<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 October 14, 1997
<PAGE>
PLATINUM ENTERTAINMENT, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1997
TABLE OF CONTENTS
Page
-----
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 (3,017) (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 1,001 -
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
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)
3. DEBT (CONTINUED)
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.
4. MERGER, RESTRUCTURING AND ONE-TIME COSTS
As a result of the Intersound Acquisition, the Company incurred
significant costs to merge and restructure its business with Intersound. Such
merger and restructuring cost include severance costs, relocation costs,
lease commitment write-offs, warehouse closing costs and other related costs
and were primarily expensed during fiscal 1997; $240 remains accrued at
August 31, 1997. 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 the three months ended August 31, 1997
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 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.
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.
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 Intersound Acquisition, the Company incurred
significant costs to merge and restructure its business with Intersound.
Such merger and restructuring costs include severance costs, relocation
costs, lease commitment write-offs, warehouse closing costs and other related
costs and were primarily expensed during fiscal 1997; $240,000 remains
accrued at August 31, 1997. 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 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 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
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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. . . (3,017) -22.5% (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 . . . . . . . . 9,673 71.9% 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 . . . . . . . . . . . 4,925 36.6% 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 . . . . . . . . . 1,001 7.4% - -
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 $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 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
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 $3,269,000 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
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 $1,001,000.
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
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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.
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
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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
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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.
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.
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
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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.
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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Platinum
Entertainment, Inc. has duly caused this filing to be signed on its behalf by
the undersigned, thereunto duly authorized, on this 14th day of October, 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)
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PLATINUM ENTERTAINMENT, INC.
FOURTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
Bank of Montreal, as Agent
Chicago, Illinois
Ladies and Gentlemen:
Reference is hereby made to that certain Amended and Restated Credit
Agreement dated as of January 31, 1997 as amended by that certain First
Amendment to Amended and Restated Credit Agreement dated as of April 22, 1997
and as further amended by that certain Second Amendment to Amended and Restated
Credit Agreement dated as of June 12, 1997 and as further amended by that
certain Third Amendment to Amended and Restated Credit Agreement (the "THIRD
AMENDMENT") dated as of July 31, 1997 (as so amended, the "CREDIT AGREEMENT")
between the undersigned, Platinum Entertainment, Inc., a Delaware corporation
(the "COMPANY"), and you as Agent for the Banks (the "AGENT"). All capitalized
terms used herein without definition shall have the same meanings herein as such
terms have in the Credit Agreement.
The Company has requested that each Bank party to the Credit Agreement
extend the maturity of the credit outstanding under the Credit Agreement, and
make certain other corresponding modifications to the Credit Agreement, and the
Banks are willing to do so under the terms and conditions set forth in this
Amendment.
1. AMENDMENTS.
Upon satisfaction of the conditions precedent to the effectiveness hereof
set forth below, the Credit Agreement shall be and hereby is amended as follows:
SECTION 1.01. AMENDED DEFINITIONS. Section 1.1 of the Credit Agreement
shall be and hereby is amended by amending the definitions of "REVOLVING CREDIT
TERMINATION DATE" and "TERM CREDIT MATURITY DATE" and as so amended the
definitions shall be restated in their entirety to read as follows:
"REVOLVING CREDIT TERMINATION DATE" shall mean October 31, 1997, or
such earlier date on which the Commitments are terminated in whole
pursuant to Section 4.5 or Section 9 hereof. THE COMPANY ACKNOWLEDGES AND
AGREES THAT THE BANKS HAVE ABSOLUTELY NO OBLIGATION WHATSOEVER TO EXTEND
THE REVOLVING CREDIT TERMINATION DATE BEYOND OCTOBER 31, 1997.
"TERM CREDIT MATURITY DATE" means the earlier of (i) October 31,
1997, or (ii) such earlier date on which the Commitments are terminated in
whole pursuant to Section 4.5 or Section 9 hereof. THE COMPANY
ACKNOWLEDGES AND AGREES THAT THE BANKS HAVE ABSOLUTELY NO OBLIGATION
WHATSOEVER TO EXTEND THE TERM CREDIT MATURITY DATE BEYOND OCTOBER 31, 1997.
<PAGE>
SECTION 1.02. AMENDED EVENTS OF DEFAULT. Sections 9.1(o) and 9.1(p) shall
be and hereby are amended in their entirety to read as follows:
"(o) [Intentionally Deleted]; or
(p) DLJ Capital Funding, Inc. shall withdraw at any time as
manager in the Company's proposed private placement of convertible
preferred stock; or"
SECTION 1.03. AMENDED EVENT OF DEFAULT. Section 9.1(r) of the Credit
Agreement shall be and hereby is amended in its entirety to read as follows:
"(r) By September 30, 1997, the Company shall have failed to make
such filings (such as proxy statements) with the SEC as are necessary under
applicable law to solicit its shareholders' approval of the Company's
issuance of at least an additional 3,000,000 shares of its common capital
stock, and the Agent shall have received assurances reasonably satisfactory
to it of the foregoing; or"
SECTION 1.04. DELETED FINANCIAL COVENANTS. The text of each of Sections
8.10, 8.11 and 8.12 hereof shall be and hereby is amended and as so amended
shall be restated in its entirety to read in each case as follows:
"[Intentionally Deleted]"
2. DEFERRAL OF EXISTING EXTENSION FEE.
As consideration for the Banks' agreements in the Third Amendment, the
Company agreed to pay the Banks an extension fee (the "THIRD AMENDMENT FEE")
equal to $350,000 (representing 1% of the outstanding principal amount as of
July 31, 1997 of the sum of (i) the Term Credit Loans and (ii) the Revolving
Credit Loans). The Third Amendment Fee has been fully-earned and is due on
August 31, 1997. The Company has requested that the Banks defer the Company's
obligation to pay the Third Amendment Fee. Accordingly, effective upon their
acceptance of this Amendment in the space provided for that purpose below, the
Banks agree to defer the Third Amendment Fee such that the same shall be due and
payable on the earlier of (i) October 31, 1997 or (ii) such earlier date on
which the Commitments are terminated in whole pursuant to Section 4.5 or Section
9 of the Credit Agreement.
3. NEW FEES.
As consideration for the Banks' agreements in this Amendment, the Company
agrees to pay to the Agent for (except as indicated below) the ratable account
of the Banks:
(a) an extension fee (the "FOURTH AMENDMENT FEE") equal to
$752,500 (representing two and 15/100 percent (2.15%) of the outstanding
principal amount as of the date hereof of the sum of (i) the Term Credit
Loans and (ii) the Revolving Credit Loans), with 3/43 of such fee being for
the Agent's sole use and benefit; and
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(b) an additional extension fee (the "FINAL FEE") equal to two
percent (2.00%) of the outstanding principal amount as of the Final Fee Due
Date (as hereinafter defined) of the sum of (i) the Term Credit Loans and
(ii) Revolving Credit Loans.
The Fourth Amendment Fee and Final Fee shall be deemed fully-earned upon the
parties' execution of this letter. The Fourth Amendment Fee will be payable on
the earlier of (i) October 31, 1997 or (ii) such earlier date on which the
Commitments are terminated in whole pursuant to Section 4.5 or Section 9 of the
Credit Agreement. The Final Fee shall be due and payable on the date (the
"FINAL FEE DATE") which is the earlier of (i) October 31, 1997 or (ii) the date
on which the Commitments are terminated in whole by reason of an Event of
Default pursuant to Section 9 of the Credit Agreement.
4. WAIVER OF FEES.
In order to induce the Company to repay the Term Credit Loans and the
Revolving Credit Loans as soon as possible, the Banks agree to waive payment of
the Third Amendment Fee, the Fourth Amendment Fee and the Final Fee as follows:
(a) If (i) the Company prepays the principal of the Term Credit Loans
and the Revolving Credit Loans such that the aggregate unpaid principal
balance thereof is $5,000,000 or less on or before September 15, 1997 and
(ii) no Event of Default or Default has occurred and is continuing, then
the Banks hereby waive payment in their entirety of the Third Amendment Fee
and the Fourth Amendment Fee to the same extent as if they had never been
required to have been paid; and
(b) If in circumstances under which the foregoing clause (a) is not
applicable (i) the Company prepays the principal of the Term Credit Loans
and Revolving Credit Loans so as to reduce the aggregate unpaid principal
balance thereof to less than $5,000,000 on or before September 30, 1997
and (ii) no Event of Default or Default has occurred and is continuing,
then the Banks hereby waive all but $50,000 of the Fourth Amendment Fee
to such portion of the Fourth Amendment Fee extent as if such portion of
the Fourth Amendment Fee had never been required to have been paid (the
$50,000 portion of the Fourth Amendment Fee not so waived being for the
Agent's sole use and benefit).
5. WAIVER.
The Banks hereby waive compliance with Section 6.4 of the Credit Agreement
to the extent that the Company's use of not more than $2,000,000 of Loans to
fund a down payment on the so-called K-tel acquisition constituted a breach of
such Section.
The Banks also hereby waive any Event of Default that may have existed
under Section 9.1(r) hereof as such Section was in force and effect prior to
giving effect to this Amendment to the same extent as if such Section did not
exist prior to the effectiveness hereof.
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6. REPRESENTATIONS.
In order to induce each Bank party to the Credit Agreement to execute and
deliver this Amendment, the Company hereby represents to each such Bank that as
of the date hereof and as of the date this Amendment becomes effective, but in
each case after giving effect to this Amendment, (i) the representations and
warranties set forth in Section 6 of the Credit Agreement are and shall be and
remain true and correct (except that the representations contained in Section
6.5 shall be deemed to refer to the most recent financial statements of the
Company audited by Ernst & Young LLP and delivered to the Agent for the account
of the Banks) and (ii) unless specifically waived herein, the Company is in full
compliance with all of the terms and conditions of the Credit Agreement and
(iii) no Default or Event of Default has occurred and is continuing under the
Credit Agreement or shall result after giving effect to this Amendment.
7. CONDITIONS PRECEDENT.
The effectiveness of this Amendment is subject to the satisfaction of all
of the following conditions precedent:
(a) The Company, the Guarantors, the Agent and each Bank then party
to the Credit Agreement shall have executed and delivered this Amendment.
(b) The Company shall have paid the Agent for its sole use and
benefit and arrangement fee of $50,000.
(c) The Company's representations in Section 5 hereof shall be true
and correct.
(d) The Agent shall have received certified copies of the resolutions
of the Board of Directors of the Company authorizing the execution,
delivery and performance of, and indicating the authorized signers of, this
Amendment and all other documents relating thereto.
(e) Legal matters incident to the execution and delivery of this
Amendment shall be satisfactory to the Agent and its counsel.
8. MISCELLANEOUS.
(a) The Company has heretofore executed and delivered to the Agent
that certain (i) Security Agreement (the "SECURITY AGREEMENT"); (ii)
Security Agreement Re: Intellectual Property (the "INTELLECTUAL PROPERTY
SECURITY AGREEMENT"); and (iii) Pledge Agreement (the "PLEDGE AGREEMENT")
each dated as of January 31, 1997 between the Company, the Subsidiary
Guarantors and the Agent and the Company hereby acknowledges and agrees
that, notwithstanding the execution and delivery of this Amendment, the
Security Agreement, the Intellectual Property Security Agreement and the
Pledge Agreement remain in full force and effect and the rights
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and remedies of the Agent thereunder, the obligations of the Company thereunder
and the liens and security interests created and provided for thereunder remain
in full force and effect for the benefit and security of the indebtedness
purported to be secured thereby (including the Loans as modified hereby) and
shall not be affected, impaired or discharged hereby. Nothing herein contained
shall in any manner affect or impair the priority of the liens and security
interests created and provided for by the Security Agreement, the Intellectual
Property Security Agreement and the Pledge Agreement as to the indebtedness
which would be secured thereby prior to giving effect to this Amendment.
(b) Except as specifically amended herein, the Loan Documents shall
continue in full force and effect in accordance with its original terms.
Reference to this specific Amendment need not be made in the Loan Documents
or any other instrument or document executed in connection therewith, or in
any certificate, letter or communication issued or made pursuant to or with
respect to the Credit Agreement, any reference in any of such items to the
Credit Agreement being sufficient to refer to the Credit Agreement as amended
hereby.
(c) The Company agrees to pay on demand all reasonable costs and expenses
of or incurred by the Agent in connection with the negotiation, preparation,
execution and delivery of this Amendment, including the reasonable fees and
expenses of counsel for the Agent.
(d) This Amendment may be executed in any number of counterparts, and by
the different parties on different counterpart signature pages, all of which
taken together shall constitute one and the same agreement. Any of the
parties hereto may execute this Amendment by signing any such counterpart and
each of such counterparts shall for all purposes be deemed to be an original.
This Amendment shall be governed by the internal laws of the State of
Illinois.
Dated as of August 29, 1997.
PLATINUM ENTERTAINMENT, INC.
By /s/ Steven Devick
------------------------
Its CEO
---------------------
<PAGE>
GUARANTORS' CONSENT
Each of the undersigned have heretofore executed and delivered to the Agent
its respective Guaranty dated January 31, 1997 and hereby consents to the Second
Amendment to the Credit Agreement as set forth above and confirms that its
Guaranty and all of its obligations thereunder remain in full force and effect.
Each of the undersigned further agrees that the consent of each of the
undersigned to any further amendments to the Credit Agreement shall not be
required as a result of this consent having been obtained, except to the extent,
if any, required by the respective Guaranty referred to above.
Each of the undersigned, except for Steven Devick, have heretofore executed
and delivered to the Agent that certain (i) Security Agreement; (ii) Security
Agreement Re: Intellectual Property; and (iii) Pledge Agreement, each dated as
of January 31, 1997 and hereby confirms that the Collateral Documents to which
each is a party remain in full force and effect and the rights and remedies of
the Agent thereunder, the obligations of the Subsidiary Guarantors thereunder
and the liens and security interests created and provided for thereunder remain
in full force and effect for the benefit and security of the indebtedness
purported to be secured thereby and shall not be affected, impaired or
discharged hereby.
/s/ Steven Devick
--------------------------------------
Steven Devick, individually
RIVER NORTH STUDIOS, INC.
By: /s/ Steven Devick
---------------------------------
Name: Steven Devick
Title: President
RIVER NORTH RECORDS, INC.
By: /s/ Steven Devick
---------------------------------
Name: Steven Devick
Title: President
CGI RECORDS, INC.
By: /s/ Steven Devick
---------------------------------
Name: Steven Devick
Title: President
<PAGE>
LEXICON MUSIC, INC.
By: /s/ Steven Devick
--------------------------------------
Name: Steven Devick
Title: President
LIGHT RECORDS, INC.
By: /s/ Steven Devick
--------------------------------------
Name: Steven Devick
Title: President
THE RECORDING EXPERIENCE, INC.
By: /s/ Steven Devick
--------------------------------------
Name: Steven Devick
Title: President
JUSTMIKE MUSIC, INC.
By: /s/ Steven Devick
--------------------------------------
Name: Steven Devick
Title: President
PEG PUBLISHING, INC.
By: /s/ Steven Devick
--------------------------------------
Name: Steven Devick
Title: President
ROYCE PUBLISHING, INC.
By: /s/ Steven Devick
--------------------------------------
Name: Steven Devick
Title: President
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<PAGE>
Accepted and agreed to in Chicago, Illinois as of the date and year last
above written.
BANK OF MONTREAL, individually and as
Agent
By /s/ Bradford B. Courl
--------------------------------------
Its Senior Trader
------------------------------------
PPM AMERICA SPECIAL INVESTMENTS FUND
L.P.
By /s/ Levoyd E. Robinson
--------------------------------------
Its Managing Director
------------------------------------
FC CBO LIMITED
By /s/ Barry Campbell
--------------------------------------
Its Managing Director
------------------------------------
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<PAGE>
PLATINUM ENTERTAINMENT, INC.
EMPLOYMENT AGREEMENT
This Agreement ("AGREEMENT"), is made and entered into as of the 1st day of
June, 1997 (the "EFFECTIVE DATE"), by and between Platinum Entertainment, Inc.,
a Delaware corporation (the "COMPANY"), and Steven Devick (the "EXECUTIVE").
WHEREAS, the Company wishes to employ Executive as an executive employee,
and Executive wishes to be employed by the Company as an executive employee, all
upon the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. EMPLOYMENT OF EXECUTIVE:
As of the Effective Date, the Company hereby engages and employs Executive
in an executive capacity as the Company's Chief Executive Officer and Executive
hereby accepts such employment and agrees to act as an employee of the Company
in accordance with the terms of employment hereinafter specified ("EXECUTIVE
EMPLOYMENT").
2. TERM OF EXECUTIVE EMPLOYMENT:
The period of Executive Employment shall begin on the Effective Date for a
three year term (the "EMPLOYMENT PERIOD"); provided, however, unless the Company
or the Executive shall notify the other of its intent not to extend the
Employment Period at least six months prior to the end of the Employment Period
(including any extensions of the initial term thereof), the Employment Period
shall automatically be extended for one additional year.
3. DUTIES:
Executive shall be employed by Company as the Company's Chief Executive
Officer. In such capacity, Executive shall have supervision and control over,
and responsibility for, the general management and operation of the Company, and
shall have such other powers and duties as the Board of Directors of the Company
may from time to time prescribe; provided that, such powers and duties are
consistent with the Executive's then present duties and with his position as the
Company's senior executive officer in charge of the general management of the
Company.
<PAGE>
Nothing contained herein shall be construed so as to prohibit Executive
from performing such other or additional duties or responsibilities, and
exercising such other or additional authority in furtherance of the goals of the
Company, as the Executive and the Board of Directors of the Company shall from
time to time agree upon.
Executive shall devote such portion of his business time and attention as
is necessary to appropriately and efficiently discharge his duties and
responsibilities as herein set forth. If Executive so discharges his duties he
may engage in other business and civic activities, in addition to those relating
to the Company's business, if such activities are not otherwise prohibited by
the terms of this Agreement.
During Executive's employment hereunder, Executive shall not be required to
relocate his principal residence from his current location as a result of the
Company moving its principal executive offices or the Executive's office to an
address greater than twenty (20) miles away from the Company's principal
executive offices (or the Executive's office) at the Effective Date and shall
not be required to perform services which could make the continuance of
Executive's principal residence in such location unreasonably difficult or
inconvenient for Executive except to the extent that the performance of such
services (and travel) is commensurate with Executive's duties specified
hereunder.
4. EXECUTIVE SALARY AND COMPENSATION:
(a) BASE SALARY. During the Employment Period the Company shall pay or
cause to be paid to Executive an initial base salary ("BASE SALARY") at an
annual rate of $625,000 per year, payable to Executive on a periodic basis in
accordance with the Company's then current executive salary payment practice;
provided, however, that the installments may not be made less frequently than on
a monthly basis. Such base salary shall be subject to review in accordance with
the Company's normal practice for executive salary review from time to time in
effect, and will not be reduced without the prior written consent of Executive.
(b) INCENTIVE COMPENSATION. Executive shall be entitled during the
Employment Period to participate in the bonus program established by the
Compensation Committee of the Company's Board of Directors (the "BONUS
PROGRAM"). Pursuant to the Bonus Program, the bonus payable to Executive in
each fiscal year shall be equal to the sum of (i) a base bonus equal to 25% of
base salary for such fiscal year (the "BASE BONUS"); provided, however, that the
base bonus shall be payable only if the Company's revenues for such fiscal year
are greater than or equal to 125% of revenues for the previous fiscal year and
(ii) an additional bonus (the "ADDITIONAL BONUS") equal to the product of (A)
base salary for such fiscal year and (B) the amount obtained by dividing (x) the
amount by which revenues for such fiscal year exceed revenues for the previous
fiscal year by (y) revenues for the previous fiscal year; provided, however,
that the additional bonus shall be payable only if (1) the Company achieves
earnings before interest, taxes, depreciation and amortization ("EBITDA") in
such fiscal year greater than or equal to the plan approved by the Board of
Directors for such fiscal year and (2) the
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<PAGE>
Company's earnings per share in such year are greater than or equal to those
projected by the Company's primary outside analyst, as adjusted for material
events occurring during such year. It is hereby acknowledged that as of the
date of this agreement, EBITDA is internally projected to be $16.0 million for
the fiscal year ending May 31, 1998 and earnings per share are projected at
$0.80 per share (assuming a June 1, 1997 acquisition of the music business of
K-tel International, Inc. (the "K-tel Acquisition")) and that such projections,
for purposes of calculating the additional bonus, shall be adjusted by the
Compensation Committee to reflect the actual closing date of the K-tel
Acquisition. Notwithstanding anything to the contrary contained herein,
Executive's total bonus in any fiscal year shall not exceed 3% of the Company's
total revenues for such year. If Executive's employment is terminated effective
at any time other than the end of the Company's fiscal year, the final awards
under the Bonus Program will be made by the Company's independent accountant or
accounting firm based upon the most recent unaudited financial statements of the
Company for the month end immediately prior to the effective date of
termination.
If Executive is entitled to receive severance payments pursuant to Section
7 of this Agreement, then for purposes of such Sections the amount of Bonus
Program compensation and base salary which is payable on an annualized basis as
severance shall be equal to the greatest annual amount paid under each of the
Bonus Program and as base salary, respectively, to Executive during any 12 month
period during the 36 month period preceding termination of Executive's
employment with the Company.
(c) WITHHOLDING OF CERTAIN TAXES. All compensation referred to in
Sections 4(a) and 4(b) of this Agreement is stated in terms of gross amount, it
being understood that the Company will be required to withhold from such gross
amount deductions for federal, state and local income taxes (if any), F.I.C.A.,
unemployment compensation taxes and the like.
(d) FRINGE BENEFITS. During the Employment Period, the Company shall
provide, in addition to benefits available to company employees generally, the
following fringe benefits to Executive: (i) MEDICAL AND DENTAL INSURANCE, the
Company shall provide Executive and Executives's immediate family, including
spouse, if any, and children, if any, at the Company's expense, with
comprehensive medical and dental insurance coverage similar to that provided to
other executive officers of the Company; (ii) LIFE INSURANCE, the Company shall
provide Executive, at the Company's expense, a "split dollar" policy or policies
of life insurance insuring the life of Executive for the benefit of person(s)
designated from time to time by Executive, and such life insurance policy or
policies shall be in the amount of five million dollars ($5,000,000), which
policy or policies shall be assigned to Executive, together with any cash value
thereof, at Executive's separation in accordance with the terms of such policy
or policies; (iii) DISABILITY INSURANCE, the Company shall provide Executive, at
the Company's expense, with comprehensive short and long term disability
insurance in an amount which the Company determines is reasonably commensurate
with Executive's compensation contemplated hereunder, including, without
limitation, Executive's base salary, Bonus Program compensation, fringe benefits
and the like; (iv) CLUBS; PROFESSIONAL ORGANIZATIONS, the Company shall pay the
annual dues and assessments for the Executive's membership in the two clubs
selected by
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<PAGE>
Executive (whether social, professional, athletic, golf or otherwise); (v)
NON-ACCOUNTABLE EXPENSE ALLOWANCE, the Company shall pay to Executive an
allowance for non-accountable expenses of $50,000 per year.
5. EXPENSES:
In addition to the allowance payable pursuant to clause (v) of Section 4(d)
hereof, the Company shall pay or reimburse Executive in accordance with the
Company's policy for all expenses reasonably incurred by Executive during the
period of Executive's employment, in connection with the performance of
Executive's duties under this Agreement, including, without limitation, travel,
entertainment and automobile expenses. As the Company may reasonably request,
Executive shall provide to the Company documentation or supporting information
relating to the expenses for which Executive seeks reimbursement.
6. TERMINATION OF EXECUTIVE EMPLOYMENT BY THE COMPANY FOR GOOD CAUSE:
Subject to its obligations under Section 7, the Company shall have the
option to terminate Executive's employment with or without cause, for any reason
whatsoever, including without limitation, Disability (as hereinafter defined) by
providing written Notice of Termination (as defined below) to Executive and such
termination shall be effective 10 days after the giving of said written notice.
If Executive is terminated for Good Cause (as defined below), then Company
shall pay to Executive all such compensation owing through the date of
termination.
For purposes of this Agreement, the termination of the Executive's
employment hereunder shall be deemed to have been for Good Cause only if the
termination of the Executive's employment shall have been the result of (a) an
act or acts of dishonesty by Executive which the Board of Directors reasonably
believes constitute a felony which result directly or indirectly in gain to or
personal enrichment of the Executive at the Company's expense, or (b) an act or
acts by Executive which the Board of Directors reasonably believes constitute a
felony and as a result of which the continued employment of Executive by the
Company will have an adverse effect on the Company's business.
For purposes of this Agreement, Notice of Termination shall mean delivery
to Executive of a copy of a resolution duly adopted by the affirmative vote of
not less than a majority of the entire membership of the Company's Board of
Directors at a meeting of the Board of Directors (after reasonable notice has
been delivered to Executive and reasonable opportunity has been provided for
Executive, together with Executive's counsel, to be heard before the Board of
Directors prior to such vote).
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<PAGE>
7. TERMINATION OF EXECUTIVE EMPLOYMENT WITHOUT GOOD CAUSE, BY EXECUTIVE FOR
GOOD REASON OR AS A RESULT OF DISABILITY:
The Executive may terminate the Executive's employment by the Company for
"Good Reason" (as defined below) at any time unless prior to giving his notice,
Executive shall have received a Notice of Termination for Good Cause.
If Executive (i) is terminated for any reason other than Good Cause, (ii)
is terminated as a result of Executive's Disability, (iii) terminates his
employment for Good Reason (as defined below), or (iv) is notified by the
Company of its intent not to extend the Employment Period (as defined in Section
2, above), then the Company shall continue to pay to Executive, as severance
compensation, all compensation payable including base salary, payments under the
Bonus Program, fringe benefits and the like, for a period of three years from
the date of Executive's termination (the "SEVERANCE PAYOUT PERIOD").
In lieu of regular payments due under the preceding paragraph, Executive
shall be entitled to receive, upon Executive's written election, a lump sum
payment equal to the present value of the stream of monthly payments for the
Severance Payout Period, in which each monthly payment is 1/12 of the greatest
amount paid to Executive under the Bonus Program during any trailing 12 month
period in the 36 months prior to Executive's election hereunder. Executive may
also similarly elect to receive a lump sum payment equal to the present value of
the base salary under Section 4(a) hereof for the balance of the severance
compensation and an amount equal to the present value of the fringe benefits
remaining to be paid for the balance of the Severance Payout Period based upon
the Company's expenses for providing the fringe benefits pursuant to
Section 4(d) hereof during the Company's most recently completed fiscal year.
For purposes of this computation, present value shall be calculated on the basis
of the prime rate of interest announced by the Company's principal bank, or if
it has no such bank, published in THE WALL STREET JOURNAL, on the date of
Executive's election to receive the lump sum payments provided for herein.
For purposes of this Agreement, "Good Reason" shall mean, so long as the
Executive has not been guilty of the conduct giving rise to the right to
terminate the Executive for Good Cause, (i) a breach by the Company of this
Agreement in any material respect if such breach is not cured by the Company
within thirty (30) days after notice setting forth in reasonable detail the
facts and circumstances claimed to provide the basis of such noncompliance has
been given by the Executive to the Company, (ii) the failure to elect the
Executive to the office of Chief Executive Officer of the Company, the removal
of the Executive from such 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, except in connection with the termination of his
employment on account of his death or disability or for Good Cause, (iii) a
relocation by the Company of the Executive's place of employment as described in
Section 3 hereof, (iv) any purported termination of the Executive's employment
which is not effected pursuant to a Notice of Termination satisfying the
requirements set forth above (and for purposes of this Agreement
-5-
<PAGE>
no such purported termination shall be effective), or (v) the occurrence of a
"change in control" of the Company. For purposes of this Agreement, a "change
in control" of the Company shall be deemed to have occurred on the first of any
of the following dates:
(1) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of
twenty percent (20%) or more of either (A) the then-outstanding shares of
common stock of the Company (the "Outstanding Company Common Stock") or (B)
the combined voting power of the then-outstanding voting securities of the
Company entitled to vote generally in the election of directors (the
"Outstanding Company Voting Securities"); provided, however, that for
purposes of this subsection (1), the following acquisitions shall not
constitute a Change of Control: (A) any acquisition directly from the
Company other than in connection with the acquisition by the Company or its
affiliates of a business, (B) any acquisition by the Company, (C) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company, (D)
any acquisition by a lender to the Company pursuant to a debt restructuring
of the Company, or (E) any acquisition by any corporation pursuant to a
transaction which complies with clauses (A), (B) and (C) of subsection (3)
of this Section 8(a);
(2) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority
of the Board; provided, however, that any individual becoming a director
subsequent to the date hereof whose election, or nomination for election by
the Company's shareholders, was approved by a vote of at least a majority
of the directors then comprising the Incumbent Board shall be considered as
though such individual were a member of the Incumbent Board, but excluding,
for this purpose, any such individual whose initial assumption of office
occurs as a result of an actual or threatened election contest with respect
to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than
the Board;
(3) Consummation of a reorganization, merger or consolidation of the
Company or any direct or indirect subsidiary of the Company or sale or
other disposition of all or substantially all of the assets of the Company
(a "Business Combination"), in each case, unless, following such Business
Combination, (A) all or substantially all of the individuals and entities
who were the beneficial owners, respectively, of the Outstanding Company
Common Stock and Outstanding Company Voting Securities immediately prior to
such Business Combination beneficially own, directly or indirectly, more
than sixty percent (60%) of, respectively, the then-outstanding shares of
common stock and the combined voting power of the then-outstanding voting
securities entitled to vote generally in the election of directors, as the
case may be, of the corporation resulting from such Business Combination
(which shall include for these purposes, without limitation, a corporation
which as a result of such transaction owns the Company
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<PAGE>
or all or substantially all of the Company's assets either directly
or through one or more subsidiaries) in substantially the same proportions
as their ownership, immediately prior to such Business Combination, of the
Outstanding Company Common Stock and Outstanding Company Voting Securities,
as the case may be, (B) no Person (excluding any corporation resulting from
such Business Combination or any employee benefit plan (or related trust)
of the Company or such corporation resulting from such Business Combination
and any Person beneficially owning, immediately prior to such Business
Combination, directly or indirectly, 20% or more of the Outstanding Common
Stock or Outstanding Voting Securities, as the case may be) beneficially
owns, directly or indirectly, twenty percent (20%) or more of,
respectively, the then-outstanding shares of common stock of the
corporation resulting from such Business Combination, or the combined
voting power of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors and (C) at least a
majority of the members of the board of directors of the corporation
resulting from such Business Combination were members of the Incumbent
Board at the time of the execution of the initial agreement, or of the
action of the Board, providing for such Business Combination; or
(4) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company other than to a corporation which
would satisfy the requirements of clauses (A), (B) and (C) of Subsection
(3) of this Section 8(a), assuming for this purpose that such liquidation
or dissolution was a Business Combination.
8. DEATH OR DISABILITY OF THE EXECUTIVE:
Executive's employment shall automatically terminate upon the death of the
Executive and, at the option of the Company as determined by the Board of
Directors, upon the Disability (as hereinafter defined) of Executive.
"Disability," as used herein, shall be deemed to have occurred whenever the
Board determines that in its judgment Executive has suffered physical or mental
illness, injury or infirmity of such a nature, degree or effect as to render
Executive, for a significant period of time, substantially unable to perform his
duties as delineated in paragraph 3 hereof.
9. GROSS UP FOR PARACHUTE PAYMENTS:
If any payments or benefits received by the Executive upon his termination
of employment pursuant to this Agreement or any Company compensation plans
(including, by way of example but not limitation, any stock, stock option or
restricted stock plans or grants) (the "PAYMENTS") will be subject to the tax
imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the
"IRC") (the "EXCISE TAX") (or any similar tax that may hereafter be imposed by
the IRC), the Company shall pay to the Executive an additional amount (the
"GROSS-UP PAYMENT"), such that the net amount received by him, after deduction
of any Excise Tax
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<PAGE>
on the Payments and any federal income tax and Excise Tax upon the payment
provided for by this subsection, shall be equal to the Payments. For purposes
of determining whether any of the Payments will be subject to the Excise Tax and
the amount of such Excise Tax, (A) all Payments shall be treated as "parachute
payments" within the meaning of Section 280G(b)(2) of the IRC, and all "excess
parachute payments" within the meaning of Section 280G(b)(1) shall be treated as
subject to the Excise Tax, unless in the opinion of the Company's independent
auditors (the "ACCOUNTING FIRM"), such Payments (in whole or in part) do not
constitute parachute payments, or such excess parachute payments (in whole or in
part) represent reasonable compensation for services actually rendered within
the meaning of Section 280G(b)(4) of the IRC in excess of the base amount within
the meaning of Section 280G(b)(3) of the IRC, allocable to such reasonable
compensation, or are otherwise not subject to the Excise Tax, (B) the amount of
the Payments which shall be treated as subject to the Excise Tax shall be equal
to the lesser of (1) the total amount of the Payments or (2) the amount of
excess parachute payments within the meaning of Section 280G(b)(1) (after
applying clause (A), above), and (C) the value of any non-cash benefits or any
deferred payment or benefit shall be determined by the Accounting Firm in
accordance with the principles of Sections 280G(d)(3) and (4) of the IRC. For
purposes of determining the amount of the Gross-Up Payment, the Executive shall
be deemed to pay federal income taxes at the highest marginal rate of federal
income taxation applicable to individuals in the calendar year in which the
Gross-Up Payment is to be made. A Gross-Up Payment shall be made not later than
the fifth day, or as soon thereafter as the Company deems practicable, following
the date the Executive becomes subject to payment of the Excise Tax. In the
event that the Excise Tax is determined to exceed the amount determined by the
Accounting Firm, the Company shall make an additional Gross-up Payment in
respect of the additional amount (plus any interest and penalties payable with
respect to such excess) at the time that the amount of such excess is finally
determined.
In the event that the Excise Tax is determined to be less than the amount
determined by the Accounting Firm, the Executive shall repay to the Company at
the time that the amount of such reduction in Excise Tax is finally refunded to
or otherwise realized as a benefit by Executive, the portion of the Gross-up
Payment that would not have been paid, plus interest on the amount of such
repayment at the rate provided in Section 1274(b)(2)(B) of the Code.
The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that would require payment by the Company of the
Gross-Up Payment. If the Company elects to contest such claim, the Executive
shall:
(i) give the Company any information reasonably requested by the
Company relating to such claim,
(ii) take such action to contest such claim as the Company (or its
counsel) shall reasonably request, and
(iii) cooperate with the Company in good faith in order to
effectively contest such claim.
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<PAGE>
The Company shall bear and pay directly all costs and expenses (including
additional interest and penalties) incurred in connection with such contest and
shall indemnify and hold the Executive harmless, on an after-tax basis, for any
Excise Tax or income tax (including interest and penalties with respect thereto)
imposed as a result of such contest, and the Executive agrees to prosecute such
contest to a determination as the Company shall determine; provided, however,
the Company shall advance the amount of any payment pending the contest to the
Executive and shall indemnify the Executive with respect to any taxes (including
penalties and interest, if any) which may be imposed in connection with the
advance of such funds.
10. MITIGATION OF AMOUNTS PAYABLE UNDER SECTION 7:
The Executive shall not be required to mitigate the amount of any payment
provided for pursuant to Section 7 of this Agreement by seeking other employment
or otherwise, and, further, any payment or benefit to be provided to Executive
pursuant to this Agreement shall not be reduced by any compensation or other
amount earned or collected by Executive at any time before or after the
termination of Executive Employment hereunder.
11. MISCELLANEOUS:
(a) NOTICES. Any notice or other communication required or permitted
hereunder shall be in writing and shall be deemed given when delivered in person
to the following addresses:
(i) if to the Company, to:
Platinum Entertainment, Inc.
2001 Butterfield Road, Suite 1400
Downers Grove, IL 60515
with a copy to:
Katten Muchin & Zavis
525 West Monroe Street
Suite 1600
Chicago, Illinois 60661-3693
Attention: Matthew S. Brown, Esq.
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<PAGE>
(ii) if to Executive to:
Steven Devick
c/o Platinum Entertainment, Inc.
2001 Butterfield Road, Suite 1400
Downers Grove, IL 60515
Any party may change its address for notice hereunder by notice to the other
party hereto.
(b) GOVERNING LAW. The parties agree that this Agreement shall be
construed and governed in accordance with the laws of the State of Illinois
applicable to agreements made and to be performed entirely within such state.
(c) BINDING EFFECT. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, legal representatives,
executors, administrators, successors and assigns. Any Successor will
automatically succeed to the obligations of the Company under this Agreement,
including the obligations set forth in Section 7 of this Agreement; provided
that, the Company shall remain liable under this Agreement in such event.
(d) COUNTERPARTS. This Agreement may be executed simultaneously in one or
more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
(e) ENTIRE AGREEMENT. This Agreement represents the entire agreement and
understanding of the parties hereto with respect to the matters set forth
herein. This Agreement supersedes all prior negotiations, discussions,
correspondence, communications, understandings and agreements between the
parties, written or oral, relating to the subject matter of this Agreement.
This Agreement, may be amended, superseded, cancelled, renewed, or extended and
the terms hereof may be waived, only by a written instrument signed by the
parties hereto or, in the case of a waiver, by the party waiving compliance.
(f) WAIVERS. No delay on the part of any party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof. Nor shall any
waiver on the part of any party of any such right, power or privilege hereunder,
nor any single or partial exercise of any right, power or privilege hereunder,
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege hereunder.
(g) HEADINGS. The headings in this Agreement are inserted for convenience
only and are not to be considered in the interpretation or construction of the
provisions hereof.
(h) ARBITRATION. Except for any claim or dispute which gives rise or
could give rise to equitable relief under this Agreement, at the request of the
Executive any disagreement, dispute, controversy or claim arising out of or
relating to this Agreement or the breach hereof shall be settled exclusively and
finally by arbitration. The arbitration shall be conducted in
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<PAGE>
accordance with such rules and before such arbitrator as the parties shall agree
and if they fail to so agree within 15 days after demand for arbitration, such
arbitration shall be conducted in accordance with the Commercial Arbitration
Rules of the American Arbitration Association (hereinafter referred to as "AAA
RULES"). Such arbitration shall be conducted in Chicago, Illinois, or in such
other city as the parties to the dispute may designate by mutual consent. The
arbitral tribunal shall consist of three arbitrators (or such lesser number as
may be agreed upon by the parties) selected according to the procedure set forth
in the AAA Rules in effect on the date hereof and the arbitrators shall be
empowered to order any remedy which is appropriate to the proceedings and issues
presented to them. The chairman of the arbitral tribunal shall be appointed by
the American Arbitration Association from among the three arbitrators so
selected. Any party to a decision rendered in such arbitration proceedings may
seek an order enforcing the same by any court having jurisdiction.
(i) NO STRICT CONSTRUCTION. The language used in this Agreement will be
deemed to be the language chosen by the Executive and the Company to express
their mutual intent, and no rule of strict construction will be applied against
the Executive or the Company.
(j) LEGAL EXPENSES. The Executive shall be entitled to recover any
expenses for attorney's fees and disbursements incurred by him in connection
with enforcing his rights under this Agreement.
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IN WITNESS WHEREOF, the Company and Executive have signed this Agreement as
of the day and year written above.
PLATINUM ENTERTAINMENT, INC.
By: /s/ Thomas R. Leavens
----------------------------------------
Its: General Counsel/COO
----------------------------------------
/s/ Steven Devick
--------------------------------------------
Steven Devick
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PLATINUM ENTERTAINMENT, INC.
EMPLOYMENT AGREEMENT
This Agreement ("AGREEMENT"), is made and entered into as of the 1st day of
June, 1997 (the "EFFECTIVE DATE"), by and between Platinum Entertainment, Inc.,
a Delaware corporation (the "COMPANY"), and Douglas C. Laux (the "EXECUTIVE").
WHEREAS, the Company wishes to employ Executive as an executive employee,
and Executive wishes to be employed by the Company as an executive employee, all
upon the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. EMPLOYMENT OF EXECUTIVE:
As of the Effective Date, the Company hereby engages and employs Executive
in an executive capacity as the Company's Chief Financial Officer and Executive
hereby accepts such employment and agrees to act as an employee of the Company
in accordance with the terms of employment hereinafter specified ("EXECUTIVE
EMPLOYMENT").
2. TERM OF EXECUTIVE EMPLOYMENT:
The period of Executive Employment shall begin on the Effective Date for a
three year term (the "EMPLOYMENT PERIOD"); provided, however, unless the Company
or the Executive shall notify the other of its intent not to extend the
Employment Period at least six months prior to the end of the Employment Period
(including any extensions of the initial term thereof), the Employment Period
shall automatically be extended for one additional year.
3. DUTIES:
Executive shall be employed by Company as the Company's Chief Financial
Officer. In such capacity, Executive shall have supervision and control over,
and responsibility for, the finance and accounting management and operation of
the Company, and shall have such other powers and duties as the Board of
Directors of the Company may from time to time prescribe; provided that, such
powers and duties are consistent with the Executive's then present duties and
with his position as the Company's senior executive officer in charge of the
financial management of the Company.
<PAGE>
Nothing contained herein shall be construed so as to prohibit Executive
from performing such other or additional duties or responsibilities, and
exercising such other or additional authority in furtherance of the goals of the
Company, as the Executive and the Board of Directors of the Company shall from
time to time agree upon.
Executive shall devote substantially all of his business time and attention
to appropriately and efficiently discharge his duties and responsibilities as
herein set forth. If Executive so discharges his duties he may engage in other
business and civic activities, in addition to those relating to the Company's
business, if such activities are not otherwise prohibited by the terms of this
Agreement.
During Executive's employment hereunder, Executive shall not be required to
relocate his principal residence from his current location as a result of the
Company moving its principal executive offices or the Executive's office to an
address greater than twenty (20) miles away from the Company's principal
executive offices (or the Executive's office) at the Effective Date and shall
not be required to perform services which could make the continuance of
Executive's principal residence in such location unreasonably difficult or
inconvenient for Executive except to the extent that the performance of such
services (and travel) is commensurate with Executive's duties specified
hereunder.
4. EXECUTIVE SALARY AND COMPENSATION:
(a) BASE SALARY. During the Employment Period the Company shall pay or
cause to be paid to Executive an initial base salary ("BASE SALARY") at an
annual rate of $300,000 per year, payable to Executive on a periodic basis in
accordance with the Company's then current executive salary payment practice;
provided, however, that the installments may not be made less frequently than on
a monthly basis. Such base salary shall be subject to review in accordance with
the Company's normal practice for executive salary review from time to time in
effect, and will not be reduced without the prior written consent of Executive.
(b) INCENTIVE COMPENSATION. Executive shall be entitled during the
Employment Period to participate in the bonus program established by the
Compensation Committee of the Company's Board of Directors (the "BONUS
PROGRAM"). Pursuant to the Bonus Program, the bonus payable to Executive in
each fiscal year shall be equal to the sum of (i) a base bonus equal to 25% of
base salary for such fiscal year (the "BASE BONUS"); provided, however, that the
base bonus shall be payable only if the Company's revenues for such fiscal year
are greater than or equal to 125% of revenues for the previous fiscal year and
(ii) an additional bonus (the "ADDITIONAL BONUS") equal to the product of (A)
base salary for such fiscal year and (B) the amount obtained by dividing (x) the
amount by which revenues for such fiscal year exceed revenues for the previous
fiscal year by (y) revenues for the previous fiscal year; provided, however,
that the additional bonus shall be payable only if (1) the Company achieves
earnings before interest, taxes, depreciation and amortization ("EBITDA") in
such fiscal year greater than or equal to the plan approved by the Board of
Directors for such fiscal year and (2) the
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Company's earnings per share in such year are greater than or equal to those
projected by the Company's primary outside analyst, as adjusted for material
events occurring during such year. It is hereby acknowledged that as of the
date of this agreement, EBITDA is internally projected to be $16.0 million for
the fiscal year ending May 31, 1998 and earnings per share are projected at
$0.80 per share (assuming a June 1, 1997 acquisition of the music business of K-
tel International, Inc. (the "K-tel Acquisition")) and that such projections,
for purposes of calculating the additional bonus, shall be adjusted by the
Compensation Committee to reflect the actual closing date of the K-tel
Acquisition. Notwithstanding anything to the contrary contained herein,
Executive's total bonus in any fiscal year shall not exceed 100% of Executive's
base salary for such year. If Executive's employment is terminated effective at
any time other than the end of the Company's fiscal year, the final awards under
the Bonus Program will be made by the Company's independent accountant or
accounting firm based upon the most recent unaudited financial statements of the
Company for the month end immediately prior to the effective date of
termination.
If Executive is entitled to receive severance payments pursuant to Section
7 of this Agreement, then for purposes of such Section, the amount of Bonus
Program compensation and base salary which is payable on an annualized basis as
severance shall be equal to the greatest annual amount paid under each of the
Bonus Program and as base salary, respectively, to Executive during any 12 month
period during the 36 month period preceding termination of Executive's
employment with the Company.
(c) WITHHOLDING OF CERTAIN TAXES. All compensation referred to in
Sections 4(a) and 4(b) of this Agreement is stated in terms of gross amount, it
being understood that the Company will be required to withhold from such gross
amount deductions for federal, state and local income taxes (if any), F.I.C.A.,
unemployment compensation taxes and the like.
(d) FRINGE BENEFITS. During the Employment Period, the Company shall
provide, in addition to benefits available to company employees generally, the
following fringe benefits to Executive: (i) MEDICAL AND DENTAL INSURANCE, the
Company shall provide Executive and Executives's immediate family, including
spouse and children, if any, at the Company's expense, with comprehensive
medical and dental insurance coverage similar to that provided to other
executive officers of the Company; (ii) LIFE INSURANCE, the Company shall
provide Executive, at the Company's expense, a term policy or policies of life
insurance insuring the life of Executive for the benefit of person(s) designated
from time to time by Executive, and such life insurance policy or policies shall
be in the amount of one million dollars ($1,000,000); (iii) DISABILITY
INSURANCE, the Company shall provide Executive, at the Company's expense, with
comprehensive short and long term disability insurance in an amount which the
Company determines is reasonably commensurate with Executive's compensation
contemplated hereunder, including, without limitation, Executive's base salary,
Bonus Program compensation, fringe benefits and the like; (iv) CLUBS;
PROFESSIONAL ORGANIZATIONS, the Company shall pay the annual dues and
assessments for the Executive's membership in one club selected by Executive
(whether social, professional, athletic, golf or otherwise) not in excess of
$425 per month.
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5. EXPENSES:
The Company shall pay or reimburse Executive in accordance with the
Company's policy for all expenses reasonably incurred by Executive during the
period of Executive's employment, in connection with the performance of
Executive's duties under this Agreement, including, without limitation, travel
and entertainment expenses. As the Company may reasonably request, Executive
shall provide to the Company documentation or supporting information relating to
the expenses for which Executive seeks reimbursement.
6. TERMINATION OF EXECUTIVE EMPLOYMENT BY THE COMPANY FOR GOOD CAUSE:
Subject to its obligation under Section 7, the Company shall have the
option to terminate Executive's employment with or without cause, for any reason
whatsoever, including without limitation, Disability (as hereinafter defined) by
providing written Notice of Termination (as defined below) to Executive and such
termination shall be effective 10 days after the giving of said written notice.
If Executive is terminated for Good Cause (as defined below), then Company
shall pay to Executive all such compensation owing through the date of
termination.
For purposes of this Agreement, the termination of the Executive's
employment hereunder shall be deemed to have been for Good Cause only if the
termination of the Executive's employment shall have been the result of (a) an
act or acts of dishonesty by Executive which the Board of Directors reasonably
believes constitute a felony which result directly or indirectly in gain to or
personal enrichment of the Executive at the Company's expense, (b) an act or
acts by Executive which the Board of Directors reasonably believes constitute a
felony and as a result of which the continued employment of Executive by the
Company will have an adverse effect on the Company's business, or (c) the
Executive willfully engaging in one or more acts, or willfully omitting to act,
which is demonstrably and materially damaging to the Company or any of its
subsidiaries.
For purposes of this Agreement, Notice of Termination shall mean delivery
to Executive of a copy of a resolution duly adopted by the affirmative vote of
not less than a majority of the entire membership of the Company's Board of
Directors at a meeting of the Board of Directors (after reasonable notice has
been delivered to Executive and reasonable opportunity has been provided for
Executive, together with Executive's counsel, to be heard before the Board of
Directors prior to such vote).
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<PAGE>
7. TERMINATION OF EXECUTIVE EMPLOYMENT WITHOUT GOOD CAUSE, BY EXECUTIVE FOR
GOOD REASON OR AS A RESULT OF DISABILITY:
The Executive may terminate the Executive's employment by the Company for
"Good Reason" (as defined below) at any time unless prior to giving his notice,
Executive shall have received a Notice of Termination for Good Cause.
If Executive (i) is terminated for any reason other than Good Cause, (ii)
is terminated as a result of Executive's Disability, (iii) terminates his
employment for Good Reason (as defined below), or (iv) is notified by the
Company of its intent not to extend the Employment Period (as defined in Section
2, above), then the Company shall continue to pay to Executive, as severance
compensation, all compensation payable including base salary, payments under the
Bonus Program, fringe benefits and the like, (x) if the termination occurs
pursuant to clause (i), (ii) or (iii) of this paragraph, for a period beginning
on the date of Executive's termination and ending on the date which is the later
of (A) the end of the Employment Period and (B) the first anniversary of the
date of Executive's termination and (y) if the termination occurs pursuant to
clause (iv) of this paragraph, for a period beginning on the date of Executive's
termination and ending on the first anniversary of the end of the Employment
Period (the "Severance Payout Period").
In lieu of regular payments due under the preceding paragraph, Executive
shall be entitled to receive, upon Executive's written election, a lump sum
payment equal to the present value of the stream of monthly payments for the
Severance Payout Period, in which each monthly payment is 1/12 of the greatest
amount paid to Executive under the Bonus Program during any trailing 12 month
period in the 36 months prior to Executive's election hereunder. Executive may
also similarly elect to receive a lump sum payment equal to the present value of
the base salary under Section 4(a) hereof for the balance of the severance
compensation and an amount equal to the present value of the fringe benefits
remaining to be paid for the balance of the Severance Payout Period based upon
the Company's expenses for providing the fringe benefits pursuant to
Section 4(d) hereof during the Company's most recently completed fiscal year.
For purposes of this computation, present value shall be calculated on the basis
of the prime rate of interest announced by the Company's principal bank, or if
it has no such bank, published in THE WALL STREET JOURNAL, on the date of
Executive's election to receive the lump sum payments provided for herein.
For purposes of this Agreement, "Good Reason" shall mean, so long as the
Executive has not been guilty of the conduct giving rise to the right to
terminate the Executive for Good Cause, (i) a breach by the Company of this
Agreement in any material respect if such breach is not cured by the Company
within thirty (30) days after notice setting forth in reasonable detail the
facts and circumstances claimed to provide the basis of such noncompliance has
been given by the Executive to the Company, (ii) the failure to elect the
Executive to the office of Chief Financial Officer of the Company, the removal
of the Executive from such 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
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<PAGE>
position, except in connection with the termination of his employment on account
of his death or disability or for Good Cause, (iii) a relocation by the Company
of the Executive's place of employment as described in Section 3 hereof, (iv)
any purported termination of the Executive's employment which is not effected
pursuant to a Notice of Termination satisfying the requirements set forth above
(and for purposes of this Agreement no such purported termination shall be
effective), or (v) the occurrence of a "change in control" of the Company. For
purposes of this Agreement, a "change in control" of the Company shall be deemed
to have occurred on the first of any of the following dates:
(1) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) (a
"Person") of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of twenty percent (20%)
or more of either (A) the then-outstanding shares of common stock
of the Company (the "Outstanding Company Common Stock") or (B)
the combined voting power of the then-outstanding voting
securities of the Company entitled to vote generally in the
election of directors (the "Outstanding Company Voting
Securities"); provided, however, that for purposes of this
subsection (1), the following acquisitions shall not constitute a
Change of Control: (A) any acquisition directly from the Company
other than in connection with the acquisition by the Company or
its affiliates of a business, (B) any acquisition by the Company,
(C) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation
controlled by the Company, (D) any acquisition by a lender to the
Company pursuant to a debt restructuring of the Company, or (E)
any acquisition by any corporation pursuant to a transaction
which complies with clauses (A), (B) and (C) of subsection (3)
below;
(2) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual
becoming a director subsequent to the date hereof whose election,
or nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding,
for this purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election
contest with respect to the election or removal of directors or
other actual or threatened solicitation of proxies or consents by
or on behalf of a Person other than the Board;
(3) Consummation of a reorganization, merger or consolidation of the
Company or any direct or indirect subsidiary of the Company or
sale or
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other disposition of all or substantially all of the assets of
the Company (a "Business Combination"), in each case, unless,
following such Business Combination, (A) all or substantially all
of the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly,
more than sixty percent (60%) of, respectively, the then-
outstanding shares of common stock and the combined voting power
of the then-outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of
the corporation resulting from such Business Combination (which
shall include for these purposes, without limitation, a
corporation which as a result of such transaction owns the
Company or all or substantially all of the Company's assets
either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership,
immediately prior to such Business Combination, of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities, as the case may be, (B) no Person (excluding any
corporation resulting from such Business Combination or any
employee benefit plan (or related trust) of the Company or such
corporation resulting from such Business Combination and any
Person beneficially owning, immediately prior to such Business
Combination, directly or indirectly, 20% or more of the
Outstanding Common Stock or Outstanding Voting Securities, as the
case may be) beneficially owns, directly or indirectly, twenty
percent (20%) or more of, respectively, the then-outstanding
shares of common stock of the corporation resulting from such
Business Combination, or the combined voting power of the then
outstanding voting securities of such corporation entitled to
vote generally in the election of directors and (C) at least a
majority of the members of the board of directors of the
corporation resulting from such Business Combination were members
of the Incumbent Board at the time of the execution of the
initial agreement, or of the action of the Board, providing for
such Business Combination; or
(4) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company other than to a
corporation which would satisfy the requirements of clauses (A),
(B) and (C) of Subsection (3) above, assuming for this purpose
that such liquidation or dissolution was a Business Combination.
8. DEATH OR DISABILITY OF THE EXECUTIVE:
Executive's employment shall automatically terminate upon the death of the
Executive and, at the option of the Company as determined by the Board of
Directors, upon the Disability (as hereinafter defined) of Executive.
"Disability," as used herein, shall be deemed to have
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occurred whenever the Board determines that in its judgment Executive has
suffered physical or mental illness, injury or infirmity of such a nature,
degree or effect as to render Executive, for a significant period of time,
substantially unable to perform his duties as delineated in paragraph 3 hereof.
9. GROSS UP FOR PARACHUTE PAYMENTS:
If any payments or benefits received by the Executive upon his termination
of employment pursuant to this Agreement or any Company compensation plans
(including, by way of example but not limitation, any stock, stock option or
restricted stock plans or grants) (the "PAYMENTS") will be subject to the tax
imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the
"IRC") (the "EXCISE TAX") (or any similar tax that may hereafter be imposed by
the IRC), the Company shall pay to the Executive an additional amount (the
"GROSS-UP PAYMENT"), such that the net amount received by him, after deduction
of any Excise Tax on the Payments and any federal income tax and Excise Tax upon
the payment provided for by this subsection, shall be equal to the Payments.
For purposes of determining whether any of the Payments will be subject to the
Excise Tax and the amount of such Excise Tax, (A) all Payments shall be treated
as "parachute payments" within the meaning of Section 280G(b)(2) of the IRC, and
all "excess parachute payments" within the meaning of Section 280G(b)(1) shall
be treated as subject to the Excise Tax, unless in the opinion of the Company's
independent auditors (the "ACCOUNTING FIRM"), such Payments (in whole or in
part) do not constitute parachute payments, or such excess parachute payments
(in whole or in part) represent reasonable compensation for services actually
rendered within the meaning of Section 280G(b)(4) of the IRC in excess of the
base amount within the meaning of Section 280G(b)(3) of the IRC, allocable to
such reasonable compensation, or are otherwise not subject to the Excise Tax,
(B) the amount of the Payments which shall be treated as subject to the Excise
Tax shall be equal to the lesser of (1) the total amount of the Payments or (2)
the amount of excess parachute payments within the meaning of Section 280G(b)(1)
(after applying clause (A), above), and (C) the value of any non-cash benefits
or any deferred payment or benefit shall be determined by the Accounting Firm in
accordance with the principles of Sections 280G(d)(3) and (4) of the IRC. For
purposes of determining the amount of the Gross-Up Payment, the Executive shall
be deemed to pay federal income taxes at the highest marginal rate of federal
income taxation applicable to individuals in the calendar year in which the
Gross-Up Payment is to be made. A Gross-Up Payment shall be made not later than
the fifth day, or as soon thereafter as the Company deems practicable, following
the date the Executive becomes subject to payment of the Excise Tax. In the
event that the Excise Tax is determined to exceed the amount determined by the
Accounting Firm, the Company shall make an additional Gross-up Payment in
respect of the additional amount (plus any interest and penalties payable with
respect to such excess) at the time that the amount of such excess is finally
determined.
In the event that the Excise Tax is determined to be less than the amount
determined by the Accounting Firm, the Executive shall repay to the Company at
the time that the amount of such reduction in Excise Tax is finally refunded to
or otherwise realized as a benefit by
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Executive, the portion of the Gross-up Payment that would not have been paid,
plus interest on the amount of such repayment at the rate provided in Section
1274(b)(2)(B) of the Code.
The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that would require payment by the Company of the Gross-
Up Payment. If the Company elects to contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by the
Company relating to such claim,
(ii) take such action to contest such claim as the Company (or
its counsel) shall reasonably request, and
(iii) cooperate with the Company in good faith in order to
effectively contest such claim.
The Company shall bear and pay directly all costs and expenses (including
additional interest and penalties) incurred in connection with such contest and
shall indemnify and hold the Executive harmless, on an after-tax basis, for any
Excise Tax or income tax (including interest and penalties with respect thereto)
imposed as a result of such contest, and the Executive agrees to prosecute such
contest to a determination as the Company shall determine; provided, however,
the Company shall advance the amount of any payment pending the contest to the
Executive and shall indemnify the Executive with respect to any taxes (including
penalties and interest, if any) which may be imposed in connection with the
advance of such funds.
10. MITIGATION OF AMOUNTS PAYABLE UNDER SECTION 7:
The Executive shall not be required to mitigate the amount of any payment
provided for pursuant to Section 7 of this Agreement by seeking other employment
or otherwise, and, further, any payment or benefit to be provided to Executive
pursuant to this Agreement shall not be reduced by any compensation or other
amount earned or collected by Executive at any time before or after the
termination of Executive Employment hereunder.
11. MISCELLANEOUS:
(a) NOTICES. Any notice or other communication required or permitted
hereunder shall be in writing and shall be deemed given when delivered in person
to the following addresses:
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(i) if to the Company, to:
Platinum Entertainment, Inc.
2001 Butterfield Road, Suite 1400
Downers Grove, IL 60515
with a copy to:
Katten Muchin & Zavis
525 West Monroe Street
Suite 1600
Chicago, Illinois 60661-3693
Attention: Matthew S. Brown, Esq.
(ii) if to Executive to:
Douglas C. Laux
c/o Platinum Entertainment, Inc.
2001 Butterfield Road, Suite 1400
Downers Grove, IL 60515
Any party may change its address for notice hereunder by notice to the other
party hereto.
(b) GOVERNING LAW. The parties agree that this Agreement shall be
construed and governed in accordance with the laws of the State of Illinois
applicable to agreements made and to be performed entirely within such state.
(c) BINDING EFFECT. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, legal representatives,
executors, administrators, successors and assigns. Any Successor will
automatically succeed to the obligations of the Company under this Agreement,
including the obligations set forth in Section 7 of this Agreement; provided
that, the Company shall remain liable under this Agreement in such event.
(d) COUNTERPARTS. This Agreement may be executed simultaneously in one or
more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
(e) ENTIRE AGREEMENT. This Agreement represents the entire agreement and
understanding of the parties hereto with respect to the matters set forth
herein. This Agreement supersedes all prior negotiations, discussions,
correspondence, communications, understandings and agreements between the
parties, written or oral, relating to the subject matter of this Agreement.
This Agreement, may be amended, superseded, cancelled, renewed, or extended and
the terms hereof may be waived, only by a written instrument signed by the
parties hereto or, in the case of a waiver, by the party waiving compliance.
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(f) WAIVERS. No delay on the part of any party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof. Nor shall any
waiver on the part of any party of any such right, power or privilege hereunder,
nor any single or partial exercise of any right, power or privilege hereunder,
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege hereunder.
(g) HEADINGS. The headings in this Agreement are inserted for convenience
only and are not to be considered in the interpretation or construction of the
provisions hereof.
(h) ARBITRATION. Except for any claim or dispute which gives rise or
could give rise to equitable relief under this Agreement, at the request of the
Executive any disagreement, dispute, controversy or claim arising out of or
relating to this Agreement or the breach hereof shall be settled exclusively and
finally by arbitration. The arbitration shall be conducted in accordance with
such rules and before such arbitrator as the parties shall agree and if they
fail to so agree within 15 days after demand for arbitration, such arbitration
shall be conducted in accordance with the Commercial Arbitration Rules of the
American Arbitration Association (hereinafter referred to as "AAA RULES"). Such
arbitration shall be conducted in Chicago, Illinois, or in such other city as
the parties to the dispute may designate by mutual consent. The arbitral
tribunal shall consist of three arbitrators (or such lesser number as may be
agreed upon by the parties) selected according to the procedure set forth in the
AAA Rules in effect on the date hereof and the arbitrators shall be empowered to
order any remedy which is appropriate to the proceedings and issues presented to
them. The chairman of the arbitral tribunal shall be appointed by the American
Arbitration Association from among the three arbitrators so selected. Any party
to a decision rendered in such arbitration proceedings may seek an order
enforcing the same by any court having jurisdiction.
(i) NO STRICT CONSTRUCTION. The language used in this Agreement will be
deemed to be the language chosen by the Executive and the Company to express
their mutual intent, and no rule of strict construction will be applied against
the Executive or the Company.
(j) LEGAL EXPENSES. The Executive shall be entitled to recover any
expenses for attorney's fees and disbursements incurred by him in connection
with enforcing his rights under this Agreement.
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IN WITNESS WHEREOF, the Company and Executive have signed this Agreement as
of the day and year written above.
PLATINUM ENTERTAINMENT, INC.
By: /s/ Steven Devick
---------------------------------------------
Its: CEO
---------------------------------------
/s/ Douglas C. Laux
------------------------------------------------
Douglas C. Laux
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PLATINUM ENTERTAINMENT, INC.
EMPLOYMENT AGREEMENT
This Agreement ("AGREEMENT"), is made and entered into as of the 1st day of
June, 1997 (the "EFFECTIVE DATE"), by and between Platinum Entertainment, Inc.,
a Delaware corporation (the "COMPANY"), and Thomas R. Leavens (the "EXECUTIVE").
WHEREAS, the Company wishes to employ Executive as an executive employee,
and Executive wishes to be employed by the Company as an executive employee, all
upon the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. EMPLOYMENT OF EXECUTIVE:
As of the Effective Date, the Company hereby engages and employs Executive
in an executive capacity as the Company's General Counsel and Executive hereby
accepts such employment and agrees to act as an employee of the Company in
accordance with the terms of employment hereinafter specified ("EXECUTIVE
EMPLOYMENT").
2. TERM OF EXECUTIVE EMPLOYMENT:
The period of Executive Employment shall begin on the Effective Date for a
three year term (the "EMPLOYMENT PERIOD"); provided, however, unless the Company
or Executive shall notify the other of its intent not to extend the Employment
Period at least six months prior to the end of the Employment Period (including
any extensions of the initial term thereof), the Employment Period shall
automatically be extended for one additional year.
3. DUTIES:
Executive shall be employed by Company as the Company's General Counsel.
In such capacity, Executive shall have supervision and control over, and
responsibility for, the legal and regulatory compliance management of the
Company, and shall have such other powers and duties as the Board of Directors
of the Company may from time to time prescribe; provided that, such powers and
duties are consistent with the Executive's then present duties and with his
position as the Company's senior executive officer in charge of the management
of the legal affairs of the Company.
<PAGE>
Nothing contained herein shall be construed so as to prohibit Executive
from performing such other or additional duties or responsibilities, and
exercising such other or additional authority in furtherance of the goals of the
Company, as the Executive and the Board of Directors of the Company shall from
time to time agree upon.
Executive shall devote substantially all of his business time and attention
to appropriately and efficiently discharge his duties and responsibilities as
herein set forth. If Executive so discharges his duties he may engage in other
business and civic activities, in addition to those relating to the Company's
business, if such activities are not otherwise prohibited by the terms of this
Agreement.
During Executive's employment hereunder, Executive shall not be required to
relocate his principal residence from his current location as a result of the
Company moving its principal executive offices or the Executive's office to an
address greater than twenty (20) miles away from the Company's principal
executive offices (or the Executive's office) at the Effective Date and shall
not be required to perform services which could make the continuance of
Executive's principal residence in such location unreasonably difficult or
inconvenient for Executive except to the extent that the performance of such
services (and travel) is commensurate with Executive's duties specified
hereunder.
4. EXECUTIVE SALARY AND COMPENSATION:
(a) BASE SALARY. During the Employment Period the Company shall pay or
cause to be paid to Executive an initial base salary ("BASE SALARY") at an
annual rate of $250,000 per year, payable to Executive on a periodic basis in
accordance with the Company's then current executive salary payment practice;
provided, however, that the installments may not be made less frequently than on
a monthly basis. Such base salary shall be subject to review in accordance with
the Company's normal practice for executive salary review from time to time in
effect, and will not be reduced without the prior written consent of Executive.
(b) INCENTIVE COMPENSATION. Executive shall be entitled during the
Employment Period to participate in the bonus program established by the
Compensation Committee of the Company's Board of Directors (the "BONUS
PROGRAM"). Pursuant to the Bonus Program, the bonus payable to Executive in
each fiscal year shall be equal to the sum of (i) a base bonus equal to 25% of
base salary for such fiscal year (the "BASE BONUS"); provided, however, that the
base bonus shall be payable only if the Company's revenues for such fiscal year
are greater than or equal to 125% of revenues for the previous fiscal year and
(ii) an additional bonus (the "ADDITIONAL BONUS") equal to the product of (A)
base salary for such fiscal year and (B) the amount obtained by dividing (x) the
amount by which revenues for such fiscal year exceed revenues for the previous
fiscal year by (y) revenues for the previous fiscal year; provided, however,
that the additional bonus shall be payable only if (1) the Company achieves
earnings before interest, taxes, depreciation and amortization ("EBITDA") in
such fiscal year greater than or equal to the plan approved by the Board of
Directors for such fiscal year and (2) the
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Company's earnings per share in such year are greater than or equal to those
projected by the Company's primary outside analyst, as adjusted for material
events occurring during such year. It is hereby acknowledged that as of the
date of this agreement, EBITDA is internally projected to be $16.0 million for
the fiscal year ending May 31, 1998 and earnings per share are projected at
$0.80 per share (assuming a June 1, 1997 acquisition of the music business of
K-tel International, Inc. (the "K-tel Acquisition")) and that such projections,
for purposes of calculating the additional bonus, shall be adjusted by the
Compensation Committee to reflect the actual closing date of the K-tel
Acquisition. Notwithstanding anything to the contrary contained herein,
Executive's total bonus in any fiscal year shall not exceed 100% of Executive's
base salary for such year. If Executive's employment is terminated effective at
any time other than the end of the Company's fiscal year, the final awards under
the Bonus Program will be made by the Company's independent accountant or
accounting firm based upon the most recent unaudited financial statements of the
Company for the month end immediately prior to the effective date of
termination.
If Executive is entitled to receive severance payments pursuant to Section
7 of this Agreement, then for purposes of such Section, the amount of Bonus
Program compensation and base salary which is payable on an annualized basis as
severance shall be equal to the greatest annual amount paid under each of the
Bonus Program and as base salary, respectively, to Executive during any 12 month
period during the 36 month period preceding termination of Executive's
employment with the Company.
(c) WITHHOLDING OF CERTAIN TAXES. All compensation referred to in
Sections 4(a) and 4(b) of this Agreement is stated in terms of gross amount, it
being understood that the Company will be required to withhold from such gross
amount deductions for federal, state and local income taxes (if any), F.I.C.A.,
unemployment compensation taxes and the like.
(d) FRINGE BENEFITS. During the Employment Period, the Company shall
provide, in addition to benefits available to company employees generally, the
following fringe benefits to Executive: (i) MEDICAL AND DENTAL INSURANCE, the
Company shall provide Executive and Executives's immediate family, including
spouse and children, if any, at the Company's expense, with comprehensive
medical and dental insurance coverage similar to that provided to other
executive officers of the Company; (ii) LIFE INSURANCE, the Company shall
provide Executive, at the Company's expense, a term policy or policies of life
insurance insuring the life of Executive for the benefit of person(s) designated
from time to time by Executive, and such life insurance policy or policies shall
be in the amount of five hundred thousand dollars ($500,000); (iii) DISABILITY
INSURANCE, the Company shall provide Executive, at the Company's expense, with
comprehensive short and long term disability insurance in an amount which the
Company determines is reasonably commensurate with Executive's compensation
contemplated hereunder, including, without limitation, Executive's base salary,
Bonus Program compensation, fringe benefits and the like; (iv) CLUBS;
PROFESSIONAL ORGANIZATIONS, the Company shall pay the annual dues and
assessments for the Executive's membership in one club selected by Executive
(whether social, professional, athletic, golf or otherwise) not in excess of
$425 per month.
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5. EXPENSES:
The Company shall pay or reimburse Executive in accordance with the
Company's policy for all expenses reasonably incurred by Executive during the
period of Executive's employment, in connection with the performance of
Executive's duties under this Agreement, including, without limitation, travel
and entertainment expenses. As the Company may reasonably request, Executive
shall provide to the Company documentation or supporting information relating to
the expenses for which Executive seeks reimbursement.
6. TERMINATION OF EXECUTIVE EMPLOYMENT BY THE COMPANY FOR GOOD CAUSE:
Subject to its obligations under Section 7, the Company shall have the
option to terminate Executive's employment with or without cause, for any reason
whatsoever, including without limitation, Disability (as hereinafter defined) by
providing written Notice of Termination (as defined below) to Executive and such
termination shall be effective 10 days after the giving of said written notice.
If Executive is terminated for Good Cause (as defined below), then Company
shall pay to Executive all such compensation owing through the date of
termination.
For purposes of this Agreement, the termination of the Executive's
employment hereunder shall be deemed to have been for Good Cause only if the
termination of the Executive's employment shall have been the result of (a) an
act or acts of dishonesty by Executive which the Board of Directors reasonably
believes constitute a felony which result directly or indirectly in gain to or
personal enrichment of the Executive at the Company's expense, (b) an act or
acts by Executive which the Board of Directors reasonably believes constitute a
felony and as a result of which the continued employment of Executive by the
Company will have an adverse effect on the Company's business, or (c) the
Executive willfully engaging in one or more acts, or willfully omitting to act,
which is demonstrably and materially damaging to the Company or any of its
subsidiaries.
For purposes of this Agreement, Notice of Termination shall mean delivery
to Executive of a copy of a resolution duly adopted by the affirmative vote of
not less than a majority of the entire membership of the Company's Board of
Directors at a meeting of the Board of Directors (after reasonable notice has
been delivered to Executive and reasonable opportunity has been provided for
Executive, together with Executive's counsel, to be heard before the Board of
Directors prior to such vote).
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7. TERMINATION OF EXECUTIVE EMPLOYMENT WITHOUT GOOD CAUSE, BY EXECUTIVE FOR
GOOD REASON OR AS A RESULT OF DISABILITY:
The Executive may terminate the Executive's employment by the Company for
"Good Reason" (as defined below) at any time unless prior to giving his notice,
Executive shall have received a Notice of Termination for Good Cause.
If Executive (i) is terminated for any reason other than Good Cause, (ii)
is terminated as a result of Executive's Disability, (iii) terminates his
employment for Good Reason (as defined below), or (iv) is notified by the
Company of its intent not to extend the Employment Period (as defined in Section
2, above), then the Company shall continue to pay to Executive, as severance
compensation, all compensation payable including base salary, payments under the
Bonus Program, fringe benefits and the like, (x) if the termination occurs
pursuant to clause (i), (ii) or (iii) of this paragraph, for a period beginning
on the date of Executive's termination and ending on the date which is the later
of (A) the end of the Employment Period and (B) the first anniversary of the
date of Executive's termination and (y) if the termination occurs pursuant to
clause (iv) of this paragraph, for a period beginning on the date of Executive's
termination and ending on the first anniversary of the end of the Employment
Period (the "Severance Payout Period").
In lieu of regular payments due under the preceding paragraph, Executive
shall be entitled to receive, upon Executive's written election, a lump sum
payment equal to the present value of the stream of monthly payments for the
Severance Payout Period, in which each monthly payment is 1/12 of the greatest
amount paid to Executive under the Bonus Program during any trailing 12 month
period in the 36 months prior to Executive's election hereunder. Executive may
also similarly elect to receive a lump sum payment equal to the present value of
the base salary under Section 4(a) hereof for the balance of the severance
compensation and an amount equal to the present value of the fringe benefits
remaining to be paid for the balance of the Severance Payout Period based upon
the Company's expenses for providing the fringe benefits pursuant to
Section 4(d) hereof during the Company's most recently completed fiscal year.
For purposes of this computation, present value shall be calculated on the basis
of the prime rate of interest announced by the Company's principal bank, or if
it has no such bank, published in THE WALL STREET JOURNAL, on the date of
Executive's election to receive the lump sum payments provided for herein.
For purposes of this Agreement, "Good Reason" shall mean, so long as the
Executive has not been guilty of the conduct giving rise to the right to
terminate the Executive for Good Cause, (i) a breach by the Company of this
Agreement in any material respect if such breach is not cured by the Company
within thirty (30) days after notice setting forth in reasonable detail the
facts and circumstances claimed to provide the basis of such noncompliance has
been given by the Executive to the Company, (ii) the failure to elect the
Executive to the office of General Counsel of the Company, the removal of the
Executive from such 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
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<PAGE>
position, except in connection with the termination of his employment on account
of his death or disability or for Good Cause, (iii) a relocation by the Company
of the Executive's place of employment as described in Section 3 hereof, (iv)
any purported termination of the Executive's employment which is not effected
pursuant to a Notice of Termination satisfying the requirements set forth above
(and for purposes of this Agreement no such purported termination shall be
effective), or (v) the occurrence of a "change in control" of the Company. For
purposes of this Agreement, a "change in control" of the Company shall be deemed
to have occurred on the first of any of the following dates:
(1) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) (a
"Person") of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of twenty percent (20%)
or more of either (A) the then-outstanding shares of common stock
of the Company (the "Outstanding Company Common Stock") or (B)
the combined voting power of the then-outstanding voting
securities of the Company entitled to vote generally in the
election of directors (the "Outstanding Company Voting
Securities"); provided, however, that for purposes of this
subsection (1), the following acquisitions shall not constitute a
Change of Control: (A) any acquisition directly from the Company
other than in connection with the acquisition by the Company or
its affiliates of a business, (B) any acquisition by the Company,
(C) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation
controlled by the Company, (D) any acquisition by a lender to the
Company pursuant to a debt restructuring of the Company, or (E)
any acquisition by any corporation pursuant to a transaction
which complies with clauses (A), (B) and (C) of subsection (3) of
this Section 8(a);
(2) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual
becoming a director subsequent to the date hereof whose election,
or nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding,
for this purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election
contest with respect to the election or removal of directors or
other actual or threatened solicitation of proxies or consents by
or on behalf of a Person other than the Board;
(3) Consummation of a reorganization, merger or consolidation of the
Company or any direct or indirect subsidiary of the Company or
sale or
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<PAGE>
other disposition of all or substantially all of the assets of
the Company (a "Business Combination"), in each case, unless,
following such Business Combination, (A) all or substantially all
of the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly,
more than sixty percent (60%) of, respectively, the then-
outstanding shares of common stock and the combined voting power
of the then-outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of
the corporation resulting from such Business Combination (which
shall include for these purposes, without limitation, a
corporation which as a result of such transaction owns the
Company or all or substantially all of the Company's assets
either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership,
immediately prior to such Business Combination, of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities, as the case may be, (B) no Person (excluding any
corporation resulting from such Business Combination or any
employee benefit plan (or related trust) of the Company or such
corporation resulting from such Business Combination and any
Person beneficially owning, immediately prior to such Business
Combination, directly or indirectly, 20% or more of the
Outstanding Common Stock or Outstanding Voting Securities, as the
case may be) beneficially owns, directly or indirectly, twenty
percent (20%) or more of, respectively, the then-outstanding
shares of common stock of the corporation resulting from such
Business Combination, or the combined voting power of the then
outstanding voting securities of such corporation entitled to
vote generally in the election of directors and (C) at least a
majority of the members of the board of directors of the
corporation resulting from such Business Combination were members
of the Incumbent Board at the time of the execution of the
initial agreement, or of the action of the Board, providing for
such Business Combination; or
(4) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company other than to a
corporation which would satisfy the requirements of clauses (A),
(B) and (C) of Subsection (3) above, assuming for this purpose
that such liquidation or dissolution was a Business Combination.
8. DEATH OR DISABILITY OF THE EXECUTIVE:
Executive's employment shall automatically terminate upon the death of the
Executive and, at the option of the Company as determined by the Board of
Directors, upon the Disability
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(as hereinafter defined) of Executive. "Disability," as used herein, shall be
deemed to have occurred whenever the Board determines that in its judgment
Executive has suffered physical or mental illness, injury or infirmity of such a
nature, degree or effect as to render Executive, for a significant period of
time, substantially unable to perform his duties as delineated in paragraph 3
hereof.
9. GROSS UP FOR PARACHUTE PAYMENTS:
If any payments or benefits received by the Executive upon his termination
of employment pursuant to this Agreement or any Company compensation plans
(including, by way of example but not limitation, any stock, stock option or
restricted stock plans or grants) (the "PAYMENTS") will be subject to the tax
imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the
"IRC") (the "EXCISE TAX") (or any similar tax that may hereafter be imposed by
the IRC), the Company shall pay to the Executive an additional amount (the
"GROSS-UP PAYMENT"), such that the net amount received by him, after deduction
of any Excise Tax on the Payments and any federal income tax and Excise Tax upon
the payment provided for by this subsection, shall be equal to the Payments.
For purposes of determining whether any of the Payments will be subject to the
Excise Tax and the amount of such Excise Tax, (A) all Payments shall be treated
as "parachute payments" within the meaning of Section 280G(b)(2) of the IRC, and
all "excess parachute payments" within the meaning of Section 280G(b)(1) shall
be treated as subject to the Excise Tax, unless in the opinion of the Company's
independent auditors (the "ACCOUNTING FIRM"), such Payments (in whole or in
part) do not constitute parachute payments, or such excess parachute payments
(in whole or in part) represent reasonable compensation for services actually
rendered within the meaning of Section 280G(b)(4) of the IRC in excess of the
base amount within the meaning of Section 280G(b)(3) of the IRC, allocable to
such reasonable compensation, or are otherwise not subject to the Excise Tax,
(B) the amount of the Payments which shall be treated as subject to the Excise
Tax shall be equal to the lesser of (1) the total amount of the Payments or (2)
the amount of excess parachute payments within the meaning of Section 280G(b)(1)
(after applying clause (A), above), and (C) the value of any non-cash benefits
or any deferred payment or benefit shall be determined by the Accounting Firm in
accordance with the principles of Sections 280G(d)(3) and (4) of the IRC. For
purposes of determining the amount of the Gross-Up Payment, the Executive shall
be deemed to pay federal income taxes at the highest marginal rate of federal
income taxation applicable to individuals in the calendar year in which the
Gross-Up Payment is to be made. A Gross-Up Payment shall be made not later than
the fifth day, or as soon thereafter as the Company deems practicable, following
the date the Executive becomes subject to payment of the Excise Tax. In the
event that the Excise Tax is determined to exceed the amount determined by the
Accounting Firm, the Company shall make an additional Gross-up Payment in
respect of the additional amount (plus any interest and penalties payable with
respect to such excess) at the time that the amount of such excess is finally
determined.
In the event that the Excise Tax is determined to be less than the amount
determined by the Accounting Firm, the Executive shall repay to the Company at
the time that the amount of
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such reduction in Excise Tax is finally refunded to or otherwise realized as a
benefit by Executive, the portion of the Gross-up Payment that would not have
been paid, plus interest on the amount of such repayment at the rate provided in
Section 1274(b)(2)(B) of the Code.
The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that would require payment by the Company of the
Gross-Up Payment. If the Company elects to contest such claim, the Executive
shall:
(i) give the Company any information reasonably requested
by the Company relating to such claim,
(ii) take such action to contest such claim as the Company
(or its counsel) shall reasonably request, and
(iii) cooperate with the Company in good faith in order to
effectively contest such claim.
The Company shall bear and pay directly all costs and expenses (including
additional interest and penalties) incurred in connection with such contest and
shall indemnify and hold the Executive harmless, on an after-tax basis, for any
Excise Tax or income tax (including interest and penalties with respect thereto)
imposed as a result of such contest, and the Executive agrees to prosecute such
contest to a determination as the Company shall determine; provided, however,
the Company shall advance the amount of any payment pending the contest to the
Executive and shall indemnify the Executive with respect to any taxes (including
penalties and interest, if any) which may be imposed in connection with the
advance of such funds.
10. MITIGATION OF AMOUNTS PAYABLE UNDER SECTION 7:
The Executive shall not be required to mitigate the amount of any payment
provided for pursuant to Section 7 of this Agreement by seeking other employment
or otherwise, and, further, any payment or benefit to be provided to Executive
pursuant to this Agreement shall not be reduced by any compensation or other
amount earned or collected by Executive at any time before or after the
termination of Executive Employment hereunder.
11. MISCELLANEOUS:
(a) NOTICES. Any notice or other communication required or permitted
hereunder shall be in writing and shall be deemed given when delivered in person
to the following addresses:
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(i) if to the Company, to:
Platinum Entertainment, Inc.
2001 Butterfield Road, Suite 1400
Downers Grove, IL 60515
with a copy to:
Katten Muchin & Zavis
525 West Monroe Street
Suite 1600
Chicago, Illinois 60661-3693
Attention: Matthew S. Brown, Esq.
(ii) if to Executive to:
Thomas R. Leavens
c/o Platinum Entertainment, Inc.
2001 Butterfield Road, Suite 1400
Downers Grove, IL 60515
Any party may change its address for notice hereunder by notice to the other
party hereto.
(b) GOVERNING LAW. The parties agree that this Agreement shall be
construed and governed in accordance with the laws of the State of Illinois
applicable to agreements made and to be performed entirely within such state.
(c) BINDING EFFECT. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, legal representatives,
executors, administrators, successors and assigns. Any Successor will
automatically succeed to the obligations of the Company under this Agreement,
including the obligations set forth in Section 7 of this Agreement; provided
that, the Company shall remain liable under this Agreement in such event.
(d) COUNTERPARTS. This Agreement may be executed simultaneously in one or
more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
(e) ENTIRE AGREEMENT. This Agreement represents the entire agreement and
understanding of the parties hereto with respect to the matters set forth
herein. This Agreement supersedes all prior negotiations, discussions,
correspondence, communications, understandings and agreements between the
parties, written or oral, relating to the subject matter of this Agreement.
This Agreement, may be amended, superseded, cancelled, renewed, or extended and
the terms hereof may be waived, only by a written instrument signed by the
parties hereto or, in the case of a waiver, by the party waiving compliance.
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(f) WAIVERS. No delay on the part of any party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof. Nor shall any
waiver on the part of any party of any such right, power or privilege hereunder,
nor any single or partial exercise of any right, power or privilege hereunder,
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege hereunder.
(g) HEADINGS. The headings in this Agreement are inserted for convenience
only and are not to be considered in the interpretation or construction of the
provisions hereof.
(h) ARBITRATION. Except for any claim or dispute which gives rise or
could give rise to equitable relief under this Agreement, at the request of the
Executive any disagreement, dispute, controversy or claim arising out of or
relating to this Agreement or the breach hereof shall be settled exclusively and
finally by arbitration. The arbitration shall be conducted in accordance with
such rules and before such arbitrator as the parties shall agree and if they
fail to so agree within 15 days after demand for arbitration, such arbitration
shall be conducted in accordance with the Commercial Arbitration Rules of the
American Arbitration Association (hereinafter referred to as "AAA RULES"). Such
arbitration shall be conducted in Chicago, Illinois, or in such other city as
the parties to the dispute may designate by mutual consent. The arbitral
tribunal shall consist of three arbitrators (or such lesser number as may be
agreed upon by the parties) selected according to the procedure set forth in the
AAA Rules in effect on the date hereof and the arbitrators shall be empowered to
order any remedy which is appropriate to the proceedings and issues presented to
them. The chairman of the arbitral tribunal shall be appointed by the American
Arbitration Association from among the three arbitrators so selected. Any party
to a decision rendered in such arbitration proceedings may seek an order
enforcing the same by any court having jurisdiction.
(i) NO STRICT CONSTRUCTION. The language used in this Agreement will be
deemed to be the language chosen by the Executive and the Company to express
their mutual intent, and no rule of strict construction will be applied against
the Executive or the Company.
(j) LEGAL EXPENSES. The Executive shall be entitled to recover any
expenses for attorney's fees and disbursements incurred by him in connection
with enforcing his rights under this Agreement.
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IN WITNESS WHEREOF, the Company and Executive have signed this Agreement as
of the day and year written above.
PLATINUM ENTERTAINMENT, INC.
By: /s/ Steven Devick
-----------------------------------------
Its: CEO
------------------------------------
/s/ Thomas R. Leavens
---------------------------------------------
Thomas R. Leavens
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EXHIBIT 10.5
July 1, 1996
Lynne Hoffman-Engel
One Tunstall Road
Scarsdale, New York 10583
Dear Lynne:
The following are the terms of your employment by Platinum Entertainment,
Inc. as Senior Vice President, Sales and Marketing.
1. You shall exercise all of the executive and administrative
responsibilities of Senior Vice President - Sales and Marketing, subject to
the by-laws of Platinum and the supervision of the Chief Executive Officer
and the Board of Directors of Platinum. You also agree to perform such other
duties and services as may be entrusted to you by the Chief Executive Officer
and the Board of Directors that are consistent with your position and title
and shall report to the Chief Executive Officer of Platinum. Your place of
employment shall be Downers Grove, Illinois. You agree to discharge your
responsibilities diligently, in good faith, and to the best of your abilities
and to at all times give Platinum full information and truthful explanation
of all matters relative to your employment responsibilities. You shall
devote all of your time during ordinary business hours to the interests and
business of Platinum and shall not, except as otherwise agreed to by the
Board of Directors, work with or receive any compensation or consideration
from any other party for services performed or to be performed by you.
2. Your employment will be for a term of three (3) years and four (4)
months, beginning July 1, 1996 (the "Term"), at the annual base salary of
$250,000.00, less withholding, which will be paid every other week according
Platinum's regular schedule. You shall also be entitled to receive a bonus
in the amount of $25,000.00 in each December occurring during the Term. You
shall also be entitled to receive further incentive compensation (determined
and based on an annual basis) for achieving sales results that meet
performance goals established from time to time by Platinum. In addition,
during the term of your employment, you and your family will be entitled to
participate in Platinum's regular health and dental insurance plan under
Platinum's policies with respect to such plans. During each annual period of
your employment you shall be entitled to three (3) weeks of vacation
(provided, however, that no vacation time shall be taken during the first six
(6) months of this agreement except by the mutual agreement of you and
Platinum), and five (5) personal leave days. You shall also be eligible to
<PAGE>
Lynne Hoffman-Engel
July 1, 1996
participate in the 401(K), life insurance, and all other benefit plans of
Platinum under Platinum's policies with respect to such plans for its
employees. You shall also be reimbursed for reasonable expenses incurred by
you for promoting the business of Platinum and in performance of your duties
hereunder in accordance with Platinum's expense policies. You will be issued
a company credit card and long distance telephone charge card.
3. (a) In further consideration of your services hereunder, Platinum
agrees to grant to you an option (the "Purchase Option") to purchase an
aggregate of Twenty Thousand (20,000) shares of Platinum's common stock
(adjusted for any stock splits or stock dividends) at a purchase price equal
to the closing share price of such stock as reported by NASDAQ as of the date
of the next annual meeting of shareholders of Platinum (the "Grant Date").
The Purchase Option shall be exercisable with respect to a portion of the
shares subject to the Purchase Option over the course of the option period as
follows: up to and including one-third (1/3) of the shares subject to the
Purchase Option shall be exercisable on and after the first anniversary of
the Grant Date; up to and including two thirds (2/3) of the shares subject to
the Purchase Option shall be exercisable on and after the second anniversary
of the Grant Date; and up to and including one hundred percent (100%) of the
shares subject to the Purchase Option shall be exercisable on and after the
third anniversary of the Grant Date. The Purchase Option shall be subject to
the provisions of a separate stock option agreement and Platinum's Stock
Option Plan dated as of the Grant Date.
(b) Platinum agrees to reimburse you for the cost of moving your
possessions from your home in Scarsdale, New York (the "Home") to 661
Robinwood Court, Wheaton, Illinois (the "Rental Home"). You shall be
entitled to occupy the Rental Home for the period of July 1, 1996, through
June 30, 1997. Your occupancy of the Rental Home shall be without charge
other than the cost of water, utilities, telephone, cable television, and
other similar costs (which you shall be responsible for) until the earlier of
(i) January 1, 1997 or (ii) the closing of the sale of the Home (the "Rent
Commencement Date"). Upon the occurrence of the Rent Commencement Date, you
shall have the option to elect to either (i) rent the Rental Home for a
period of one year commencing on the Rent Commencement Date at a rental price
determined in accordance with comparable market rental rates or (ii) purchase
the Rental Home for a price equal to the amount of all mortgages on the
Rental Home outstanding as of the Rent Commencement Date. In the event you
elect to purchase the Rental Home, you agree to pay rent for the occupancy of
the Rental Home at a rental price determined in accordance with comparable
market rental rates for the period commencing on the Rent Commencement Date and
ending on the date of
2
<PAGE>
Lynne Hoffman-Engel
July 1, 1996
the closing of the purchase of the Rental Home.
14. Unless otherwise mutually extended, this agreement shall terminate
on November 1, 1999, or the first to occur of the following:
(a) Your death.
(b) Your absence or inability to render the services required
hereunder by reason of a state of physical or mental incapacity for more than
a period of two (2) consecutive months and upon thirty (30) days prior
written notice by Platinum to you of an intent to terminate because of such
absence or inability.
(c) Your malfeasance or misperformance of your obligations under
this agreement, or your dishonest, fraudulent or criminal act.
5. You agree that, during the term of this agreement and at all times
thereafter, you will maintain the confidentiality of all Confidential
Information regarding Platinum and its subsidiaries, affiliates, successors,
and assigns (hereinafter collectively the "Protected Entities") that you
have, or will have received or had access to as an employee, officer or
director and that you will not make any disclosure thereof to anyone else
except as to matters that have been the subject of public announcement or
disclosure or except as required by law. "Confidential Information" shall
mean any information maintained in confidence that is owned or possessed by a
Protected Entity relating to the business or affairs of the Protected
Entities, including but not limited to information relating to plans,
developments, financial statements, customer identities, potential customers,
employees, suppliers, servicing methods, equipment, programs, strategies and
information, analyses, profit margins, inventions, improvements,
copyrightable work, or other proprietary information used by the Protected
Entities in connection with their businesses.
6. This agreement (a) represents the entire agreement between you and
Platinum; (b) is not to be amended, supplemented, varied or discharged except
by an instrument in writing; (c) may be executed in counterparts, each of
which shall be deemed an original; and (d) shall be interpreted in accordance
with and in all respects governed by the laws of the State of Illinois. If
any provision of this agreement is declared void, or otherwise unenforceable,
such
3
<PAGE>
Lynne Hoffman-Engel
July 1, 1996
provision shall be deemed to have been severed from this agreement, which
shall otherwise remain in full force and effect.
If the foregoing correctly states our agreement, please so confirm by
signing below where indicated.
Platinum Entertainment, Inc.
By: /s/ Thomas Leavens
---------------------------------
Accepted and Agreed:
/s/ Lynne Hoffman-Engel
- ------------------------------------
Lynne Hoffman-Engel
<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> 7,857
<TOTAL-REVENUES> 13,437
<CGS> 3,526
<TOTAL-COSTS> 4,748
<OTHER-EXPENSES> 5,450<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 $1,001 OF ONE-TIME COSTS
<F2>INCLUDES $450 OF ONE-TIME COSTS
</FN>
</TABLE>
