the giving of such notice pursuant to
Section 9.5(a)(vi) to and including the date when the holder shall have received
the copies of the supplemented or amended prospectus contemplated by and meeting
the requirements of Section 9.5(a)(vi).
9.6 REGISTRATION EXPENSES. The Company shall pay all expenses
(other than underwriting discounts and commissions) arising from or incident to
the performance of, or compliance with, Section 9 of this Agreement, including
without limitation, (i) SEC, stock exchange, NASDAQ and NASD registration and
filing fees, (ii) all fees and expenses incurred in complying with securities or
blue sky laws (including reasonable fees, charges and disbursements of counsel
in connection with blue sky qualifications of the Registrable Securities),
(iii) all printing, messenger and delivery expenses, (iv) the fees, charges and
disbursements of counsel to the
<PAGE>
47
Company and of its independent public accountants and any other accounting and
legal fees, charges and expenses incurred by the Company (including without
limitation any expenses arising from any special audits incident to or required
by any registration or qualification), and (v) any liability insurance or other
premiums for insurance obtained by the Company and the reasonable fees, charges
and expenses of any special experts retained by the Company in connection with
any Demand Registration or piggy-back registration pursuant to the terms of this
Agreement, regardless of whether such registration statement is declared
effective. In connection with each registration hereunder, the Company shall
reimburse the holders of Registrable Securities being registered in such
registration for the reasonable fees, charges and disbursements of not more than
one counsel chosen by the holders of a majority of Registrable Securities being
registered in such registration. All of the expenses described in this
Section 9.6 are referred to herein as "Registration Expenses."
9.7 INDEMNIFICATION; CONTRIBUTION.
(a) INDEMNIFICATION BY THE COMPANY. The Company agrees to
indemnify, to the fullest extent permitted by law, each holder of Registrable
Securities, its officers, directors, partners, employees, advisors and agents
and each Person who controls (within the meaning of the Act or the Exchange Act)
such holder from and against any and all losses, claims, damages, liabilities
and expenses (including reasonable costs of investigation) arising out of or
based upon any untrue, or alleged untrue, statement of a material fact contained
in any registration statement, prospectus or preliminary prospectus or
notification or offering circular (as amended or supplemented if the Company
shall have furnished any amendments or supplements thereto) or arising out of or
based upon any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as the same are caused by or contained in any
information furnished in writing to the Company by such holder expressly for use
therein and provided further that the Company will not be liable to any holder
of Registrable Securities or any person controlling such holder with respect to
any loss, claim, liability, expense, charge or damage arising out of or based on
any untrue statement or alleged untrue statement or omission or alleged omission
to state a material fact in any preliminary prospectus which is corrected in the
prospectus. The Company shall also indemnify any underwriters of the
Registrable Securities, their officers, directors and employees and each Person
who controls such underwriters (within the meaning of the Act and the Exchange
Act) to the same extent as provided above with respect to the indemnification of
the holders of Registrable Securities.
(b) INDEMNIFICATION BY HOLDERS. In connection with any
registration statement in which a holder of Registrable Securities is
participating pursuant to Section 9.2 or 9.3 hereof, each such holder shall
furnish to the Company in writing such information with respect to such holder
as the Company may reasonably
<PAGE>
48
request or as may be required by law for use in connection with any such
registration statement or prospectus and each holder, by its participation in
such registration, agrees to indemnify, to the extent permitted by law, the
Company, any underwriter retained by the Company and their respective directors,
officers, employees and each Person who controls the Company or such underwriter
(within the meaning of the Act and the Exchange Act) to the same extent as the
foregoing indemnity from the Company to the holders of Registrable Securities,
but only with respect to any such information furnished in writing by or on
behalf of such holder.
(c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. Any Person
entitled to indemnification hereunder (the "Registration Rights Indemnified
Party") agrees to give prompt written notice to the indemnifying party (the
"Registration Rights Indemnifying Party") after the receipt by the Registration
Rights Indemnified Party of any written notice of the commencement of any
action, suit, proceeding or investigation or threat thereof made in writing for
which the Registration Rights Indemnified Party intends to claim indemnification
or contribution pursuant to this Agreement; provided, that the failure so to
notify the Registration Rights Indemnifying Party shall not relieve the
Registration Rights Indemnifying Party of any liability that it may have to the
Registration Rights Indemnified Party hereunder unless, and only to the extent
that, such failure results in the Registration Rights Indemnifying Party's
forfeiture of substantial rights or defenses. If notice of commencement of any
such action is given to the Registration Rights Indemnifying Party as above
provided, the Registration Rights Indemnifying Party shall be entitled to
participate in and, to the extent it may wish, jointly with any other
Registration Rights Indemnifying Party similarly notified, to assume the defense
of such action at its own expense, with counsel chosen by it and satisfactory to
such Registration Rights Indemnified Party. The Registration Rights Indemnified
Party shall have the right to employ separate counsel in any such action and
participate in the defense thereof, but the fees and expenses of such counsel
(other than reasonable costs of investigation) shall be paid by the Registration
Rights Indemnified Party unless (i) the Registration Rights Indemnifying Party
agrees to pay the same, (ii) the Registration Rights Indemnifying Party fails to
assume the defense of such action with counsel satisfactory to the Registration
Rights Indemnified Party in its reasonable judgment, (iii) the named parties to
any such action (including any impleaded parties) have been advised by such
counsel that either (A) representation of such Registration Rights Indemnified
Party and the Registration Rights Indemnifying Party by the same counsel would
be inappropriate under applicable standards of professional conduct or (B) there
may be one or more legal defenses available to the Registration Rights
Indemnified Party which are different from or additional to those available to
the Registration Rights Indemnifying Party. No Registration Rights Indemnifying
Party shall, without the prior written consent of each Registration Rights
Indemnified Party, settle, compromise or consent to the entry of any judgment
unless such settlement, compromise or consent includes an unconditional release
of the Registration Rights Indemnified Party from all liability relating
thereto.
<PAGE>
49
In either of such cases the Registration Rights Indemnifying Party shall not
have the right to assume the defense of such action on behalf of such
Registration Rights Indemnified Party. No Registration Rights Indemnifying
Party shall be liable for any settlement entered into without its written
consent, which consent shall not be unreasonably withheld, conditioned or
delayed.
(d) CONTRIBUTION. If the indemnification provided for in
this Section 9.7 from the Indemnifying Party is unavailable to a Registration
Rights Indemnified Party hereunder in respect of any losses, claims, damages,
liabilities or expenses referred to therein, then the Indemnifying Party, in
lieu of indemnifying such Registration Rights Indemnified Party, shall
contribute to the amount paid or payable by such Registration Rights Indemnified
Party as a result of such losses, claims, damages, liabilities or expenses in
such proportion as is appropriate to reflect the relative fault of the
Registration Rights Indemnifying Party and Registration Rights Indemnified Party
in connection with the actions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative faults of such Registration Rights Indemnifying Party and
Registration Rights Indemnified Party shall be determined by reference to, among
other things, whether any action in question, including any untrue or alleged
untrue statement of a material fact or omission or alleged omission to state a
material fact, has been made by, or relates to information supplied by, such
Registration Rights Indemnifying Party or Registration Rights Indemnified Party,
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such action. The amount paid or payable by a
party as a result of the losses, claims, damages, liabilities and expenses
referred to above shall be deemed to include, subject to the limitations set
forth in Sections 9.7(a), 9.7(b) and 9.7(c), any legal or other fees, charges or
expenses reasonably incurred by such party in connection with any investigation
or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 9.7(d) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person.
9.8 RULE 144. The Company covenants that it shall file any
reports required to be filed by it under the Exchange Act and the rules and
regulations adopted by the Commission thereunder; and that it shall take such
further action as each holder of Registrable Securities may reasonably request
(including providing any information necessary to comply with Rules 144 and 144A
under the Securities Act), all to the extent required from time to time to
enable such holder to sell Registrable Securities without registration under the
Act within the limitation of the exemptions provided by (a) Rule 144 or
Rule 144A under the Act, as such rules may
<PAGE>
50
be amended from time to time, or (b) any similar rules or regulations hereafter
adopted by the SEC. The Company shall, upon the request of any holder of
Registrable Securities, deliver to such holder a written statement as to whether
it has complied with such requirements.
10. TERMINATION.
10.1 TERMINATION. Subject to Section 10.2, this Agreement may
be terminated at any time prior to the Closing:
(a) by the Purchasers or the Company if the Stockholder
Meeting is held to consider the transactions contemplated hereby and the
stockholders fail to approve the Proposal;
(b) by the Purchasers if there has been a material breach
of any representation, warranty, covenant or agreement of the Company contained
in this Agreement, which breach is incurable or has not been cured by the
Company within 10 days after written notice from the Purchasers; PROVIDED,
HOWEVER, that no pending or threatened action, suit, proceeding or investigation
questioning the validity of this Agreement or any action to be taken pursuant
hereto or thereto or seeking to enjoin consummation of any of the transactions
contemplated hereby or thereby, shall give the Purchasers any right to terminate
this Agreement under this Section 10.1(a) except as set forth in paragraph (f)
below;
(c) by the Company if there has been a material breach of
any representation, warranty, covenant or agreement of the Purchasers contained
in this Agreement, which breach is incurable or has not been cured by the
Purchasers within 10 days after written notice from the Company;
(d) by the Purchasers if the Disclosure Schedules are not
in form and substance satisfactory to the Purchasers;
(e) by the Company or the Purchasers, if the Closing shall
not have occurred on or before December 31, 1997; PROVIDED, HOWEVER, that the
right to terminate this Agreement under this Section 10.1(e) shall not be
available to any party whose failure to fulfill any obligation under this
Agreement has been the cause of, or resulted in, the failure of the Closing to
occur on or before such date;
(f) by the Company or the Purchasers, if any judgment,
injunction, order or decree enjoining the Company or the Purchasers from
consummating the transactions contemplated by this Agreement is entered and such
judgment, injunction, order or decree becomes final and nonappealable; PROVIDED,
<PAGE>
51
HOWEVER, that the party seeking to terminate this Agreement must use all
reasonable efforts to remove such judgment, injunction, order or decree; or
(g) by mutual written consent of the Company and the
Purchasers.
10.2 EFFECT OF TERMINATION. If this Agreement is terminated
pursuant to Section 10.1, this Agreement shall become void and of no effect with
no liability on the part of any party hereto, except that the representation
contained in Section 4.25 and the covenants and agreements contained in Sections
6.1.4(b), 6.1.5, 8, 10.2 and 11 shall survive the termination hereof.
11. MISCELLANEOUS.
11.1 PERFORMANCE; WAIVER. The provisions of this Agreement may
be modified or amended, and waivers and consents to the performance and
observance of the terms hereof may be given (i) prior to the Closing, by written
instrument executed and delivered by the Company and the Purchasers, and (ii)
subsequent to the Closing, by written instrument executed and delivered by the
Company and the holders of (x) 66 2/3% of the outstanding shares of Preferred
Stock, if any, and (y) 66 2/3% of the Warrant Shares (as defined in Section
6.2.4(a)). The failure at any time to require performance of any provision
hereof shall in no way affect the full right to require such performance at any
time thereafter (unless performance thereof has been waived in accordance with
the terms hereof for all purposes and at all times by the parties to whom the
benefit of such performance is to be rendered). The waiver by any party to this
Agreement of a breach of any provision hereof shall not be taken or held to be a
waiver of any succeeding breach of such provision of any other provision or as a
waiver of the provision itself.
11.2 SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the successors and permitted assigns of the
parties hereto. Subject to applicable securities laws and the applicable
provisions of this Agreement, the Purchasers may assign any of their rights
under any of this Agreement to any of their Affiliates, employees, members or
partners. The Company may not assign any of its rights under this Agreement,
except to a successor-in-interest to the Company, without the written consent of
the Purchasers. No Person other than the parties hereto and their successors
and permitted assigns is intended to be a beneficiary of this Agreement.
11.3 NOTICES. All notices or other communications given or made
hereunder shall be validly given or made if in writing and delivered by
facsimile transmission or in Person at, mailed by registered or certified mail,
return receipt
<PAGE>
52
requested, postage prepaid, or sent by a reputable overnight courier to, the
following addresses (and shall be deemed effective at the time of receipt
thereof).
If to the Company:
Platinum Entertainment, Inc.
20001 Butterfield Road, Suite 1400
Downers Grove, Illinois 60515
Telecopy: (630) 769-0049
Attention: Chief Executive Officer
with a copies to:
Katten, Muchin & Zavis
525 West Monroe Street, Suite 1600
Chicago, Illinois
Telecopy: (312) 902-1061
Attention: Matthew S. Brown, Esq.
If to the Purchasers:
SK-Palladin Partners, LP
c/o Palladin Capital, Inc.
1285 Avenue of the Americas
New York, New York 10019-6064
Telecopy: (212) 641-5065
Attention: Mark J. Schwartz
and
MAC Music LLC
c/o Alpine Equity Partners, L.P.
1285 Avenue of the Americas
New York, New York 10019-6064
Telecopy: (212) 641-5148
Attention: Lorraine E. Jackson, Esq.
<PAGE>
53
with a copy to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
Telecopy: (212) 757-3990
Attention: Bruce A. Gutenplan, Esq.
or to such other address as the party to whom notice is to be given may have
previously furnished notice in writing to the other in the manner set forth
above.
11.4 TRANSACTION EXPENSES. The Company shall pay all Transaction
Expenses incurred by the Purchaser, regardless of whether or not the Closing
occurs unless this Agreement has been terminated by the Company pursuant to
Section 10.1(c) hereof.
11.5 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
AGREEMENTS MADE AND PERFORMED ENTIRELY WITHIN SUCH STATE. EACH OF THE PARTIES
HERETO AGREES TO SUBMIT TO THE JURISDICTION OF THE STATE AND FEDERAL COURTS IN
THE STATE OF NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO
THIS AGREEMENT.
11.6 SEVERABILITY. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, void or unenforceable, each of the Company and the Purchasers directs
that such court interpret and apply the remainder of this Agreement in the
manner that it determines most closely effectuates their intent in entering into
this Agreement, and in doing so particularly take into account the relative
importance of the term, provision, covenant or restriction being held invalid,
void or unenforceable.
11.7 HEADINGS; INTERPRETATION. The index and section headings
herein are for convenience only and shall not affect the construction hereof.
References to sections means sections of this Agreement unless the context
otherwise requires. References to herein or hereof mean this Agreement.
11.8 ENTIRE AGREEMENT. This Agreement embodies the entire
agreement between the parties relating to the subject matter hereof and
supersedes any and all prior oral or written agreements, representations or
warranties, contracts, understandings, correspondence, conversations, and
memoranda, whether written or oral, between the Company and the Purchasers, or
between or among any agents,
<PAGE>
54
representatives, parents, Subsidiaries, Affiliates, predecessors in interest or
successors in interest, with respect to the subject matter hereof.
11.9 NO THIRD PARTY RIGHTS. Except for the indemnified parties,
this Agreement is intended solely for the benefit of the parties hereto and is
not intended to confer any benefits upon, or create any rights in favor of, any
Person (including, without limitation, any stockholder or debtholder of the
Company) other than the parties hereto.
11.10 REMEDIES FOR BREACH. The parties agree that in addition to
any other rights or remedies which may be available at law or equity, the
parties shall be entitled to seek specific performance of any post-Closing duty
or obligation of any party hereto.
<PAGE>
55
11.11 COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original and both of which
together shall be deemed to be one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
PLATINUM ENTERTAINMENT, INC.
By: /s/ Steven Devick
------------------------------------
Name: Steven Devick
Title: Chief Executive Officer
MAC MUSIC LLC
By: Alpine Equity Partners, L.P.,
Managing Member
By: AEP, LLC
General Partner
By: /s/ Lisa Hook
------------------------------------
Name: Lisa Hook
Title: Managing Director
By: Maroley Media Group LLC,
Managing Member
By: /s/ Andrew B. Lipsher
------------------------------------
Name: Anderew B. Lipsher
Title: Executive Vice President
SK-PALLADIN PARTNERS, LP
By: SK-Palladin Gen Par, LP,
General Partner
By: SK-Palladin Gen Par, Inc.
General Partner
By: /s/ Mark J. Schwartz
------------------------------------
Name: Mark J. Schwartz
<PAGE>
56
EACH OF THE UNDERSIGNED, by execution hereof and delivery of a
counterpart hereof hereby join and becomes a party to the foregoing Securities
Purchase Agreement but only for purposes of Sections 6.3 and 11 thereof.
FRONTENAC VI LIMITED PARTNERSHIP
By: /s/ Rodney L. Goldstein
------------------------------------
Name: Rodney L. Goldstein
Title:
/s/ Steven Devick
---------------------------------------
Steven Devick
/s/ Andrew J. Filipowski
---------------------------------------
Andrew J. Filipowski
/s/ Craig Duchossois
---------------------------------------
Craig Duchossois
<PAGE>
SCHEDULE 2.2
NUMBER OF SHARES PORTION OF
PURCHASER OF PREFERRED STOCK WARRANTS PURCHASE PRICE
- ---------------------------------------------------------------------------
MAC Music LLC 10,000 1,800,000 $10,000,000.00
SK-Palladin Partners, LP 10,000 1,800,000 $10,000,000.00
ALLOCATION OF PURCHASE PRICE: The portion of the Purchase Price paid by each
Purchaser shall be allocated ____% to the shares of Preferred Stock purchased by
such Purchaser and ___% to the Warrants purchased by such Purchaser.*
- ---------------
* As soon as practicable, but no later than 15 days after the Closing Date
(unless the parties agree to an extension beyond such date) the parties
will in good faith attempt to reach agreement with respect to an
allocation. If the parties are unable to agree, then the allocation shall
be determined by an "Independent Financial Expert" within the meaning of,
and chosen in the manner set forth in, the definition of "Current Market
Price" in Section 1.12 of the Certificate of Designation.
<PAGE>
PLATINUM ENTERTAINMENT, INC.
2001 BUTTERFIELD ROAD
DOWNERS GROVE, ILLINOIS 60515
PROXY FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 29, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder(s) hereby appoints Steven Devick and Douglas
C. Laux, and each of them, with full power of substitution, as attorneys and
proxies for and in the name and place of the undersigned, and hereby
authorizes each of them to represent and to vote all of the shares of Common
Stock of Platinum Entertainment, Inc. ("Platinum") held of record by the
undersigned as of October 3, 1997 which the undersigned is entitled to vote at
the Annual Meeting of Stockholders to be held on October 29, 1997, at the
offices of Platinum, 2001 Butterfield Road, Suite 1400, Downers Grove,
Illinois 60515 at 10:00 a.m., Chicago time, and at any adjournment thereof.
THIS PROXY, WHEN PROPERLY EXECUTED AND RETURNED IN A TIMELY MANNER, WILL
BE VOTED AT THE ANNUAL MEETING AND AT ANY ADJOURNMENT THEREOF IN THE MANNER
DESCRIBED HEREIN. IF NO CONTRARY INDICATION IS MADE THE PROXY WILL BE VOTED
FOR PROPOSALS 1, 2, 3, 4, AND 5 AND IN ACCORDANCE WITH THE JUDGMENT OF THE
PERSONS NAMED AS PROXIES HEREIN ON ANY OTHER MATTERS THAT MAY PROPERLY COME
BEFORE THE ANNUAL MEETING.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE.
CONTINUED AND TO BE SIGNED AND DATED ON REVERSE SIDE.
SEE REVERSE SIDE
<PAGE>
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR PROPOSALS 1,
2, 3, 4 AND 5.
1. Proposal to elect two Class II directors as described in the Company's
Proxy Statement:
For Withhold For All Except
/ / / / / /
Class II directors to serve until the Annual Meeting of Stockholders in
2000, as provided in the By-laws of the Company.
Michael P. Cullinane and Andrew J. Filipowski
(INSTRUCTION: To withhold authority to vote for any nominee[s], mark the
"For All Except" box above and write the nominee name[s] on the line
below.)
___________________________________________________________________________
2. Proposal to approve the issuance and sale by the Company of 20,000 shares
of Series B Convertible Preferred Stock together with warrants to
purchase an aggregate of 3,600,000 shares of the Company's common stock,
par value $.001 per share.
For Against Abstain
/ / / / / /
3. Proposal to approve an amendment to the Platinum Entertainment, Inc. 1995
Directors' Stock Option Plan.
For Against Abstain
/ / / / / /
4. Proposal to adopt the Platinum Entertainment, Inc. 1997 Employee Stock
Purchase Plan.
For Against Abstain
/ / / / / /
5. Proposal to ratify the appointment by the Board of Directors of Ernst &
Young LLP as the independent auditors of the Company's financial statements
for the fiscal year ending May 31, 1998.
For Against Abstain
/ / / / / /
Each of the persons named as proxies herein are authorized, in such
person's discretion, to vote upon such other matters as may properly come
before the Annual Meeting.
/ / MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT
This Proxy must be signed exactly as your name appears hereon. When shares
are held by joint tenants, both should sign. Attorneys, executors,
administrators, trustees and guardians should indicate their capacities. If
the signer is a corporation, please print full corporate name and indicate
capacity of duly authorized officer executing on behalf of the corporation.
If the signer is a partnership, please print full partnership name and
indicate capacity of duly authorized person executing on behalf of the
partnership.
(Reverse Side)
Signature(s)
- -------------------------------------------
Date , 1997
--------------------------------
