<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1 to QUARTERLY REPORT ON FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 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 000-27852
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:
6,040,166 Shares of Common Stock, par value $.001 per share, at August 14, 1998
<PAGE>
The Registrant hereby amends Items 1. and 2. of the Form 10-Q filed January
14, 1998 in order to revise certain financial information for the three and
six month periods ended November 30, 1997 and to make corresponding revisions
to Management's Discussion and Analysis of Financial Condition and Results of
Operations.
PLATINUM ENTERTAINMENT, INC.
FORM 10-Q/A AMENDMENT NO. 1
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 1997
TABLE OF CONTENTS
PAGE
----
Part I - FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets pro forma November 30, 1997
(Unaudited), November 30, 1997 (Unaudited) and May 31,
1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the three and
six months ended November 30, 1997 and 1996 (Unaudited) . . 5
Consolidated Statements of Cash Flows for the three and
six months ended November 30, 1997 and 1996 (Unaudited) . . 6
Notes to Unaudited Consolidated Financial Statements. . . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . 10
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . 18
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Exhibits
2
<PAGE>
PART 1 - FINANICAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
(NOTE 1)
NOVEMBER 30 NOVEMBER 30 MAY 31
1997 1997 1997
(UNAUDITED) (UNAUDITED)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash $ 3,694 $ 226 $53
Cash in escrow, net reserves of $1,750, $1,750 and $-,
respectively - - 1,750
Accounts receivable, less allowances of $3,312,
$3,312 and $3,291, respectively 19,095 19,095 15,034
Artist advances 2,791 2,791 2,444
Inventories, less allowances of $492, $492
and $350, respectively 5,354 5,354 5,416
Other 788 388 1,068
-------------------------------------
Total current assets 31,722 27,854 25,765
Artist advances, net of current amounts, less allowances
of $10,691, $10,691 and $9,745, respectively 3,061 3,061 2,297
Equipment and leasehold improvements, net 1,069 1,069 1,185
Music catalog, less accumulated amortization of $719,
$719 and $327, respectively 18,885 18,885 19,277
Music publishing rights, less accumulated amortization
of $298, $298 and $203, respectively 3,529 3,529 3,624
Goodwill, less accumulated amortization of $302, $302
and $97, respectively 5,796 5,796 6,001
Equity investment in joint venture 2,954 2,954 3,154
Deferred financing fees 727 - -
Other 1,097 1,097 1,001
-------------------------------------
Total assets $ 68,840 $ 64,245 $ 62,304
-------------------------------------
-------------------------------------
</TABLE>
3
See accompanying notes to financial statements
<PAGE>
PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
(NOTE 1)
NOVEMBER 30 NOVEMBER 30 MAY 31,
1997 1997 1997
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ - $ 10,000 $ 9,706
Term loan - 25,000 25,000
Related party loans 1,800 1,800 -
Current portion of long-term bank debt 2,000 - -
Accounts payable 5,440 5,440 4,038
Accrued liabilities and other 4,284 5,403 2,521
Reserve for future returns 3,491 3,491 2,660
Royalties payable 5,913 5,913 5,513
----------------------------------------
Total current liabilities 22,928 57,047 49,438
Convertible subordinated debentures 5,000 5,000 5,000
Bank debt 18,000 - -
Stockholders' equity:
Preferred Stock:
Preferred Stock ($.001 par value); 10,000,000 shares
authorized, no shares issued and outstanding pro forma
November 30, November 30 and May 31, 1997, respectively - - -
Series B Convertible Preferred Stock ($.001 par value);
20,000 shares issued and outstanding pro forma
November 30, 1997, no shares issued and
outstanding November 30 and May 31, 1997, respectively - - -
Series C Convertible Preferred Stock ($.001 par value);
2,500 shares issued and outstanding pro forma
November 30, 1997, no shares issued and
outstanding November 30 and May 31, 1997, respectively - - -
Common Stock:
Common Stock ($.001 par value); 40,000,000 shares authorized,
5,274,403 shares issued and outstanding pro forma November
30 and November 30, 1997 and 5,171,439 shares issued and
outstanding May 31, 1997, respectively 5 5 5
Additional paid-in capital 58,475 37,761 37,261
Accumulated deficit (35,568) (35,568) (29,400)
----------------------------------------
Stockholders' equity 22,912 2,198 7,866
----------------------------------------
Total liabilities and stockholders' equity $ 68,840 $ 64,245 $ 62,304
----------------------------------------
----------------------------------------
</TABLE>
4
See accompanying notes to financial statements
<PAGE>
PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER ENDED NOVEMBER 30 SIX MONTHS ENDED NOVEMBER 30
-------------------------- -----------------------------
1997 1996 1997 1996
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Gross product sales $ 19,676 $ 5,962 $ 31,356 $ 11,609
Less: Returns and allowances (3,903) (1,199) (7,320) (2,272)
Less: Discounts (1,561) (319) (2,165) (763)
-------------------------- -----------------------------
Net product sales 14,212 4,444 21,871 8,574
Licensing, publishing and other revenues 373 355 932 470
-------------------------- -----------------------------
Net sales 14,585 4,799 22,803 9,044
Cost of sales and services 8,051 3,215 12,144 5,804
-------------------------- -----------------------------
Gross profit 6,534 1,584 10,659 3,240
Other operating expenses:
Selling, general and administrative 5,269 2,441 9,233 4,745
Merger, restructuring and one-time costs 1,964 - 2,965 -
Depreciation and amortization 515 97 1,000 167
-------------------------- -----------------------------
7,748 2,538 13,198 4,912
-------------------------- -----------------------------
Operating loss (1,214) (954) (2,539) (1,672)
Interest income 21 36 42 126
Interest expense (1,450) (2) (2,659) (5)
Other financing costs (363) - (813) -
Equity loss (215) - (200) -
-------------------------- -----------------------------
Net loss $ (3,221) $ (920) $ (6,169) $ (1,551)
-------------------------- -----------------------------
-------------------------- -----------------------------
Per common share $ (0.61) $ (0.18) $ (1.18) $ (0.30)
Weighted average number of common shares outstanding 5,275,460 5,142,106 5,224,804 5,102,221
</TABLE>
5
See accompanying notes to financial statements
<PAGE>
PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED NOVEMBER 30
-------------------------------------
PRO FORMA 1997 1996
1997
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (6,169) $ (6,169) $ (1,551)
Adjustments to reconcile net loss to net cash used in
operating activities:
Charge to provision for future returns 1,298 1,298 175
Charge to provision for doubtful accounts 200 200 -
Charge to provision for co-op advertising 221 221 -
Charge to provision for slow-moving inventory 400 400 -
Charge to provision for unrecoupable artist balances 946 946 237
Depreciation and amortization 1,000 1,000 167
Equity loss from joint venture 200 200 -
Write-off of one-time costs 2,525 2,525 -
Changes in operating assets and liabilities:
Accounts receivable (4,482) (4,482) (1,282)
Inventories (338) (338) (777)
Notes receivable - - 1,025
Artist advances (2,057) (2,057) (2,038)
Accounts payable 1,402 1,402 (142)
Accrued liabilities and other 1,763 2,882 (801)
Reserve for future returns (468) (468) -
Royalties payable 400 400 2,041
Other (707) (307) (735)
-------------------------------------
Net cash used in operating activities (3,866) (2,347) (3,681)
INVESTING ACTIVITIES
Investment in joint venture - - (3,063)
Prepaid acquisition costs - - (259)
Cash paid for acquisition - - (100)
Purchases of equipment and leasehold improvements (74) (74) (166)
-------------------------------------
Net cash used in investing activities (74) (74) (3,588)
FINANCING ACTIVITIES
Proceeds from revolving line of credit 294 294 -
Payments on revolving line of credit (10,000) - -
Payment of bank term loan (25,000) - -
Proceeds from long-term debt 20,000 - -
Related party borrowings 2,650 2,650 -
Related party payments (850) (850) -
Deferred financing costs (727) - -
Proceeds from sale of Common Stock to a related party 500 500 -
Net proceeds from sale of preferred stock and warrants
to purchase Common Stock 20,714 - -
-------------------------------------
Net cash provided by financing activities 7,581 2,594 -
-------------------------------------
Net increase (decrease) in cash 3,641 173 (7,269)
Cash, beginning of period 53 53 8,222
-------------------------------------
Cash, end of period $ 3,694 $ 226 $ 953
-------------------------------------
-------------------------------------
</TABLE>
6
See accompanying notes to financial statements
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
The financial statements included herein are unaudited and have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and Securities and Exchange Commission ("Commission")
regulations. In the opinion of management, the financial statements reflect all
adjustments (of a normal and recurring nature) which are necessary to present
fairly the financial position, results of operations and cash flows for the
interim periods presented, except as addressed in Note 4 below. 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/A.
The interim results presented are not necessarily indicative of the results that
may be expected for the year ending May 31, 1998.
On December 12, 1997, the Company sold 22,500 shares (including 2,500
shares to affiliates of the Company) of convertible preferred stock and
warrants to purchase 4,050,000 shares (including 450,000 shares to affiliates
of the Company) of Common Stock for aggregate consideration of $22,500
(approximately $20,714 net of related costs) (collectively the "Preferred
Stock with Warrants Issuance"). The net proceeds were used to pay amounts
outstanding under the Company's $35,000 acquisition-related bank financing
with Bank of Montreal ("BMO"). In addition, the Company refinanced its
banking facility with BMO resulting in bank debt of $20,000 with a three-year
term and a $10,000 three-year revolving credit facility. The Company was not
required to draw against the available line of credit when the refinancing
was effectuated. These events have been reflected in the pro forma
consolidated balance sheet at November 30, 1997 and the pro forma
consolidated statement of cash flows for the six months ended November 30,
1997 as if they had occurred on such date. See also Notes 3 and 4 below.
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
On January 31, 1997, the Company entered a Credit Agreement with BMO,
individually and as agent, to provide a 90-day term loan in the amount of
$25,000 and a 90-day revolving credit facility in the amount of $10,000 (the
"Original Credit Facility"). The Original Credit Facility was extended through
December 31, 1997 and was refinanced on December 12, 1997 as discussed below.
Financing costs associated with the Original Credit Facility from January 31,
1997 through November 30, 1997 approximated 9% of the total facility. The
interest incurred on the Original Credit Facility was initially LIBOR plus 6%
and was increased to LIBOR plus 9% effective August 1, 1997.
On December 12, 1997, the Company refinanced the Original Credit Facility
with the net proceeds from the Preferred Stock with Warrants Issuance and an
amended credit agreement with BMO (the "Amended Credit Facility"). Under the
terms of the Amended Credit Facility, the Company has $20,000 in bank debt with
a three year term, due in quarterly installments beginning June 1, 1998, bearing
interest at the bank's base rate plus 1.0% per annum, and a $10,000 available
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. The Company was not required to draw
against the available line of credit when the refinancing was effectuated.
Borrowings under the revolving line of credit are limited to the Borrowing Base,
as defined, which is based upon eligible accounts receivable and inventory. The
Amended Credit Facility contains certain financial covenants and is secured by
substantially all of the Company's assets.
At November 30, 1997, the Company had $900 payable to Steven Devick,
an officer and director of the Company. In addition, the Company also had
$900 payable to a party unrelated to the Company, of which repayment was
personally guaranteed by Mr. Devick and Douglas C. Laux, an officer and
director of the Company. These loans bore interest at 10.0% per annum and
were both fully repaid on December 15, 1997 from the proceeds of the
Preferred Stock with Warrants Issuance.
7
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. PREFERRED STOCK AND WARRANTS
Pursuant to an Investment Agreement dated October 12, 1997, and as
amended, on December 12, 1997 the Company issued and sold to certain parties
(the "Purchasers"), for aggregate gross consideration of $20,000, 20,000
shares of Series B Convertible Preferred Stock ("Series B Preferred Stock")
and warrants to purchase 3,600,000 shares of Common Stock ("Purchaser
Warrants"). The Company also issued and sold to a certain affiliate of the
Company, for aggregate gross consideration of $2,500, 2,500 shares of Series
C Convertible Preferred Stock ("Series C Preferred Stock") and warrants to
purchase 450,000 shares of Common Stock (the "Affiliate Warrants"). The
Series B Preferred Stock and the Series C Preferred Stock are collectively
referred to as the "Preferred Stock."
The Preferred Stock accrues dividends compounded 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 of the Preferred Stock, 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 the lesser of $5.9375 or the average of the daily closing
price per share of Common Stock for 30 consecutive trading days following the
public release by the Company of its consolidated earnings statement for the
1998 fiscal year; provided that if shares of Common Stock are not then traded
on any national securities exchange or quoted on the Nasdaq Stock Market or a
similar service, the closing price for the foregoing purpose shall be deemed
to be the fair value of a share of Common Stock as determined in good faith
by the Board of Directors. If the Board of Directors is unable to determine
fair market value or if the holders of a majority of the outstanding shares
of the Preferred Stock disagree with the Board's determination, then fair
market value will be determined by an independent financial expert.
The number of shares of Common Stock which may be received upon exercise
of the Purchaser Warrants will be increased by an amount equal to 12.0% of
the shares initially underlying the Purchaser Warrants on each anniversary of
the original date of issuance of the Series B Preferred Stock, so long as any
Series B Preferred Stock remains outstanding. The Common Stock underlying the
Purchaser and Affiliate Warrants may be purchased at an exercise price per
share of the lesser of $6.25 and 82.5% of the average of the daily closing
price per share of Common Stock for the 30 consecutive trading days following
the public release by the Company of its consolidated earnings statement for
the 1998 fiscal year; provided that if shares of Common Stock are not then
traded on any national securities exchange or quoted on the Nasdaq Stock
Market or a similar service, the closing price for the foregoing purpose
shall be deemed to be the fair value of a share of Common Stock as determined
in good faith by the Board of Directors. If the Board of Directors is unable
to determine fair market value or if the holders of a majority of the
outstanding shares of the Preferred Stock disagree with the Board's
determination, then fair market value will be determined by an independent
financial expert.
The value of the net proceeds ($20,714) of the Preferred Stock with
Warrants Issuance is to be assigned to each of the securities involved in the
transaction. The Company has engaged an independent company to value each
equity security issued and sold in the Preferred Stock with Warrants Issuance
and will disclose the proper valuation of such securities upon completion of
the valuation, as appropriate.
8
<PAGE>
PLATINUM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. MERGER AND RESTRUCTURING COSTS
As a result of the acquisition of substantially all the assets of
Intersound, Inc. ("Intersound") during January 1997, 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. $39 and $265 of such costs
were expensed during the three and six months ended November 30, 1997,
respectively. The restructuring is substantially complete at 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 change in third-party fulfillment of Platinum
Christian Distribution from Riverside Book and Bible House, Inc. to the
Company's primary third-party distributor, PolyGram Group Distribution, Inc.
The shift in third-party fulfillment of Platinum Christian Distribution was
not fully implemented until September 1, 1997, resulting in negligible
revenues for product sales to the Christian bookstore market during the first
fiscal quarter of 1998.
6. TERMINATION OF THE K-TEL AGREEMENT
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. On September 10, 1997, the Company terminated the K-tel
Agreement alleging that K-tel materially breached the K-tel Agreement. Both
the Company and K-tel have filed claim to the escrowed amounts. The outcome
of such claims is uncertain. Accordingly, the Company reserved the full
escrowed amount during the second fiscal quarter. In addition, approximately
$175 and $950 of legal, accounting, and other incremental costs associated
with the K-tel Acquisition were expensed by the Company during the three and
six months ended November 30, 1997, respectively. These costs are classified
as merger, restructuring and one-time costs in the consolidated statements of
operations.
7. RECLASSIFICATIONS
Certain amounts in the three and six months ended November 30, 1996
consolidated statements of operations have been reclassified to conform with
the three and six months ended November 30, 1997 presentation.
8. SUBSEQUENT EVENT
See Notes 1, 3, and 4.
9
<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
genre, as well as compilations and repackagings of previously recorded music
that enable the Company to exploit its catalog of master recordings.
On December 12, 1997, the Company sold 22,500 shares (including 2,500
shares to affiliates of the Company) of convertible preferred stock and
warrants to purchase 4,050,000 shares (including 450,000 shares to affiliates
of the Company) of Common Stock for aggregate consideration of $22,500,000
(approximately $20,714,000 net of related costs) (collectively the "Preferred
Stock with Warrants Issuance"). The net proceeds were used to pay amounts
outstanding under the Company's $35,000,000 acquisition-related bank
financing with Bank of Montreal ("BMO"). In addition, the Company refinanced
its banking facility with BMO resulting in bank debt of $20,000,000 with a
three-year term and a $10,000,000 three-year available revolving credit
facility. The Company was not required to draw against the available line of
credit when the refinancing was effectuated. See "Capital Resources."
During January 1997, the Company acquired substantially all of the
assets of Intersound, Inc. ("Intersound"). The Company determined the
purchase price allocation for Intersound, as disclosed in the balance sheet
at May 31, 1997, based on available information at that time. However,
during the seven months ended December 31, 1997, the Company determined that
the purchase value allocated certain purchased assets exceeded their fair
market values by approximately $1,150,000. In addition, further liabilities
of approximately $2,350,000, which the Company believes relate to returned
products that had been sold prior to the Company's purchase of Intersound,
were identified. Had these matters been identified by the Company at the
time of purchase or shortly thereafter, such valuations would have been
recorded through purchase accounting, resulting in no subsequent income
statement impact. As these matters were not identified at the time of
purchase or shortly thereafter, the Company is required to reflect these
amounts in its results of operations, resulting in a nonrecurring charge to
operations of $3,500,000 for the seven months ended December 31, 1997. The
Company recorded the portion of these adjustments identified herein during
the three month period ended November 30, 1997 (a $700,000 charge to
provision for future returns and a $650,000 charge to provision for
unrecoupable artist balances) and the six month period ended November 30,
1997 (a $1,100,000 charge to provision for future returns, a $400,000 charge
to provision for slow-moving inventory and a $650,000 charge to provision for
unrecoupable artist balances).
As a result of the acquisition of substantially all the assets of
Intersound, 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. $39,000 and $265,000 of such costs were expensed during the
three and six months ended November 30, 1997, respectively. The restructuring
is substantially complete at 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 change in
third-party fulfillment of Platinum Christian Distribution from Riverside
Book and Bible House, Inc. to the Company's primary third-party distributor,
PolyGram Group Distribution, Inc. ("PGD"). The shift in third-party
fulfillment of Platinum Christian Distribution was not fully implemented
until September 1, 1997, resulting in negligible revenues for product sales
to the Christian bookstore market during the first fiscal quarter of 1998.
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.
On September 10, 1997, the Company terminated the K-tel Agreement alleging that
K-tel materially breached the K-tel Agreement. Both the Company and K-tel have
filed claim to the escrowed amounts. The outcome of such claims is uncertain.
Accordingly, the Company reserved the full escrowed amount during the second
fiscal quarter. In addition, approximately $175,000 and $950,000 of legal,
accounting, and other incremental costs associated with the K-tel Acquisition
were expensed by the Company during the three and six months ended November 30,
1997, respectively. These costs are classified as merger, restructuring and
one-time costs in the consolidated statements of operations.
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
10
<PAGE>
Company's allowance for future returns is based upon its historical returns,
SOUNDSCAN data and the return rate of the Company's primary distributor, PGD.
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. The Company terminated this arrangement during the first fiscal
quarter of 1998 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.
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>
THREE MONTHS ENDED
NOVEMBER 30,
------------------------------------------------
1997 1996
(IN THOUSANDS, EXCEPT PERCENTAGE AMOUNTS)
<S> <C> <C> <C> <C>
Total gross revenues . . . . . . . . . . $20,049 100.0% $6,317 100.0%
Less: Returns and allowances . . . . . . (3,903) -19.5% (1,199) -19.0%
Less: Discounts. . . . . . . . . . . . . (1,561) -7.8% (319) -5.0%
-------- --------
Total net revenues . . . . . . . . . . . 14,585 72.7% 4,799 76.0%
Cost of sales and services . . . . . . . 8,051 40.2% 3,215 50.9%
-------- --------
Gross profit . . . . . . . . . . . . . . 6,534 32.5% 1,584 25.1%
Other operating expenses:
Selling, general and
administrative expenses. . . . . . . . 5,269 26.3% 2,441 38.6%
Merger, restructuring and
one-time costs . . . . . . . . . . . . 1,964 9.8% - -
Depreciation and amortization. . . . . . 515 2.6% 97 1.5%
-------- --------
7,748 38.7% 2,538 40.1%
-------- --------
Operating loss . . . . . . . . . . . . . (1,214) -6.2% (954) -15.0%
Interest income. . . . . . . . . . . . . 21 0.1% 36 0.6%
Interest expense . . . . . . . . . . . . (1,450) -7.2% (2) -
Other financing costs. . . . . . . . . . (363) -1.8% - -
Equity loss. . . . . . . . . . . . . . . (215) -1.1% - -
-------- --------
Net loss . . . . . . . . . . . . . . . . ($3,221) -16.2% ($920) -14.4%
-------- --------
-------- --------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30,
------------------------------------------------
1997 1996
(IN THOUSANDS, EXCEPT PERCENTAGE AMOUNTS)
<S> <C> <C> <C> <C>
Total gross revenues . . . . . . . . . . $32,288 100.0% $12,079 100.0%
Less: Returns and allowances . . . . . . (7,320) -22.7% (2,272) -18.8%
Less: Discounts. . . . . . . . . . . . . (2,165) -6.7% (763) -6.3%
-------- --------
Total net revenues . . . . . . . . . . . 22,803 70.6% 9,044 74.9%
Cost of sales and services . . . . . . . 12,144 37.6% 5,804 48.1%
-------- --------
Gross profit . . . . . . . . . . . . . . 10,659 33.0% 3,240 26.8%
Other operating expenses:
Selling, general and
administrative expenses. . . . . . . . 9,233 28.6% 4,745 39.3%
Merger, restructuring and
one-time costs . . . . . . . . . . . . 2,965 9.2% - -
Depreciation and amortization. . . . . . 1,000 3.1% 167 1.4%
-------- --------
13,198 40.9% 4,912 40.7%
-------- --------
Operating loss . . . . . . . . . . . . . (2,539) -7.9% (1,672) -13.9%
Interest income. . . . . . . . . . . . . 42 0.1% 126 1.0%
Interest expense . . . . . . . . . . . . (2,659) -8.2% (5) -
Other financing costs. . . . . . . . . . (813) -2.5% - -
Equity loss. . . . . . . . . . . . . . . (200) -0.6% - -
-------- --------
Net loss . . . . . . . . . . . . . . . . ($6,169) -19.1% ($1,551) -12.9%
-------- --------
-------- --------
</TABLE>
GROSS REVENUES
Gross revenues increased $13,732,000 or 217.4% to $20,049,000 for the
current fiscal quarter compared to the comparable period of the prior fiscal
year, and increased $20,209,000 or 167.3% to $32,288,000 for the six months
ended November 30, 1997 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
11
<PAGE>
prior fiscal year from the release of The Beach Boys' STARS AND STRIPES,
VOLUME I. Significant contributions to revenues for the current fiscal
quarter include John Denver's A CELEBRATION OF LIFE and the continued success
of Peter Cetera's A COLLECTION (River North), William Becton's HEART OF A
LOVE SONG (CGI Records), BOOTLEG BOOTY, a compilation of various urban
artists, and George Clinton's LIVE...AND KICKIN' (Intersound Urban), Eddie
Rabbitt's BEATIN' THE ODDS (Intersound Country), PAINT IT, BLUE - a tribute
to the Rolling Stones by various blues artists (House of Blues) and numerous
Christmas releases (Intersound Classical).
RETURNS AND ALLOWANCES
Returns and allowances increased $2,704,000 or 225.5% to $3,903,000
for the current fiscal quarter compared to the comparable period of the prior
fiscal year, and increased $5,048,000 or 222.2% to $7,320,000 for the six
months ended November 30, 1997 compared to the comparable period of the prior
fiscal year. Returns and allowances as a percentage of gross product sales,
less discounts, remained relatively unchanged at 21.5% for the current fiscal
quarter from 21.2% for the comparable period of the prior fiscal year, and
increased to 25.1% for the six months ended November 30, 1997 from 20.9% for
the comparable period of the prior fiscal year. As discussed in the
"Overview" above, the Company ascertained additional product returns of
$700,000 and $1,100,000 during the three and six months ended November 30,
1997, respectively, which the Company believes relate to Intersound prior to
the Intersound Acquisition. Had these returns been identified by the Company
at the time of purchase or shortly thereafter, such amount would have been
recorded through purchase accounting, resulting in no subsequent income
statement impact. As these returns were not ascertained at the time of
purchase or shortly thereafter, the Company is required to reflect this
amount in its results of operations. Excluding these returns, returns and
allowances as a percentage of gross product sales, less discounts, for the
three and six months ended November 30, 1997 are 17.7% and 21.3%,
respectively. The current period decrease in the current fiscal quarter is
primarily due to unusually high returns in the prior year second quarter as a
result of a weakened music retail market at that time.
DISCOUNTS
Discounts increased $1,242,000 or 389.3% to $1,561,000 for the current
fiscal quarter compared to the comparable period of the prior fiscal year, and
increased $1,402,000 or 183.7% to $2,165,000 for the six months ended November
30, 1997 compared to the comparable period of the prior fiscal year. Discounts
as a percentage of gross product sales increased to 7.9% for the current fiscal
quarter from 5.4% for the comparable period of the prior fiscal year, and
remained relatively unchanged at 6.9% for the six months ended November 30, 1997
from 6.6% for the comparable period of the prior fiscal year. The increase in
the current fiscal quarter is primarily due to customer incentives owed on
activity through the recently acquired Intersound distribution system; no such
incentives were owed in the prior year second quarter.
COST OF SALES AND SERVICES
Cost of sales and services increased $4,836,000 or 150.4% to $8,051,000
for the current fiscal quarter compared to the comparable period of the prior
fiscal year, and increased $6,340,000 or 109.2% to $12,144,000 for the six
months ended November 30, 1997 compared to the comparable period of the prior
fiscal year. Cost of sales and services as a percentage of gross revenues
decreased to 40.2% for the current fiscal quarter from 50.9% for the
comparable period of the prior fiscal year, and decreased to 37.6% for the
six months ended November 30, 1997 from 48.1% for the comparable period of
the prior fiscal year. As discussed in the "Overview" above, the Company
ascertained that the purchase value allocated certain assets purchased from
Intersound exceeded their fair market values, as disclosed in its balance
sheet at May 31, 1997. The Company specifically ascertained certain
unrecoupable artist balances ($650,000 during the three months ended November
30, 1997) and obsolete inventory ($400,000 during the three months ended
August 31, 1997), which, when recorded, affects cost of sales and services.
Had these write-downs been ascertained by the Company at the time of purchase
or shortly thereafter, such amounts would have been recorded through purchase
accounting, resulting in no subsequent income statement impact. As these
write-downs were not ascertained at the time of purchase or shortly
thereafter, the Company is required to reflect these amounts in its results
of operations. Excluding these write-downs, cost of sales and services as a
percentage of gross revenues for the three and six months ended November 30,
1997 are 36.9% and 34.4%, respectively. The current period 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.
GROSS PROFIT
Gross profit increased $4,950,000 or 312.5% to $6,534,000 for the
current fiscal quarter compared to the comparable period of the prior fiscal
year, and increased $7,419,000 or 229.0% to $10,659,000 for the six months
ended November 30, 1997 compared to the comparable period of the prior fiscal
year. As a percentage of gross revenues, gross profit increased to 32.5% for
the current fiscal quarter from 25.1% for the comparable period of the prior
fiscal year, and increased to 33.0% for the six months ended November 30,
1997 from 26.8% for the comparable period of the prior fiscal year. As
discussed in the "Overview" above, gross profit includes $1,350,000 and
$2,150,000 of costs and expenses for the three and six months ended November
30, 1997, respectively, that the Company believes relate to Intersound prior
to the Company's purchase. Had these matters been ascertained by the Company
at the time of purchase or shortly thereafter, such adjustments would have
been recorded through purchase accounting, resulting in no subsequent income
statement impact. As these matters were not ascertained at the time of
purchase or shortly thereafter, the Company is required to reflect these
amounts in its results of operations. Excluding these adjustments, gross
profit increased $6,300,000 or 397.7% and $9,569,000 or 295.3% for the three
and six months ended November 30, 1997, respectively, compared to the
comparable periods of the prior fiscal year. The current period increase is
primarily a result of the lower cost of product sales associated with
direct-to-retail activity, which is
12
<PAGE>
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 $2,828,000 or 115.9%
to $5,269,000 for the current fiscal quarter compared to the comparable period
of the prior fiscal year, and increased $4,488,000 or 94.6% to $9,233,000 for
the six months ended November 30, 1997 compared to the comparable period of the
prior fiscal year. Selling general and administrative expenses as a percentage
of gross revenues decreased to 26.3% for the current fiscal quarter from 38.6%
for the comparable period of the prior fiscal year, and decreased to 28.6% for
the six months ended November 30, 1997 from 39.3% 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 $1,964,000 and $2,965,000 for the three and six months ended
November 30, 1997, respectively.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased to $515,000 for the current fiscal
quarter from $97,000 for the comparable period of the prior fiscal year, and
increased to $1,000,000 for the six months ended November 30, 1997 from $167,000
for the comparable period of the prior fiscal year. The increase relates
primarily to amortization expense resulting from approximately $31,000,000 of
music catalog, music publishing rights and goodwill assets recorded from the
acquisitions completed during fiscal 1997.
OPERATING LOSS
As a result of the factors described above, an operating loss of
$1,214,000 was experienced in the current fiscal quarter compared to an
operating loss of $954,000 in the comparable period of the prior fiscal year,
and an operating loss of $2,539,000 was experienced during the six months
ended November 30, 1997 compared to an operating loss of $1,672,000 for the
comparable period of the prior fiscal year. As discussed in the "Overview"
above, operating loss includes $1,350,000 and $2,150,000 of costs and
expenses for the three and six months ended November 30, 1997, respectively,
that the Company believe relate to Intersound prior to the Company's
purchase. Had these matters been ascertained by the Company at the time of
purchase or shortly thereafter, such adjustments would have been recorded
through purchase accounting, resulting in no subsequent income statement
impact. As these matters were not ascertained at the time of purchase or
shortly thereafter, the Company is required to reflect these amounts in its
results of operations. Excluding these adjustments, the Company experienced
operating income of $136,000 and an operating loss of $389,000 for the three
and six months ended November 30, 1997, respectively. The current periods
includes $1,964,000 and $2,965,000 for the three and six months ended
November 30, 1997, respectively, of nonrecurring merger, restructuring and
one-time costs as discussed above.
INCOME TAXES
No tax expense or benefit has been recorded through November 30, 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 ("Section 382"),
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
and the recently completed Preferred Stock with Warrants Issuance. 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 $1,405,000
compared to $2,000 for the comparable period of the prior fiscal year, and
totaled $2,659,000 for the six months ended November 30, 1997 compared to
$5,000 for the comparable period of the prior fiscal year. See "Capital
Resources" below for details of the Company's current debt structures.
13
<PAGE>
OTHER FINANCING COSTS
Other financing costs of $363,000 and $813,000 were incurred during the
three and six months ended November 30, 1997, respectively, due to the funding
of the Intersound Acquisition. These costs represent fees incurred as a result
of extension of the Original 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 $3,221,000 compared
to a net loss of $920,000 for the comparable period of the prior fiscal year,
and totaled $6,169,000 for the six months ended November 30, 1997 compared to
a net loss of $1,551,000 for the comparable period of the prior fiscal year.
As discussed in the "Overview" above, net loss includes $1,350,000 and
$2,150,000 of costs and expenses for the three and six months ended November
30, 1997, respectively, that the Company believes relate to Intersound prior
to the Company's purchase. Had these matters been ascertained by the Company
at the time of purchase or shortly thereafter, such adjustments would have
been recorded through purchase accounting, resulting in no subsequent income
statement impact. As these matters were not ascertained at the time of
purchase or shortly thereafter, the Company is required to reflect these
amounts in its results of operations. Excluding these adjustments, the
Company experienced a net loss of $1,871,000 and a net loss of $4,019,000 for
the three and six months ended November 30, 1997, respectively. The current
period increased net loss relates primarily to non-recurring financing,
merger, restructuring and one-time costs ($2,327,000 and $3,778,000 for the
three and six months ended November 30, 1997, respectively) and interest
expense ($1,405,000 and $2,659,000 for the three and six months ended
November 30, 1997, respectively) related to the Intersound Acquisition, as
well as an 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 is not
expected to be material to the Company's financial disclosures.
SFAS No. 129, DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE,
establishes standards for disclosing information about an entity's capital
structure. This Statement requires disclosure of the pertinent rights and
privileges of various securities outstanding (stock, options, warrants,
preferred stock, debt and participation rights) including dividend and
liquidation preferences, participant rights, call prices and dates,
conversion or exercise prices and redemption requirements. This Statement is
effective for the Company's fiscal year ending May 31, 1998. The impact of
SFAS 129 is not expected to materially change the Company's financial
disclosures.
SEASONALITY
The Company's results of operations are subject to seasonal variations.
In accordance with industry practice, the Company records revenues for music
product when such products are shipped to retailers. The Company has
historically experienced a decline in revenues and operating income in its
third fiscal quarter (December, January and February) due to the fact that
retailers purchase products from the Company in the quarter ending November
30 in anticipation of holiday sales. As a result, sales are traditionally
lower during December and the post holiday period. However, the acquisition
of Intersound is expected to help mitigate the seasonality of the third
fiscal quarter in the future due to its history of new releases during
January and February.
14
<PAGE>
SIGNIFICANT MATTERS
On December 12, 1997, the Company sold 22,500 shares (including 2,500
shares to affiliates of the Company) of convertible preferred stock and
warrants to purchase 4,050,000 shares (including 450,000 shares to affiliates
of the Company) of Common Stock for aggregate consideration of $22,500,000
(approximately $20,714,000 net of related costs). The net proceeds were used
to pay amounts outstanding under the Company's $35,000,000
acquisition-related bank financing with BMO. In addition, the Company
refinanced its banking facility with BMO resulting in bank debt of
$20,000,000 with a three-year term and a $10,000,000 three-year available
revolving credit facility. The Company was not required to draw against the
available line of credit when the refinancing was effectuated. See "Capital
Resources."
LIQUIDITY
The Company's cash balances were $226,000 and $53,000 at November 30 and
May 31, 1997, respectively. Assuming the Preferred Stock with Warrants
Issuance and bank refinancing that occurred on December 12,1997 had occurred
on November 30, 1997, the Company's cash balance would have been $3,694,000.
See Note 1 to the Consolidated Financial Statements. Net cash used in
operating activities was $3,866,000 for the six months ended November 30,
1997. The uses primarily reflect net cash used to fund accounts receivable
of $4,482,000 and artist advances of $2,057,000, attributable to releases by
such artists as Peter Cetera, The Bellamy Brothers and George Clinton,
several Blues compilations, and scheduled future releases including Kansas,
Phoebe Snow, and numerous Gospel albums, by artists including Bronx Mass
Choir and Terri Carroll. The net uses were offset primarily by increases in
accounts payable and accrued and other liabilities funding of $1,402,000 and
$2,882,000, respectively, and a $2,525,000 write-off of one-time costs. See
"Results of Operations - Merger, Restructuring and One-Time Costs."
Net cash provided by financing activities for the six months ended
November 30, 1997 was $500,000 from the sale of shares of Common Stock to a
director of the Company and $294,000 in borrowings under the revolving line
of credit under the Original Credit Facility. The Original Credit Facility
was refinanced subsequent to November 30, 1997. The Company borrowed
$1,500,000 from Mr. Devick during the six months ended November 30, 1997;
$600,000 was repaid by the Company during the same time period. In addition,
the Company borrowed $1,150,000 from a party unrelated to the Company during
the six months ended November 30, 1997, of which repayment was personally
guaranteed by Mr. Devick and Mr. Laux; $250,000 was repaid by the Company
during the same time period. Such loans bore interest at 10.0% per annum.
See "Capital Resources." In addition, the Company sold equity securities for
net proceeds of $20,714,000 subsequent to November 30, 1997. See
"Significant Matters" and "Capital Resources." Assuming the Preferred Stock
with Warrants Issuance and bank refinancing that occurred on December 12,1997
had occurred on November 30, 1997, the Company's net cash provided by
financing activities for the six months ended November 30, 1997 would have
been $5,781,000. See Note 1 to the Consolidated Financial Statements.
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 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
On January 31, 1997, the Company entered a Credit Agreement with BMO,
individually and as agent, to provide a 90-day term loan in the amount of
$25,000,000 and a 90-day revolving credit facility in the amount of $10,000,000
(the "Original Credit Facility"). The Original Credit Facility was extended
through December 31, 1997 and was refinanced on December 12, 1997 as discussed
below. Financing costs associated with the Original Credit Facility from
January 31, 1997 through November 30, 1997 approximated 9% of the total
facility. The interest incurred on the Original Credit Facility was initially
LIBOR plus 6% and was increased to LIBOR plus 9% effective August 1, 1997.
15
<PAGE>
At November 30, 1997, the Company had $900,000 payable to Mr. Devick. In
addition, the Company also had $900,000 payable to a party unrelated to the
Company, of which repayment was personally guaranteed by Mr. Devick and Mr.
Laux. These loans bore interest at 10.0% per annum and were both fully
repaid on December 15, 1997 from the proceeds of the Preferred Stock with
Warrants Issuance.
On December 12, 1997, the Company refinanced the Original Credit Facility
with the net proceeds from the Preferred Stock with Warrants Issuance and the
Amended Credit Facility. Under the terms of the Amended Credit Facility, the
Company has $20,000,000 in bank debt with a three year term, due in quarterly
installments beginning June 1, 1998, bearing interest at the bank's base rate
plus 1.0% per annum, and a $10,000,000 available 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. The Company was not required to draw against the available line of
credit when the refinancing was effectuated. Borrowings under the revolving
line of credit are limited to the Borrowing Base, as defined, which is based
upon eligible accounts receivable and inventory. The Amended Credit Facility
contains certain financial covenants and is secured by substantially all of the
Company's assets.
Pursuant to an Investment Agreement dated October 12, 1997, and as amended,
on December 12, 1997 the Company issued and sold to certain parties (the
"Purchasers"), for aggregate gross consideration of $20,000,000, 20,000 shares
of Series B Convertible Preferred Stock ("Series B Preferred Stock") and
warrants to purchase 3,600,000 shares of Common Stock ("Purchaser Warrants").
The Company also issued and sold to a certain affiliate of the Company, for
aggregate gross consideration of $2,500,000, 2,500 shares of Series C
Convertible Preferred Stock ("Series C Preferred Stock") and warrants to
purchase 450,000 shares of Common Stock (the "Affiliate Warrants"). The Series
B Preferred Stock and the Series C Preferred Stock are collectively referred to
as the "Preferred Stock."
The Preferred Stock accrues dividends compounded 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 of the Preferred Stock, 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 the
lesser of $5.9375 or the average of the daily closing price per share of Common
Stock for 30 consecutive trading days following the public release by the
Company of its consolidated earnings statement for the 1998 fiscal year;
provided that if shares of Common Stock are not then traded on any national
securities exchange or quoted on the Nasdaq Stock Market or a similar service,
the closing price for the foregoing purpose shall be deemed to be the fair value
of a share of Common Stock as determined in good faith by the Board of
Directors. If the Board of Directors is unable to determine fair market value
or if the holders of a majority of the outstanding shares of the Preferred Stock
disagree with the Board's determination, then fair market value will be
determined by an independent financial expert.
The number of shares of Common Stock which may be received upon exercise of
the Purchaser Warrants will be increased by an amount equal to 12.0% of the
shares initially underlying the Purchaser Warrants on each anniversary of the
original date of issuance of the Series B Preferred Stock, so long as any Series
B Preferred Stock remains outstanding. The Common Stock underlying the
Purchaser and Affiliate Warrants may be purchased at an exercise price per share
of the lesser of $6.25 and 82.5% of the average of the daily closing price per
share of Common Stock for the 30 consecutive trading days following the public
release by the Company of its consolidated earnings statement for the 1998
fiscal year; provided that if shares of Common Stock are not then traded on any
national securities exchange or quoted on the Nasdaq Stock Market or a similar
service, the closing price for the foregoing purpose shall be deemed to be the
fair value of a share of Common Stock as determined in good faith by the Board
of Directors. If the Board of Directors is unable to determine fair market
value or if the holders of a majority of the outstanding shares of the Preferred
Stock disagree with the Board's determination, then fair market value will be
determined by an independent financial expert.
The Company intends to upgrade its current computer systems prior to the
end of fiscal 1998. While the Company has no material purchase commitments to
date, estimated upgrade expenditures are $500,000 to $750,000.
16
<PAGE>
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 November 30, 1997 totaled $2,198,000 compared to
$7,866,000 at May 31, 1997. This decrease of $5,668,000 or 72.1% is due to
net losses experienced by the Company during the six months ended November
30, 1997 offset by an equity sale of $500,000 to a director of the Company.
Assuming the equity sale and bank refinancing that occurred on December 12,
1997 had occurred on November 30, 1997, the Company's stockholders' equity at
November 30, 1997 would have been $22,912,000. See Note 1 to the
Consolidated Financial Statements. As discussed in the "Overview" above,
stockholders' equity includes $2,150,000 of costs and expenses that the
Company believes relate to Intersound prior to the Company's purchase. Had
these matters been ascertained by the Company at the time of purchase or
shortly thereafter, such adjustments would have been recorded through
purchase accounting, resulting in no stockholders' equity impact. As these
matters were not ascertained at the time of purchase or shortly thereafter,
the Company is required to reflect these amounts in its results of
operations, thus impacting stockholders' equity. Excluding these
adjustments, the Company's stockholders' equity would have been $4,348,000 at
November 30, 1997. Assuming the equity sale and bank refinancing that
occurred on December 12, 1997 had occurred on November 30, 1997, the
Company's stockholders' equity at November 30, 1997 would have been
$25,062,000. See Note 1 to the Consolidated Financial Statements.
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 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.
PART II - OTHER INFORMATION
17
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. Exhibits.
*3.1 Third Amended and Restated Certificate of Incorporation of the
Registrant, as amended.
*3.2 Amended and Restated By-laws of the Registrant, as amended.
*4.1 Warrant to Purchase 315,000 Shares of Common Stock of the Registrant
issued to Platinum Venture Partners II, L.P., as nominee, dated
December 12, 1997.
*4.2 Warrant to Purchase 135,000 Shares of Common Stock of the Registrant
issued to Platinum Venture Partners II, L.P., as nominee, dated
December 12, 1997.
*4.3 Warrant to Purchase 1,800,000 Shares of Common Stock of the Registrant
issued to SK-Palladin Partners, LP, dated December 12, 1997.
*4.4 Warrant to Purchase 1,800,000 Shares of Common Stock of the Registrant
issued to MAC Music LLC, dated December 12, 1997.
*4.5 Warrant to Purchase 50,000 Shares of Common Stock of the Registrant
issued to Carl D. Harnick, dated December 12, 1997.
*4.6 Registration Rights Agreement, dated December 12, 1997, between the
Registrant and Platinum Venture Partners I, L.P and Platinum Venture
Partners II, L.P.
*4.7 Registration Rights Agreement, dated December 12, 1997, between the
Registrant and Carl D. Harnick.
*10.1 Platinum Entertainment, Inc. 1997 Employee Stock Purchase Plan,
effective June 1, 1997, is herein incorporated by reference to the
1997 Annual Meeting of Stockholders Proxy Statement filed with
the Commission December 2, 1997 (the "1997 Annual Meeting of
Stockholders Proxy Statement").
18
<PAGE>
*10.2 Platinum Entertainment, Inc. 1995 Directors' Stock Option Plan,
as amended and restated as of October 1, 1997, is herein
incorporated by reference to the 1997 Annual Meeting of
Stockholders Proxy Statement.
*10.3 Investment Agreement among the Company, MAC Music LLC and
SK-Palladin Partners, LP dated as of October 12, 1997 (the
"Investment Agreement"), is herein incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarterly
period ended August 31, 1997 filed with the Commission October
14, 1997.
*10.4 Amendment to the Investment Agreement dated October 28, 1997, is
herein incorporated by reference to the 1997 Annual Meeting of
Stockholders Proxy Statement.
*10.5 Amendment to the Investment Agreement dated October 30, 1997, is
herein incorporated by reference to the 1997 Annual Meeting of
Stockholders Proxy Statement.
*10.6 Amendment to the Investment Agreement dated November 26, 1997, is
herein incorporated by reference to the 1997 Annual Meeting of
Stockholders Proxy Statement.
*10.7 Stock and Warrant Purchase Agreement, dated December 12, 1997
between the Registrant and Platinum Venture Partners II, L.P., as
nominee.
*10.8 Amendment No. 1 dated as of December 12, 1997 to Employment
Agreement between the Registrant and Steven Devick dated June 1,
1997.
*10.9 Amendment No. 1 dated as of December 12, 1997 to Employment
Agreement between the Registrant and Douglas C. Laux dated June
1, 1997.
*10.10 Amendment No. 1 dated as of December 12, 1997 to Employment
Agreement between the Registrant and Thomas R. Leavens dated June
1, 1997.
*10.11 Credit Agreement, dated as December 12, 1997, among the
Registrant, Intersound, Inc. and the Banks who are or may become
parties thereto, and exhibits and schedules thereto.
*10.12 Term Credit Note, dated December 12, 1997, issued by the
Registrant in the principal amount of $20,000,000.
*10.13 Revolving Credit Note, dated December 12, 1997, issued by the
Registrant in the principal amount of $10,000,000.
*10.14 Security Agreement, dated December 12, 1997, among the
Registrant, its subsidiaries and Bank of Montreal and the Banks
who are or may become parties thereto, and schedules thereto.
*10.15 Security Agreement re: Intellectual Property, dated as of
December 12, 1997, among the Registrant, its subsidiaries and the
Bank of Montreal and the Banks who are or may become parties
thereto, and schedules thereto.
*10.16 Pledge Agreement, dated December 12, 1997, among the Registrant,
its subsidiaries and the Bank of Montreal and the Banks who are
or may become parties thereto.
27. Financial Data Schedule.
* Previously filed.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Platinum
Entertainment, Inc. has duly caused this Amendment No. 1 to this Report to be
signed on its behalf by the undersigned, thereunto duly authorized, on this
14th day of August, 1998.
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)
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEET AT NOVEMBER 30, 1997, THE UNAUDITED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED NOVEMBER 30,
1997 AND THE UNAUDITED NOTES THERETO FOR PLATINUM ENTERTAINMENT, INC. AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> NOV-30-1997
<CASH> 226
<SECURITIES> 0
<RECEIVABLES> 22,407
<ALLOWANCES> (3,312)
<INVENTORY> 5,846
<CURRENT-ASSETS> 27,854
<PP&E> 1,844
<DEPRECIATION> (775)
<TOTAL-ASSETS> 66,245
<CURRENT-LIABILITIES> 57,047
<BONDS> 5,000
0
0
<COMMON> 5
<OTHER-SE> 2,193
<TOTAL-LIABILITY-AND-EQUITY> 64,245
<SALES> 14,212
<TOTAL-REVENUES> 20,049
<CGS> 7,813
<TOTAL-COSTS> 8,051
<OTHER-EXPENSES> 7,748<F1>
<LOSS-PROVISION> 200
<INTEREST-EXPENSE> 1,813<F2>
<INCOME-PRETAX> (3,221)<F3>
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,221)<F3>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,221)<F3>
<EPS-PRIMARY> (0.61)<F3>
<EPS-DILUTED> (0.61)<F3>
<FN>
<F1>INCLUDES $1,964 OF NON-RECURRING CHARGES
<F2>INCLUDES $363 OF NON-RECURRING CHARGES
<F3>INCLUDES $2,327 OF NON-RECURRING CHARGES
</FN>
</TABLE>
