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 June 30, 1999
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:
7,313,754 Common Stock, par value $.001 per share, at August 16, 1999.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Platinum Entertainment, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
<S> <C> <C>
________________________________
Assets (Unaudited)
Current assets:
Cash $ 47 $ 12
Accounts receivable, net 7,765 5,647
Artist advances, net 2,269 1,899
Inventories, net 6,828 7,036
Other receivable - 2,500
Other 2,469 1,986
________________________________
Total current assets 19,378 19,080
Investment securities 750 750
Property and equipment, net 2,578 2,461
Recorded music costs, net 1,178 1,251
Music catalog, net 20,849 21,314
Music publishing rights, net 2,950 3,026
Goodwill, net 5,488 5,610
Deferred financing costs, net 225 253
Equity investment in joint venture 2,088 2,205
Other 977 1,028
________________________________
Total assets $ 56,461 $ 56,978
================================
Liabilities and Stockholders' Equity
Current liabilities:
Revolving line of credit $ 34,247 $ 33,965
Accounts payable 5,084 6,452
Accrued liabilities 2,239 3,233
Royalties payable 7,798 5,410
________________________________
Total current liabilities 49,368 49,060
Stockholders' equity:
Preferred stock:
Preferred Stock ($.001 par value); 10,000,000
shares authorized:
Series B Convertible Preferred Stock,
20,000 shares issued and outstanding - -
Series C Convertible Preferred Stock,
2,500 shares issued and outstanding - -
Series D Convertible Preferred Stock,
3,938 shares issued and outstanding - -
Common stock:
Common Stock ($.001 par value); 40,000,000
shares authorized, 7,514,502 and 6,626,099
shares issued and 7,310,421 and 6,626,099
shares outstanding, respectively 7 7
Additional paid-in capital 79,870 71,378
Accumulated deficit (72,784) (63,467)
________________________________
Stockholders' equity 7,093 7,918
_________________________________
Total liabilities and stockholders' equity $ 56,461 $ 56,978
=================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Platinum Entertainment, Inc.
Consolidated Statements of Operations
(Unaudited - in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Quarter ended June 30 Six months ended June 30
1999 1998 1999 1998
_____________________ _________________________
<S> <C> <C> <C> <C>
Gross product sales $ 10,739 $ 12,942 $ 23,097 $ 26,607
Less: Returns (2,739) (2,847) (5,452) (4,271)
Less: Discounts (276) (603) (852) (1,208)
______________________ _________________________
Net product sales 7,724 9,492 16,793 21,128
Licensing, publishing
and other revenues 364 976 525 1,327
______________________ _________________________
Net sales 8,088 10,468 17,318 22,455
Cost of sales and
services 6,613 6,316 11,794 13,922
______________________ _________________________
Gross profit 1,475 4,152 5,524 8,533
Other operating expenses:
Selling, general and
administrative 5,837 4,820 10,136 8,440
Depreciation and
amortization 536 410 1,187 905
______________________ _________________________
6,373 5,230 11,323 9,345
______________________ _________________________
Operating loss (4,898) (1,078) (5,799) (812)
Interest income - 22 - 41
Interest expense (773) (695) (1,433) (1,263)
Other financing costs (70) 275 (103) 205
Equity loss (79) (199) (117) (29)
_______________________ _________________________
Net loss (5,820) (1,675) (7,452) (1,858)
Less: Preferred
dividend requirements (979) (695) (1,865) (1,370)
_______________________ _________________________
Loss applicable to
common shares $ (6,799) $ (2,370) $ (9,317) $ (3,228)
======================= ===========================
Basic and diluted
loss per common share $ (0.97) $ (0.44) $ (1.36) $ (0.60)
Weighted average number
of common shares
outstanding 7,016,134 5,401,138 6,866,653 5,338,437
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Platinum Entertainment, Inc.
Consolidated Statement of Stockholders' Equity
(Unaudited - in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Additional
Preferred stock Common Stock paid-In Stockholders'
Series B Series C Series D Shares Amount capital Deficit equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ - $ - $ - 6,626 $ 7 $ 71,378 $ (63,467) $ 7,918
Issuances of Common Stock:
Private placement ($7.09 per share) - - - 423 - 3,000 - 3,000
Warrant exercises - - - 259 - 2 - 2
Professional services by related parties - - - 75 - 527 - 527
Employee stock plans - - - 43 - 251 - 251
Litigation settlement - - - 20 - 129 - 129
Professional services - - - 18 - 123 - 123
Issuances of preferred stock:
Series D with warrants - - - - - 3,909 - 3,909
Redemption of Common Stock:
Litigation settlement - - - (204) - (1,314) - (1,314)
Dividends:
Preferred dividend requirements - - - - - 1,865 (1,865) -
Net loss for the six months ended
June 30, 1999 - - - - - - (7,452) (7,452)
Other - - - 50 - - - -
______________________________ _______________________________________________________
Balance at June 30, 1999 $ - $ - $ - 7,310 $ 7 $ 79,870 $ (72,784) $ 7,093
============================== =======================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Platinum Entertainment, Inc.
Consolidated Statements of Cash Flows
(Unaudited - in thousands)
<TABLE>
Six months ended June 30
1999 1998
_______________________________
<S> <C> <C>
Operating activities
Net loss $ (7,452) $ (1,858)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for future returns 5,452 4,271
Provision for unrecoupable artist balances 2,039 1,303
Provision for slow-moving inventory 100 -
Depreciation 337 190
Amortization 849 716
Deferred financing costs 103 126
Equity loss from joint venture 117 28
Professional services by related parties paid in common stock 527 -
Professional services paid in common stock 123 -
Litigation settlement, net (1,185) -
Changes in operating assets and liabilities:
Accounts receivable (7,570) (7,492)
Inventories 108 (725)
Artist advances (2,389) (2,879)
Recorded music costs (113) (264)
Accounts payable (1,490) 67
Accrued liabilities (994) (1,161)
Royalties payable 2,388 1,420
Other (403) (624)
_______________________________
Net cash used in operating activities (9,453) (6,882)
Investing activities
Cash paid for acquisition - (150)
Purchases of property and equipment (454) (733)
_______________________________
Net cash used in investing activities (454) (883)
Financing activities
Net proceeds from revolving lines of credit 282 9,107
Payment on bank term loan - (1,000)
Net proceeds from sale of preferred stock with warrants
to related parties 3,909 -
Proceeds from sale of Common Stock 5,500 -
Employee stock plans 251 -
Other - (76)
_______________________________
Net cash provided by financing activities 9,942 8,031
_______________________________
Net increase in cash 35 266
Cash, beginning of period 12 11
_______________________________
Cash, end of period $ 47 $ 277
===============================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Platinum Entertainment, Inc.
Notes to Consolidated Financial Statements
(Unaudited - in thousands, except share and 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 (GAAP) for interim
financial reporting and Securities and Exchange Commission regulations.
Accordingly, the financial statements do not include all the information and
footnotes required by GAAP for complete financial statements. In the
opinion of management, the financial statements reflect all adjustments which
are necessary to present fairly the financial position, results of operations
and cash flows for the interim periods presented. Certain prior period
amounts in the financial statments have been reclassified to conform with the
current period presentation. These financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto for the year ended December 31, 1998, of Platinum Entertainment, Inc.
included in the Annual Report on Form 10-K filed with the Securities and
Exchange Commission on April 15, 1999. The interim results presented are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1999.
We have incurred significant net losses and negative cash flows from operations
since our inception, including a net loss of $7,452 ($9,317 after preferred
dividend requirements) and negative cash flows from operations of $9,453 in the
six months ended June 30, 1999. We have historically sustained net losses and
negative cash flows, in part due to the high costs associated with the
establishment and expansion of our activities.
For the quarter ended June 30, 1999, we were in violation of one of the
financial covenants contained in our bank credit agreement. This violation
was waived by the bank in July 1999. Our fiscal 1999 plan, if achieved, would
allow us to comply with our financial covenants. However, under the current
provisions of the bank credit agreement and based on actual results to date,
it is likely that we will be in violation of the same financial covenant for
the third and fourth quarters of fiscal 1999. If so, we would seek to have
these violations waived. If we are unsuccessful in obtaining a waiver, the
lender could declare the facility in default. A default could have a material
adverse effect on the Company's business as there is no assurance that
alternative financing could be obtained on terms satisfactory to the Company,
if at all.
Historically, we have funded our operations and other activities from a
variety of capital sources, including debt and equity financing. We have
continued to obtain equity financing from time-to-time. On December 31, 1998,
a private placement of our Common Stock occurred, providing proceeds of $2,500
in January 1999.
We have formulated plans and instituted specific measures which we believe will
improve cash flows and liquidity and enable us to continue in existence without
a significant curtailment of operations.
* We established a fiscal 1999 business plan and adopted a fiscal 1999
budget which includes, among other things, (i) a focus on the efficiency
of internal operations, (ii) implementation of procedures to reduce costs
and improve margins, (iii) the addition of new releases in a variety of
genres and (iv) the hiring of experienced music industry executives to
supplement the efforts of management.
* During April 1999, we issued shares of a new series of preferred stock and
warrants to purchase shares of our Common Stock to one of our executive
officers and certain other members of our Board of Directors, providing net
proceeds of approximately $3,900 (see "Note 5").
<PAGE>
* During May 1999, a private placement of our Common Stock occurred, providing
proceeds of $3,000 (see "Note 7").
* During July 1999, musicmaker.com, Inc. (musicmaker.com) completed its
initial public offering (IPO). Based on the pro forma assumptions discussed
in "Note 2," the value of our investment in musicmaker.com is $8,039.
Pursuant to a lock-up agreement with the underwriters of the IPO, we are
unable to sell the musicmaker.com shares until January 2000. However, we
have secured permission to use the shares as collateral for the purpose of
generating additional liquidity in the near term.
* We have agreed to sell our country music publishing rights originally
purchased from Double J Music Group for $1,449. We anticipate this sale to
be completed by the end of August 1999.
The events described above should allow us to complete our 1999 plan. In
addition to the events described above, we may need additional equity financing
in order to achieve our fiscal 2000 plan. While we have been successful in the
past in raising equity as needed, there can be no assurance that additional
equity financing may be available on satisfactory terms, if at all. The
financial statements and related notes included elsewhere herein do not
include any adjustments which might result from the outcome of this
uncertainty. Our plans for fiscal 1999 and beyond are subject to
uncertainties, many of which are beyond our control, such as general economic
conditions and competitive factors, and actual results may vary significantly
from our plans.
2. Musicmaker.com
We own 798,856 shares of common stock of musicmaker.com. Musicmaker.com
completed its IPO on July 7, 1999, for an IPO price of $14 per share under the
symbol "HITS." We obtained our equity interest in musicmaker.com, the
Internet's largest music download and custom CD vendor, on September 30, 1998,
in exchange for $750 of our common stock, par value $.001 per share. In
addition, we granted musicmaker.com the exclusive right to our music catalog
for Internet downloads and "burn and mail" compilations for two years, and
thereafter a non-exclusive right to our music catalog for Internet downloads
and "burn and mail" compilations for five years. We retained the exclusive
rights to our music catalog for promotional Internet downloads. Effective
July 7, 1999, and prospectively, the accounting treatment for our investment in
musicmaker.com will require us to record the investment at its fair market value
which has a significant affect on our assets and net worth. The pro forma
information following assumes musicmaker.com's IPO occurred on June 30, 1999,
and reflects the value of our investment as of August 13, 1999, at the per share
price of $10.063, which price equals the closing price of musicmaker.com's
common stock as reported by the Nasdaq National Market on that date.
<TABLE>
<CAPTION>
June 30 June 30
1999 1999
(Unaudited) (Pro forma)
<S> <C> <C>
Total assets $ 56,461 $ 63,750
Total liabilities 49,368 49,368
Total stockholders' equity 7,093 14,382
Total liabilities and stockholders' equity $ 56,461 $ 63,750
</TABLE>
<PAGE>
3. Basic and Diluted Loss Per Common Share
Basic loss per common share is based upon the net loss applicable to common
shares after preferred dividend requirements and upon the weighted-average
number of common shares outstanding during the period. Diluted loss per common
share adjusts for the effect of convertible securities, stock options and
warrants only in the periods presented in which such effect would have been
dilutive. The total of such securities at June 30, 1999, was 13,399,271. Such
effect was not dilutive in any of the periods presented herein.
4. Debt
During July 1998, we entered a credit agreement with First Source Financial,
Inc. (First Source) for a $35,000 revolving line of credit. Our First Source
facility has a five year term and bears interest at the bank's base rate plus
1.5% per annum (9.25% at June 30, 1999). Borrowings under our First Source
facility are limited to the Borrowing Base, as defined, which is based upon
eligible accounts receivable, inventory and music catalog. Our First Source
facility contains certain financial covenants, requires a lockbox arrangement
and is secured by substantially all of our assets. Because the facility
contains a subjective acceleration clause, the entire balance is classified as
current in the balance sheet. The First Source agreement was amended during
April 1999, providing for revised financial covenants through December 31, 1999.
For the quarter ended June 30, 1999, we were in violation of one of the
financial covenants contained in this amendment. This violation was waived by
the bank during July 1999. The First Source agreement was amended again during
August 1999, to allow the sale of our Double J publishing rights. Pursuant to
this amendment, the revolving line of credit will be permanently reduced by 50%
of the net proceeds from the sale of Double J, or approximately $700.
5. Preferred Stock
On April 15, 1999, we issued and sold an aggregate of 3,938 shares of Series D
Convertible Preferred Stock and warrants (the Series D Warrants) to purchase an
aggregate of 794,163 shares of Common Stock to Steven Devick, one of our
executive officers and a director, and Craig J. Duchossois and Andrew
Filipowski, each members of our Board of Directors. The terms of the Series D
Convertible Preferred Stock and Series D Warrants were determined on April 9,
1999, pursuant to approval by the Board of Directors on such date. We received
$3,938 in gross consideration in connection with this private placement. We
also paid an aggregate of $29 to Mr. Duchossois and Mr. Filipowski as a
related transaction fee. The Series D Convertible Preferred Stock accrues
dividends compounded at an annual rate of 12% for the first year, 14% for the
second year, 16% for the third year, 18% for the fourth and fifth years and
20% at all times thereafter, of the purchase price of the Series D Convertible
Preferred Stock, in preference to any dividends on any class of capital stock
that is junior to the Series D Convertible Preferred Stock. The Series D
Convertible Preferred Stock is junior to the Series B Convertible Preferred
Stock and the Series C Convertible Preferred Stock with respect to the right to
receive dividends and to participate in any distribution of assets other than
by way of dividends. The Series D Convertible Preferred Stock is redeemable
by us at any time at a price per share equal to the purchase price paid by the
purchasers thereof plus accrued and unpaid dividends. The Series D Convertible
Preferred Stock is convertible, commencing two years from the date of issue,
into shares of Common Stock at $7.00 per share, which is equal to the closing
trading price of the Common Stock on April 9, 1999. The value assigned the
Series D Convertible Preferred Stock is $3,532 and the value assigned the Series
D Warrants is $406. These amounts, net of associated costs of $29, are
reflected in additional paid-in capital on the balance sheet.
<PAGE>
The number of shares of Common Stock obtainable upon exercise of the Series D
Warrants does not increase. If the Series D Convertible Preferred Stock is
redeemed in full during the twelve month period following the issuance of the
Series D Warrants, the holders of the Series D Warrants are required to return
1% of the Series D Warrants (or Common Stock representing shares received upon
exercise of the Series D Warrants), determined on a pro rata basis, for each
month remaining in such twelve month period; provided, however, that the
holders of the Series D Warrants are not required to return more than 12% of
the aggregate number of Series D Warrants originally issued. The Common Stock
underlying the Series D Warrants may be purchased at an exercise price per
share of $6.126, which is equal to the average of the closing trading price of
the Common Stock for the 30 consecutive trading days that commenced April 9,
1999.
6. Preferred Dividend Requirements
The preferred stock accrued dividends as follows:
<TABLE>
<CAPTION>
Series B Series C Series D Total
<S> <C> <C> <C> <C>
May 31, 1999 $ 815 $ 102 $ 62 $ 979
February 28, 1999 788 98 - 886
May 31, 1998 618 77 - 695
February 28, 1998 600 75 - 675
</TABLE>
The dividends reflect a compounding per annum rate of 14% (effective December
1998; prior to such date the per annum rate was 12%) of the initial costs of
the Series B Convertible Preferred Stock and Series C Convertible Preferred
Stock and 12% of the initial costs of the Series D Convertible Preferred Stock.
7. Common Stock
During May 1999, we issued 423,280 shares of our Common Stock to unrelated
parties at a per share price of $7.088, which approximated the closing price
of our Common Stock as reported by the Nasdaq National Market on the date of
sale. We received $3,000 in consideration for this sale.
8. Related Party Transactions
We entered a distribution agreement, dated August 1998, with Envisage
Multimedia LLC pursuant to which we are the exclusive distributor of Envisage
recorded music products, in certain territories, for a period of three years.
For such services, we receive a distribution fee from Envisage. We also have
paid certain manufacturing and promotional costs on behalf of Envisage, to be
fully repaid to us by Envisage. Gross product sales of Envisage product
reflected in the statement of operations for the quarter and six months ended
June 30, 1999 were immaterial. The amount due from Envisage at June 30, 1999
reflected in the balance sheet is approximately $749. Envisage is a partnership
owned by parties related to us.
During April 1999, we issued 75,246 shares of our Common Stock, valued at
$527 or $7 per share, to Platinum technology Interational, Inc. (Platinum
technology), of which certain shareholders, directors and officers are members
of the Company's Board of Directors, in connection with computer consulting
services. Pursuant to an agreement accompanying the issuance, if Platinum
technology sells the shares below the initial value of the shares at time of
issuance, we are required to issue Platinum technology additional shares of our
Common Stock equal to their loss on the sale. To the extent Platinum technology
sells the stock for greater than such initial value, Platinum technology shall
retain 10% of such excess value and shall remit the remaining excess value to
the Company to be applied on a priority basis to future invoices for additional
services, if any. Such arrangement also applies to the initial payment of
53,192 shares issued to Platinum technology on November 20, 1998 valued at
$7.188 per share.
<PAGE>
9. Litigation
During March 1999, we settled our pending litigation with JCSHO, Inc. (see
"Part II - Other Information - Item 1. Legal Proceedings"). The settlement
resulted in an offset of charges previously expensed by us in connection with
the acquired assets and assumed liabilities of Intersound, Inc. through the
recognition of a gain of $1,185. This amount is included as an offset to our
operating expenses in the statement of operations for the six months ended June
30, 1999.
On April 7, 1999, Ichiban Records, Inc. filed a lawsuit in the Superior Court
of Fulton County, State of Georgia, captioned "Ichiban Records, Inc. v. Platinum
Entertainment, Inc.," Civil Action No. 1999 CV 07215 ("Ichiban Claim"), seeking
termination of its distribution agreement with us and damages in excess of
$10,000,000, for alleged breaches of its distribution agreement by us. Ichiban
Records, Inc. also filed a complaint for injunction and temporary restraining
order and appointment of a receiver under the same caption. On April 21, 1999,
Ichiban Records, Inc. also filed a voluntary petition to commence a case under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the
Northern District of Georgia, Atlanta Division, Case No. 99-66017. Further, we
removed the Ichiban Claim from the State of Georgia court to the United States
District Court for the Northern District of Georgia, Atlanta Division, Case No.
1:99 CV-1113. The Ichiban Claim will now be asserted through the bankruptcy
action. We are presently in discussions with Ichiban Records, Inc. concerning
a restructuring of the distribution relationship between the parties in order
to recover advances and other monies owed by Ichiban Records, Inc. to us. A
settlement agreement to dismiss the Ichiban Claim and an agreement amending the
distribution agreement with Ichiban has been reached with the trustee for the
bankruptcy estate. We anticipate filing a joint motion soon with the trustee to
approve the settlement and amendment agreement. We believe the claims of Ichiban
Records, Inc. are without merit and that the matter will be successfully
resolved without a material impact on our financial position or results of
operations. However, because the bankruptcy is at an early stage, there can be
no assurances that the matter can be resolved in our favor. A decision adverse
to us in this matter could have a material adverse impact on our financial
position and results of operations.
On May 28, 1999, PolyGram Group Distribution, Inc. filed an action against us in
the Superior Court of the State of California for the County of Los Angeles
captioned "PolyGram Group Distribution, Inc. -v- Platinum Entertainment, Inc.,"
Case No. B C211091, seeking injunctive relief, restitution, and disgorgement
of profits arising out of PolyGram's claim that the distribution agreement
between us and PolyGram Group Distribution bars the distribution of our
recordings through our own distribution facilities and requires that they be
distributed by PolyGram. On June 25, 1999, PolyGram filed an amended complaint
that additionally seeks the recovery of an unspecified amount of damages. We
have filed an answer to this complaint denying the claims of PolyGram and
asserting cross-claims for damages arising out of PolyGram's breach of the
distribution agreement, for damages incurred in connection with the production
of a compilation album by PolyGram entitled "Essential Southern Rock" and for
the failure of PolyGram's successor, Universal Music, to properly pay royalties
to us pursuant to the terms of a foreign licensing agreement between us and
Universal. We have rejected earlier demands to cease and desist selling our
recording through our own distribution facilities on the grounds that an
amendment to the distribution agreement with PolyGram Group Distribution
specifically allows us to distribute records through our own distribution
company. In addition, on July 21, 1999, we provided PolyGram with a notification
of termination of the distribution agreement. Because this litigation is at a
very early stage, we are unable to predict its outcome with any accuracy.
However, we believe PolyGram's claims are without merit and we intend to
vigorously defend this action and pursue our claims against PolyGram. The
Company is also a plaintiff in a copyright infringement action against MCA, Inc.
and MCA Records, Inc., subsidiaries of Universal Music, now pending in the
United States District Court for the Southern District of New York, captioned
"Platinum Entertainment, Inc. v. MCA, Inc., et al," Civil Action No. 99
Civ.1521. This action seeks damages and injunctive relief by the Company for the
wrongful use by the defendants of one of the Company's published musical
compositions.
<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 related notes contained elsewhere herein.
Overview
Our primary business is the production, distribution, marketing and sale of
music. Our pre-recorded music products include new releases, typically by
established artists, as well as compilations featuring various artists and
repackagings of previously recorded music from our master music catalog and
under licenses from third party record companies. We sell music products,
including compact discs, tape cassettes and digital versatile discs (DVDs)
mainly to retailers and wholesalers primarily in the United States. We
currently release music in a variety of genres including classical, urban,
adult contemporary, blues, gospel and country and on our Intersound Classical,
Platinum, River North, House of Blues, CGI Platinum and Platinum Nashville
labels. Our headquarters are located in Downers Grove, Illinois, our primary
distribution facility is located in Roswell, Georgia, and we have a promotional
office in Nashville, Tennessee.
We distribute our products through a multi-channel system comprised of (i) PED
Corp (formerly named Platinum Distribution), our proprietary distribution
system, (ii) international licensing agreements as well as production and
distribution agreements on a territory-by-territory basis and (iii) Internet
distribution. We had a distribution agreement with PolyGram Group Distribution,
Inc. (PGD) through July 1999, at which time we notified PGD we were terminating
the agreement (see "Part II - Other Information - Item 1. Legal Proceedings").
Our gross revenues through PGD were $1,006,000 and $4,185,000 for the second
quarter of 1999 and 1998, respectively, reflecting a 76% decrease. Our gross
revenues through PGD were $3,095,000 and $8,801,000 for the first six months
of 1999 and 1998, respectively, reflecting a 65% decrease. Management believes
that this decrease is related to the acquisition by Universal Music and Video
Distribution (Universal) of PGD during the summer of 1998. This decrease was
offset in part by increased sales volume through PED. Gross revenues through
PED were $9,162,000 and $7,998,000 for the second quarter of 1999 and 1998,
respectively, reflecting a 15% increase. Gross revenues through PED were
$19,148,000 and $14,806,000 for the first six months of 1999 and 1998,
respectively, reflecting a 29% increase.
As a result of the termination of the PGD agreement, we increased our reserve
for future returns related to product distributed by PGD by $400,000 effective
June 30, 1999. In addition, effective June 30, 1999, we increased artist
advance and inventory reserves related to product distributed by PGD by
approximately $1,200,000. An additional $390,000 in costs were incurred during
the second quarter of 1999, primarily due to increased handling fees, freight
charges, etc. to transfer product from PGD to PED. We are currently moving PED
to a new, larger facility which we anticipate will enable us to more efficiently
distribute product. This is expected to result in increased gross margins with
the elimination of PGD's distribution fee of approximately 18%, and additional
miscellaneous fees representing another 5% on average.
While we have historically distributed records for a limited number of outside
labels, it is our strategy to increase the volume of outside labels we
distribute in order to generate additional revenues and to expand our PED
system. Under these arrangements, we generate a distribution fee of
approximately 20% to 30%, depending on the volume and range of services
provided. The gross margin from these sales has ranged from as low as 6% (for
third party product distributed by PGD to which we owed a distribution fee) to
27% (for product distributed through our proprietary systems). Additional
gross margin benefits are expected to occur as PED assumes the distribution
responsibilities of additional third party labels. These third party
activities represented 6% of our gross revenues in the second quarter of 1999,
as compared to 9% in the second quarter of 1998, and 8% during the six months
ended June 30, 1999, as compared to 7% in the six months ended June 30, 1998.
The decrease in the second quarter of 1999 resulted from decreased activity
with Ichiban Records, which filed for bankruptcy during April 1999 (see "Part
II - Other Information - Item 1. Legal Proceedings").
<PAGE>
We distribute via the Internet through our website, www.PlatinumCD.com, and
our equity investment and revenue sharing arrangement with musicmaker.com, Inc.
(musicmaker.com), the first and largest digital download and "burn and mail"
company. Musicmaker.com completed its initial public offering (IPO) on July 7,
1999 under the symbol "HITS." "Note 2" to the financial statement included
herein discloses the pro forma impact to our assets and net worth at June 30,
1999, relating to this offering. Through musicmaker.com our customers can
create custom compilation CDs or download songs onto the hard drive of their
own computers using Liquid Audio and Secure-MP3, two downloading formats used
to protect the copyrights of the record label and the recording artist. We
also are an affiliate with Amazon.com, a leader in the Internet commerce
industry, to provide customers who visit our website access to hundreds of
thousands of commercially available titles.
Product sales are recognized upon shipment. In accordance with industry
practice, our music products are sold on a returnable basis. Our allowance for
future returns is primarily based upon our historical returns and "SoundScan"
data. Our returns were 25% of our gross revenues in the second quarter of 1999,
as compared to 20% in the second quarter of 1998. The current quarter is higher
than the comparable prior period due to increase future returns for product
distributed by PGD as discussed above. Our returns were 23% during the six
months ended June 30, 1999, as compared to 15% in the six months ended June 30,
1998. The return rate for the first half of 1998, was unusually low; the
return rate for the six months ended June 30, 1999, is the same as our overall
1998 return rate and we believe this return rate approximates our anticipated
future returns. It is our policy to inventory returned product and resell
such product at market value.
During March 1999, we settled our pending litigation with JCSHO, Inc. (see
"Part II - Other Information - Item 1. Legal Proceedings"). The settlement
resulted in an offest of charges previously expensed by us in connection with
the acquired assets and assumed liabilities of Intersound, Inc. through the
recognition of a gain of $1,185,000. This amount is included as an offset to
our operating expenses in the statement of operations for the six months ended
June 30, 1999.
We have historically sustained losses and negative operating cash flows, in part
due to the high costs associated with the establishment and expansion of our
activities. We require significant recurring funds for artist and repertoire
(A&R) expenses, which include recorded music costs. We make substantial
payments each year for recording costs and advances to artists and producers
in order to maintain and enhance our artist roster. Advances to established
artists and producers and direct costs associated with the creation of record
masters are capitalized and are charged to cost of sales as the related albums
earn revenues or when the amounts are determined to be unrecoverable. See
"Liquidity and Capital Resources" following.
<PAGE>
Results of Operations
The following table sets forth for the periods indicated the percentage of gross
revenues represented by certain items included in our "Consolidated Statements
of Operations." Operating performance for any period is not necessarily
indicative of performance for any future periods.
<TABLE>
<CAPTION>
Quarter ended Six months ended
June 30 June 30
1999 1998 1999 1998
________________ _________________
<S> <C> <C> <C> <C>
Gross revenues
Platinum labels 91% 84% 90% 88%
Distributed labels 6% 9% 8% 7%
Licensing, publishing and other 3% 7% 2% 5%
________________ _________________
Total gross revenues 100% 100% 100% 100%
Less: Returns -25% -20% -23% -15%
Less: Discounts -2% -4% -4% -4%
________________ _________________
Net revenues 73% 76% 73% 81%
Cost of sales 60% 45% 50% 50%
________________ _________________
Gross profit 13% 31% 23% 31%
Other operating expenses:
Selling, general and administrative 53% 35% 43% 30%
Depreciation and amortization 5% 3% 5% 3%
_________________ _________________
57% 38% 48% 33%
_________________ _________________
Operating income (loss) -44% -7% -25% -2%
Interest expense -7% -5% -6% -5%
Other financing costs -1% 2% - 1%
Equity gain (loss) -1% -1% - -
_________________ _________________
Net loss -53% -11% -31% -6%
Less: Preferred dividend requirements -9% -5% -8% -5%
_________________ _________________
Loss applicable to common shares -62% -16% -39% -11%
================= =================
</TABLE>
Gross Revenues. Gross revenues decreased $2,815,000 or 20% to $11,103,000 for
the second quarter of 1999, compared to $13,918,000 for the second quarter of
1998, and decreased $4,311,000 or 15% to $23,622,000 for the six months ended
June 30, 1999, compared to $27,933,000 for the same period of the prior year.
Gross revenues through PGD were down $3,179,000 or 76% in the second quarter of
1999, compared to the second quarter of 1998, and down $5,706,000 or 65% in the
six months ended June 30, 1999, compared to the same period of the prior year.
Management believes that this decrease is related to the acquisition by
Universal of our former third party, major label distributor, PolyGram Group
Distribution, during the summer of 1998. During July 1999, we provided PGD with
a notification of termination of the distribution agreement. See "Part II -
Other Information - Item 1. Legal Proceedings." This decrease was offset in
part by increased sales through our own distribution system, particularly in
the classical genre. Gross revenues through PED were up $1,164,000 or 15% in
the second quarter of 1999, compared to the second quarter of 1998, and up
$4,342,000 or 29% in the six months ended June 30, 1999, compared to the same
period of the prior year. Notable releases shipped during the current periods
include Rick Springfield's first release in over ten years, "Karma", Vickie
Winans' second live album on CGI Platinum, "Live in Detroit II", initial
shipments of "Blues Power: Songs of Eric Clapton" performed by blues greats
such as Buddy Guy, Otis Rush and Bo Diddley, and catalog titles such as urban
compilation "Booty Mix 4" and country singer T. Graham Brown's
"Wine into Water".
<PAGE>
Returns. We record an estimate of future returns at the time product is sold
(see "Overview"). Returns as a percentage of gross revenues were 25% of gross
revenues in the second quarter of 1999, as compared to 20% in the second quarter
of 1998. The current quarter is higher than the comparable prior period due to
increased returns for product distributed by PGD as discussed above. Returns as
a percentage of gross revenues were 23% during the six months ended June 30,
1999, as compared to 15% in the same period of the prior year. The return rate
for the first half of 1998 was unusually low; the return rate for the six months
ended June 30, 1999, is the same as our overall 1998 return rate and we believe
this return rate approximates our anticipated future returns.
Discounts. Discounts as a percentage of gross revenues decreased slightly to
2% for the second quarter of 1999, compared to 4% for the second quarter of
1998, and remained unchanged at 4% for the six months ended June 30, 1999 and
1998.
Cost of Sales. Cost of sales as a percentage of gross revenues increased to
60% for the second quarter of 1999, compared to 45% for the second quarter of
1998, and remained unchanged at 50% for the six month periods ended June 30,
1999 and 1998. The increase for the second quarter of 1999, relates to
additional artist advance and inventory reserves relative to records
distributed by PGD - see "Overview" above. Without these increased costs, cost
of sales as a percentage of gross revenues would have been 45% for the six
months ended June 30, 1999.
Gross Profit. Gross profit decreased $2,677,000 or 64% to $1,475,000 for the
second quarter of 1999, compared to $4,152,000 for the second quarter of 1998,
and decreased $3,009,000 or 35% to $5,524,000 for the six months ended June 30,
1999, compared to $8,533,000 for the same period of the prior year. As a
percentage of gross revenues, gross profit decreased to 13% for the second
quarter of 1999, compared to 31% for the second quarter of 1998, and decreased
to 23% for the six months ended June 30, 1999, compared to 31% for the same
period of the prior year. The decreases are primarily a result of the
increased reserves for future returns, artist advances and inventory relative
to product distributed by PGD as described above. The remaining decrease
relates to decreased sales volume as described above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1,017,000 or 21% to $5,837,000 for the second
quarter of 1999, compared to $4,820,000 for the second quarter of 1998, and
increased $1,696,000 or 20% to $10,136,000 for the six months ended June 30,
1999, compared to $8,440,000 for the same period of the prior year. The six
month period ended June 30, 1999, includes a net gain from litigation
settlements of $1,185,000 (see "Overview"). Excluding these settlements,
selling general and administrative expenses increased 34%. This increase is
primarily attributable to increased promotional spending on our urban releases,
a genre which management believes requires significant promotional expenditures
in order for us to capitalize on the opportunities for significant sales in
this genre. In addition, we have incurred additional costs, including
compensation expense, as we have expanded our sales staff and distribution
capabilities in preparation for the shift to proprietary distribution for
product formerly distributed by PGD.
Operating Loss. Primarily as a result of the factors described above, we
incurred an operating loss of $4,898,000 for the second quarter of 1999,
compared to an operating loss of $1,078,000 for the second quarter of 1998, and
incurred an operating loss of $5,799,000 for the six months ended June 30, 1999,
compared to an operating loss of $813,000 for the same period of the prior year.
As discussed above, as a result of the termination of the PGD agreement, we
increased our reserve for future returns related to product distributed by PGD
by $400,000 effective June 30, 1999. In addition, effective June 30, 1999, we
increased artist advance and inventory reserves related to product distributed
by PGD by approximately $1,200,000. An additional $390,000 in estimated
costs were incurred during the second quarter of 1999, primarily due to
increased handling fees, freight charges, etc. to transfer product from PGD to
PED.
<PAGE>
Interest Expense. Interest expense for the second quarter of 1999, totaled
$772,000 compared to $695,000 for the second quarter of 1998, and totaled
$1,431,000 for the six months ended June 30, 1999, compared to $1,263,000 for
the same period of the prior year. The current period increase resulted from
a higher outstanding line of credit balance than in the prior periods. See
"Liquidity and Capital Resources" below for details of our current debt
structures.
Income Taxes. No income tax expense or benefit has been recorded through June
30, 1999, due to our 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, our
net operating loss carryforward of approximately $57,857,000 at December 31,
1998, expiring in years 2008 through 2013, is subject to annual limitations
due to a change in ownership as a result of our initial public offering.
Accordingly, approximately $6,185,000 of the net operating loss carryforward is
subject to an annual limitation of approximately $2,200,000.
Preferred Dividend Requirements. During the first and second quarters of 1999,
the preferred stock outstanding accrued dividends of $886,000 and $979,000,
respectively. See "Note 6" to the financial statements for details.
Loss Applicable to Common Shares. The loss applicable to common shares for the
second quarter of 1999, totaled $6,799,000, including preferred dividend
requirements of $979,000, compared to a loss applicable to common shares of
$2,370,000, including preferred dividend requirements of $695,000, for the
second quarter of 1998. The loss applicable to common shares for the six months
ended June 30, 1999, totaled $9,317,000, including preferred dividend
requirements of $1,865,000, compared to a loss applicable to common shares of
$3,228,000, included preferred dividend requirements of $1,370,000, for the
same period of the prior year. As discussed above, as a result of the
termination of the PGD agreement, we increased our reserve for future returns
related to product distributed by PGD by $400,000 effective June 30, 1999.
In addition, effective June 30, 1999, we increased artist advance and inventory
reserves related to product distributed by PGD by approximately $1,200,000. An
additional $390,000 in estimated costs were incurred during the second quarter
of 1999, primarily due to increased handling fees, freight charges, etc. to
transfer product from PGD to PED.
Fluctuations in Our Quarterly Operating Results and Seasonality
Our results of operations are subject to seasonal variations. In particular,
our revenues and operating income are affected by end-of-the-year holiday sales.
In accordance with industry practice, we record product sales when products are
shipped to retailers. In anticipation of holiday sales, retailers purchase
products from us prior to December. As a result, our revenues and operating
income typically decline during December, January and February. In addition,
timing of a new release may materially affect our business, financial
condition and results of operations. For example, if releases planned for the
peak holiday season are delayed, our business, financial results and operating
results could be materially adversely affected.
Liquidity and Capital Resources
We have incurred significant net losses and negative cash flows from operations
since our inception, including a net loss of $7,452,000 ($9,317,000 after
preferred dividend requirements) and negative cash flows from operations of
$9,453,000 in the six months ended June 30, 1999. We have historically
sustained net losses and negative cash flows, in part due to the high costs
associated with the establishment and expansion of our activities.
<PAGE>
For the quarter ended June 30, 1999, we were in violation of one of the
financial covenants contained in our bank credit agreement. This violation
was waived by the bank in July 1999. Our fiscal 1999 plan, if achieved, would
allow us to comply with our financial covenants. However, under the current
provisions of the bank credit agreement and based on actual results to date,
it is likely that we will be in violation of the same financial covenant for
the third and fourth quarters of fiscal 1999. If so, we would seek to have
these violations waived. If we are unsuccessful in obtaining a waiver, the
lender could declare the facility in default. A default could have a material
adverse effect on the Company's business as there is no assurance that
alternative financing could be obtained on terms satisfactory to the Company,
if at all.
Historically, we have funded our operations and other activities from a variety
of capital sources, including debt and equity financing. We have continued
to obtain equity financing from time-to-time. On December 31, 1998, a private
placement of our Common Stock occurred, providing proceeds of $2,500,000 in
January 1999.
We have formulated plans and instituted specific measures which we believe will
improve cash flows and liquidity and enable us to continue in existence without
a significant curtailment of operations.
* We established a fiscal 1999 business plan and adopted a fiscal 1999
budget which includes, among other things, (i) a focus on the efficiency
of internal operations, (ii) implementation of procedures to reduce
costs and improve margins, (iii) the addition of new releases in a
variety of genres and (iv) the hiring of experienced music industry
executives to supplement the efforts of management.
* During April 1999, we issued shares of a new series of preferred stock
and warrants to purchase shares of our Common Stock to one of our
executive officers and certain other members of our Board of Directors,
providing net proceeds of approximately $3,900,000 (see "Note 5" to the
financial statements).
* During May 1999, a private placement of our Common Stock occurred,
providing proceeds of $3,000,000 (see "Note 7" to the financial
statements).
* During July 1999, musicmaker.com completed its IPO. Based on the pro
forma assumptions discussed in "Note 2" to the financial statements,
the value of our investment in musicmaker.com is $8,039,000. Pursuant
to a lock-up agreement with the underwriters of the IPO, we are unable
to sell the musicmaker.com shares until January 2000. However, we have
secured permission to use the shares as collateral for the purpose of
generating additional liquidity in the near term.
* We have agreed to sell our country music publishing rights originally
purchased from Double J Music Group for $1,449,000. We anticipate this
sale to be completed by the end of August 1999.
The events described above should allow us to complete our 1999 plan. In
addition to the events described above, we may need additional equity financing
in order to achieve our fiscal 2000 plan. While we have been successful in
the past in raising equity as needed, there can be no assurance that additional
equity financing may be available on satisfactory terms, if at all. The
financial statements and related notes included elsewhere herein do not
include any adjustments which might result from the outcome of this
uncertainty. Our plans for fiscal 1999 and beyond are subject to
uncertainties, many of which are beyond our control, such as general economic
conditions and competitive factors, and actual results may vary significantly
from our plans.
<PAGE>
During the six months ended June 30, 1999, we experienced negative cash flow
from operations of $9,453,000. This resulted from continued operating losses
and approximately $2,505,000 of new project funding. Investing activities for
the six months ended June 30, 1999, totaled $454,000 and related to capital
expenditures. Operating and investing activities were funded primarily from
two equity placements with unrelated parties totaling $5,500,000, an equity
placement with certain related parties totaling $3,909,000 and from our line
of credit with First Source Financial, Inc.
During the six months ended June 30, 1998, we experienced negative cash flow
from operations of $6,882,000. This resulted from continued operating losses
and approximately $3,143,000 of new project funding. Investing activities for
the period totaled $883,000, related to capital expenditures and the purchase
of a classical catalog. Operating and investing activities were funded from
our then-outstanding banking line of credit.
We require significant recurring funds for A&R expenses, which include recorded
music costs. We make substantial payments each period for recording costs and
advances to artists and producers in order to maintain and enhance our artist
roster. Advances to established artists and producers and direct costs
associated with the creation of record masters are capitalized and are charged
to cost of sales as the related albums earn revenues or when the amounts are
determined to be unrecoverable. Royalties are not paid to the artist until all
advances made to the artist have been recouped by us. Also, we establish and
maintain reserves relative to royalty payments for a period of 18 to 24 months
to allow for product returns activity, as royalties are not owed on returned
product.
During July 1998, we entered a credit agreement with First Source Financial,
Inc. (First Source) for a $35,000,000 revolving line of credit. Our First
Source facility has a five year term and bears interest at the bank's base rate
plus 1.5% per annum (9.25% at June 30, 1999). Borrowings under our First Source
facility are limited to the Borrowing Base, as defined, which is based upon
eligible accounts receivable, inventory and music catalog. Our First Source
facility contains certain financial covenants, requires a lockbox arrangement
and is secured by substantially all of our assets. Because the facility
contains a subjective acceleration clause, the entire balance is classified
as current in the balance sheet. The First Source agreement was amended during
April 1999, providing for revised financial covenants through December 31, 1999.
For the quarter ended June 30, 1999, we were in violation of one of the
financial covenants contained in this amendment. This violation was waived by
the bank during July 1999. The First Source agreement was amended again during
August 1999, to allow the sale of our Double J publishing rights. Pursuant to
this amendment, the revolving line of credit will be permanently reduced by 50%
of the net proceeds from the sale of Double J, or approximately $700,000.
Stockholders' equity at June 30, 1999, totaled $7,093,000 compared to
$7,918,000 at December 31, 1998. This net decrease of $825,000 or 11% is the
net effect of continued operating net losses, the redemption of shares of our
Common Stock in connection with a certain litigation settlement (see "Part II
- - Other Information - Item 1. Legal Proceedings") and the issuances of both
preferred and common stock as discussed above. As discussed above, as a result
of the termination of the PGD agreement, we increased our reserve for future
returns related to product distributed by PGD by $400,000 effective June 30,
1999. In addition, effective June 30, 1999, we increased artist advance and
inventory reserves related to product distributed by PGD by approximately
$1,200,000. An additional $390,000 in estimated costs were incurred during the
second quarter of 1999, primarily due to increased handling fees, freight
charges, etc. to transfer product from PGD to PED. "Note 2" to the financial
statements included herein discloses the pro forma impact of the IPO of
musicmaker.com. Such impact results in pro forma stockholders' equity at June
30, 1999, of $14,382,000.
<PAGE>
Our near and long-term capital requirements will depend on numerous factors,
including the rate at which we grow and acquire new artists and products. We
have various on-going needs for capital, including working capital for
operations, artist advances and recorded music costs, and capital
expenditures to maintain and expand our operations. In addition, as part of
our strategy, we evaluate potential acquisitions of music catalogs, publishing
rights and labels. We may in the future consummate acquisitions which may
require us to make additional capital expenditures, and such expenditures may
be significant. Future acquisitions, as well as other on-going capital needs,
may be funded with institutional financing, seller financing and/or additional
equity or debt offerings. We currently do not have any material commitments
for capital expenditures for the next twelve months.
Inflation
The impact of inflation on our operating results has been moderate in recent
years, reflecting generally lower rates of inflation in the economy. While
inflation has not had a material impact on operating results, there is no
assurance that our business will not be affected by inflation in the future.
Year 2000 Risks
Many existing computer programs use only two digits (rather than four) to
identify a year in the date field. These programs were designed and developed
without considering the impact of the upcoming change in the century. If not
corrected, many computer applications could fail or create erroneous results
by or at the Year 2000.
In 1998, we started analyzing, reprogramming and replacing our computer systems
to address the Year 2000 problem. We have completed a significant portion of
the reprogramming, replacing and testing, but have not yet completed our
review of the significant software and equipment used in our business operations
and the operations of our key business partners. Until these reviews are
complete, we cannot be sure that our efforts to address Year 2000 issues are
appropriate, adequate or complete.
Based on our current assessment of our Year 2000 issues detailed below, we plan
to be Year 2000 compliant by September 30, 1999:
* We are dependent on personal computer systems for internal electronic
information processing. To bring our systems into Year 2000 compliance
we have spent approximately $250,000 since January 1, 1998, to replace
existing hardware.
* We have recently completed the implementation of new financial
accounting software that is Year 2000 compliant. We have spent
approximately $330,000 on software since January 1, 1998. We have also
paid $500,000 in consulting services since January 1, 1998.
* We are currently assessing the state of readiness for Year 2000 of our
material vendors, suppliers, customers and other material third parties.
We expect to have sent the letters by September 30, 1999. If any of our
material vendors, suppliers or customers has a serious Year 2000
problem, we could experience a loss of revenues from their operations
and/or incur a significant amount of expenses.
<PAGE>
If we are unable to manage the Year 2000 date change successfully, we may
suffer the following consequences:
* We may experience a significant number of operational inconveniences
and inefficiencies for us and our customers that may divert our time
and attention and financial and human resources from our ordinary
business activities.
* We may suffer serious systems failures that may require significant
efforts by us or our customers to prevent or alleviate material business
disruptions.
* We may be in default of a number of agreements, including our credit
agreement, if we fail to respond to our Year 2000 issues in a timely
manner.
* We may experience significant loss of revenues or incur a significant
amount of unanticipated expenses.
* We may incur liability for the losses incurred by our customers or
others where business is disrupted by our system failures or incur
significant costs of defending claims made against us for the recovery
of such losses.
Safe Harbor Provision
Some of the information in this filing contains forward-looking statements that
involve substantial risks and uncertainties. You can identify these statements
by forward-looking words such as "anticipate," "believe," "estimate" and
"expect" or similar words. You should read statements that contain these words
because they (1) discuss our future expectations, (2) contain projections of our
future results of operations or of our financial condition or (3) state other
"forward-looking" information. We believe it is important to communicate our
expectations to our investors. There may be events in the future, however, that
we are not accurately able to predict or over which we have no control. A
number of important factors could cause our actual results, performance and
achievements for fiscal 1999, and beyond to differ materially from those
expressed in such forward-looking statements. Reference is made to our prior
filings with the Securities and Exchange Commission, in particular the "Risk
Factors" section of our Prospectus effective August 9, 1999, for a discussion of
some of these factors. These risk factors include, without limitation,
commercial success of our repertoire, risks of inadequate financing, charges and
costs related to acquisitions, management of growth, relationships with artists,
producers and licensees, attraction and retention of key personnel, general
economic and business conditions and competition in the recorded music industry.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.
The principal market risk (i.e., the risk of loss arising from adverse changes
in market rates and prices) to which we are exposed is interest rates on debt.
<PAGE>
On June 30, 1999, we had $34,247,000 of debt outstanding under a $35,000,000
revolving bank line of credit. The line of credit expires during July 2003.
The line of credit bears interest at the bank's base rate plus 1.5% per annum
(9.25% at June 30, 1999).
We do not hold and have not issued derivative financial instruments for
speculation or trading purposes.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On March 31, 1999, we settled our pending litigation with JCSHO, Inc. entitled
"JCSHO, Inc. f/k/a Intersound, Inc. v. Platinum Entertainment, Inc.,"
No. 97-2479 MJD/AJB (D. Minn.). The parties determined that JSCHO would retain
306,122 shares (60%) of the 510,203 shares of our Common Stock issued to JCSHO
in connection with our acquisition of Intersound in 1997 which were held in
escrow pending resolution of this litigation and that JSCHO would return
204,081 shares (40%) to us. We also agreed to issue Donald R. Johnson, a
shareholder and former employee of Intersound, Inc., 20,000 shares of our
Common Stock. The settlement resulted in an offset of charges previously
expensed by us in connection with the acquired assets and assumed liabilities
of Intersound, Inc. through the recognition of a gain of $1,185,000 during the
first quarter of 1999. This settlement results in the mutual release of all
claims and actions the parties have or ever had against each other arising from
conduct occurring before March 31, 1999, including all claims that were asserted
or that could have been asserted by Donald R. Johnson, a shareholder and former
employee of Intersound, Inc., in the action entitled "Donald R. Johnson v.
Intersound, Inc. (Del), f/k/a River North Studios, Inc.," No. E-64885, Superior
Court in Fulton County Georgia. The lawsuit has been dismissed with prejudice.
On April 7, 1999, Ichiban Records, Inc. filed a lawsuit in the Superior Court
of Fulton County, State of Georgia, captioned "Ichiban Records, Inc. v. Platinum
Entertainment, Inc.," Civil Action No. 1999 CV 07215 ("Ichiban Claim"), seeking
termination of its distribution agreement with us and damages in excess of
$10,000,000, for alleged breaches of its distribution agreement by us. Ichiban
Records, Inc. also filed a complaint for injunction and temporary restraining
order and appointment of a receiver under the same caption. On April 21, 1999,
Ichiban Records, Inc. also filed a voluntary petition to commence a case under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the
Northern District of Georgia, Atlanta Division, Case No. 99-66017. Further, we
removed the Ichiban Claim from the State of Georgia court to the United States
District Court for the Northern District of Georgia, Atlanta Division, Case No.
1:99 CV-1113. The Ichiban Claim will now be asserted through the bankruptcy
action. We are presently in discussions with Ichiban Records, Inc. concerning
a restructuring of the distribution relationship between the parties in order
to recover advances and other monies owed by Ichiban Records, Inc. to us. A
settlement agreement to dismiss the Ichiban Claim and an agreement amending
the distribution agreement with Ichiban has been reached with the trustee for
the bankruptcy estate. We anticipate filing a joint motion soon with the
trustee to approve the settlement and amendment agreement. We believe the
claims of Ichiban Records, Inc. are without merit and that the matter will be
successfully resolved without a material impact on our financial position or
results of operations. However, because the bankruptcy is at an early stage,
there can be no assurances that the matter can be resolved in our favor. A
decision adverse to us in this matter could have a material adverse impact on
our financial position and results of operations.
On May 28, 1999, PolyGram Group Distribution, Inc. filed an action against us
in the Superior Court of the State of California for the County of Los Angeles
captioned "PolyGram Group Distribution, Inc. -v- Platinum Entertainment, Inc.,"
Case No. B C211091, seeking injunctive relief, restitution, and disgorgement
of profits arising out of PolyGram's claim that the distribution agreement
between us and PolyGram Group Distribution bars the distribution of our
recordings through our own distribution facilities and requires that they be
distributed by PolyGram. On June 25, 1999, PolyGram filed an amended complaint
that additionally seeks the recovery of an unspecified amount of damages. We
have filed an answer to this complaint denying the claims of PolyGram and
asserting cross-claims for damages arising out of PolyGram's breach of the
distribution agreement, for damages incurred in connection with the production
of a compilation album by PolyGram entitled "Essential Southern Rock" and for
the failure of PolyGram's successor, Universal Music, to properly pay royalties
to us pursuant to the terms of a foreign licensing agreement between us and
Universal. We have rejected earlier demands to cease and desist selling our
recording through our own distribution facilities on the grounds that an
amendment to the distribution agreement with PolyGram Group Distribution
specifically allows us to distribute records through our own distribution
company. In addition, on July 21, 1999, we provided PolyGram with a notification
of termination of the distribution agreement. Because this litigation is at a
very early stage, we are unable to predict its outcome with any accuracy.
However, we believe PolyGram's claims are without merit and we intend to
vigorously defend this action and pursue our claims against PolyGram. The
Company is also a plaintiff in a copyright infringement action against MCA,
Inc. and MCA Records, Inc., subsidiaries of Universal Music, now pending in
the United States District Court for the Southern District of New York,
captioned "Platinum Entertainment, Inc. v. MCA, Inc., et al," Civil Action No.
99 Civ.1521. This action seeks damages and injunctive relief by the Company
for the wrongful use by the defendants of one of the Company's published musical
compositions.
<PAGE>
We are a party in various other lawsuits which have arisen in the normal course
of business. In the opinion of management, after consultation with legal
counsel, the ultimate outcome of these lawsuits will not have a material impact
on our financial position or results of operations.
Item 2. Changes in Securities and Use of Proceeds.
During April 1999, we issued 75,246 shares of our Common Stock, valued at
$526,724 or $7 per share, to Platinum technology International, Inc., in
connection with computer consulting services.
During April 1999, we issued 8,571 shares of our Common Stock, valued at
$60,000 or $7 per share, to FS Affiliate, in connection with an amendment to
our bank credit agreement.
During May 1999, we issued 3,333 shares of our Common Stock, valued at $20,000
or $6 per share, to Michael Lloyd, in connection with professional services
rendered.
During May 1999, we issued an aggregate 3,000 shares of our Common Stock, valued
at $18,000 or $6 per share, to Web Solutions, Robert Pappas and Michael Vena, in
connection with professional services rendered.
During May 1999, we issued an aggregate 50,343 shares of our Common Stock to
Special Situations Fund III, L.P., Special Situations Private Fund, L.P.,
Special Situations Cayman Fund, L.P. and Special Situations Technology Fund,
L.P., each unrelated parties (Special Situations), pursuant to an agreement
dated December 31, 1998. In addition, order to raise additional capital, we
issued an aggregate 423,280 shares of our Common Stock to Special Situations,
at a per share price of $7.088, which price approximated the closing price of
our Common Stock as reported by the Nasdaq National Market on the date of sale.
We received $3,000,000 in consideration for this sale.
<PAGE>
During June 1999, we issued 3,333 shares of our Common Stock, valued at $25,000
or $7.50 per share, to William Benedict, in connection with professional
services rendered.
These transactions were exempt from registration pursuant to Section 4(2) of
the Securities Act of 1933 as transactions not involving a public offering.
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits.
27. Financial Data Schedule.
B. Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, we have
duly caused this Report to be signed on our behalf by the undersigned,
thereunto duly authorized, in the City of Downers Grove, State of Illinois,
on August 16, 1999.
Platinum Entertainment, Inc.
By: /s/STEVEN DEVICK
Steven Devick
Chairman, President and Chief Executive
Officer
/s/DOUGLAS C. LAUX
Douglas C. Laux
Chief Operating Officer, Chief Financial
Officer and Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOR
PLATINUM ENTERTAINMENT, INC. AND THE ACCOMPANYING NOTES THERETO FOR THE
PERIOD INDICATED 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> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 47
<SECURITIES> 0
<RECEIVABLES> 14,940
<ALLOWANCES> (7,175)
<INVENTORY> 8,085
<CURRENT-ASSETS> 19,378
<PP&E> 4,203
<DEPRECIATION> (1,625)
<TOTAL-ASSETS> 56,461
<CURRENT-LIABILITIES> 49,368
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0
0
<COMMON> 7
<OTHER-SE> 7,086
<TOTAL-LIABILITY-AND-EQUITY> 56,461
<SALES> 10,739
<TOTAL-REVENUES> 11,103
<CGS> 6,401
<TOTAL-COSTS> 6,613
<OTHER-EXPENSES> 6,373
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<INTEREST-EXPENSE> 773
<INCOME-PRETAX> (5,820)
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<NET-INCOME> (5,820)
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