<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1 to Quarterly Report on Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 0-27852
PLATINUM ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3802328
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2001 Butterfield Road
Downers Grove, Illinois 60515
(Address of principal executive offices, including zip code)
(630) 769-0033
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
5,274,403 Shares of Common Stock, par value $.001 per share, at November 25,
1997
<PAGE>
The Registrant hereby amends the Form 10-Q filed October 14, 1997 in order to
reclassify certain financial information for the three months ended August
31, 1997. Such reclassification does not affect gross revenues, operating
loss or loss per share.
PLATINUM ENTERTAINMENT, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1997
TABLE OF CONTENTS
Page
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Part I - FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets as of August 31, 1997 (Unaudited)
and May 31, 1997. . . . . . . . . . . . . . . . . . . . . . . 3-4
Consolidated Statements of Operations for the three months
ended August 31, 1997 and 1996 (Unaudited). . . . . . . . . . 5
Consolidated Statements of Cash Flows for the three months
ended August 31, 1997 and 1996 (Unaudited). . . . . . . . . . 6
Notes to Unaudited Consolidation Financial Statements . . . . 7-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . 9-17
Part II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders . . . . . 17
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . 17
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Exhibits
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
AUGUST 31, MAY 31,
1997 1997
(UNAUDITED)
ASSETS
Current assets:
Cash $ 8 $ 53
Cash in escrow 1,750 1,750
Accounts receivable, less allowances of
$2,982 and $3,291, respectively 13,778 15,034
Artist advances 2,705 2,444
Inventories, less allowances of $705
and $350, respectively 5,685 5,416
Notes receivable 50 50
Other 264 1,018
----------------------
Total current assets 24,240 25,765
Artist advances, net of current amounts, less
allowances of $9,886 and $9,745, respectively 3,442 2,297
Equipment and leasehold improvements, net 1,123 1,185
Music catalog, less accumulated amortization of
$523 and $327, respectively 19,081 19,277
Music publishing rights, less accumulated amortization
of $255 and $203, respectively 3,572 3,624
Goodwill, less accumulated amortization of $184 and
$97, respectively 6,714 6,001
Equity investment in joint venture 3,169 3,154
Other 1,100 1,001
---------------------
Total assets $ 62,441 $ 62,304
---------------------
---------------------
3
See accompanying notes to financial statements
<PAGE>
PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
AUGUST 31, MAY 31,
1997 1997
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ 10,000 $ 9,706
Term loan 25,000 25,000
Accounts payable 6,150 4,038
Accrued liabilities and other 1,997 2,521
Reserve for future returns 2,710 2,660
Royalties payable 5,866 5,513
---------------------
Total current liabilities 51,723 49,438
Convertible subordinated debentures 5,000 5,000
Stockholders' equity:
Preferred Stock:
Preferred Stock ($.001 par value); 10,000,000 shares
authorized, no shares issued and outstanding
at August 31 and May 31, 1997, respectively - -
Common Stock:
Common Stock ($.001 par value); 40,000,000 shares
authorized, 5,184,474 shares issued and outstanding
at August 31, 1997 and 5,171,439 shares issued and
outstanding at May 31, 1997, respectively 5 5
Additional paid-in capital 37,261 37,261
Accumulated deficit (31,548) (29,400)
---------------------
Stockholders' equity 5,718 7,866
---------------------
Total liabilities and stockholders' equity $ 62,441 $ 62,304
---------------------
---------------------
4
See accompanying notes to financial statements
<PAGE>
PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER ENDED AUGUST 31
-----------------------
1997 1996
(UNAUDITED)
Gross product sales $ 11,478 $ 5,647
Less: Returns and allowances (3,172) (1,073)
Less: Discounts (604) (444)
-----------------------
Net product sales 7,702 4,130
Cost of product sales 3,526 2,416
-----------------------
4,176 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 4,770 1,656
Other operating expenses:
Selling, general and administrative 3,964 2,304
Merger, restructuring and one-time costs 846 -
Depreciation and amortization 485 70
-----------------------
5,295 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
5
See accompanying notes to financial statements
<PAGE>
PLATINUM ENTERTAINMENT,INC.
CONSOLIDATION STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
QUARTER ENDED AUGUST 31
-----------------------
1997 1996
(UNAUDITED)
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
-----------------------
-----------------------
6
See accompanying notes to financial statements
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANACIAL 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.
7
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. PREFERRED STOCK
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 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 issue, 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 per share of $6.60.
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.
5. 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 cost
include 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 the Company's Country label
and in-house sales department and a shift in third-party fulfillment of
Platinum Christian Distribution. In addition, one-time costs for the three
months ended August 31, 1997 include $775 of legal, accounting, and other
incremental costs incurred by the Company associated with the Acquisition of
K-tel. Such transaction was terminated by the Company. See "Subsequent Event"
below.
6. 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.
7. 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 4.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information in this section should be read together with the
consolidated financial statements and notes thereto that are included elsewhere
in this filing.
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.
In connection with the Intersound Acquisition, the Company obtained a
credit facility totaling $35,000,000 which matures in full on October 31, 1997
("Existing Credit Facility"). The Company intends to repay the Existing Credit
Facility with the net proceeds of the Preferred Stock with Warrants Issuance and
the Proposed Credit Facility - as hereinafter defined - see "Capital Resources"
below.
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 $240,000 was accrued at August 31,
1997, relating primarily to severance costs and a distribution termination
fee. The restructuring is expected to be completed by the end of the second
quarter of fiscal 1998. Such restructuring resulted in shifts in the selling
and promotion efforts of the Company's Country label and in-house sales
department and a shift in third-party fulfillment of Platinum Christian
Distribution. In addition, one-time costs for the three months ended August 31,
1997 include $775,000 of legal, accounting, and other incremental costs
incurred by the Company associated with the Acquisition of K-tel. Such
transaction was terminated by the Company. See "Significant Matters" below.
The Company records revenues for music products 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, PolyGram Group
Distribution, Inc. ("PGD").
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 period 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 terminated this arrangement
during the current fiscal quarter 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.
9
<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 periods reflected below. Operating results for any period are not
necessarily indicative of results for any future periods.
<TABLE>
<CAPTION>
QUARTER ENDED AUGUST 31
------------------------------------------------------
1997 1996
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(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Total gross revenues . . . . . . . $13,437 100.0% $6,968 100.0%
Less: Returns and allowances. . . (3,172) -23.6% (1,073) -15.4%
Less: Discounts . . . . . . . . . (604) -4.5% (444) -6.4%
Less: Allowances for
unrecoupable
artist advances. . . . . . . . . (143) -1.1% (150) -2.2%
--------- ---------
Total net revenues . . . . . . . . 9,518 70.8% 5,301 76.0%
Cost of product sales. . . . . . . 3,526 26.2% 2,416 34.7%
Cost of artist projects
and other revenues . . . . . . . 1,222 9.1% 1,229 17.6%
--------- ---------
Total cost of sales and
services . . . . . . . . . . . . 4,748 35.3% 3,645 52.3%
--------- ---------
Gross profit . . . . . . . . . . . 4,770 35.5% 1,656 23.7%
Other operating expenses:
Selling, general and
administrative expenses. . . . . 3,964 29.5% 2,304 33.1%
Merger, restructuring and
one-time costs . . . . . . . . . 846 6.3% - -
Depreciation and amortization. . . 485 3.6% 70 1.0%
--------- ---------
Operating loss . . . . . . . . . . (525) -3.9% (718) -10.4%
Interest income. . . . . . . . . . 21 0.2% 90 1.3%
Interest expense . . . . . . . . . (1,209) -9.0% (3) -
Other financing costs. . . . . . . (450) -3.3% - -
Equity gain. . . . . . . . . . . . 15 0.1% - -
--------- ---------
Net loss . . . . . . . . . . . . . ($2,148) -15.9% ($631) -9.1%
--------- ---------
--------- ---------
</TABLE>
10
<PAGE>
GROSS REVENUES
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 I. 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 ORINOCO 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
Returns and allowances increased $2,099,000 or 195.6% to $3,172,000 for
the current fiscal quarter compared to the comparable period of the prior
fiscal year. Returns and allowances as a percentage of gross product sales,
less discounts, increased to 29.2% 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
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.
ALLOWANCE FOR UNRECOUPABLE ARTIST ADVANCES
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.
11
<PAGE>
COST OF PRODUCT SALES
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
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
Gross profit increased $3,114,000 or 188.0% to $4,770,000 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 35.5% 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
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.
MERGER, RESTRUCTURING AND ONE-TIME COSTS
See "Overview" above for details of nonrecurring merger, restructuring and
one-time costs of $846,000.
DEPRECIATION AND AMORTIZATION
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.
12
<PAGE>
OPERATING LOSS
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.
INCOME TAXES
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 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
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
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.
NET LOSS
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.
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
13
<PAGE>
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.
SIGNIFICANT MATTERS
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 $1,750,000 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. 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.
Net cash used in investing activities for the current fiscal 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.
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 period for
14
<PAGE>
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 (6.98% 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 $25,000,000 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
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 $12,500,000 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.
The Company has entered into an Investment Agreement with certain parties
(the "Purchasers") whereby 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 3,600,000 shares of Common Stock. 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 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 beginning two years from the date of issue, 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.
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. If the Preferred Stock with
Warrants Issuance, the Proposed Credit Facility or other
15
<PAGE>
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 of up
to $40,000,000 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 $40,000,000 to finance the then-contemplated acquisition by the
Company of the music business of 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 $40,000,000 preferred stock issuance on
the terms previously approved and is soliciting stockholder approval of the
Preferred Stock with Warrants Issuance.
The Company intends to upgrade its current computer systems prior to the
end of fiscal 1998. While the Company has no material purchase commitments to
date, estimated expenditures are $500,000 to $750,000.
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 Company currently does not have any material
commitments for capital expenditures for the next twelve months. The Company
anticipates that the net proceeds from the Preferred Stock with Warrants
Issuance, the Proposed Credit Facility and the operating cash flows will be
adequate to fund the Company's operations for at least 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 current fiscal quarter.
INFLATION
The impact of inflation on the Company's operating results has been
moderate in recent periods, reflecting generally lower rates of inflation in the
economy. While inflation has not had a material impact on operating results,
there is no assurance that the Company's business will not be affected by
inflation in the future.
SAFE HARBOR PROVISION
This filing 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 filing, 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
16
<PAGE>
include, without limitation, commercial success of the Company's repertoire,
charges and costs related to acquisitions, relationships with artists and
producers, attraction and retention of key personnel, general economic and
business conditions and enhanced competition and new competitors in the recorded
music industry. In addition, the Company intends to refinance its current
credit facility when it becomes due in full on October 31, 1997. If such
refinancing does not occur, the consequences could be materially adverse to the
Company's business, results of operations and financial position. There are no
assurances that such refinancing could be obtained on terms favorable to the
Company, or at all.
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 "Liquidity and Capital Resources" above.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Special Meeting of Stockholders of the Company was held on July
30, 1997.
(b) 1. The Stockholders voted to approve the issuance and sale by the
Company of Convertible Preferred Stock in an amount of up to
$40 million ("Preferred Stock"), with the following votes:
For Against Abstentions
--- ------- -----------
3,144,179 142,322 7,900
2. The Stockholders also voted to approve the possible issuance
and sale by the Company of Common Stock of the Company to
directors and/or officers of the Company in order to fund the
first six quarterly dividend payments on the Preferred Stock:
For Against Abstentions
--- ------- -----------
3,134,279 151,822 8,300
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. Exhibits.
10.1* Fourth Amendment to Amended and Restated Credit Agreement dated
August 29, 1997 among Platinum Entertainment, Inc., Bank of
Montreal, individually and as Agent, PPM America Special
Investments Fund L.P. and FC CBO Limited and the Guarantors'
Consent attached thereto.
10.2* Employment Agreement dated June 1, 1997 between the Company and
Steven Devick.
10.3* Employment Agreement dated June 1, 1997 between the Company and
Douglas C. Laux.
10.4* Employment Agreement dated June 1, 1997 between the Company and
Thomas R. Leavens.
10.5* Employment Agreement dated July 1, 1996 between the Company and
Lynne Hoffman-Engel.
10.6* Investment Agreement dated October 12, 1997 among the Company, MAC
Music LLC and SK-Palladin Partners, LP is herein incorporated by
reference to the Proxy Statement for the 1997 Annual Meeting of
Stockholders.
27. Financial Data Schedule.
- ----------------------------
* Previously filed.
B. Form 8-K.
On September 10, 1997, a Form 8-K was filed by the Registrant announcing
termination of an agreement between the Registrant and K-tel International,
Inc.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Platinum
Entertainment, Inc. has duly caused this Amendment to this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, on this 25th day
of November, 1997.
PLATINUM ENTERTAINMENT, INC.
By: /s/ Steven Devick
--------------------------------------------
Steven Devick
Chairman of the Board, President and Chief
Executive Officer
By: /s/ Douglas C. Laux
--------------------------------------------
Douglas C. Laux
Chief Financial Officer
(Principal Financial and Accounting Officer)
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE QUARTER ENDED AUGUST 31,
1997 AND THE UNAUDITED CONSOLIDATED BALANCE SHEET AT AUGUST 31, 1997 AND THE
ACCOMPANYING NOTES THERETO AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> AUG-31-1997
<CASH> 8
<SECURITIES> 0
<RECEIVABLES> 16,760
<ALLOWANCES> (2,982)
<INVENTORY> 6,390
<CURRENT-ASSETS> 24,240
<PP&E> 1,803
<DEPRECIATION> (680)
<TOTAL-ASSETS> 62,441
<CURRENT-LIABILITIES> 51,723
<BONDS> 5,000
0
0
<COMMON> 5
<OTHER-SE> 5,713
<TOTAL-LIABILITY-AND-EQUITY> 62,441
<SALES> 7,702
<TOTAL-REVENUES> 13,437
<CGS> 3,526
<TOTAL-COSTS> 4,748
<OTHER-EXPENSES> 5,295<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,659<F2>
<INCOME-PRETAX> (2,148)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,148)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,148)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> 0
<FN>
<F1>INCLUDES $846 OF ONE-TIME COSTS
<F2>INCLUDES $450 OF ONE-TIME COSTS
</FN>
</TABLE>
