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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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, Suite 1400
Downers Grove, Illinois 60515
(Address of principal executive offices, including zip code)
(630) 769-0033
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendments to this Form 10-K. ( )
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant (based upon the per share closing sale price
of $11.25 on April 13, 1999, and for the purpose of this calculation
only, the assumption that all of the registrant's directors and executive
officers are affiliates) was approximately $61,716,000.
The number of shares outstanding of the registrant's Common Stock, par
value $.001, as of April 13, 1999 was 6,784,407.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into this
report:
Notice of Annual Meeting of Stockholders and Proxy Statement for the
Annual Meeting of Stockholders
(the "1998 Proxy Statement") (Part III)
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PART I
ITEM 1. BUSINESS
OVERVIEW
Our primary business is the production, distribution, marketing and sale
of music. Our music products include new releases, typically by artists
established in a particular genre, 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 in the form of compact discs, tape cassettes and digital versatile
discs (DVDs) mainly to retailers and wholesalers in the United States and
internationally. We release music in a variety of genres including classical,
urban, adult contemporary, blues, gospel and country on our Intersound
Classical, Platinum, River North, House of Blues, CGI Platinum and Platinum
Nashville labels.
Expansion and exploitation of our music catalog and publishing rights is
an integral part of our business and growth strategy. We currently own or
control a music catalog with more than 13,000 master recordings and add to
the catalog through strategic and complementary acquisitions, as well as
through the signing of established artists with a history of album sales and
new artists. We also target the producers of film, television and video
projects as potential licensees of our proprietary and controlled recordings.
Our catalog contains releases by many established artists including
those listed below.
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The Beach Boys Peter Cetera John Denver Dionne Warwick
The Blues Brothers The Band Roger Daltrey Taylor Dayne
Juice Newton Phoebe Snow Rick Springfield Mighty Clouds of Joy
Otis Rush The Bellamy Brothers Eddie Rabbitt Crystal Gayle
Kansas T. Graham Brown George Clinton Lakeside
Cameo Dazz Band Vickie Winans Andrae Crouch
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We distribute our products through traditional retail channels and the
Internet. Domestically, we distribute our products through Platinum
Distribution, our proprietary distribution system, and Universal Music and
Video Distribution (Universal), our third party, major label distributor. We
also serve as a distributor for various third party music labels located in
the United States and Europe. We are also increasing our international sales
efforts by establishing additional licensing agreements as well as production
and distribution agreements on a territory-by-territory basis.
We believe that continued consolidation in the entertainment industry,
particularly the largest merger in music history between MCA/Universal and
PolyGram, presents significant opportunities for growth for niche music
companies like ours, as established artists become available to sign to our
labels. We believe that our artist roster of both established and new
artists, our music catalog and our expanding proprietary and Internet
distribution capabilities positions us to take advantage of the opportunities
that may become available due to changes in the music business.
We were incorporated in Delaware in 1991. Our principal executive
offices are located at 2001 Butterfield Road, Suite 1400, Downers Grove,
Illinois 60515, and our telephone number is (630) 769-0033.
MARKETS
GOSPEL
CGI Platinum is a leader in the gospel market. We own a catalog of
master recordings of some of the best-selling gospel music artists of all
time, including: The Winans, Andrae Crouch, Walter Hawkins and Highway Q.C.s.
Consistent with our belief that gospel music sales are artist-driven, rather
than "hit" driven, we have acquired, and continue to pursue and produce,
master recordings by established gospel artists who have a history of stable
sales. A successful example of this strategy is the strong sales of the
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compilation TODAY'S GOSPEL MUSIC, which was created entirely from our
existing catalog and has generated net sales in excess of 125,000 units since
its June 1997 release.
In 1998, CGI Platinum and its artists were recognized for their
outstanding accomplishments including: being the second most charted gospel
label of 1998 with 13 charted albums, according to BILLBOARD'S Top Gospel
Label chart; GOSPEL'S GREATEST HITS #1, a compilation by various gospel
artists, was named the No. 4 Top Gospel Catalog Album in 1998 by BILLBOARD;
Vickie Winans was named one of the Top 10 Gospel Artists in 1998 by
BILLBOARD; Vickie Winans and The Christianaires each received a 1998 Stellar
Award, and House of Blues artist Cissy Houston received a 1998 Grammy Award
for her album HE LEADETH ME. New releases for 1999 on CGI Platinum include
albums by Witness, Vickie Winans, Mighty Clouds of Joy, James Hall and Walt
Whitman and the Soul Children of Chicago.
According to the Recording Industry Association of America (RIAA),
gospel's share of the music market increased from 4.5% in 1997 to 6.3% in
1998, showing the greatest market growth of any genre. We believe we are well
positioned with our roster of gospel artists and industry experience to take
advantage of growth trends in the gospel music segment.
ADULT CONTEMPORARY
In 1993, River North established its presence in the adult contemporary
genre by signing Peter Cetera, formerly the lead singer of the rock group
Chicago and an established solo artist. By the end of 1998, ONE CLEAR VOICE,
released in July 1995, and YOU'RE THE INSPIRATION (A COLLECTION), released in
May 1997, had net sales in excess of 550,000 units in the U.S. YOU'RE THE
INSPIRATION (A COLLECTION), an album that includes both new songs and
re-recordings of some of his and Chicago's former No. 1 hits, has generated
three hit singles, including the Top 5 DO YOU LOVE ME THAT MUCH. We plan a
new release by Peter Cetera in 1999.
In 1998, River North signed Dionne Warwick, an icon in American music
with two No. 1 hits, 12 Top 10 hits, 31 Top 40 singles, 1 platinum album, 5
gold albums and 5 Grammy Awards to her name. In 1998, we released DIONNE
SINGS DIONNE, which includes re-recordings of many of Dionne's classic hits
as well as new material, and the first single from this album WHAT THE WORLD
NEEDS NOW IS LOVE, a recording of the 1967 Bachrach/David hit featured
performances by hip-hop artists including Bobby Brown, Coolio, Flesh-N-Bone,
Kurput, Tyrese and others. We also plan a new release by Dionne Warwick in
1999.
Other artists, such as The Beach Boys, The Band, Taylor Dayne and
Kansas, allow us to produce and market artist-driven records that have both
predictable sales and the potential to chart in the Top 10. New releases in
1999 include albums by recording artist and actress Crystal Bernard,
including the title track DON'T TOUCH ME THERE which was Hot Shot Debut #29
on BILLBOARD'S Adult Contemporary chart its first week in release, and KARMA,
a scheduled release by Rick Springfield which will include new material by
this Grammy award winning pop artist, film and television personality.
BLUES
On our House of Blues label, we produce original recordings by
established blues and gospel artists, including The Blues Brothers, Luther
Allison, Derek Trucks, Taj Mahal, Phoebe Snow, JGB (formerly the Jerry Garcia
Band), Otis Rush and Larry McCray, as well as blues compilations that include
music both from our catalog and licensed from other companies. Our joint
venture with the House of Blues, which has music venues across the United
States and opened its first House of Blues Hotel in Chicago, Illinois in
1998, allows us to market, promote and merchandise our music products on the
popular House of Blues label and in the House of Blues venues and hotels.
Otis Rush won a 1998 Grammy Award for Best Traditional Blues Album and has
been nominated for a 1999 Handy Award for Contemporary Blues Album of the
Year. Larry McCray was also nominated for a 1999 Handy Award for Blues
Artist Most Deserving Wider Recognition.
Many of our blues releases have charted in the Top 15 on BILLBOARD'S
Blues Chart, including PAINT IT BLUE, a collection of songs by the Rolling
Stones performed by celebrated blues artists which was listed
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as the No. 14 album of 1998. In 1999, we plan to release ESSENTIAL BLUES
III, the third compilation in our ESSENTIAL BLUES compilation series; tribute
albums to music greats Eric Clapton, Bob Dylan and Led Zeppelin; and MUSIC IN
THE AIR, an album by gospel legends Dixie Hummingbirds, a commemorative CD
marking the group's 70th anniversary and featuring artists such as Stevie
Wonder and Paul Simon.
COUNTRY
In 1995, we established our country music operations in Nashville,
originally targeting established and up and coming country artists, the
latter of which are heavily dependent on costly radio promotions for their
sales. By the end of 1997, we shifted our music strategy to focus
principally on signing artists with an established fan base, thereby
significantly reducing radio promotion expenses, and also focused on
predictable sales with the "Classics Country" concept, which produces "latest
and greatest" releases for classic country acts.
Platinum Nashville has since expanded its artist roster to include
country artists such as The Bellamy Brothers, Eddie Rabbitt, Crystal Gayle,
The Gatlin Brothers, Earl Thomas Conley, Jo-El Sonnier and T. Graham Brown.
WINE INTO WATER, a single by Platinum Nashville artist T. Graham Brown, was
one of the most requested songs in 1998 on country radio. With continued
album sales in 1999, WINE INTO WATER has been on the Top 40 R&R chart and
BILLBOARD'S Top 40 Country Album Sales Chart for more than 20 weeks. T.
Graham Brown was also nominated Nashville Music Award's Male Vocalist of the
Year for 1998. A CELEBRATION OF LIFE by John Denver, which was released on
our River North label, was also ranked by BILLBOARD as one of the Top Country
Albums of the Year in 1998.
In 1999, Platinum Nashville signed the Oak Ridge Boys, a world renowned
country music group with 17 No. 1 hits and 34 Top 10 singles to their credit.
In 1999, Platinum Nashville plans to release its first album by the Oak Ridge
Boys, which will feature all four original members of the group for the first
time since 1987.
CLASSICAL/THEMED PRODUCTIONS/ADULT ORIENTED
Intersound Classical is a leading creator of classical and theme-based
products. Intersound Classical was named the No. 1 Top Budget Classical Label
and Top Budget Classical Imprint of 1998 and Intersound Classical artist John
Bayless was named as the No. 1 Top Budget Classical Artist of 1998. In 1998,
their second year of release, NUTCRACKER CHRISTMAS was ranked No. 1, ROMANCE
AND ROSES was ranked No. 3 and BEATLES GREATEST HITS was ranked No. 5 on
BILLBOARD'S Top Budget Classical Album chart. Each of these three titles
also ranked in the Top 5 of this chart for 1997. Intersound Classical's
Reference Gold label was named the No. 4 Top Budget Classical Label and Top
Budget Classical Imprint of the year and had the No. 2 (MOZART - GREATEST
HITS) and the No. 6 (BEETHOVEN -GREATEST HITS) Top Budget Classical Albums
for 1998, according to BILLBOARD. In addition to various compilations,
Intersound Classical plans to release up to 80 albums by the Royal
Philharmonic Orchestra in 1999, which are master recordings we acquired
during fiscal 1998.
Intersound Classical produces themed-based products, which are generally
music products arranged around a specific theme and often targeted to a
specific demographic audience. We typically utilize our extensive catalog to
release existing titles in this format. Our theme-based products range from
the music of Hollywood and Broadway to recordings by such established artists
as Dizzy Gillespie, Al Hirt, Doc Severinson and Ferrante & Teicher. We also
release multi-disc packages such as BACH AND BAGELS and CLASSICS FOR KIDS,
"best of" packages featuring select composers and music genres, religious and
ethnic selections, music for various party themes and Christmas and various
other holiday selections.
During the past two years we have established a presence in new age
music with such compilations as FULL MOON and INDIGO MOODS and the
development of the Taliesin Orchestra, whose ORNICO FLOW - THE MUSIC OF ENYA
spent more that 80 weeks on BILLBOARD'S Top Classical Crossover chart in 1997
and 1998. In 1999, we plan to release several albums pursuant to
production/distribution agreements we have with Half Note, which will be live
recordings from the legendary jazz club, the Blue Note Music Club, and
EarthSea Records, which will include new releases and catalog re-releases by
Peter Kater, new
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age artist and founder of EarthSea Records. Two new albums by Trammell
Starks, the developer of the Taliesin Orchestra and producer of ORNICO FLOW -
THE MUSIC OF ENYA, are also planned for release in 1999.
URBAN/WORLD MUSIC
Our urban music division focuses on several specialty niches, including
rhythm and blues (R & B), funk, soul, dance, electronic, bass and hip-hop.
We have employed experienced management and staff well-versed in urban radio
and promotion, including Hank Caldwell as Vice President and General Manager
of urban music. Mr. Caldwell was previously president of Death Row Records
and senior vice president of Epic Black Music. We intend to increase our
offerings in this genre by signing and producing new recordings from
established and new urban artists. In 1998, we released another album in our
highly successful BOOTY MIX compilation series, which has had net sales of
over 940,000 units. BOOTY MIX 4 is planned for release in 1999. Additional
new releases for 1999 include: THE UNION PRESENTS ORGANIZED RHYMES, a
collaboration featuring rap's hottest new talents; BASS BROTHERS VOLUMES I
AND II; DOLLAR SOUNDTRACK, a compilation featuring artists including MC Breed
and Too Short; and new recordings by The Spinners.
Our catalog of electronic music includes critically-acclaimed releases
by Trip Theory, Duke Mushroom and FREEDOM: THEE SOUND OF ZEN, a two-disc
compilation featuring electronic's top DJs and composers including Fat Boy
Slim and Crystal Method. We recently announced our joint venture with
Pioneer Entertainment (USA) to develop and release ANIMETRONIC, a series of
unique, multiple format music and video releases that combine Japanese
animation with original, new electronic music compositions. The first
ANIMETRONIC collection is planned for release during 1999.
SONGS FROM THE HEART OF CUBA, a follow-up to the 1998 release RHYTHM &
SMOKE: THE CUBA SESSIONS, is also scheduled to be released in 1999. These
two world music albums feature the talents of some of Cuba's finest musicians
and were produced by Grammy nominated producer Daisuke Hinata, in Havana's
historic SonoCaribe Studios.
DVD
Our Concert@Home DVD label presents the best in contemporary music
events, as well as classic performances from the world's most popular
entertainers. The superior digital video quality and surround sound of DVD
creates a "front row seat" environment, plus a level of interactivity never
before available in home video. Our DVD releases include: The Beach Boys'
NASHVILLE SOUNDS, Roger Daltrey's A CELEBRATION: THE MUSIC OF PETE TOWNSHEND
AND THE WHO, Harry Chapin's THE BOOK OF CHAPIN (SOUNDSTAGE), Luther Allison's
LIVE IN PARADISE, George Clinton's LIVE AT THE HOUSE OF BLUES AT THE ATLANTA
OLYMPICS, and The Taliesin Orchestra's FORBIDDEN FOREST. We are planning a
number of DVD releases for 1999 including: BEST OF PLATINUM ADULT
CONTEMPORARY VOL. 1, BEST OF PLATINUM COUNTRY VOL. 1 and CUBAMANIA, featuring
the recordings of some of Cuba's most talented musicians.
DISTRIBUTION, SALES AND PROMOTION
We distribute our products through a multi-channel system comprised of
(i) Platinum Distribution, our proprietary distribution system, (ii)
Universal, our third party distributor, (iii) international distribution and
(iv) Internet distribution. In January 1999, we hired Brent Gordon, an
industry veteran, to head all of our distribution channels as Senior
Executive Vice President. Mr. Gordon was President of Sales and Operations
for Pacific Coast One-Stop, a California-based music wholesaler, from August
1997 through December 1998, and served as Regional Vice President - Sales and
Distribution, Marketing, and Operations at WEA Corp., from 1980 to 1997.
PLATINUM SALES AND DISTRIBUTION
We distribute most of our products through Platinum Distribution, our
distribution and warehouse facility located at our offices in Roswell,
Georgia. We have a salaried direct sales force that contact customers
throughout the United States and Canada. In addition to our sales operation
at our Roswell,
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Georgia facility, we have regional sales offices located throughout the
United States and Canada. Our sales personnel also support Platinum
Distribution's marketing efforts with large retail customers. Additionally,
we have sales personnel who cover specialty retail sectors, international
customers, and record club and catalog customers.
DISTRIBUTION THROUGH UNIVERSAL
In May 1993, we entered an exclusive agreement with Universal, the
largest distributor of recorded music in the world, according to the RIAA.
Universal currently distributes releases on our River North, CGI Platinum and
House of Blues labels domestically. We have retained the right to distribute
our records through key-outlet sales, licenses or sales to record clubs,
sales through Christian bookstore channels and other third party licenses of
master recordings. For its services, Universal is entitled to a distribution
fee based on sales volume of 15% to 18% of the net sales for all records
distributed under the agreement, less reserves set aside against returns and
credits. Our distribution fee to Universal is secured by all of our products
in Universal's possession. The distribution agreement is effective until
December 31, 2002.
INTERNATIONAL DISTRIBUTION
We distribute our products internationally by various means. We
distribute products to international customers direct from Platinum
Distribution, via licensing agreements, and most recently, via production
and distribution arrangements on a territory-by-territory basis. We believe
that utilizing such means of international distribution will allow us to
exploit our existing international licensing relationships, electronic media,
and overseas manufacturing to increase revenues derived from international
distribution. For example, in 1998, Platinum teamed with German-based
in-akustik, one of Europe's leading music distribution and marketing
companies, in a distribution and fulfillment agreement. The agreement allows
in-akustik to distribute Platinum releases throughout Germany from a European
operations center established and controlled by Platinum and managed by
in-akustik. We believe that these relationships give us a greater sales
presence in the European marketplace.
DISTRIBUTION FOR THIRD PARTIES
We utilize our distribution channels to facilitate distribution for the
following third parties, which are generally small independent record labels
specializing in particular genres of music:
Ruf Records Ichiban Records
Power Records Gator Records
Half Note Records EarthSea Records
INTERNET DISTRIBUTION
During October 1998, we announced the debut of our website,
www.PlatinumCD.com, and our equity investment and revenue sharing arrangement
with musicmaker.com, the first and largest digital download and "burn and
mail" company. We also joined with Amazon.com, a leader in the Internet
industry, to provide customers who visit our new website access to hundreds
of thousands of commercially available music titles, including access to our
own titles. For specific limited time periods (usually two weeks), we
provide MP3.com with promotional recordings for free download from their
site. These promotionally downloaded songs encourage visits to our site for
further evaluation of our product. As a result, traffic to our website
increased dramatically from its opening in October 1998 through the end of
calendar 1998. www.PlatinumCD.com allows consumers to buy music in four
distinct ways:
- - www.PlatinumCD.com allows customers to purchase CDs manufactured by our
music labels for home delivery at discount prices. We fulfill these sales
through Platinum Distribution, our proprietary distribution system.
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- - www.PlatinumCD.com allows customers to create customized CD compilations on
a "burn and mail" basis, with consumers selecting individual tracks that
will be recorded to their own unique compact disc and shipped to them
within 48 hours through musicmaker.com, the first and largest custom CD and
music download resource on the Internet. We have an equity interest in
musicmaker.com and a licensing and profit sharing arrangement with
musicmaker.com for these sales.
- - www.PlatinumCD.com allows customers to create customized CD compilations
through musicmaker.com by downloading tracks through Secure MP3 or Liquid
Audio to a customer's personal computers. These digital audio files can
then be transferred from the computer to a customer's own CD-Recordable
device. We have an equity interest, a licensing, and a profit sharing
arrangement with musicmaker.com for these sales.
- - www.PlatinumCD.com gives customers access to hundreds of thousands of
commercially available titles via our affiliation with Amazon.com. We
receive referral revenues from the sale of such titles.
We believe that diversity of our distribution channels will help us
absorb shifts in audience taste and the economy and provide the foundation
for our expansion into additional markets.
LIBRARY
We own or control the copyrights to over 13,000 master recordings. Our
library contains significant catalogs of classical, urban, adult
contemporary, blues, gospel and country music. We intend to continue to
expand, diversify and exploit our catalog. We also intend to continue to
create compilation products with masters from our catalog and selections
licensed from third parties.
RELATIONSHIPS WITH ARTISTS
CONTRACT TERMS
We seek to contract with artists on an exclusive basis for the marketing
of their recordings in return for a royalty based on the net sales of the
recordings. Generally, we seek to obtain rights on a worldwide basis. A
typical contract with an artist may provide for multiple albums to be
delivered, with advances against royalties being paid upon delivery of each
album, although advances are often made prior to recording. We generally
have an option to take each album that the artist is contracted to deliver,
exercisable within an agreed period of time, usually a few months following
delivery of the previous album. Normally, if an option is not exercised, the
artist has no obligation to deliver additional albums. Provisions in
contracts with established artists vary considerably, and may, for example,
require us to release a fixed number of albums and/or contain an option
exercisable by us covering more than one album. We seek to obtain rights to
exploit product delivered by the artist for the life of the product's
copyright. Under the contracts, advances are normally recoupable against
royalties paid to the artist. We also seek to recoup a portion of certain
marketing and tour support costs, if any, against artist royalties.
RECORDING
Recording contracts either provide that the artist deliver completed
recordings or that we undertake the recording with the artist. If the
recording costs are advanced by Platinum, they are added to the advances paid
to the artist and recouped against royalties payable to the artist. Our
staff is generally involved in selecting producers, recording studios, any
additional musicians needed and songs to be recorded, as well as supervising
the output of recording sessions. For experienced artists, such involvement
may be minimal.
OPTION PROGRAM
We have granted and intend to continue to grant stock options to certain
artists as an inducement to sign with our labels. We expect that these stock
options will be granted based on the achievement of identified sales and
other performance milestones. We will evaluate the use of options on a case
by case
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basis based on our assessment of the cost of making cash advances to the
artist, the sales potential of the artist and the financial impact of
granting such options. Under the current industry practice, cash advances to
an artist are recouped from royalties payable to the artist from record
sales. Because artist options would not be subject to recoupment, we believe
that such options will provide a valuable method of attracting, signing and
retaining artists while maintaining appropriate economic incentives for the
artists.
PRODUCTION AND MANUFACTURING
We are a full service record company with an art department that
provides design and finished film for print-ready manufacturing of record
cover design. We manufacture our finished music products through third party
arrangements. We coordinate all of our manufacturing of finished music
products through our Roswell, Georgia facility.
INTELLECTUAL PROPERTY
Our business, like that of other companies involved in recorded music,
primarily rests on ownership, control and exploitation of musical works and
sound recordings. Our music products are protected under applicable domestic
and international copyright laws. In addition, we own or control the
copyrights to over 13,000 master recordings.
Although circumstances vary from case to case, rights and royalties
relating to a particular recording typically operate as follows: When a
recording is made, copyright in that recording vests either in the recording
artist (and is licensed to the recording company) or in the record company
itself, depending on the terms of the agreement between them. Similarly,
when a musical composition is written, copyright in the composition vests
either in the writer (and is licensed to the music publishing company) or in
the publishing company itself. Artists generally record songs that are
controlled by music publishers. We obtain the rights to reproduce such songs
on soundcarriers from music publishers or collection societies on their
behalf. The manufacture and sale of a soundcarrier results in royalties
being payable by the record company to the publishing company at industry
agreed or statutory rates for the use of the composition (and the publishing
company in turn pays a royalty to the writer) and by the record company to
the recording artist for the use of the recording. We operate in an industry
in which revenues are adversely affected by the unauthorized reproduction of
recordings for commercial sale, commonly referred to as "piracy," and by home
taping for personal use.
LICENSING
We are engaged in licensing activity involving both the acquisition of
rights to certain master recordings and compositions for our own projects and
the granting of rights to third parties in the master recordings and
compositions we own or control. We typically obtain an ownership or
co-ownership interest in all newly-recorded compositions appearing on albums
released by Platinum that are written by the artists performing the
compositions. The rights to use all other compositions appearing on albums
or audiovisual works are obtained from the publishers of those compositions
under agreements that, for albums, are called mechanical licenses, which are
often issued through a central agency, and for audiovisual works are called
synchronization licenses. The mechanical license fee is customarily indexed
to a statutory rate established under the United States Copyright Act, which
currently is 7.1 cents for a performance of up to five minutes and higher for
performances of greater length. Although fees for synchronization licenses
vary from set fees to percentages of sales price, the fee often corresponds
to the statutory rate for mechanical licenses. We typically issue our own
mechanical and synchronization licenses to third parties when compositions
from our own catalog are used by others. The availability and terms of such
cross-licensing arrangements are generally made possible by industry
practices based on reciprocity.
Performance rights in compositions we own are enforced under agreements
we have with the performing rights organizations, American Society of
Composers, Authors and Publishers (ASCAP), Broadcast Music, Inc. (BMI) and
SESAC, Inc., (SESAC) which license commercial users of music such as radio
and television broadcasters, restaurants and retailers and disburse collected
fees based upon the frequency and type of performances they identify. Print
publishing rights in our owned compositions are
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either directly licensed by us to third party users or are enforced through
agencies such as Christian Copyright Licensing International, which issues
print licenses to churches and other organizations and collects and disburses
the fees.
We often obtain, pursuant to license agreements, the right to use master
recordings owned by others, either in original album form or for compilation
projects. Although the terms of such agreements vary, they are typically for
a period of three to five years and involve the payment of a royalty in the
range of five to eight cents for the use of individual masters and between
16% and 20% of suggested retail price for complete original albums. We
typically license to others only the right to use individual masters for
compilation projects under terms similar to the terms under which we obtain
master license rights. Should such industry practices change, there can be
no assurance that we will be able to obtain licenses from third parties on
satisfactory terms. If we are unable to obtain such licenses, our business,
particularly with respect to compilation products, could be adversely
affected.
COMPETITION
Our success depends, among other things, on the skill and creativity of
our employees and on their relationships with artists. We face intense
competition for discretionary consumer spending from numerous other record
companies and other forms of entertainment offered by film companies, video
companies and others. We compete directly with other record companies,
including the five major record companies, BMG Entertainment, EMI, Universal
Music Group, Sony Music Entertainment and Warner Music, as well as other
record and music publishing companies. We compete against these companies for
the signing of established and new artists and songwriters and the
acquisition of music catalogs. Many of our competitors have significantly
longer operating histories, greater financial resources and larger music
catalogs. Our ability to compete successfully will be largely dependent upon
our ability to build upon and maintain our reputation for quality music
products and to introduce music products that are accepted by consumers.
EMPLOYEES
As of April 14, 1999, we employed 149 employees, of whom 35 were located
in our Downers Grove, Illinois office, 103 were located in our Roswell,
Georgia facility, and 11 were located in our Nashville, Tennessee office. Of
such employees, 89 were engaged in marketing, sales and related customer
services, 31 were engaged in administration and accounting, 11 were engaged
in legal, royalty and publishing services and 18 were engaged in production.
None of our employees is represented by a labor union. We have not
experienced any work stoppage and we consider relations with our employees to
be good.
ITEM 2. FACILITIES
Our corporate headquarters are in Downers Grove, Illinois. We currently
lease a 12,250 square foot office facility, which lease expires April 30,
2003. This facility houses our corporate offices, as well as management,
accounting, royalties, legal affairs, sales staff and an art department. We
also lease a facility in Roswell, Georgia which houses our warehouse and
distribution centers, production studios, an art department and marketing and
promotion operations. This facility contains 59,334 square feet and has a
lease term expiring December 31, 1999. We lease 10,120 square feet of
additional warehouse space near the Roswell, Georgia facility which lease
also expires December 31, 1999. We also lease sales offices in Minneapolis,
MN, Dallas, TX, and Toronto, Ontario under various short-term leases. In
addition, we lease 3,200 square feet of office space in Nashville, Tennessee,
pursuant to a lease expiring October 31, 2000, that houses the promotional
staff of Platinum, the staff of Platinum Nashville and staff from our
publishing department.
We believe our facilities are in good condition. In connection with the
expansion of our proprietary distribution operations, we are planning to move
our facilities in Roswell, Georgia to a larger
9
<PAGE>
location in the same area. We have located a prospective property and are
currently in lease negotiations for such property.
ITEM 3. 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 (40%) shares 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 results in a reversal of charges
previously expensed by us in connection with the acquired assets and assumed
liabilities of Intersound, Inc. and the recognition of a gain of
approximately $1,000,000. 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 parties will be
filing all documents necessary to effectuate the dismissal with prejudice,
and without attorneys' fees and costs, of all claims asserted in the pending
litigation.
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, 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. While
we have obtained copies of the two complaints, we have not been served with
any summons in the action. In the event Ichiban Records, Inc. elects to
proceed with the action, we will pursue our counterclaims against Ichiban
Records, Inc. and its principals for damages incurred by us as a result of
breaches of the distribution agreement by Ichiban Records, Inc., for
injunctive relief barring Ichiban Records, Inc. from terminating the
distribution agreement and for recovery of advances and other monies owed by
Ichiban Records, Inc. to us. 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 lawsuit 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.
We are a party in various lawsuits which have arisen in the normal
course of business. In the opinion of management, based upon 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our Common Stock trades on the Nasdaq National Market under the symbol
"PTET." The following table sets forth for the periods indicated the high
and low closing prices of our Common Stock, as reported by Nasdaq. Such
quotations reflect inter-dealer prices without markup, markdown or
commissions and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Price range of Common Stock
---------------------------
High Low
<S> <C> <C>
Fiscal year ended May 31, 1997:
First quarter $19.250 $13.750
Second quarter 16.250 8.500
Third quarter 8.500 6.000
Fourth quarter 7.000 5.000
Seven months ended December 31, 1997*:
Three months ended August 31, 1997 $ 7.250 $ 5.375
Three months ended November 30, 1997 8.500 4.875
One month ended December 31, 1997 6.750 5.000
Fiscal year ended December 31, 1998:
First quarter $ 7.438 $ 5.375
Second quarter 13.750 6.563
Third quarter 10.125 4.000
Fourth quarter 8.875 4.000
Fiscal year ended December 31, 1999:
First quarter $ 8.875 $ 5.063
</TABLE>
* Effective December 1997, we changed our fiscal year from May 31 to
December 31.
At April 13, 1999, there were approximately 134 stockholders of record
and 6,784,407 shares outstanding.
During July 1998, we issued 53,055 shares of our Common Stock, valued at
$400,000 or $7.54 per share, to Tring International Plc, in connection with a
purchase agreement whereby we purchased exclusive North American rights to
selected sound recordings by The Royal Philharmonic Orchestra.
In order to raise additional capital, during December 1998, we issued an
aggregate 416,665 shares of our Common Stock to Special Situations Fund III,
L.P., Special Situations Private Equity Fund, L.P., Special Situations Cayman
Fund, L.P. and Special Situations Technology Fund, L.P., each unrelated
parties, at a per share price of $6.00, which price approximated the closing
price of our Common Stock as reported by the Nasdaq National Market on the
date of sale. We received $2,500,000 in consideration during January 1999
for this sale.
These sales were exempt from registration pursuant to Section 4(2) of
the Securities Act of 1933, as amended, as transactions not involving a
public offering.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth our selected consolidated statements of
operations and consolidated balance sheet data as of the dates and for the
periods indicated. Effective December 31, 1997, we changed our fiscal year
from May 31 to December 31. The selected consolidated financial data as of
and for the year ended December 31, 1998, the seven months ended December 31,
1997, the years ended May 31, 1997, 1996 and 1995, and the five months ended
May 31, 1994, listed below have been derived from our audited consolidated
financial statements. The selected consolidated financial data for the
unaudited years ended December 31, 1997 and 1996 and the unaudited seven
months ended December 31, 1996, were prepared in accordance with generally
accepted accounting principles; in the opinion of management, the financial
statements for these periods reflect all adjustments (of a normal and
recurring nature) which are necessary to present fairly the results of
operations shown.
The following table also reflects earnings before interest, other
financing costs, equity gain (loss), taxes, depreciation and amortization
(EBITDA). EBITDA is a non-GAAP financial metric utilized by management and is
intended solely to provide additional information to investors.
Certain prior period amounts in the financial statements and related
notes have been reclassified to conform with the current year presentation.
Effective with the third quarter of 1998, we changed our method for reporting
product returns in the statements of operations and balance sheet. While
there is no impact on gross margins for operations previously reported, a
reclassification between returns and cost of sales in the statements of
operations has been made to prior period amounts to reflect returns activity
consistently with our current reporting practices. In addition, inventory
and royalties payable, as impacted by returned product, have been restated
from amounts previously reported on the balance sheet.
12
<PAGE>
The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and related notes included elsewhere
herein.
<TABLE>
<CAPTION>
Seven months ended Five
Year ended December 31 December 31 Year ended May 31 months
------------------------------ -------------------- ---------------------------- ended
------------------------------ -------------------- ---------------------------- May 31
1998 1997 1996 1997 1996 1997 1996 1995 1994
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Gross revenues $ 56,314 $ 60,559 $ 21,157 $ 35,294 $ 12,878 $ 38,757 $ 20,121 $ 12,782 $ 3,527
Net revenues (1) 40,616 34,797 15,242 18,280 9,773 25,418 14,416 8,547 2,943
Gross profit (1) 11,275 13,074 2,733 4,871 3,506 11,707 4,236 4,204 490
Merger, restructuring and
one-time costs (2) - 5,326 6 3,100 6 2,231 - - -
EBITDA (1) (9,515) (12,012) (6,167) (10,545) (2,195) (3,665) (3,781) (4,596) (862)
Operating loss (1) (11,570) (13,847) (6,430) (11,607) (2,394) (4,638) (3,937) (4,729) (901)
Interest expense (2,661) (4,324) (229) (2,944) (7) (1,385) (570) (157) (28)
Other financing costs (344) (4,791) - (1,258) - (3,533) - - -
Loss from continuing
operations (1) (14,797) (23,533) (6,417) (16,446) (2,265) (9,354) (4,401) (4,840) (929)
Loss from discontinued
operations - - (226) - - - (226) (4,684) (755)
Net loss (1) (14,797) (23,533) (6,643) (16,446) (2,265) (9,354) (4,627) (9,524) (1,684)
Less: Preferred dividends
requirements (3) (2,824) - (602) - - - (602) - -
Loss applicable to
common shares (1) $(17,261) $(23,533) $ (7,245) $(16,446) $ (2,265) $ (9,354) $ (5,229) $ (9,524) $(1,684)
Basic and diluted loss
per common share (4):
Loss from continuing
operations (1) $ (3.07) $ (4.52) $ (1.54) $ (3.14) $ (0.44) $ (1.82) $ (1.71) $ (2.12)
Loss from discontinued
operations - - (0.13) - - - (0.08) (2.05)
------------------------------------ ------------------------ --------------------------------
Net loss (1) $ (3.07) $ (4.52) $ (1.67) $ (3.14) $ (0.44) $ (1.82) $ (1.79) $ (4.17)
------------------------------------ ------------------------ --------------------------------
------------------------------------ ------------------------ --------------------------------
Weighted average number of
common shares
outstanding (4) 5,732,661 5,206,964 4,548,151 5,232,030 5,112,066 5,136,830 2,925,987 2,284,090
BALANCE SHEET DATA:
Cash and cash equivalents $ 12 $ 11 $ 53 $ 8,222 $ 87 $ 9
Working capital (deficit) (5) (29,980) (16,469) (22,953) 12,055 (9,129) (4,117)
Total assets (1) 56,978 48,463 58,308 18,991 5,737 4,544
Long-term obligations
(including current portions) - 25,000 5,000 - - 1,140
Redeemable preferred stock (3) - - - - 5,423 -
Total stockholders' equity
(net capital deficiency) (1) 7,918 12,375 7,866 15,215 (12,321) (3,302)
</TABLE>
(1) During January 1997, we purchased substantially all of the assets of
Intersound, Inc. for consideration of $24,000 in cash, $5,000 in
convertible subordinated debentures and the assumption of certain
liabilities. Intersound, Inc.'s primary business was the production,
distribution, marketing and sale of music for classical, urban, gospel and
country genres. The acquisition was accounted for by the purchase method
of accounting and the purchase price of approximately $41,000, including
assumed liabilities, exceeds the fair value of the assets acquired by
$6,098, which represents goodwill. The purchase value was allocated to the
acquired assets based upon their estimated respective fair market values.
The amounts allocated to music catalog, music publishing rights and
goodwill are being amortized over 25 years using the straight-line method.
We determined the purchase price allocation for the assets purchased and
liabilities assumed from Intersound, Inc., 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, we ascertained
that the purchase value allocated to certain purchased assets exceeded
their fair market values by approximately $1,150. In addition, we
identified $4,051 of returned product which we believe relates to product
that had been sold prior to our purchase of Intersound, Inc. Had these
matters been identified by us at the time of purchase or shortly
thereafter, such valuations would have been recorded through purchase
accounting, resulting in no subsequent impact to the income statement. As
these matters were not identified at the time of purchase or shortly
thereafter, we were required to reflect these amounts in our results of
operations for the seven months ended December 31, 1997, resulting in a
nonrecurring charge to operations of $3,500. The returned product of
$4,051 is reflected in net revenues with corresponding offsets of $1,701 to
cost of sales; the asset write-down of $1,150 was also included in cost of
sales. These matters were subject of the action entitled JCSHO, INC. F/K/A
INTERSOUND, INC. V. PLATINUM ENTERTAINMENT, INC., (D. Minn.) which were
settled on March 31, 1999 (see "Item 3. Legal Proceedings").
13
<PAGE>
(2) As a result of the acquisitions completed during the fiscal year ended May
31, 1997, we incurred significant costs to merge and restructure our
business with the acquired companies. Such merger and restructuring costs
included severance costs, relocation costs, lease commitment write-offs,
warehouse closing costs and other related costs. Such costs were $251 and
$1,700 during the seven months ended December 31, 1997, and the year ended
May 31, 1997, respectively, relating primarily to severance costs and a
distribution termination fee. The restructuring was substantially
completed at December 31, 1997. Such restructuring resulted in shifts in
the selling and promotion efforts of our country label and in-house sales
department and a shift in third party fulfillment of Platinum Christian
Distribution. In addition, one-time costs for the year ended May 31, 1997,
included write-offs of artist advances of approximately $600 in areas for
which we have chosen to redirect our resources. These costs were classified
as merger, restructuring and one-time costs and were included in our
operating losses.
During June 1998, we executed a settlement agreement with K-tel
International, Inc., whereby we mutually agreed to settle our claims to
$1,750 we had deposited in escrow pursuant to a purchase and sale agreement
signed by us and K-tel International, Inc. during March 1997, and
terminated by us during September 1997. Pursuant to this settlement
agreement, each party received 50% of the escrowed amount. We fully
reserved the $1,750 in escrow prior to December 1997, and expensed
approximately $1,100 of legal, accounting and other incremental costs
related to this transaction. Accordingly, our selling, general and
administrative expenses for 1998 are net of $875 received from this
settlement.
(3) For the year ended December 31, 1998, dividends of $2,824 accrued on the
Series B and Series C Convertible Preferred Stock outstanding. For the
year ended May 31, 1996, dividends of $602 accrued on Series A-1 Redeemable
Non-Convertible Preferred Stock, which were paid concurrent with the
redemption of that stock during March 1996.
(4) Basic loss per common share is based upon the net loss applicable to common
shares after preferred dividend requirements and upon the weighted-average
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 December 31, 1998, was
10,700,509. Such effect was not dilutive in any of the periods indicated.
(5) Includes short-term debt for all periods indicated.
ITEM 7. 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.
14
<PAGE>
We distribute our products through a multi-channel system comprised of
(i) Platinum Distribution, our proprietary distribution system, (ii)
Universal Music and Video Distribution (Universal), our third party, major
label distributor, (iii) internationally, primarily through licensing
agreements as well as production and distribution agreements on a
territory-by-territory basis and (iv) Internet distribution. We are
increasing the volume of products distributed through Platinum Distribution
compared to Universal; this results in reduced incremental costs per record
sold, due to the lack of a third party distribution fee. Our gross revenues
through Universal were $2,363,000 and $6,979,000 for the fourth quarter of
1998 and 1997, respectively, reflecting a 66% decrease from the prior period,
and $16,922,000 and $21,010,000 for fiscal 1998 and 1997, respectively,
reflecting a 19% decrease from the prior period.
During the fourth quarter of 1998, a plan was approved to move our
distribution facilities in Roswell, Georgia to a new, larger facility. The
move is planned to take place during spring of 1999. This new facility is
intended to enable us to perform more efficiently and provide the necessary
space for anticipated growth. In preparation for the move, we reduced the
carrying cost of a significant amount of our older catalog titles resulting
in a substantial write-down of approximately $1,000,000. This write-down was
recognized in anticipation of the disposal of these titles rather than
incurring the cost of moving these titles to the new distribution facility.
Accordingly, provisions have been made in our financial statements at
December 31, 1998, related to these titles.
We are also increasing our international sales efforts by establishing
additional licensing agreements as well as production and distribution
agreements on a territory-by-territory basis. In 1998, our international
revenues grew to $1,400,000 from $500,000 in the prior year. We believe
international revenues will continue to be a strong growth area for our
products.
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
Platinum Distribution 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 ranges from a
low of 6% (for third party product distributed by Universal to which we owe a
distribution fee) to 27% (for product distributed through our proprietary
systems). These activities represented 12% of our gross revenues in the year
ended December 31, 1998, as compared to 4% in the year ended May 31, 1996.
We believe that increasing the volume of products distributed for select
third parties will contribute significantly to offsetting the fixed costs of
maintaining Platinum Distribution as well as provide incremental revenue and
income. We intend to pursue additional third party distribution
opportunities in the future.
In 1998, we added distribution via the Internet as a distribution
channel. In October, we announced the debut of 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. 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 joined 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.
During the fiscal year ended May 31, 1997, we completed several
acquisitions: (i) substantially all of the assets of R.E.X. Music, Inc.,
(ii) substantially all of the assets of Double J Music Group, (iii) a 50%
interest in the House of Blues Music Company and (iv) substantially all of
the assets of Intersound, Inc.
As a result of these acquisitions, we incurred significant costs to
merge and restructure our business with the acquired companies. Such merger
and restructuring costs included severance costs, relocation costs, lease
commitment write-offs, warehouse closing costs and other related costs. Such
costs were $251,000 and $1,700,000 during the seven months ended December 31,
1997, and the year ended
15
<PAGE>
May 31, 1997, respectively, relating primarily to severance costs and a
distribution termination fee. The restructuring was substantially completed
at December 31, 1997. Such restructuring resulted in shifts in the selling
and promotion efforts of our country label and in-house sales department and
a shift in third party fulfillment of Platinum Christian Distribution. In
addition, one-time costs for the year ended May 31, 1997, include write-offs
of artist advances of approximately $600,000 in areas for which we have
chosen to redirect our resources. These costs were classified as merger,
restructuring and one-time costs and were included in our operating losses.
We determined the purchase price allocation for the assets purchased and
liabilities assumed from Intersound, Inc., 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, we ascertained that the
purchase value allocated to certain purchased assets exceeded their fair
market values by approximately $1,150,000. In addition, we identified
$4,051,000 of product returns which we believe relate to product that had
been sold prior to our purchase of Intersound, Inc. Had these matters been
identified by us at the time of purchase or shortly thereafter, such
valuations would have been recorded through purchase accounting, resulting in
no subsequent impact to the income statement. As these matters were not
identified at the time of purchase or shortly thereafter, we were required to
reflect these amounts in our results of operations for the seven months ended
December 31, 1997, resulting in a nonrecurring charge to operations of
$3,500,000. The returned product of $4,051,000 is reflected in net revenues
with corresponding offsets of $1,701,000 to cost of sales; the asset
write-down of $1,150,000 was also included in cost of sales. These matters
were subject of an action entitled JCSHO, INC. F/K/A/ INTERSOUND, INC. V.
PLATINUM ENTERTAINMENT, INC., (D. Minn.) which was settled on March 31, 1999
(see "Item 3. Legal Proceedings").
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 based upon our historical returns, SOUNDSCAN data, and
the return rate of Universal. Our returns as a percentage of gross revenues
were 22%, 37%, 42%, 18%, 28% and 25% for the years ended December 31, 1998
and 1997, the seven months ended December 31, 1997 and 1996, and the years
ended May 31, 1997 and 1996, respectively. Our historical returns experience
has been adversely impacted by several factors. As discussed above, we
experienced excessive returns of Intersound, Inc. product during the seven
months ended December 31, 1997, that we believe related to Intersound, Inc.
prior to our acquisition. In addition, as a result of the acquisitions
completed during the fiscal year ended May 31, 1997, including Intersound,
Inc., we terminated our relationship with Riverside Book and Bible House,
Inc. (Riverside) for fulfillment of Platinum Christian Distribution.
Platinum Christian Distribution fulfillment is now handled by our internal
distribution system. As a result, we experienced unusually high returns of
our product through the Riverside distribution channel as customers were
allowed a limited time to return products before returns were no longer
accepted from previous Riverside sales. In addition, we ceased relations
with certain customers who consistently failed to pay on a timely basis,
prompting an unusually high returns experience from these customers. It is
our policy to inventory all returned product and resell such product at
market value. The excessive product returns during the fiscal year ended May
31, 1997, are primarily close-out items. These items have been inventoried
and are valued at the lower of cost or market. Some of these items were
included in the write-down in anticipation of the facility move, as discussed
above.
During June 1998, we executed a settlement agreement with K-tel
International, Inc., whereby we mutually agreed to settle our claims to
$1,750,000 we deposited in escrow pursuant to a purchase and sale agreement
signed by us and K-tel International, Inc. during March 1997, and terminated
by us during September 1997. Pursuant to this settlement agreement, each
party received 50% of the escrowed amount. We fully reserved the $1,750,000
in escrow prior to December 1997 and expensed approximately $1,100,000 of
legal, accounting and other incremental costs related to this transaction.
Accordingly, our selling, general and administrative expenses for 1998 are
net of $875,000 received from this settlement.
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
16
<PAGE>
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.
We have historically sustained losses, in part due to the high costs
associated with the establishment and expansion of our activities. We
believe that the significant investments made to date will enhance our future
profitability. Prior to March 1996, a significant portion of our losses
resulted from the operation of our River North recording studio. During the
fiscal year ended May 31, 1995, we decided to discontinue this business and
disposed of our River North studio operations in conjunction with the initial
public offering of our Common Stock during March 1996.
RESULTS OF OPERATIONS
During February 1998, our Board of Directors resolved to change our
fiscal year, formerly May 31, to a calendar year, effective December 31,
1997. This change in fiscal year conforms our fiscal periods to the quarterly
and semi-annual periods for which we report royalties to our recording
artists and publishers as well as the annual term of our distribution
agreement with Universal.
Effective with the third quarter of 1998, we changed our method for
reporting product returns in the statements of operations and balance sheet.
While there is no impact on gross margins for operations previously reported,
a reclassification between returns and cost of sales in the statements of
operations has been made to prior period amounts to reflect returns activity
consistently with our current reporting practices.
17
<PAGE>
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>
Seven months
Year ended ended Year ended
December 31 December 31 May 31
1998 1997 1997 1996 1997 1996
------------------------ ----------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Gross revenues
Platinum labels 85% 93% 93% 87% 91% 90%
Distributed labels 12% 4% 4% 10% 5% 1%
Licensing, publishing and other 3% 3% 3% 3% 4% 9%
------------------------ ------------------------ -----------------------
Total gross revenues 100% 100% 100% 100% 100% 100%
Less: Returns -22% -37% -42% -18% -28% -25%
Less: Discounts -6% -5% -6% -6% -6% -4%
------------------------ ------------------------ -----------------------
Net revenues 72% 58% 52% 76% 66% 71%
Cost of sales 52% 36% 38% 49% 35% 51%
------------------------ ------------------------ -----------------------
Gross profit 20% 22% 14% 27% 31% 20%
Other operating expenses:
Selling, general and administrative 37% 33% 35% 44% 34% 40%
Merger, restructuring and one-time costs - 9% 9% - 6% -
Depreciation and amortization 4% 3% 3% 2% 3% 1%
------------------------ ------------------------ -----------------------
41% 45% 47% 46% 43% 41%
------------------------ ------------------------ -----------------------
Operating loss -21% -23% -33% -19% -12% -21%
Interest income - - - 1% - 1%
Interest expense -5% -7% -8% - -4% -3%
Other financing costs -1% -8% -4% - -9% -
Equity gain (loss) - -1% -2% - - -
------------------------ ------------------------ -----------------------
Loss from continuing operations -27% -39% -47% -18% -25% -23%
Discontinued operations:
Loss on disposal - - - - - -1%
------------------------ ------------------------ -----------------------
Loss from discontinued operations - - - - - -1%
------------------------ ------------------------ -----------------------
Net loss -27% -39% -47% -18% -25% -24%
Less: Preferred dividend requirements -5% - - - - -3%
------------------------ ------------------------ -----------------------
Loss applicable to common shares -32% -39% -47% -18% -25% -27%
------------------------ ------------------------ -----------------------
------------------------ ------------------------ -----------------------
</TABLE>
FISCAL YEAR ENDED DECEMBER 31, 1998, COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 1997 (UNAUDITED)
GROSS REVENUES. Gross revenues decreased $4,245,000 or 7% to
$56,314,000 for the fiscal year ended December 31, 1998, compared to the
prior fiscal year; however, net revenues increased $5,819,000 or 17% to
$40,616,000 for the fiscal year ended December 31, 1998, compared to the
prior fiscal year, primarily as a result of improved returns experience (see
"Overview"). We significantly reduced our direct to consumer sales of which
approximately $3,000,000 in gross revenues were recognized during the prior
fiscal year. We also experienced decreases in gross revenues through
Universal. Gross revenues through Universal were down $4,616,000 or 66% in
the fourth quarter of 1998 and $4,088,000 or 19% in 1998 compared to the
prior year. Universal purchased our former third party, major label
distributor, PolyGram Group Distribution, during the summer of 1998. These
decreases were in part offset by increases in gross sales from the
distribution of third party product over the prior year, representing 12% of
current year gross revenues compared to only 4% in the prior year. This
increase is primarily due to distribution of third party labels we signed
during 1998. Our notable releases shipped during 1998 included the urban
compilation BOOTY MIX 3, pop artist Taylor Dayne's NAKED WITHOUT YOU, gospel
Stellar Award winner Vickie Winans' LIVE IN DETROIT, country singer T. Graham
Brown's WINE INTO WATER, and numerous releases from our classical catalog,
which ranked #1 on BILLBOARD'S Budget Classical Chart.
RETURNS. We record an estimate of future returns at the time product is
sold (see "Overview"). Returns as a percentage of gross revenues were 22% for
the fiscal year ended December 31, 1998,
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compared to 37% for the prior fiscal year. The decrease relates to unusually
high returns activity for the prior period, as discussed in the "Overview."
DISCOUNTS. Discounts as a percentage of gross revenues remained
relatively unchanged at 6% for the fiscal year ended December 31, 1998,
compared to 5% for the prior fiscal year.
COST OF SALES. Cost of sales as a percentage of gross revenues
increased to 52% for the fiscal year ended December 31, 1998, from 36% for
the prior fiscal year. The increase is partially due to the increase in
third party label sales, for which we receive a distribution fee which is
less than gross margins derived from our own releases. We also incurred
significant A&R costs associated with current and future releases by artists
such as Dionne Warwick, Taylor Dayne, The Beach Boys, The Band and Kansas,
which all or a portion of such costs were expensed as incurred. In addition,
we wrote-down certain inventory titles to facilitate a planned warehouse
move, as discussed in the "Overview." Such write-down added $1,000,000 to
cost of sales.
GROSS PROFIT. Gross profit decreased $1,799,000 or 14% to $11,275,000
for the fiscal year ended December 31, 1998, compared to $13,074,000 for the
prior fiscal year. As a percentage of gross revenues, gross profit decreased
slightly to 20% for the current fiscal year compared to 22% for the prior
fiscal year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1,030,000 or 5% to $20,790,000 for the
fiscal year ended December 31, 1998, compared to the prior fiscal year.
Selling, general and administrative expenses as a percentage of gross
revenues increased to 37% for the current fiscal year from 33% for the prior
fiscal year. This increase relates to the expansion of our urban label and
costs associated with the development of our Internet and proprietary
distribution capabilities.
MERGER, RESTRUCTURING AND ONE-TIME COSTS. During the fiscal year ended
December 31, 1997, we incurred significant costs to merge and restructure our
business through various acquisitions. Such merger and restructuring costs
include severance costs, relocation costs, lease commitment write-offs,
warehouse closing costs and other related costs. In addition, we terminated
an agreement to purchase certain business assets of K-tel International, Inc.
during September 1997. As a result, earnest monies we deposited in escrow of
$1,750,000 were fully reserved and recorded as one-time costs in the
statement of operations.
OPERATING LOSS. As a result of the factors described above, we incurred
an operating loss of $11,570,000 for the fiscal year ended December 31, 1998,
compared to an operating loss of $13,847,000 for the prior fiscal year.
INTEREST EXPENSE. Interest expense for the fiscal year ended December
31, 1998, totaled $2,660,000 compared to $4,324,000 for the prior fiscal
year. The current year decrease is primarily a result of lower interest
rates under our current banking facility compared to the banking facility
outstanding during the prior year. See "Liquidity and Capital Resources"
below for details of our current debt structures.
OTHER FINANCING COSTS. Other financing costs of $344,000 were incurred
during the fiscal year ended December 31, 1998, compared to $4,791,000 during
the prior fiscal year. Other financing costs for the year ended December 31,
1998, include the write-off of $660,000 unamortized bank fees on a previous
bank facility offset in part by the reversal of a $350,000 previously accrued
extension fee on a separate, previous bank facility which would have been due
in 1998 had our stock value not met a certain threshold; as the threshold was
met, the fees were not payable and the accrual was reversed. The prior period
amounts relate to the short-term financing of the acquired assets and assumed
liabilities of Intersound, Inc. and the related extension fees incurred until
we refinanced our then-outstanding debt structure. See "Liquidity and
Capital Resources" for further discussion of our current debt structure.
INCOME TAXES. No income tax expense or benefit has been recorded through
December 31, 1998, due to our net operating loss carryforward and related
valuation allowance, as required under generally
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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 fiscal year ended December 31,
1998, the Series B and Series C Convertible Preferred Stock outstanding accrued
quarterly dividends aggregating $2,824,000 (representing a 12% return on
investment). The Series B and Series C Convertible Preferred Stock did not
accrue dividends in the prior year.
LOSS APPLICABLE TO COMMON SHARES. The loss applicable to common shares for
the fiscal year ended December 31, 1998, totaled $17,621,000, including
preferred dividend requirements of $2,824,000, compared to a loss applicable to
common shares of $23,533,000 for the prior fiscal year. The decreased loss
applicable to common shares relates primarily to nonrecurring merger,
restructuring and one-time costs related to the acquired assets and assumed
liabilities of Intersound, Inc. incurred in the prior fiscal year.
SEVEN MONTHS ENDED DECEMBER 31, 1997, COMPARED TO SEVEN MONTHS ENDED DECEMBER
31, 1996 (UNAUDITED)
GROSS REVENUES. Gross revenues increased $22,416,000 or 174% to
$35,294,000 for the seven months ended December 31, 1997, compared to the seven
months ended December 31, 1996; the seven months ended December 31, 1996, did
not include the acquired business activities of Intersound, Inc., which
represents $21,060,000 or 94% of this increase. Our notable releases shipped
during the seven months ended December 31, 1997, included gospel singer William
Becton's HEART OF A LOVE SONG, John Denver's A CELEBRATION OF LIFE, PAINT IT,
BLUE - a tribute to the Rolling Stones by various blues artists, urban
compilation BOOTLEG BOOTY, country singer Eddie Rabbit's BEATIN' THE ODDS and
numerous classical Christmas releases. These increases were offset by decreased
activity in country releases whose sales are largely determined by the success
of obtaining country radio airplay. Radio-driven country releases shipped
during the prior period included The Beach Boys' STARS AND STRIPES, VOL. I and
Crystal Bernard's THE GIRL NEXT DOOR. We have shifted our country music
strategy to principally sign artists with an established fan base, thereby
significantly reducing radio promotion expense.
RETURNS. Returns as a percentage of gross revenues were 42% for the seven
months ended December 31, 1997, compared to 18% for the prior year period. This
increase relates to unusually high returns activity for the seven months ended
December 31, 1997, as discussed in the "Overview."
DISCOUNTS. Discounts as a percentage of gross revenues remained unchanged
at 6% for the seven months ended December 31, 1997 and 1996.
COST OF SALES. Cost of sales increased $7,142,000 or 114% to $13,409,000
for the seven months ended December 31, 1997, compared to the seven months ended
December 31 1996; the seven months ended December 31, 1996, did not include the
acquired business activities of Intersound, Inc., which represents $4,912,000 or
69% of this increase. Cost of sales as a percentage of gross revenues decreased
to 38% for the seven months ended December 31, 1997, from 49% for the prior
period. As discussed in the "Overview," we ascertained that the purchase value
allocated certain assets purchased from Intersound, Inc. exceeded their fair
market values, as disclosed in the balance sheet at May 31, 1997. We
specifically ascertained $750,000 of unrecoupable artist advances and $400,000
of obsolete inventory which, when recorded, affects cost of sales. As these
write-downs were not ascertained at the time of purchase or shortly thereafter,
we are required to reflect these amounts in our results of operations. Had
these write-downs been ascertained by us at the time of purchase or shortly
thereafter, such amounts would have been recorded through purchase accounting,
resulting in no subsequent impact to the income statement.
GROSS PROFIT. Gross profit increased $1,365,000 or 39% to $4,871,000 for
the seven months ended December 31, 1997, compared to the seven months ended
December 31, 1996; the seven months ended
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December 31, 1996, did not include the acquired business activities of
Intersound, Inc., which represents the majority of this increase. As a
percentage of gross revenues, gross profit decreased to 14% for the seven
months ended December 31, 1997, from 27% for the prior period. As discussed
in the "Overview" above, gross profit includes $3,500,000 of costs and
expenses that related to Intersound, Inc. prior to our acquisition. Had these
matters been ascertained by us at the time of purchase of shortly thereafter,
such adjustments would have been recorded through purchase accounting,
resulting in no subsequent impact to the income statement. As these matters
were not ascertained at the time of purchase or shortly thereafter, we are
required to reflect these amounts in our results of operations. Excluding
these adjustments, gross profit as a percentage of gross revenues would have
been 24% for the seven months ended December 31, 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $6,621,000 or 116% to $12,316,000 for the
seven months ended December 31, 1997, compared to the seven months ended
December 31, 1996; the seven months ended December 31, 1996, did not include the
acquired business activities of Intersound, Inc., which represents $5,479,000
or 83% of this increase. Selling general and administrative expenses as a
percentage of gross revenues decreased to 35% for the seven months ended
December 31, 1997, from 44% for the prior period, primarily due to a larger
revenue base.
MERGER, RESTRUCTURING AND ONE-TIME COSTS. See "Overview" above for details
of nonrecurring merger, restructuring and one-time costs of $3,100,000.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to
$1,062,000 for the seven months ended December 31, 1997, from $199,000 for the
seven months ended December 31, 1996. The increase relates primarily to
amortization expense resulting from approximately $27,000,000 of music catalog,
music publishing rights and goodwill recorded from the acquisitions completed
during the fiscal year ended May 31, 1997.
OPERATING LOSS. As a result of the factors described above, an operating
loss of $11,607,000 was experienced in the seven months ended December 31, 1997,
compared to an operating loss of $2,394,000 in the seven months ended December
31, 1996. As discussed in the "Overview" above, operating loss includes
$3,500,000 of costs and expenses that related to Intersound, Inc. prior to our
purchase. Had these matters been ascertained by us at the time of purchase of
shortly thereafter, such adjustments would have been recorded through purchase
accounting, resulting in no subsequent impact to the income statement. As these
matters were not ascertained at the time of purchase or shortly thereafter, we
are required to reflect these amounts in our results of operations. Excluding
these adjustments, we experienced an operating loss of $8,107,000 during the
seven months ended December 31, 1997. $3,100,000 of this period increase is due
to nonrecurring merger, restructuring and one-time costs as discussed above.
INTEREST EXPENSE. Interest expense for the seven months ended December 31,
1997, totaled $2,944,000 compared to $7,000 for the seven months ended December
31, 1996. The increase primarily relates to interest incurred on bank financing
outstanding during the seven months ended December 31, 1997 related to the
acquired assets and assumed liabilities from Intersound, Inc.
OTHER FINANCING COSTS. Other financing costs of $1,258,000 were incurred
during the seven months ended December 31, 1997, related to the funding of the
acquired assets and assumed liabilities from Intersound, Inc.
INCOME TAXES. No income tax expense or benefit has been recorded
through December 31, 1997, 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 $33,158,000 at
May 31, 1997 (we had not yet obtained permission to change our fiscal year to
December 31 for tax purposes), expiring in years 2007 through 2012, is
subject to annual limitations due to a change in ownership as a result of our
initial public offering. Accordingly, approximately $12,349,000 of the net
operating loss carryforward is subject to an annual limitation of
approximately $2,200,000.
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NET LOSS. The net loss for the seven months ended December 31, 1997,
totaled $16,446,000 compared to $2,265,000 for the seven months ended December
31, 1996. As discussed in the "Overview" above, net loss includes $3,500,000 of
costs and expenses that related to Intersound, Inc. prior to our acquisition.
Had these matters been ascertained by us at the time of purchase or shortly
thereafter, such adjustments would have been recorded through purchase
accounting, resulting in no subsequent impact to the income statement. As these
matters were not ascertained at the time of purchase or shortly thereafter, we
are required to reflect these amounts in our results of operations. Excluding
these adjustments, we experienced a net loss of $12,946,000 during the seven
months ended December 31, 1997. The period increase relates primarily to
financing, merger, restructuring and one-time costs of $4,358,000 and interest
expense of $2,944,000 related to the acquired assets and assumed liabilities
from Intersound, Inc., as well as an $863,000 increase in depreciation and
amortization primarily related to the acquisitions completed during the fiscal
year ended May 31, 1997.
FISCAL YEAR ENDED MAY 31, 1997, COMPARED TO FISCAL YEAR ENDED MAY 31, 1996
GROSS REVENUES. Gross revenues increased $18,636,000 or 93% to $38,757,000
for the fiscal year ended May 31, 1997, compared to the prior fiscal year; the
fiscal year ended May 31, 1996, did not include the acquired business activities
of Intersound, Inc., which represents $12,671,000 or 68% of this increase. Our
notable releases shipped during the fiscal year ended May 31, 1997, included
National Baptist Convention's LET'S GO TO CHURCH, The Beach Boys' STARS AND
STRIPES, VOLUME I, The Blues Brothers' LIVE FROM CHICAGO'S HOUSE OF BLUES and
seven blues compilations compared to two during the prior fiscal year, urban
compilation BOOTY MIX 2, classical compilation ROMANCE AND ROSES and The
Taliesin Orchestra's ORINOCO FLOW: THE MUSIC OF ENYA.
RETURNS. Returns as a percentage of gross revenues were 28% for the year
ended May 31, 1997, compared to 25% for the prior fiscal year. The increase
relates to unusually high returns activity for the year ended May 31, 1997, as
discussed in the "Overview."
DISCOUNTS. Discounts as a percentage of gross revenues increased to 6% for
the seven months ended December 31, 1997, from 4% for the prior fiscal year.
The increase related to a more aggressive utilization of discount plans with
retailers.
COST OF SALES. Cost of sales increased $3,531,000 or 35% to $13,711,000
for the fiscal year ended May 31, 1997, compared to the prior fiscal year; the
fiscal year ended May 31, 1996, did not include the acquired business activities
of Intersound, Inc., which represents $3,049,000 of this net increase. Cost of
sales as a percentage of gross revenues decreased to 35% for the fiscal year
ended May 31, 1997, from 51% for the prior fiscal year. We experienced
increased cost of sales primarily attributable to increased royalty costs
associated with records featuring established artists in non-gospel formats.
However, these increased costs were offset by the lower cost of sales associated
with the acquired business activities of Intersound, Inc., which are generally
subject to lower royalty costs and do not incur a third party distribution fee.
In addition, significant costs of projects released during the fiscal year ended
May 31, 1997, such as albums by The Beach Boys and Crystal Bernard, were
incurred during the prior fiscal year. The projects in production during the
fiscal year ended May 31, 1997, were relatively less costly than the projects in
production during the prior fiscal year.
GROSS PROFIT. Gross profit increased $7,471,000 or 176% to $11,707,000 for
the fiscal year ended May 31, 1997, compared to the prior fiscal year; the
fiscal year ended May 31, 1996 did not include the acquired business activities
of Intersound, Inc., which represent $6,385,000 or 86% of this increase . As a
percentage of gross revenues, gross profit increased to 30% for the fiscal year
ended May 31, 1997, from 20% for the prior fiscal year. This increase is
attributable primarily to the acquired business activities of Intersound, Inc.
which are associated with lower royalty costs and no third party distribution
fee.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $5,124,000 or 64% to $13,141,000 for the
fiscal year ended May 31, 1997, compared to the prior fiscal year; the fiscal
year ended May 31, 1996, did not include the acquired business activities of
Intersound, Inc., which represents $3,039,000 or 59% of this increase .
Selling general and administrative expenses as a percentage of gross revenues
decreased to 34% for the fiscal year ended May 31, 1997, from 40% for the
prior fiscal year, primarily due to a larger revenue base.
MERGER, RESTRUCTURING AND ONE-TIME COSTS. See "Overview" above for details
of nonrecurring merger, restructuring and one-time costs of $2,231,000.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to
$973,000 for the fiscal year ended May 31, 1997, from $156,000 for the prior
fiscal year. The increase relates primarily to amortization expense resulting
from approximately $27,000,000 of music catalog, music publishing rights and
goodwill recorded from the acquisitions completed during the fiscal year ended
May 31, 1997.
OPERATING LOSS. As a result of the factors described above, an operating
loss of $4,638,000 was experienced in the fiscal year ended May 31, 1997,
compared to an operating loss of $3,937,000 in the prior fiscal year.
INTEREST EXPENSE. Interest expense for the fiscal year ended May 31, 1997,
totaled $1,385,000 compared to $570,000 for the prior fiscal year. The increase
primarily relates to interest incurred on bank financing outstanding during the
year ended May 31, 1997, related to the acquired assets and assumed liabilities
from Intersound, Inc.
OTHER FINANCING COSTS. Other financing costs of $3,533,000 were incurred
during the fiscal year ended May 31, 1997, related to the funding of the
acquired assets and assumed liabilities from Intersound, Inc. These costs
include amortization of debt discounts relating to warrants issued to a lender
and financing fees charged by such lender during the fiscal year ended May 31,
1997.
INCOME TAXES. No income tax expense or benefit has been recorded through
May 31, 1997, 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 $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 our initial public offering. Accordingly,
approximately $12,349,000 of the net operating loss carryforward is subject to
an annual limitation of approximately $2,200,000.
NET LOSS. The net loss from continuing operations for the fiscal year
ended May 31, 1997, totaled $9,354,000 compared to $4,401,000 for the prior
fiscal year. The increase relates primarily to financing, merger, restructuring
and one-time costs of $5,764,000 and interest expense of $1,385,000 related to
the acquired assets and assumed liabilities from Intersound, Inc., as well as a
$761,000 increase in depreciation and amortization related to the acquisitions
completed during the fiscal year ended May 31, 1997.
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 the 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.
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SIGNIFICANT MATTERS
During September 1998, we exchanged 111,457 shares of our Common Stock for
1,320,000 common shares of musicmaker.com. Our investment has been valued at
$750,000, which represents the fair value of the common stock relinquished by
us. 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 for promotional Internet downloads.
LIQUIDITY AND CAPITAL RESOURCES
We have incurred significant net losses and negative cash flows from
operations since our inception, including a net loss of $14,797,000 ($17,621,000
after preferred dividend requirements) and negative cash flows from operations
of $11,930,000 in fiscal 1998. 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.
Historically, we have funded our operations and other activities from a
variety of capital sources including, debt and equity financing. As a result
of the significant net loss discussed above, we were in violation of two of
the financial debt covenants contained in our bank credit agreement during
the third and fourth quarters of 1998 and as of September 30, 1998 and
December 31, 1998. As discussed below, these covenant violations were waived
and amended November 1, 1998 and April 14, 1999, respectively.
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.
- On November 1, 1998 and April 14, 1999, the bank waived our
financial covenant violations. The April 1999 amendment also
adjusted our 1999 net worth, earnings and interest coverage ratio
financial covenants to terms more favorable to us. Achieving these
new financial covenants is dependent on us fulfilling our 1999
business plan and budget.
- On April 15, 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 a director and certain other members of
our Board of Directors, providing proceeds of approximately
$4,000,000 (See "Note 23" in the notes to the financial statements).
In addition to the equity placements described above, we may need
additional equity financing in order to achieve our fiscal 1999 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. Also, while we believe that our fiscal 1999
plans, if achieved, will enable us to comply with the financial covenants in
the amended debt agreement, if some or all our plans do not materialize, we
may be in violation of the financial covenants. In this case, we may require
additional funds to operate and such funds may not be available on
satisfactory terms, if at all. Failure to raise needed fundings on favorable
terms could have a material adverse effect on our business. 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. The financial
statements and related notes included elsewhere herein do not include any
adjustments which might result from the outcome of this uncertainty.
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During the fiscal year ended December 31, 1998, we experienced negative
cash flow from operations of $11,930,000. This resulted from continued
operating losses, approximately $6,100,000 of new project funding and $3,000,000
of distribution advances for third party labels. Investing activities for the
year totaled $2,261,000, related to capital expenditures and classical catalog
purchases. Operating and investing activities were funded from our line of
credit with First Source Financial, Inc. and proceeds of $1,350,000 from a
private placement of our Common Stock to certain related parties.
Net cash used in operating activities was $6,335,000 for the seven
months ended December 31, 1997. Net cash used in operations for this period
reflected net cash used to fund trade receivables, inventories and artist
advances attributable to current releases and scheduled future releases. The
net cash provided by royalties payable arose primarily from sales of albums
in the non-gospel format, which typically command a higher royalty rate. In
addition, we fully reserved the $1,750,000 escrowed in connection with the
asset purchase agreement between us and K-tel International, Inc. Purchases
of property and equipment of $116,000 relate primarily to office equipment,
computers and leasehold improvements. Net cash provided by financing
activities for the seven months ended December 31, 1997, was $6,409,000.
Such financing activities include the refinancing of our line of credit and
short-term loan and the net proceeds from the sale of the Series B and Series
C Convertible Preferred Stock and warrants. In addition, we sold shares of
our Common Stock to a related party for proceeds of $500,000. We also
borrowed $1,500,000 from a related party, and $1,150,000 from an unrelated
person, which such loan was guaranteed by certain related parties. Such
loans bore interest of 10% per annum and were repaid in full prior to
December 31, 1997. Interest accrued and paid on these loans during the
period was $34,000.
Net cash used in operating activities was $10,573,000 for the fiscal
year ended May 31, 1997. Net cash used in operations for this period
reflected net cash used to fund trade receivables, inventories, artist
advances, trade payables and accrued liabilities and other, and was primarily
attributable to current releases and scheduled future releases. Certain
related party notes receivable provided $1,148,000 in net cash. The net cash
provided by royalties payable arose primarily from sales of albums in the
non-gospel format, which typically command a higher royalty rate. Net cash
used in investing activities for the fiscal year ended May 31, 1997, was
$29,146,000. Such investing activities include $3,063,000 relating to our
investment in our joint venture with the House of Blues. We paid
approximately $24,000,000 for the acquisition of Intersound, Inc., funded
primarily with bank financing. Approximately $100,000 was paid in connection
with our purchase of Double J Music Group. We also paid $1,750,000 to an
escrow account in connection with the asset purchase agreement between us and
K-tel International, Inc. Purchases of property and equipment of $307,000
relate primarily to office equipment, computers and software. Net cash
provided by financing activities for the fiscal year ended May 31, 1997, was
$31,550,000. Such financing activities include $25,000,000 in short-term
bank borrowings for the acquired assets and assumed liabilities from
Intersound, Inc.; such acquisition was also financed with approximately
$1,500,000 in borrowings under our revolving line of credit. We also
borrowed approximately $1,400,000 and $7,000,000 under our revolving line of
credit to fund financing costs in connection with the acquired assets and
assumed liabilities of Intersound, Inc. and our operations, respectively.
Net cash used in operating activities was $8,755,000 for continuing
operations and $1,011,000 for discontinued operations for the fiscal year ended
May 31, 1996. Net cash used in operations for this period reflected significant
increases in volume for continuing operations during the period, including net
cash used to fund trade receivables and artist advances, and was primarily
attributable to current new releases and scheduled future releases. Investing
activities for the fiscal year ended May 31, 1996, totaled $574,000 relating
primarily to additions of office equipment, computers and leasehold
improvements. Financing activities to fund our operations for the fiscal year
ended May 31, 1996, were funded with the net proceeds from the initial public
offering of $32,127,000, $4,330,000 of additional related party financing and
$1,980,000 of bank debt. Such related party indebtedness and bank debt were
paid in full at the time of our initial public offering. Of the net proceeds,
we used $9,480,000 to retire then-outstanding bank debt, $4,867,000 to retire
all then-outstanding related party debt and $4,500,000 to redeem our Series A-1
Non-Convertible Preferred Stock.
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We require significant recurring funds for 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. 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, bears interest at the bank's
base rate plus 1.5% per annum (9.25% at December 31, 1998) and includes a
LIBOR option of LIBOR plus 3% per annum (8.1875% at December 31, 1998).
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 is subject to an acceleration clause,
the entire balance is classified as current in the balance sheet. As of
December 31, 1998, we had $899,000 available under our line of credit.
During the third and fourth quarters of 1998, and as of September 30, 1998
and December 31, 1998, we were out of compliance with certain financial
covenants. These covenant violations were waived via amendments to the
original credit agreement, dated November 1998 and April 1999. The April 1999
amendment also provided for revised financial covenants through December 31,
1999 and required a $60,000 fee, which was paid in shares of our Common Stock
on April 14, 1999.
During July 1998, we purchased exclusive North American rights to
selected sound recordings by The Royal Philharmonic Orchestra for $2,875,000.
As consideration we issued 53,055 shares of our Common Stock, valued at
$400,000 or $7.54 per share, and committed to pay a total of $2,475,000 in
periodic installments through June 30, 2000, of which $625,000 has been paid
through December 31, 1998. If the market value of the stock issued on the
agreement's first anniversary date is below $400,000, we are required to make
additional cash payments representing the difference between such market
value and $400,000.
Stockholders' equity at December 31, 1998, totaled $7,918,000 compared
to $12,375,000 at December 31, 1997. This net decrease of $4,457,000 or 36%
is primarily due to the sale of our Common Stock for $2,500,000, the sale of
our Common Stock to related parties for $1,350,000, the issuance of our
Common Stock for catalog acquisitions totaling $1,150,000, the issuance of
our Common Stock for professional services provided by a related party
totaling $382,000 and the conversion of certain subordinated debentures for
$5,000,000, offset by the net loss for the year ended December 31, 1998, of
$14,797,000.
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.
26
<PAGE>
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.
We are currently working to resolve, but have not completed, an
assessment of our Year 2000 issues. Until we have completed our review of
the significant software and equipment used in our business operations, and
the operations of our key business partners, 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, we may face the
following concerns:
- 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 are currently operating two independent financial accounting
software packages - one in our Downers Grove, Illinois location and
the other in our Roswell, Georgia location; our Roswell location also
houses our distribution system. We upgraded the software financial
software package used in both locations with software that is Year
2000 compliant. We intend to modify our existing distribution software
used in both locations to be Year 2000 compliant at no material
incremental cost. 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 plan to be Year 2000 compliant by
July 31, 1999.
- We are currently assessing the state of readiness for Year 2000 of our
material vendors, suppliers, customers and other material third
parties. This assessment is not complete. We expect to have this
assessment completed by July 31, 1999. If any of our material
vendors, suppliers or customers, particularly Universal, has a serious
Year 2000 problem, we could experience a loss of revenues from their
operations and/or incur a significant amount of expenses.
As a result of these Year 2000 issues, 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.
27
<PAGE>
- 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
Prospectuses dated January 13, 1999, and March 12, 1996, 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 7a. 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.
On December 31, 1998, we had $33,965,000 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 December 31, 1998) and includes a LIBOR option of
LIBOR plus 3% per annum (8.1875% at December 31, 1998). At December 31,
1998, the portion of the outstanding debt subject to the LIBOR option totaled
$31,300,000.
We do not hold and have not issued derivative financial instruments for
speculation or trading purposes.
28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Independent Auditors
Board of Directors and Stockholders
Platinum Entertainment, Inc.
We have audited the consolidated balance sheets of Platinum Entertainment,
Inc. as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity (net capital deficiency) and
cash flows for the year ended December 31, 1998, the seven months ended
December 31, 1997, and each of the two years in the period ended May 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Platinum
Entertainment, Inc. at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for the year ended December 31,
1998, the seven months ended December 31, 1997, and for each of the two years
in the period ended May 31, 1997, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in "Note
1" to the financial statements, the Company has incurred recurring net losses
and negative operating cash flows and the Company's banking facility contains
financial covenants, compliance with which would require the Company to
substantially improve its operating results. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans with regard to these matters are also described in "Note
1." The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
Chicago, Illinois
April 14, 1999
29
<PAGE>
<TABLE>
<CAPTION>
PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31
1998 1997
-------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 12 $ 11
Accounts receivable, net 5,647 3,246
Artist advances, net 1,899 2,510
Inventories, net 7,036 7,904
Other receivable 2,500 -
Other 1,986 948
-------- ---------
Total current assets 19,080 14,619
Investments 750 -
Property and equipment, net 2,461 1,079
Recorded music costs, net 1,251 970
Music catalog, net 20,997 18,820
Music publishing rights, net 3,343 3,519
Goodwill, net 5,610 5,854
Deferred financing costs, net 253 631
Equity investment in joint venture 2,205 2,468
Other 1,028 503
-------- ---------
Total assets $56,978 $48,463
-------- ---------
-------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $33,965 $20,800
Accounts payable 6,452 4,256
Accrued liabilities and other 3,233 3,423
Royalties payable 5,410 2,609
-------- ---------
Total current liabilities 49,060 31,088
Convertible subordinated debentures - 5,000
-------- ---------
Total liabilities 49,060 36,088
Stockholders' equity:
Preferred stock:
Preferred Stock ($.001 par value); 10,000,000 shares
authorized, no shares issued and outstanding - -
Series B, Convertible Preferred Stock ($.001 par value);
20,000 shares authorized, issued and outstanding - -
Series C, Convertible Preferred Stock ($.001 par value);
2,500 shares authorized, issued and outstanding - -
Common stock:
Common Stock ($.001 par value); 40,000,000 shares authorized,
6,626,099 and 5,275,040 shares issued and outstanding,
respectively 7 5
Additional paid-in capital 71,378 58,216
Accumulated deficit (63,467) (45,846)
-------- ---------
Stockholders' equity 7,918 12,375
-------- ---------
Total liabilities and stockholders' equity $56,978 $48,463
-------- ---------
-------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
30
<PAGE>
PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
YEAR ENDED DECEMBER 31 DECEMBER 31 YEAR ENDED MAY 31
1998 1997 1997 1996 1997 1996
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Gross product sales $ 54,281 $ 58,980 $ 34,485 $ 12,393 $ 37,502 $ 18,322
Less: Returns (12,462) (22,446) (14,726) (2,284) (10,876) (4,993)
Less: Discounts (3,236) (3,316) (2,288) (821) (2,463) (712)
---------------------------------------------------------------------------------
Net product sales 38,583 33,218 17,471 9,288 24,163 12,617
Licensing, publishing and other revenues 2,033 1,579 809 485 1,255 1,799
---------------------------------------------------------------------------------
Net revenues 40,616 34,797 18,280 9,773 25,418 14,416
Cost of sales 29,341 21,723 13,409 6,267 13,711 10,180
---------------------------------------------------------------------------------
Gross profit 11,275 13,074 4,871 3,506 11,707 4,236
Other operating expenses:
Selling, general and administrative 20,790 19,760 12,316 5,695 13,141 8,017
Merger, restructuring and one-time costs - 5,326 3,100 6 2,231 -
Depreciation and amortization 2,055 1,835 1,062 199 973 156
---------------------------------------------------------------------------------
22,845 26,921 16,478 5,900 16,345 8,173
---------------------------------------------------------------------------------
Operating loss (11,570) (13,847) (11,607) (2,394) (4,638) (3,937)
Interest income 40 67 49 136 154 106
Interest expense (2,660) (4,324) (2,944) (7) (1,385) (570)
Other financing costs (344) (4,791) (1,258) - (3,533) -
Equity gain (loss) (263) (638) (686) - 48 -
---------------------------------------------------------------------------------
Loss from continuing operations (14,797) (23,533) (16,446) (2,265) (9,354) (4,401)
Discontinued operations:
Loss on disposal - - - - - (226)
----------------------------------------------------------------------------------
Loss from discontinued operations - - - - - (226)
----------------------------------------------------------------------------------
Net loss (14,797) (23,533) (16,446) (2,265) (9,354) (4,627)
Less: Preferred dividend requirements (2,824) - - - - (602)
---------------------------------------------------------------------------------
Loss applicable to common shares $ (17,621) $ (23,533) $(16,446) $ (2,265) $ (9,354) $ (5,229)
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
Basic and diluted loss per common share:
Loss from continuing operations $ (3.07) $ (4.52) $ (3.14) $ (.44) $ (1.82) $ (1.71)
Loss from discontinued operations - - - - - (.08)
---------------------------------------------------------------------------------
Net loss $ (3.07) $ (4.52) $ (3.14) $ (.44) $ (1.82) $ (1.79)
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
Weighted-average number of common shares
outstanding 5,732,661 5,206,964 5,232,030 5,112,066 5,136,830 2,925,987
</TABLE>
SEE ACCOMPANYING NOTES
TO FINANCIAL STATEMENTS
31
<PAGE>
PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK
--------------------------------------------
SERIES A-2 NO SERIES SERIES B SERIES C
<S> <C> <C> <C> <C>
Balance at May 31, 1995 $ 18 $ - $ - $ -
Issuances of Common Stock:
Initial public offering ($11.30 per share) - - - -
Founders' bonus - - - -
Stock option exercises - - - -
In lieu of compensation - - - -
Conversions into Common Stock:
Series A-2 Preferred Stock, Class A and B Common Stock (18) - - -
Series A-1 Redeemable Preferred Stock - - - -
Dividends:
Series A-1 Redeemable Preferred Stock - - - -
Net loss for the year ended May 31, 1996 - - - -
--------------------------------------------
Balance at May 31, 1996 - - - -
Issuance of Common Stock:
Acquisition - - - -
Issuance of stock warrants for financing costs - - - -
Net loss for the year ended May 31, 1997 - - - -
Other - - - -
--------------------------------------------
Balance at May 31, 1997 - - - -
Issuance of Common Stock:
Private placement with related party ($4.88 per share) - - - -
Preferred stock with warrants, net - - - -
Net loss for the seven months ended December 31, 1997 - - - -
--------------------------------------------
Balance at December 31, 1997 - - - -
Issuances of Common Stock:
Private placement ($6.00 per share) - - - -
Private placement with related parties ($6.75 per share)
Acquisitions - - - -
Professional services performed by related parties - - - -
Employee stock plan - - - -
Professional services - - - -
Conversions into Common Stock:
Convertible subordinated debentures - - - -
Dividends:
Preferred dividend requirements - - - -
Net loss for the year ended December 31, 1998 - - - -
Other - - - -
---------------------------------------------
Balance at December 31, 1998 $ - $ - $ - $ -
---------------------------------------------
---------------------------------------------
</TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Common Stock
---------------------------------------
Class A Class B No Class
-----------------
Shares Amount
-------------------
<S> <C> <C> <C> <C>
Balance at May 31, 1995 $ - $ 1 50 $ -
Issuances of common stock:
Initial public offering ($11.30 per share) - - 2,740 3
Founders' bonus - - 65 -
Stock option exercises - - 22 -
In lieu of compensation - - 19 -
Conversions into Common Stock:
Series A-2 Preferred Stock, Class A and B Common Stock - (1) 2,050 2
Series A-1 Redeemable Preferred Stock - - 117 -
Dividends:
Series A-1 Redeemable Preferred Stock - - - -
Net loss for the year ended May 31, 1996 - - - -
---------------------------------------
Balance at May 31, 1996 - - 5,063 5
Issuance of Common Stock:
Acquisition - - 88 -
Issuance of stock warrants for financing costs - - - -
Net loss for the year ended May 31, 1997 - - - -
Other - - 20 -
---------------------------------------
Balance at May 31, 1997 - - 5,171 5
Issuance of Common Stock:
Private placement with related party ($4.88 per share) - - 104 -
Preferred stock with warrants, net - - - -
Net loss for the seven months ended December 31, 1997 - - - -
---------------------------------------
Balance at December 31, 1997 - - 5,275 5
Issuances of common stock:
Private placement ($6.00 per share) - - 417 1
Private placement with related parties ($6.75 per share) - - 200 -
Acquisitions - - 165 -
Professional services performed by related parties - - 53 -
Employee stock purchase plan - - 5 -
Professional services - - 1 -
Conversions into Common Stock:
Convertible subordinated debentures - - 510 1
Dividends:
Preferred dividend requirements - - - -
Net loss for the year ended December 31, 1998 - - - -
Other - - - -
---------------------------------------
Balance at December 31, 1998 $ - $ - 6,626 $ 7
---------------------------------------
---------------------------------------
</TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
STOCKKHOLDERS'
ADDITIONAL EQUITY
PAID-IN (NET CAPITAL
CAPITAL DEFICIT DEFICIENCY)
<S> <C> <C> <C>
Balance at May 31, 1995 $ 2,476 $ (14,815) $ (12,320)
Issuances of Common Stock:
Initial public offering ($11.30 per share) 30,953 - 30,956
Founders bonus - - -
Stock option exercises 56 - 56
In lieu of compensation 227 - 227
Conversions into Common Stock:
Series A-2 Preferred Stock, Class A and B Common Stock 17 - -
Series A-1 Redeemable Preferred Stock 1,525 - 1,525
Dividends:
Series A-1 Redeemable Preferred Stock - (602) (602)
Net loss for the year ended May 31, 1996 - (4,627) (4,627)
------------------------------------------
Balance at May 31, 1996 35,254 (20,044) 15,215
Issuance of Common Stock:
Acquisition 777 - 777
Issuance of stock warrants for financing costs 1,240 - 1,240
Net loss for the year ended May 31, 1997 - (9,354) (9,354)
Other (10) (2) (12)
------------------------------------------
Balance at May 31, 1997 37,261 (29,400) 7,866
Issuance of Common Stock:
Private placement with related party ($4.88 per share) 500 - 500
Preferred stock with warrants, net 20,455 - 20,455
Net loss for the seven months ended December 31, 1997 - (16,446) (16,446)
------------------------------------------
Balance at December 31, 1997 58,216 (45,846) 12,375
Issuances of Common Stock:
Private placement ($6.00 per share) 2,499 - 2,500
Private placement with related parties ($6.75 per share) 1,350 - 1,350
Acquisitions 1,150 - 1,150
Professional services performed by related parties 382 - 382
Employee stock plan 27 - 27
Professional services 7 - 7
Conversions into Common Stock:
Convertible subordinated debentures 4,999 - 5,000
Dividends:
Preferred dividend requirements 2,824 (2,824) -
Net loss for the year ended December 31, 1998 - (14,797) (14,797)
Other (76) - (76)
------------------------------------------
Balance at December 31, 1998 $ 71,378 $ (63,467) $ 7,918
------------------------------------------
------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
TO FINANCIAL STATEMENTS
32
<PAGE>
PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
YEAR ENDED DECEMBER 31 DECEMBER 31 YEAR ENDED MAY 31
1998 1997 1997 1996 1997 1996
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net loss $(14,797) $(23,533) $(16,446) $(2,265) $ (9,354) $(4,627)
Adjustments to reconcile net loss to net cash used
in continuing operating activities:
Provision for future returns 12,462 22,446 14,726 2,284 10,876 4,993
Provision for doubtful accounts - 927 688 - 300 43
Provision for slow-moving inventory 1,438 500 240 - - 100
Provision for unrecoupable artist balances 3,929 3,599 3,136 308 1,714 1,932
Depreciation 500 399 222 146 337 111
Amortization 1,555 1,436 840 53 636 45
Common Stock issued in lieu of compensation - - - - - 227
Amortization of loan discount - 1,240 - - 1,240 -
Deferred financing costs 344 9 9 - - 56
Equity (gain) loss from joint venture 263 638 686 - (48) -
Write-off of one-time costs - 2,525 2,525 - - -
Changes in operating assets and liabilities:
Accounts receivable (14,862) (19,218) (8,742) (3,378) (13,150) (6,502)
Inventories (570) (1,978) (1,598) (680) (2,308) (236)
Notes receivable - 123 - 1,025 1,148 (1,402)
Artist advances (5,514) (3,926) (1,955) (2,301) (1,824) (3,331)
Recorded music costs (556) (416) (208) - (208) -
Accounts payable 2,196 (18) 218 (5) (431) (822)
Accrued liabilities and other (2,040) 1,456 902 (1,145) (591) 1,234
Royalties payable 4,996 1,038 (571) 2,107 1,099 3
Other (1,274) 216 (1,007) (895) (9) (579)
----------------------------------------------------------------------------
Net cash used in continuing operating activities (11,930) (12,537) (6,335) (4,746) (10,573) (8,755)
Discontinued operations:
Loss on disposal - - - - - 226
Change in net liabilities - - - - - (1,237)
----------------------------------------------------------------------------
Net cash used in discontinued operating activities - - - - - (1,011)
----------------------------------------------------------------------------
Net cash used in operating activities (11,930) (12,537) (6,335) (4,746) (10,573) (9,766)
</TABLE>
33
<PAGE>
PLATINUM ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
YEAR ENDED DECEMBER 31 DECEMBER 31 YEAR ENDED MAY 31
1998 1997 1997 1996 1997 1996
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
INVESTING ACTIVITIES
Acquisitions $ (775) $(23,983) $ - $ (100) $(24,026) $ -
Prepaid acquisition costs - - - (124) - -
Investment in joint venture - - - (3,063) (3,063) -
Cash in escrow - (1,750) - - (1,750) -
Purchases of property and equipment (1,486) (252) (116) (171) (307) (574)
------------------------------------------------------------------------------
Net cash used in investing activities (2,261) (25,985) (116) (3,458) (29,146) (574)
FINANCING ACTIVITIES
Related party borrowings - 2,650 2,650 - - 4,330
Related party payments - (2,650) (2,650) - - (4,867)
Proceeds from (payment of) revolving lines of credit 33,165 (1,800) (8,906) - 7,106 (3,000)
Net proceeds from bank term loans - 45,000 20,000 - 25,000 -
Payment of bank term loans (20,000) (25,000) (25,000) - - (4,500)
Net proceeds from initial public offering - - - - - 30,956
Employee stock plans 27 - - - - 56
Redemption of Redeemable Preferred Stock - - - - - (4,500)
Proceeds from sale of Common Stock to related parties 1,350 500 500 - - -
Net proceeds from sale of preferred stock with
warrants (76) 20,455 20,455 - - -
Deferred financing costs (274) (640) (640) - (556) -
------------------------------------------------------------------------------
Net cash provided by financing activities 14,192 38,515 6,409 - 31,550 18,475
------------------------------------------------------------------------------
Net increase (decrease) in cash 1 (7) (42) (8,204) (8,169) 8,135
Cash and cash equivalents, beginning of period 11 18 53 8,222 8,222 87
------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 12 $ 11 $ 11 $ 18 $ 53 $ 8,222
------------------------------------------------------------------------------
------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
34
<PAGE>
Platinum Entertainment, Inc.
Notes to Consolidated Financial Statements
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. DESCRIPTION OF BUSINESS
Our business operates in one segment, the production, distribution,
marketing and sale of music. Our music products include new releases, typically
by artists established in a particular genre, 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 in the form of compact discs, tape cassettes and digital
versatile discs (DVDs) mainly to retailers and wholesalers primarily in the
United States. We release music in a variety of genres including classical,
urban, adult contemporary, blues, gospel and country and on a variety of music
labels including Intersound Classical, Platinum, River North, House of Blues,
CGI Platinum and Platinum Nashville. 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 have incurred significant net losses and negative cash flows from
operations since our inception, including a net loss of $14,797 ($17,621
after preferred dividend requirements) and negative cash flows from operations
of $11,930 in fiscal 1998. 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.
Historically, we have funded our operations and other activities from a
variety of capital sources including, debt and equity financing. As a result
of the significant net loss discussed above, we were in violation of two of
the financial debt covenants contained in our bank credit agreement during
the third and fourth quarters of 1998 and as of September 30, 1998 and
December 31, 1998. As discussed below, these covenant violations were waived
and amended November 1, 1998 and April 14, 1999, respectively.
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.
- On November 1, 1998 and April 14, 1999, the bank waived our
financial covenant violations. The April 1999 amendment also
adjusted our 1999 net worth, earnings and interest coverage ratio
financial covenants to terms more favorable to us. Achieving these
new financial covenants is dependent on us fulfilling our 1999
business plan and budget.
- On April 15, 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 a director and certain other members of our
Board of Directors, providing proceeds of approximately $4,000 (See
"Note 23").
In addition to the equity placements described above, we may need
additional equity financing in order to achieve our fiscal 1999 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. Also, while we believe that our fiscal 1999
plans, if achieved, will enable us to comply with the financial covenants in
the amended debt agreement, if some or all our plans do not materialize, we
may be in violation of the financial covenants. In this case, we may require
additional funds to operate and such funds may not be available on
satisfactory terms, if at all. Failure to raise needed fundings on favorable
terms could have a material adverse effect on our business. 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. The financial
statements and related notes included elsewhere herein do not include any
adjustments which might result from the outcome of this uncertainty.
35
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Our consolidated financial statements include the accounts and transactions
of Platinum Entertainment, Inc. and its wholly owned subsidiaries. Significant
intercompany accounts and transactions have been eliminated in consolidation.
The equity method is used to account for unconsolidated affiliates in which we
own a greater than 20 percent interest (see "Note 7").
USE OF ESTIMATES
In order to prepare our financial statements in conformity with generally
accepted accounting principles we are required to make estimates and assumptions
that affect the amounts reported in the financial statements and related notes.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Our financial instruments consist of trade accounts receivable, trade
accounts payable and a revolving line of credit. The fair value of our
financial instruments approximates the carrying value of the instruments.
CASH EQUIVALENTS
We consider all highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents. We had no cash equivalents at
the balance sheet dates.
INVENTORIES
Inventories are stated at the lower of cost or market and consist primarily
of finished compact discs and tape cassettes. The cost of inventories is
determined by the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost, less accumulated depreciation.
Depreciation is determined using accelerated methods over the estimated useful
lives of the assets of five to seven years.
RECORDED MUSIC COSTS
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. Capitalized costs are charged to cost of sales when past
performance and current popularity do not provide a sound basis for estimating
that the capitalized costs will be recoverable from future album revenues.
36
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MUSIC CATALOG AND MUSIC PUBLISHING RIGHTS
Music catalog and music publishing rights represent the value allocated to
master recordings and copyrights recorded through the purchase method of
accounting as a result of our historical acquisitions. Such costs are amortized
using the straight-line method over the estimated period to be benefited which
ranges from 15 to 25 years. We assess the recoverability of such assets by
determining whether the carrying value of the net assets over their remaining
lives can be recovered through projected, undiscounted future cash flows.
GOODWILL
Goodwill, which represents the excess cost of purchase price over the fair
value of identifiable net assets acquired and assumed liabilities from
Intersound, Inc., is amortized over the expected period to be benefited of 25
years (see "Note 4").
INCOME TAXES
Deferred income taxes are calculated based on the differences between the
bases of assets and liabilities for financial statement and income tax return
purposes, at the enacted tax rates at which the resulting taxes are expected to
be paid (see Note 11).
REVENUE RECOGNITION
Product sales, discounts and estimates for future returns are recognized
upon shipment. Licensing and publishing revenues are recognized on a cash
basis.
ADVERTISING
Promotional costs are capitalized for unreleased projects and expensed when
the related product is released. All other advertising and promotional costs
are fully expensed when incurred.
The following amounts are included in selling, general and administrative
expenses:
<TABLE>
<CAPTION>
YEAR ENDED SEVEN MONTHS YEAR ENDED
DECEMBER 31 ENDED DECEMBER 31 MAY 31
1998 1997 1997 1996 1997 1996
---------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Advertising and promotion $6,107 $6,155 $2,776 $1,031 $3,270 $1,968
</TABLE>
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 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 December 31, 1998, was 10,700,509. Such effect
was not dilutive in any of the periods presented herein.
37
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards (SFAS) No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value. We
have chosen to continue to account for stock-based compensation using the
intrinsic value method as described in Accounting Principles Board Option No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related Interpretations, under
which no compensation costs related to stock options has been recognized since
the exercise price of each option at the date of grant was equal to the fair
value of the underlying common stock.
RECLASSIFICATIONS
Certain prior period amounts in the financial statements and related notes
have been reclassified to conform with the current year presentation.
Effective with the third quarter of 1998, we changed our method for
reporting product returns in the statement of operations and balance sheet.
While there is no impact on gross margins for operations previously reported, a
reclassification between returns and cost of sales in the statement of
operations has been made to prior period amounts to reflect returns activity
consistently with our current reporting practices. In addition, inventory and
royalties payable, as impacted by returned product, have been restated from
amounts previously reported on the balance sheet.
3. CHANGE IN FISCAL YEAR
During February 1998, our Board of Directors resolved to change our
fiscal year, formerly May 31, to a calendar year, effective December 31,
1997. This change in fiscal year conforms our fiscal periods to the quarterly
and semi-annual periods for which we report royalties to our recording
artists and publishers as well as the annual term of our agreement with
Universal Music and Video Distribution (Universal), our third party, major
label distributor.
Pro forma results of operations for the change in fiscal year, as if the
change in fiscal year had occurred at January 1, 1996, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
------------------------------------
(UNAUDITED)
<S> <C> <C>
Gross revenues $60,559 $21,157
Net revenues 34,797 15,242
Gross profit 13,074 2,733
Operating loss (13,848) (6,430)
Net loss from continuing operations (23,533) (6,417)
Basic and diluted loss per common share from continuing
operations (4.52) (1.54)
</TABLE>
4. ACQUISITIONS
During July 1998, we purchased exclusive North American rights to
selected sound recordings by The Royal Philharmonic Orchestra for $2,875. As
consideration we issued 53,055 shares of our Common Stock, valued at $400 or
$7.54 per share, and committed to pay a total of $2,475 in periodic
installments through June 30, 2000, of which $625 has been paid through
December 31, 1998. If the market value of the stock issued on the agreement's
first anniversary date is below $400, we are required to make additional cash
payments representing the difference between such market value and $400.
38
<PAGE>
4. ACQUISITIONS (CONTINUED)
During January 1997, we purchased substantially all of the assets of
Intersound, Inc. for consideration of $24,000 in cash, $5,000 in convertible
subordinated debentures and the assumption of certain liabilities. Intersound,
Inc.'s primary business was the production, distribution, marketing and sale of
music for classical, urban, gospel and country genres. The acquisition was
accounted for by the purchase method of accounting and the purchase price of
approximately $41,000, including assumed liabilities, exceeds the fair value of
the assets acquired by $6,098, which represents goodwill. The purchase value
was allocated to the acquired assets based upon their estimated respective fair
market values. The amounts allocated to music catalog, music publishing rights
and goodwill are being amortized over 25 years using the straight-line method.
We determined the purchase price allocation for the assets acquired and
liabilities assumed from Intersound, Inc., 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, we ascertained that the purchase value
allocated to certain purchased assets exceeded their fair market values by
approximately $1,150. In addition, we identified $4,051 of returned product
which we believe relates to product that had been sold prior to our purchase of
Intersound, Inc. Had these matters been identified by us at the time of
purchase or shortly thereafter, such valuations would have been recorded through
purchase accounting, resulting in no subsequent impact to the income statement.
As these matters were not identified at the time of purchase or shortly
thereafter, we were required to reflect these amounts in our results of
operations for the seven months ended December 31, 1997, resulting in a
nonrecurring charge to operations of $3,500. The returned product of $4,051 was
reflected in net revenues with corresponding offsets of $1,701 to cost of sales;
the asset write-down of $1,150 was also included in cost of sales. These
matters were subject of an action entitled JSCHO, INC. F/K/A INTERSOUND, INC. V.
PLATINUM ENTERTAINMENT, INC. which was settled on March 31, 1999 (see "Note
19").
During September 1996, we acquired substantially all of the assets of
Double J Music Group for 88,000 shares of our Common Stock and the assumption
of certain liabilities. Double J Music Group developed and acquired ownership
of musical compositions, primarily in the country genre, and exploits those
compositions by means of recordings, performances, audio-visual works, print
publications and other licenses. The acquisition was accounted for by the
purchase method of accounting and the purchase price of $952 approximates the
fair value of the assets acquired. The purchase value was primarily allocated
to music publishing rights and is being amortized over 25 years using the
straight-line method.
Pro forma results of operations for the acquisitions completed prior to May
31, 1997, as if the acquisitions had occurred at June 1, 1995, for the years
ended May 31 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31
1997 1996
------------------------------------
(UNAUDITED)
<S> <C> <C>
Gross revenues $57,456 $51,796
Net revenues 38,611 37,437
Gross profit 19,793 17,606
Operating loss (2,959) (2,503)
Net loss from continuing operations (9,858) (9,452)
Basic and diluted loss per common share from continuing
operations (1.92) (3.23)
</TABLE>
39
<PAGE>
5. MERGER, RESTRUCTURING, AND ONE TIME COSTS
As a result of the acquisitions discussed in "Note 4," we incurred
significant costs to merge and restructure our business with the acquired
companies. Such merger and restructuring costs included severance costs,
relocation costs, lease commitment write-offs, warehouse closing costs and
other related costs. Such costs were $251 and $1,700 during the seven months
ended December 31, 1997, and the year ended May 31, 1997, respectively,
relating primarily to severance costs and a distribution termination fee.
The restructuring was substantially completed at December 31, 1997. Such
restructuring resulted in shifts in the selling and promotion efforts of our
country label and in-house sales department and a shift in third party
fulfillment of Platinum Christian Distribution. In addition, one-time costs
for the year ended May 31, 1997, include write-offs of artist advances of
approximately $600 in areas for which we have chosen to redirect our
resources. These costs were classified as merger, restructuring and one-time
costs and were included in our operating losses. See "Note 6" for further
discussion of one-time costs.
6. TERMINATION OF THE K-TEL AGREEMENT
During June 1998, we executed a settlement agreement with K-tel
International, Inc., whereby we mutually agreed to settle our claims to
$1,750 we had deposited in escrow pursuant to a purchase and sale agreement
signed by us and K-tel International, Inc. during March 1997, and terminated
by us during September 1997. Pursuant to this settlement agreement, each
party received 50% of the escrowed amount. We fully reserved the $1,750 in
escrow prior to December 1997, and expensed approximately $1,100 of legal,
accounting and other incremental costs related to this transaction.
Accordingly, our selling, general and administrative expenses for 1998 are
net of $875 received from this settlement.
7. JOINT VENTURE
During November 1996, we formed a joint venture, the House of Blues
Music Company, with House of Blues Records, Inc. We invested approximately
$3,100 for a 50% interest in the House of Blues Music Company. House of
Blues Records, Inc. contributed a license in the House of Blues trademarks,
logo and other intellectual property in consideration for its 50% interest in
the House of Blues Music Company.
The House of Blues Music Company develops and produces recordings and
related film and video properties featuring primarily blues and gospel music.
The House of Blues Music Company, exclusively through us, manufactures,
distributes, performs, exhibits and sells sound recordings and related
audiovisual works under the House of Blues label. We distribute the House of
Blues Music Company's products through our normal distribution channels for a
fee from the House of Blues Music Company .
Gross revenues, gross profit and operating income (loss) we recorded from
House of Blues Music Company are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEVEN MONTHS ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 MAY 31
1998 1997 1997 1996 1997 1996
---------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Gross revenues $4,890 $5,878 $3,038 $563 $3,404 $-
Gross profit 936 437 82 13 368 -
Operating income (loss) (263) (638) (686) - 48 -
</TABLE>
40
<PAGE>
8. INVESTMENT IN MUSICMAKER.COM
During September 1998, we exchanged 111,457 shares of our Common Stock for
1,320,000 common shares of musicmaker.com, Inc. (musicmaker.com). Our
investment has been valued at $750, which represents the fair value of the
common stock relinquished by us. 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.
9. DISTRIBUTION AGREEMENT
We have an exclusive domestic distribution agreement with Universal through
December 31, 2002. The agreement appoints Universal exclusive distributor of
certain of our products through certain retail channels. The distribution
services rendered by Universal include billing and collecting from customers,
bearing bad debts, distributing promotional items, advertising, inventory
control and processing returns. Distribution fees paid by us for such services
provided by Universal include 15% to 18% of net sales generated by Universal.
Universal has a security interest in our inventories awaiting distribution in
Universal's possession. Inventories held by Universal are $617 and $681 at
December 31, 1998 and 1997, respectively. Accounts receivable due from
Universal are $1,263 and $4,099 at December 31, 1998 and 1997, respectively.
Distribution of our product through Universal is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEVEN MONTHS ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 MAY 31
1998 1997 1997 1996 1997 1996
---------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Gross product sales $16,922 $21,010 $13,580 $9,322 $17,605 $9,969
</TABLE>
10. 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, bears interest at the bank's base
rate plus 1.5% per annum (9.25% at December 31, 1998) and includes a LIBOR
option of LIBOR plus 3% per annum (8.1875% at December 31, 1998). 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.
The First Source Facility contains certain financial covenants, requires a
lockbox arrangement and is secured by substantially all of our assets. As the
Facility contains a subjective acceleration clause, the entire balance is
classified as current in the balance sheet. At December 31, 1998, we had $899
available under the line of credit. During the third and fourth quarters of
1998, and as of September 30, 1998 and December 31, 1998, we were out of
compliance with certain financial covenants. These covenant violations were
waived via amendments to the original credit agreement, dated November 1998
and April 1999. The April 1999 amendment also provided for revised financial
covenants through December 31, 1999 and required a $60 fee, which was paid
in shares of our Common Stock on April 14, 1999.
On December 12, 1997, we entered a credit agreement with Bank of Montreal,
under which Harris Trust and Savings Bank was appointed the exclusive lender
effective March 31, 1998. Our Harris facility included a $20,000 three year
term loan bearing interest at the bank's base rate plus 1% per annum, plus a
three year $10,000 available revolving line of credit facility bearing interest
at the bank's base rate plus 0.5% per annum. Our Harris facility was replaced
during July 1998 with our First Source facility described above.
41
<PAGE>
10. DEBT (CONTINUED)
During January 1997, we entered a credit agreement with Bank of Montreal 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. Our Bank of Montreal facility was
extended through December 31, 1997, and was refinanced on December 12, 1997, as
discussed above. Financing costs associated with our Bank of Montreal facility
approximated 10% of the total facility, which included warrants issued to Bank
of Montreal (see "Note 15"). The interest incurred on our Bank of Montreal
facility was initially LIBOR plus 6% and was increased to LIBOR plus 9%
effective August 1, 1997.
Subsequent to our initial public offering during the year ended May 31,
1996, we retired all of our then-outstanding bank debt, consisting of borrowings
against a line of credit totaling $4,980 and a term loan of $4,000, with net
proceeds from our initial public offering.
Interest expense, cash paid for interest and other financing costs are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED SEVEN MONTHS ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 MAY 31
1998 1997 1997 1996 1997 1996
---------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Interest expense, total $2,661 $4,324 $2,944 $7 $1,385 $ 891
Interest expense relating to
discontinued operations - - - - - 333
Cash paid for interest 2,653 4,191 3,233 7 985 1,022
Other financing costs 344 4,791 1,258 - 3,533 -
</TABLE>
Other financing costs for the year ended December 31, 1998, include the
write-off of $660 unamortized bank fees on our Harris facility offset in part by
the reversal of a $350 previously accrued extension fee on our Bank of Montreal
facility which would have been due in 1998 had our stock value not met a certain
threshold; as the threshold was met, the fees were not payable and the accrual
was reversed. Other financing costs for the twelve and seven months ended
December 31, 1997, include extension fees for our Bank of Montreal facility.
Other financing costs for the year ended May 31, 1997, includes amortization of
$1,240 for the loan discount related to the warrants issued to Bank of Montreal
and $2,293 for the closing transaction and a subsequent extension of our Bank of
Montreal facility.
11. INCOME TAXES
Significant components of deferred income taxes consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
------------------------------------
<S> <C> <C>
Net operating loss carryforwards $21,986 $12,600
Reserve for unrecoupable artist advances 5,163 3,723
Reserve for future returns 1,739 1,396
Other (5,258) (780)
------------------------------------
23,630 16,939
Less: Valuation allowance 23,630 16,939
------------------------------------
Net deferred income tax asset $ - $ -
------------------------------------
------------------------------------
</TABLE>
The valuation allowance increased $6,691, $6,228, $3,398 and $1,735 during
the year ended December 31, 1998, the seven months ended December 31, 1997, and
the years ended May 31, 1997 and 1996, respectively, due principally to net
operating loss carryforwards and differences between the book and tax accounting
treatment of the reserve for unrecoupable artist advances. We have not paid any
income taxes for the periods indicated.
42
<PAGE>
11. INCOME TAXES (CONTINUED)
Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended,
our net operating loss carryforward of approximately $57,857, expiring in years
2008 through 2013, is subject to annual limitations due to a change in ownership
as a result of the initial public offering. Accordingly, approximately $6,185
of the net operating loss carryforward is subject to an annual limitation of
approximately $2,200.
12. COMMITMENTS
Future minimum rental payments due under noncancelable operating leases
having an initial term of more than one year as of December 31, 1998, are $764,
$313, $255, $263 and $88 for the years ended December 31, 1999, 2000, 2001, 2002
and 2003, respectively.
Rent expense is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEVEN MONTHS ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 MAY 31
1998 1997 1997 1996 1997 1996
---------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Rent expense, total $859 $720 $435 $239 $547 $619
Rent expense relating to
discontinued operations - - - - - 340
</TABLE>
13. CONCENTRATION OF CREDIT RISKS
We sell our music products primarily to retailers and wholesalers in the
United States. There is no one customer that comprises more than 10% of our
sales; although a significant amount of our sales are generated through
Universal (see "Note 9").
14. CONVERTIBLE SUBORDINATED DEBENTURES
During June 1998, JSCHO, Inc., f/k/a Intersound, Inc., exercised certain
convertible subordinated debentures issued by us to JSCHO, Inc. in connection
with our acquisition of Intersound, Inc. An aggregate of $5,000 in convertible
subordinated debentures were converted to 510,203 shares of our Common Stock at
a conversion price of $9.80 per share. Pursuant to a settlement agreement
between us and JSCHO dated March 31, 1999, JSCHO has retained 306,122 (60%) of
the shares issued on the conversion of the convertible subordinated debentures
and 204,081 (40%) of such shares have been returned to us (see "Note 19").
15. STOCK AND WARRANTS
During March 1996, we sold a total of 2,740,000 shares of Common Stock
in an initial public offering for $13 per share, resulting (after payment of
underwriting discounts and commissions and a financial advisory fee) in net
proceeds of $32,127. The net proceeds were used to: (i) retire
then-outstanding related party debt of $4,867, (ii) retire outstanding
borrowings under our then-outstanding bank line of credit of $4,980, (iii)
retire our then-outstanding term loan of $4,000, (iv) redeem a portion of our
Series A-1 Non-Convertible Preferred Stock for cash of $4,500 (along with
stock issuance discussed below which, together, included $602 of cumulative
preferred dividends) and (v) pay costs related to the public sale,
approximating $1,170. The remaining net proceeds were used for working
capital and other general corporate purposes, including acquisitions.
43
<PAGE>
15. STOCK AND WARRANTS (CONTINUED)
Immediately prior to our initial public offering, a one-for-twenty-five
reverse split of our Common Stock, Class A Common Stock, and Class B Common
Stock occurred (par value of the shares restated to $.001). Simultaneous
with the closing of our initial public offering, each share of the our Class
A Common Stock and Class B Common Stock then-outstanding converted into one
share of Common Stock, each share of Series A-2 Convertible Preferred Stock
then-outstanding converted into one-twenty-fifth of one share of Common Stock
and 22,200 shares of Common Stock were issued to certain stockholders
exercising options (having an exercise price of $2.50 per share). Subsequent
to our initial public offering, 117,305 shares of Common Stock were issued in
connection with the redemption of our Series A-1 Non-Convertible Preferred
Stock and 65,000 shares of Common Stock were issued to certain of our
founders.
Pursuant to an Investment Agreement dated October 12, 1997, as amended, on
December 12, 1997, we issued and sold to certain purchasers, for aggregate gross
consideration of $20,000, 20,000 shares of Series B Convertible Preferred Stock
and warrants to purchase 3,600,000 shares of Common Stock (Purchaser Warrants).
We also issued and sold to an affiliate, for aggregate gross consideration of
$2,500, 2,500 shares of Series C Convertible Preferred Stock and warrants to
purchase 450,000 shares of Common Stock (the Affiliate Warrants). The initial
assigned values of the Series B Convertible Preferred Stock and Series C
Convertible Preferred Stock are approximately $17,938 and $2,242, respectively.
The values of the Purchaser Warrants and the Affiliate Warrants are $2,062 and
$258, respectively. These amounts, net of associated costs of approximately
$2,121, are reflected in additional paid-in capital on the balance sheet.
The Series B Convertible Preferred Stock and the Series C Convertible
Preferred Stock accrue 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 B Convertible Preferred Stock and the Series C Convertible Preferred
Stock, in preference to any dividends on any other class of capital stock. The
Series B Convertible Preferred Stock and the Series C Convertible Preferred
Stock is redeemable by us at any time at a price equal to the purchase price
paid by the Purchasers thereof plus accrued and unpaid dividends. The Series B
Convertible Preferred Stock and the Series C Convertible Preferred Stock is
convertible, commencing two years from the date of issue, into shares of our
Common Stock at the lesser of $5.9375 or the average of the daily closing price
per share of our Common Stock for 30 consecutive trading days following the
public release of our consolidated earnings statement for the 1998 fiscal year;
provided that if shares of our 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 Series B
Convertible Preferred Stock and the Series C Convertible Preferred Stock
disagree with the Board of Director's determination, then fair market value will
be determined by an independent financial expert. The Series B Convertible
Preferred Stock accrued dividends of $2,510 and the Series C Convertible
Preferred Stock accrued dividends of $314 during 1998.
44
<PAGE>
15. STOCKS AND WARRANTS (CONTINUED)
The number of shares of our Common Stock which may be received upon
exercise of the Purchaser Warrants is increased by an amount equal to 12% of
the shares initially underlying the Purchaser Warrants on each anniversary of
the original date of issuance of the Series B Convertible Preferred Stock, so
long as any Series B Convertible Preferred Stock remains outstanding. The
Common Stock underlying the Purchaser Warrants and the Affiliate Warrants may
be purchased at an exercise price per share of the lesser of $6.25 or 82.5%
of the average of the daily closing price per share of our Common Stock for
the 30 consecutive trading days following the public release of our
consolidated earnings statement for the 1998 fiscal year; provided that if
shares of our 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 our 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 Series
B Convertible Preferred Stock and the Series C Convertible Preferred Stock
disagree with the Board of Director's determination, then fair market value
will be determined by an independent financial expert. During 1998, the
Purchasers were issued warrants to purchase an additional 432,000 shares of
our Common Stock.
During June 1998, we issued 100,000 shares of our Common Stock to each
of Robert J. Morgado and Geoffrey W. Holmes, both members of our Board of
Directors, at a per share price of $6.75, which equaled the closing price of
our Common Stock as reported by the Nasdaq National Market on the date of
sale. We received an aggregate $1,350 in consideration during July 1998 for
this sale.
We have engaged PLATINUM technology International, inc. (Platinum
technology), a related party, to provide consultation for the upgrade of our
computer systems. During 1998, we issued to Platinum technology 53,192 shares
of our Common Stock in consideration for $382 of consulting services which have
been capitalized as part of property and equipment. An additional $275 of
consulting services have been provided to us prior to December 31, 1998, which
is to be paid for in our Common Stock. These services will continue during
1999.
During December 1998, we issued 416,665 shares of our Common Stock to
unrelated parties at a per share price of $6.00, which approximated the
closing price of our Common Stock as reported by the Nasdaq National Market
on the date of sale. We received $2,500 in consideration during January 1999
for this sale.
During January 1997, we issued to Bank of Montreal a warrant to purchase
258,572 shares of our Common Stock at an exercise price of $.01 per share in
connection with our Bank of Montreal facility. The value of the warrants was
$1,240, the balance of which is included in additional paid-in capital.
During February 1999, Bank of Montreal exercised their warrant in full,
resulting in an issuance of 235,366 shares of our Common Stock. In April
1997, Bank of Montreal assigned a portion of their warrants to PPM America
Special Investments Fund L.P. During March 1999, PPM America Special
Investments Fund L.P. exercised their warrant in full, resulting in a an
issuance of 23,206 shares of our Common Stock.
45
<PAGE>
15. STOCK AND WARRANTS (CONTINUED)
In addition, the following outstanding warrants to purchase our Common
Stock have been issued to related parties:
<TABLE>
<CAPTION>
NUMBER EXERCISE EXPIRATION
OF SHARES PRICE DATE
-----------------------------------------------------
<S> <C> <C> <C>
December 1997 50,000 $6.25 12/07
February 1998 100,000 6.25 02/08
April 1998 50,000 9.00 04/08
</TABLE>
At December 31, 1998, the following unissued shares of Common Stock were
reserved for future issuance:
<TABLE>
<CAPTION>
<S> <C>
Stock option plans 5,644,000
Stock purchase plan 495,876
Convertible preferred stock 4,265,086
Warrants 4,940,572
------------------
15,345,534
------------------
------------------
</TABLE>
We have not paid dividends on our shares of Common Stock to date and our
First Source facility precludes us from making any dividend payments.
16. STOCK-BASED COMPENSATION
Under our various stock option plans, options may be granted to purchase
our Common Stock at the fair market value of the shares on the date of grant.
Currently outstanding options become exercisable in three equal annual
increments and expire ten years after the grant date.
A summary of our stock option plans is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEVEN MONTHS ENDED YEAR ENDED MAY 31
DECEMBER 31, 1998 DECEMBER 31, 1997 1997 1996
-------------------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding -
Beginning of period 2,173,978 $6.38 1,624,844 $7.25 937,800 $ 9.56 399,100 $ 6.16
Granted 735,600 6.87 604,000 5.50 952,478 6.16 560,900 11.70
Exercised (2,000) 2.50 - - - - (22,200) 2.50
Forfeited (38,522) 6.83 (54,866) 8.54 (265,434) 11.47 - -
-------------------------------------------------------------------------------------
Outstanding - End of
period 2,869,056 $6.50 2,173,978 $6.38 1,624,844 $ 7.25 937,800 $ 9.56
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Exercisable at end of
period 1,494,852 $6.53 1,054,047 $6.50 1,063,645 $ 6.80 355,567 $ 6.26
Weighted average fair
value of options
granted during the
period 4.47 4.13 4.27 8.03
</TABLE>
46
<PAGE>
16. STOCK-BASED COMPENSATION (CONTINUED)
Other information regarding options as of December 31, 1998 is as follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
OPTIONS OPTIONS EXERCISE CONTRACTUAL
OUTSTANDING EXERCISABLE PRICE LIFE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
40,000 40,000 $0.25 4.78 years
63,800 63,800 2.50 3.95 years
2,380,156 1,040,885 6.19 8.70 years
315,100 300,167 10.15 6.54 years
70,000 50,000 13.00 7.27 years
- ------------------------------------------------------
2,869,056 1,494,852
- ------------------------------------------------------
- ------------------------------------------------------
</TABLE>
Pursuant to SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS
123), we are required to disclose the pro forma effects on net loss and basic
and diluted earnings per common share as if we had elected to use the fair value
approach to account for all our stock-based compensation plans. If compensation
cost for our plans had been determined consistent with the fair value approach
set forth in SFAS 123, our pro forma net loss and pro forma basic and diluted
loss per common share for the periods ended would be increased as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEVEN MONTHS ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 MAY 31
1998 1997 1997 1996
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss applicable to common shares $(17,621) $(16,446) $ (9,354) $(5,229)
Pro forma net loss applicable to (19,780) (17,769) (13,839) (5,501)
common shares
Basic and diluted loss per common share (3.07) (3.14) (1.82) (1.79)
Pro forma basic and diluted loss per
common share (3.45) (3.40) (2.69) (1.88)
</TABLE>
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option valuation model with the following assumptions:
<TABLE>
<CAPTION>
YEAR ENDED SEVEN MONTHS ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 MAY 31
1998 1997 1997 1996
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Expected dividend yield 0% 0% 0% 0%
Expected stock price volatility .58 .68 .59 .59
Risk-free interest rate 5.39 5.73 6.54 6.54
Weighted-average expected life of
options 7 YEARS 9 years 8 years 8 years
</TABLE>
47
<PAGE>
16. STOCK-BASED COMPENSATION (CONTINUED)
In February 1997, 200,000 options which originally had an exercise price of
$11.625 were canceled and replaced with 200,000 options with an exercise price
of $6.25, representing the market price of our Common Stock on the date of the
cancellation and new grant. In addition, approximately 395,000 options which
originally vested in three equal annual increments beginning in April 1997, were
fully vested as of February 1997.
In June 1997, 39,000 options which originally had an exercise price of
$8.25 were canceled and replaced with 39,000 options with an exercise price of
$6.00, representing the market price of our Common Stock on the date of the
cancellation and new grant. In addition, 117,300 options which originally had
an exercise price of $11.625 were canceled and replaced with 117,300 options
with an exercise price of $6.00, representing the market price of our Common
Stock on the date of the cancellation and new grant.
Option valuation models require the input of highly subjective
assumptions. Because our stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate in
management's opinion, the existing model does not necessarily provide a
reliable single measure of the fair value of its stock options.
Under our Employee Stock Purchase Plan, employees are given the
opportunity to purchase our Common Stock at 85% of the closing price of our
Common Stock on the Nasdaq National Market on the date of grant or exercise,
whichever is lower. The first offering under the Plan commenced on June 1,
1997, and concluded on November 30, 1997. Subsequent offerings begin on
December 1 and June 1 of each year and conclude on November 30 and May 31,
respectively. A total of 4,124 shares have been issued to date.
17. RETIREMENT PLAN
Our employees are eligible to participate in a defined-contribution benefit
plan (Plan) upon completing six months of service and attaining age 21. We have
amended the Plan to provide for discretionary matching contribution with Common
Stock at a rate of $.25 per $1.00 contributed by the participant, not to exceed,
during the Plan Year, as defined in the Plan, 6% of the participant's
compensation for such Plan Year. We made no contributions during the reporting
period.
18. RELATED PARTY TRANSACTIONS
We entered a distribution agreement, dated August 20, 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.
Gross product sales and gross margins for 1998 reflected in the statement of
operations resulting from this agreement are approximately $1,075 and $290,
respectively. The net amount due Envisage at December 31, 1998 reflected in
royalties payable on the balance sheet is approximately $136. Envisage is a
partnership owned by parties related to us.
During June 1998, we issued 100,000 shares of our Common Stock to each
of Robert J. Morgado and Geoffrey W. Holmes, both members of our Board of
Directors, at a per share price of $6.75, which equaled the closing price of
our Common Stock as reported by the Nasdaq National Market on the date of
sale. We received an aggregate $1,350 in consideration during July 1998 for
this sale.
48
<PAGE>
18. RELATED PARTY TRANSACTIONS (CONTINUED)
We have engaged PLATINUM technology International, inc. (Platinum
technology), a related party, to provide consultation for the upgrade of our
computer systems. During 1998, we issued to Platinum technology 53,192 shares
of our Common Stock in consideration for $382 of consulting services which have
been capitalized as part of property and equipment. An additional $275 of
consulting services have been provided to us prior to December 31, 1998, which
is to be paid for in Common Stock. These services will continue during 1999.
We entered into Consulting Agreements, each dated as of December 12, 1997,
with each of MAC Music LLC and Palladin Capital Group, Inc. Each consulting
group is paid an annual fee of $200 for its services. Each consulting group has
agreed to render consulting services to us in connection with (i) management and
strategic planning, (ii) the identification of financing, acquisition,
divestiture, joint venture and licensing opportunities for us and (iii) other
matters relating to our day-to-day business and operations, or any of our
subsidiaries or affiliated companies, as our Chief Executive Officer or our
Board of Directors may from time to time reasonably request. The term of each
agreement is for five years.
During the seven months ended December 31, 1997, we borrowed and repaid in
full $1,500 from one of our officers and directors. In addition, we borrowed
and repaid $1,150 in full from an unrelated party during the seven months ended
December 31, 1997, which was guaranteed by certain of our officers and
directors. Both borrowings bore interest of 10% per annum. Interest accrued and
paid on these loans during the seven months ended December 31, 1997 was
approximately $34.
During the year ended May 31, 1996, we retired all of our then-outstanding
related party debt with net proceeds from our initial public offering.
Principal and interest payments to related parties during this period totaled
$4,867 and $202, respectively. Interest expense incurred due to related parties
was approximately the same as interest paid to related parties.
Under an agreement dated May 1996, we sold certain audio-visual rights for
$401 and our right to free future studio usage for $850 to a minority
stockholder and former officer. The $401 is reflected in the statement of
operations for the year ended May 31, 1996. The $850 was credited to deferred
revenues and was amortized to offset cost of sales over a 27-month period,
ending August 1998.
During the year ended May 31, 1996, we purchased $421 of office equipment,
furniture and fixtures, and leasehold improvements from a company that is wholly
owned by a party that is one of our directors, officers and stockholders.
19. LITIGATION
On March 31, 1999, we settled our pending litigation with JCSHO, Inc.
entitled JCSHO, INC. F/K/A INTERSOUND, INC. V. PLATINUM ENTERTAINMENT, INC.,
(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 (40%)
shares 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 results in a reversal of charges previously expensed by us in
connection with the acquired assets and assumed liabilities of Intersound,
Inc. and the recognition of a gain of approximately $1,000,000. 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 parties will be filing all documents necessary to
effectuate the dismissal with prejudice, and without attorneys' fees and
costs, of all claims asserted in the pending litigation.
49
<PAGE>
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, seeking
termination of its distribution agreement with us and damages, in excess of
$10,000, 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. While we have
obtained copies of the two complaints, we have not been served with any
summons in the action. In the event Ichiban Records, Inc. elects to proceed
with the action, we will pursue our counterclaims against Ichiban Records,
Inc. and its principals for damages incurred by us as a result of breaches of
the distribution agreement by Ichiban Records, Inc., for injunctive relief
barring Ichiban Records, Inc. from terminating the distribution agreement and
for recovery of advances and other monies owed by Ichiban Records, Inc. to
us. 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 lawsuit 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.
We are a party in various lawsuits which have arisen in the normal course
of business. In the opinion of management, based upon consultation with legal
counsel, the ultimate outcome of these lawsuits will not have a material impact
on our financial position or results of operations.
20. VALUATION AND QUALIFYING ACCOUNTS
Activity of our valuation and qualifying accounts are as follows:
<TABLE>
<CAPTION>
ADDITIONS
-----------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING OF COSTS AND OTHER AT END
PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Reserve for future returns $12,437 $12,462 $- $17,701(1) $7,198
Allowance for doubtful accounts 2,760 - 125 1,113(2) 1,772
Reserve for unrecoupable
artist advances 12,936 3,929 50 445(3) 16,470
Allowance for slow-moving
inventory 590 1,438(4) - 82(5) 1,946
SEVEN MONTHS ENDED DECEMBER 31,
1997
Reserve for future returns 5,421 14,726(6) - 7,710(1) 12,437
Allowance for doubtful accounts 2,725 688 20 673(2) 2,760
Reserve for unrecoupable
artist advances 9,745 3,136 55 - 12,936
Allowance for slow-moving
inventory 350 240 - - 590
YEAR ENDED MAY 31, 1997
Reserve for future returns 2,222 10,876 4,529 (7) 12,206(1) 5,421
Allowance for doubtful accounts 58 300 2,414 (7) 47(2) 2,725
Reserve for unrecoupable
artist advances 4,942 1,714 3,089 (7) - 9,745
Allowance for slow-moving
inventory 100 - 250 (7) - 350
YEAR ENDED MAY 31, 1996
Reserve for future returns 1,814 4,993 - 4,585(1) 2,222
Allowance for doubtful accounts 30 43 - 15(2) 58
Reserve for unrecoupable
artist advances 3,010 1,932 - - 4,942
Allowance for slow-moving
inventory - 100 - - 100
</TABLE>
(1) Actual product returns.
(2) Write-offs, net of recoveries.
(3) Write-off of fully reserved advance.
(4) Includes $1,000 write-down in anticipation of warehouse move (see "Note
21").
(5) Miscellaneous adjustments.
(6) Amount includes $4,051 related to returns of product sold by Intersound,
Inc. prior to our acquisition (see "Note 4").
(7) Relates to amounts recorded through acquisitions.
50
<PAGE>
21. OTHER MATTERS
During the fourth quarter of 1998, a plan was approved to move our
distribution facilities in Roswell, Georgia to a new, larger facility. The
move is planned to take place during spring of 1999. This new facility is
intended to enable us to perform more efficiently and provide the necessary
space for anticipated growth. In preparation for the move, we reduced the
carrying cost of a significant amount of our older catalog titles resulting
in a substantial write-down of approximately $1,000. This write-down was
recognized in anticipation of the disposal of these titles rather than
incurring the cost of moving these titles to the new distribution facility.
Accordingly, provisions have been made in our financial statements at
December 31, 1998, related to these titles.
22. BALANCE SHEET DATA
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
---------- ----------
<S> <C> <C>
Accounts receivable $ 15,506 $ 19,595
Less: Reserve for future returns (7,198) (12,437)
Less: Allowance for doubtful accounts (1,772) (2,760)
Less: Other allowances (889) (1,152)
---------- ----------
Accounts receivable, net $ 5,647 $ 3,246
---------- ----------
---------- ----------
Inventories $ 8,982 $ 8,494
Less: Allowance for slow-moving inventory (1,946) (590)
---------- ----------
Inventories, net $ 7,036 $ 7,904
---------- ----------
Artist advances $ 18,369 $ 15,446
Less: Reserve for unrecoupable artist advances (16,470) (12,936)
---------- ----------
Artist advances, net $ 1,899 $ 2,510
---------- ----------
---------- ----------
Property and equipment:
Office equipment and computers $ 2,811 $ 1,126
Furniture and fixtures 324 308
Audio equipment 273 158
Leasehold improvements 257 222
Warehouse equipment 84 67
Autos 5 5
---------- ----------
3,754 1,886
Less: Accumulated depreciation (1,293) (807)
---------- ----------
Property and equipment, net $ 2,461 $ 1,079
---------- ----------
---------- ----------
</TABLE>
51
<PAGE>
22. BALANCE SHEET DATA (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
----------- ----------
<S> <C> <C>
Recorded music costs $ 1,738 $ 1,182
Less: Accumulated amortization (487) (212)
----------- ----------
Recorded music costs, net $ 1,251 $ 970
----------- ----------
----------- ----------
Music catalog $ 22,629 $ 19,604
Less: Accumulated amortization (1,632) (784)
----------- ----------
Music catalog, net $ 20,997 $ 18,820
----------- ----------
----------- ----------
Music publishing rights $ 3,827 $ 3,827
Less: Accumulated amortization (484) (308)
----------- ----------
Music publishing rights $ 3,343 $ 3,519
----------- ----------
----------- ----------
Goodwill $ 6,098 $ 6,098
Less: Accumulated amortization (488) (244)
----------- ----------
Goodwill, net $ 5,610 $ 5,854
----------- ----------
----------- ----------
Deferred financing costs $ 274 $ 640
Less: Accumulated amortization (21) (9)
----------- ----------
Deferred financing costs, net $ 253 $ 631
----------- ----------
----------- ----------
</TABLE>
23. SUBSEQUENT EVENT
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, 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 approximately $4,000 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 at the same rate as the Series B Convertible
Preferred Stock and the Series C Preferred Stock, which initial rate shall
begin at the time of issuance of the Series D Convertible Preferred Stock,
however, 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 Series D Warrants do not accrete. However, 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 a portion of the Series D Warrants
(or Common Stock representing shares received upon exercise of the Series D
Warrants), determined on a pro rata basis, taking into account the number of
months 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 trailing 30 consecutive trading days commencing
April 9, 1999.
52
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information in response to this item is incorporated by reference
from the "PROPOSAL NO. 1 - ELECTION OF DIRECTORS" section of the 1998 Proxy
Statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information in response to this item is incorporated by reference
from the sections of the 1998 Proxy Statement captioned "EXECUTIVE
COMPENSATION AND CERTAIN TRANSACTIONS," "COMPENSATION COMMITTEE REPORT ON
EXECUTIVE COMPENSATION" and "PERFORMANCE GRAPH."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information in response to this item is incorporated by reference
from the section of the 1998 Proxy Statement captioned "SECURITY OWNERSHIP OF
MANAGEMENT AND PRINCIPAL STOCKHOLDERS."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information in response to this item is incorporated by reference
from the section of the 1998 Proxy Statement captioned "EXECUTIVE
COMPENSATION AND CERTAIN TRANSACTIONS."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K.
A. Exhibits and Financial Statement Schedules
1. All financial statement schedules are omitted because such
schedules are not required or the information required has
been presented in the financial statements included in this
filing.
2. The following exhibits are filed with this Report or incorporated
by reference as set forth below.
<TABLE>
<CAPTION>
Exhibit
Number
--------
<S> <C>
4.1 Warrant to Purchase 50,000 shares of Common Stock of the
Registrant issued to GWH & Associates, LLC, dated February
25, 1998, is herein incorporated by reference to the Form
10-Q for the quarterly period ended March 31, 1998 filed
with the Commission on May 20, 1998 ("First Quarter 1998
10-Q").
4.2 Warrant to Purchase 50,000 shares of Common Stock of the
Registrant issued to Andrew Lipsher, dated February 25,
1998, is herein incorporated by reference to the First
Quarter 1998 10-Q
4.3 Warrant to Purchase 50,000 Shares of Common Stock of the
Registrant issued to GHW & Associates, L.P., dated April
2, 1998, is herein incorporated by reference to the Form
10-Q for the quarterly period ended June 30, 1998 filed
with the Commission on August 14, 1998 ("Second Quarter
1998 10-Q").
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.1 First Amendment to Credit Agreement dated as of December
12,1997, among the Registrant, Harris Trust and Savings
Bank, as Administrative Agent and the Lenders party
thereto, dated March 31, 1998, is herein incorporated by
reference to the First Quarter 1998 10-Q.
10.2 Revolving Credit Note issued by the Registrant in the
principal amount of $10,000,000, dated March 31, 1998, is
herein incorporated by reference to the First Quarter 1998
10-Q.
10.3 Term Credit Note issued by the Registrant in the principal
amount of $20,000,000, dated March 31, 1998, is herein
incorporated by reference to the First Quarter 1998 10-Q.
10.4 First Amendment to Pledge Agreement dated as of December
12, 1997, among the Registrant, its subsidiaries and Bank
of Montreal, dated as of March 31, 1998, is herein
incorporated by reference to the First Quarter 1998 10-Q.
10.5 First Amendment to Security Agreement and First Amendment
to Security Agreement Re: Intellectual Property, each
dated as of December 12, 1997, among the Registrant, its
subsidiaries and Bank of Montreal, dated March 31, 1998,
is herein incorporated by reference to the First Quarter
1998 10-Q.
10.6 Second Amendment to Credit Agreement dated as of December
12, 1997, among the Registrant, Harris Trust and Savings
Bank, as Administrative Agent and the Lenders party
thereto, dated May 20,1998, is herein incorporated by
reference to the First Quarter 1998 10-Q.
10.7 Credit Agreement, dated July 31, 1998, by and among the
Registrant, First Source Financial LLP ("First Source"),
as Agent and Lender, and the Lenders named therein, as
Lenders (the "Lenders"), and exhibits and schedules
thereto, is herein incorporated by reference to the Second
Quarter 1998 10-Q.
10.8 Revolving Note, dated July 31, 1998, issued by the
Registrant in favor of First Source, in the principal
amount of $35,000,000, is herein incorporated by reference
to the Second Quarter 1998 10-Q.
10.9 Security Agreement, dated July 31, 1998, among the
Registrant, First Source and the Lenders, and schedules
thereto, is herein incorporated by reference to the Second
Quarter 1998 10-Q.
10.10 Intellectual Property Security Agreement, dated July 31,
1998, among the Registrant, Lexicon Music, Inc.
("Lexicon"), PEG Publishing, Inc. ("PEG"), Just Mike
Music, Inc. ("Just Mike") and Royce Publishing, Inc.
("Royce") (Lexicon, PEG, Just Mike and Royce are
hereinafter referred to as the "Subsidiaries"), First
Source and the Lenders, and schedules thereto, is herein
incorporated by reference to the Second Quarter 1998 10-Q.
10.11 Guaranty, dated July 31, 1998, among the Subsidiaries,
First Source and the Lenders, and schedules thereto, is
herein incorporated by reference to the Second Quarter
1998 10-Q.
10.12 Stock Pledge Agreement, dated July 31, 1998, among the
Registrant, First Source and the Lenders, and exhibits
thereto, is herein incorporated by reference to the Second
Quarter 1998 10-Q.
10.13 Settlement Agreement and Mutual Release, dated March 31,
1999, between JCSHO, Inc., f/k/a Intersound, Inc. and the
Registrant.
10.14 Settlement Agreement and Mutual Release, dated March 31,
1999, between Donald R. Johnson and the Registrant.
10.15 First Amendment to Credit Agreement, dated November 1,
1998, between the Registrant and First Source.
10.16 Second Amendment to Credit Agreement, dated January __,
1999, between the Registrant and First Source.
10.17 Third Amendment to Credit Agreement dated April 14, 1999,
between the Registrant and First Source.
23.1 Consent of Ernst & Young LLP.
27. Financial Data Schedule.
</TABLE>
B. Reports on Form 8-K.
None.
54
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, we certify
that we have reasonable grounds to believe that we meet all of the
requirements for filing on Form 10-K and 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 April 15, 1999.
Platinum Entertainment, Inc.
By: /s/ Steven Devick
-------------------------------------
Steven Devick
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
In accordance with the requirements of the Securities Act of 1933, as
amended, this Report was signed by the following persons in the capacities
indicated and on April 15, 1999.
<TABLE>
<CAPTION>
Signature Title
- -------------------------------------------------------------------------------
<S> <C>
/s/Steven Devick
- ----------------------------------- Chairman, President, and Chief Executive
Steven Devick Officer and Director
/s/Douglas C. Laux
- ----------------------------------- Chief Operating Officer, Chief Financial
Douglas C. Laux Officer and Director
- ----------------------------------- Director
David S. Bauman
/s/Michael P. Cullinane
- ----------------------------------- Director
Michael P. Cullinane
/s/Craig J. Duchossois
- ----------------------------------- Director
Craig J. Duchossois
/s/Andrew J. Filipowski
- ----------------------------------- Director
Andrew J. Filipowski
- ----------------------------------- Director
Carl D. Harnick
- ----------------------------------- Director
Geoffrey W. Holmes
/s/Paul L. Humenansky
- ----------------------------------- Director
Paul L. Humenansky
- ----------------------------------- Director
Robert J. Morgado
- ----------------------------------- Director
Mark J. Schwartz
</TABLE>
55
<PAGE>
SETTLEMENT AGREEMENT AND MUTUAL RELEASE
This SETTLEMENT AGREEMENT AND MUTUAL RELEASE is made this 31st day of March
1999 between JCSHO, Inc. f/k/a Intersound, Inc., a Minnesota corporation
("JCSHO"), and Platinum Entertainment, Inc., a Delaware corporation
("Platinum").
WHEREAS, pursuant to an Asset Purchase Agreement dated November 13, 1996,
as amended January 31, 1997 ("Asset Purchase Agreement"), Platinum agreed to
purchase (through its wholly-owned subsidiary River North Studios, Inc. ("River
North")) certain assets from JCSHO. As part of the Asset Purchase Agreement,
Platinum executed two convertible promissory notes payable to JCSHO or its
successors or assigns (collectively, "Promissory Notes"). One promissory note,
dated January 31, 1997, was in the amount of $1,875,000. The second promissory
note, dated January 31, 1997, was in the amount of $3,125,000.
WHEREAS, JCSHO, Platinum, River North and Midwest Trust Services, Inc.
entered into an Indemnity Escrow Agreement dated January 31, 1997 whereby
Platinum delivered the $1,875,000 promissory note to an escrow agent, Midwest
Trust Services, Inc.
WHEREAS, on June 8, 1998, JCSHO informed Platinum of its election to
convert the outstanding principal of the Promissory Notes into shares of
Platinum stock (the "Conversion Shares"). As a result of JCSHO's election, the
$1,875,000 promissory note was converted into 191,326 Conversion Shares, and the
$3,125,000 promissory note was converted into 318,877 Conversion Shares.
WHEREAS, on January 29, 1998, Platinum delivered to JCSHO and Midwest Trust
Services, Inc. a "Notice of Claim" in which Platinum asserted JCSHO breached the
Asset Purchase Agreement and the Indemnity Escrow Agreement.
WHEREAS, on February 26, 1998, JCSHO delivered to Platinum and Midwest
Trust Services, Inc. a "Notice of Dispute" in which it denied the claims alleged
in the Notice of Claim.
WHEREAS, there is a pending action entitled JCSHO, INC. F/K/A INTERSOUND,
INC. V.
<PAGE>
PLATINUM ENTERTAINMENT, INC., No. 97-2479 MJD/AJB (D. Minn.), in which JCSHO
has asserted certain claims against Platinum and Platinum has asserted
certain claims against JCSHO, all of which arise from or relate to Platinum's
acquisition of certain assets of JCSHO pursuant to the Asset Purchase
Agreement.
WHEREAS, Platinum has denied and continues to deny all of JCSHO's claims,
and JCSHO has denied and continues to deny all of Platinum's claims.
WHEREAS, Platinum and JCSHO wish to settle their disputes and to terminate
the pending litigation.
NOW, THEREFORE, in consideration of the mutual promises contained in this
Agreement, the parties agree as follows:
1. On the same day as the execution of this Agreement, Platinum and JCSHO will
jointly direct Midwest Trust Services, Inc., pursuant to paragraph 7(b) of
the Indemnity Escrow Agreement, to release the 191,326 Conversion Shares in
its possession to Platinum, and all obligations of the parties pursuant to
the Indemnity Escrow Agreement shall expire upon the delivery of the 191,326
Conversion Shares to Platinum.
2. On the same day as counsel for JCSHO delivers this Settlement Agreement
to counsel for Platinum, Platinum will deliver to JCSHO 306,122 (60%) of
the 510,203 Conversion Shares. Prior to delivery of the Conversion Shares
to JCSHO, Platinum will ensure that the Conversion Shares do not bear any
restrictive legends. At the request of JCSHO, Platinum shall provide an
opinion of counsel and/or directions to any transfer agent or other third
party that the 306,122 Conversion Shares may be resold without registration
pursuant to Rule 144(k), provided that JCSHO meets all the requirements
thereof.
3. Platinum will retain the remaining 204,081 (40%) Conversion Shares.
4. JCSHO and Platinum mutually release, acquit, and forever discharge each
other and their respective agents, assigns, officers, employees, directors,
shareholders, subsidiaries, successors, affiliates, partnerships, limited
partnerships and corporations
<PAGE>
from any and all causes of action, rights of action, claims, counterclaims
or cross claims of any kind or nature whatsoever, whether based in law or
in equity, whether known or unknown, of whatever kind and howsoever arising,
which each has or ever had against the other, arising by reason of conduct
occurring on or before the date of this Agreement.
5. The parties expressly agree that the mutual releases set forth above in
paragraph 4 will not discharge any obligation under this Agreement or
operate to release claims of Platinum or JCSHO against any other parties
not specifically released, and all claims against other parties are
reserved as to such parties.
6. JCSHO and Platinum will file with the United States District Court for the
District of Minnesota documents necessary to effectuate the dismissal with
prejudice, and without attorneys' fees and costs, of all claims asserted
in the pending action.
7. The parties agree that the provisions of this Agreement are severable and
that in the event that any provision of this Agreement should be held
invalid by any court of competent jurisdiction, the remaining provisions
of this Agreement shall continue in full force and effect.
8. The terms of this Agreement shall be binding upon and inure to the benefit
of, and shall be enforceable by, all parties hereto and their respective
personal representatives, heirs, successors and assigns.
9. The waiver by any party hereto of any breach of any provision of this
Agreement shall not operate or be construed as a waiver of any subsequent
breach by the other party hereto.
10. This Agreement shall not be amended except by a writing signed by all
parties hereto.
11. The parties represent that they have had an adequate opportunity to discuss
all aspects of this Agreement with their respective attorneys, that they
understand all of the provisions of this Agreement and that they are
voluntarily accepting its terms, and that the person executing this
Agreement on its behalf is authorized to do so.
12. The parties agree that this Agreement may be executed in photocopied or
telecopied
<PAGE>
counterparts. All executed counterparts shall be deemed to be one and the
same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of March
31, 1999.
JCSHO, Inc. f/k/a Intersound, Inc. Platinum Entertainment, Inc.
By: /s/ Donald R. Johnson By: /s/Thomas R. Leavens
-------------------------------- -------------------------
Title: President Title: General Counsel and
Senior Executive VP
<PAGE>
SETTLEMENT AGREEMENT AND MUTUAL RELEASE
This SETTLEMENT AGREEMENT AND MUTUAL RELEASE is made this 31st day of March
1999 between Donald R. Johnson ("Johnson") and Platinum Entertainment, Inc., a
Delaware corporation ("Platinum").
WHEREAS, on February 1, 1997, Johnson entered into a Consulting, Employment
and Non-competition Agreement ("Employment Agreement") with River North Studios,
Inc. ("River North");
WHEREAS, Platinum is the successor-in-interest to River North's rights and
obligations under the Employment Agreement;
WHEREAS, Johnson filed an action entitled DONALD R. JOHNSON V. INTERSOUND,
INC. (DEL.), S/K/A RIVER NORTH STUDIOS, INC., No. E-64885, in Superior Court in
Fulton County, Georgia ("Litigation") in which Johnson asserted breaches of the
Employment Agreement;
WHEREAS, Johnson voluntarily dismissed the Litigation without prejudice to
refile the Litigation;
WHEREAS, Platinum has denied and continues to deny all of Johnson's claims;
and
WHEREAS, Platinum and Johnson wish to settle all claims that were asserted
or that could have been asserted in that Litigation by Johnson.
NOW THEREFORE, in consideration for the mutual promises contained in this
Agreement, the parties agree as follows:
1. Within two weeks from the date of this Settlement Agreement Platinum will
deliver to Johnson 20,000 shares of Platinum's common stock. Each
certificate representing the stock shall be stamped or otherwise imprinted
with a legend in substantially the following form:
"The securities represented hereby have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), or any
state securities laws and neither the securities nor any interest
therein may be offered, sold, transferred,
<PAGE>
pledged or otherwise disposed of except pursuant to an effective
registration statement under the Securities Act and applicable state
securities laws or an exemption from registration under such act and
such laws."
Within two weeks from the date of this Settlement Agreement, Platinum shall
file a post-effective amendment to its effective registration statement on
Form S-3, shall thereafter use its best efforts to cause such amendment to
be declared effective by the SEC, and shall take such other actions
necessary to register the securities. Platinum shall bear all registration
expenses in connection with any registration pursuant to this paragraph.
Platinum shall be responsible for any damages incurred by Johnson for any
failure on the part of Platinum to comply with the two preceding sentences.
2. Johnson agrees not to refile the Litigation, or file any other lawsuit,
against Platinum for any conduct occurring on or before the date of this
Agreement.
3. Platinum agrees not to file any lawsuit against Johnson for any conduct
occurring on or before the date of this Agreement.
4. Johnson and Platinum mutually release, acquit, and forever discharge each
other and their respective agents, assigns, officers, employees, directors,
shareholders, subsidiaries, successors, affiliates, partnerships, limited
partnerships and corporations from any and all causes of action, rights of
action, claims, counterclaims or cross claims of any kind or nature
whatsoever, whether based in law or in equity, whether known or unknown, of
whatever kind and howsoever arising, which each has or ever had against
the other, arising by reason of conduct occurring on or before the date of
this Agreement.
5. The parties expressly agree that the mutual releases set forth above in
paragraph 4 will not discharge any obligation under this Agreement or
operate to release claims of Platinum or Johnson against any other parties
not specifically released, and all claims against other parties are
reserved as to such parties.
6. The parties agree that the provisions of this Agreement are severable and
that in the event that any provision of this Agreement should be held
invalid by any court of
<PAGE>
competent jurisdiction, the remaining provisions of this Agreement shall
continue in full force and effect.
7. The terms of this Agreement shall be binding upon and inure to the benefit
of, and shall be enforceable by, all parties hereto and their respective
personal representatives, heirs, successors and assigns.
8. The waiver by any party hereto of any breach of any provision of this
Agreement shall not operate or be construed as a waiver of any subsequent
breach by the other party hereto.
9. This Agreement shall not be amended except by a writing signed by all
parties hereto.
10. The parties represent that they have had an adequate opportunity to discuss
all aspects of this Agreement with their respective attorneys, that they
understand all of the provisions of this Agreement and that they are
voluntarily accepting its terms.
11. The parties agree that this Agreement may be executed in photocopied or
telecopied counterparts. All executed counterparts shall be deemed to be
one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of March
31, 1999.
Donald R. Johnson Platinum Entertainment, Inc.
By: /s/Donald R. Johnson By: /s/ Thomas R. Leavens
--------------------------- -----------------------------
Title: General Counsel and
Senior Executive VP
<PAGE>
FIRST AMENDMENT TO CREDIT AGREEMENT
This First Amendment to Secured Credit Agreement (this "Agreement") is
dated as of November 1, 1998 and is between Platinum Entertainment, Inc., a
Delaware corporation (the "Borrower") and First Source Financial LLP, an
Illinois limited liability partnership, as Agent and Lender (the "Agent").
RECITALS
WHEREAS, the parties hereto are parties to that certain Secured Credit
Agreement, dated as of July 31, 1998 (as from time to time amended, restated,
supplemented or otherwise modified and in effect, the "Secured Credit
Agreement"); and
WHEREAS, Borrower and Agent desire to amend the Secured Credit
Agreement to make certain changes in the covenants and to correct certain
matters, all as set forth below.
NOW THEREFORE, in consideration of the mutual agreements contained
herein, the parties hereto agree as follows:
AGREEMENT
1. DEFINITIONS. Capitalized terms used but not otherwise
defined herein shall have the meanings as set forth in the Secured Credit
Agreement.
2. WAIVER.
Lenders and Agent hereby waive any Unmatured Event of Default or Event
of Default caused by Borrower's failure to comply with the Minimum Net Worth or
Interest Coverage Ratio covenants set forth in Sections 11.33(a) and 11.33(b) of
the Secured Credit Agreement through September 30, 1998.
3. AMENDMENTS TO SECURED CREDIT AGREEMENT.
(a) The second paragraph of Section 4.1 is hereby amended by deleting
it in its entirety and replacing it with the following:
For the period beginning the Closing Date and ending November
14, 1998, the Prime Revolver Margin and LIBOR Revolving Margin will be
.75% and 2.75% per annum, respectively. As of November 15, 1998, the
Prime Revolver Margin and LIBOR Revolving Margin will be increased to
1.50% and 3.00% per annum, respectively. In the event that (i)
Borrower's EBITDA for the twelve (12) month period ending June 30, 1999
shall be equal to or greater than $12,431,000 as determined by
Borrower's consolidated financial performance and (ii) no Unmatured
Event of Default or Event of Default shall have occurred and be
continuing, commencing with the first day of the first calendar month
that occurs more than five (5) days after delivery of Borrower's
financial statements to the Agent for the second Fiscal Quarter of
Fiscal Year 1999, the Prime Revolver Margin and the LIBOR Revolving
Margin shall be reduced to 1.25% and 2.75% per annum, respectively.
Concurrently with the delivery of such financial statements, Borrower
shall execute and deliver to the Agent and the Lenders a certificate
setting forth in reasonable detail the basis for the change in the
Applicable Margins.
(b) Section 9.1(i) is hereby amended by deleting it in its entirety
and replacing it with the following:
(i) Accounts which remain unpaid as of one hundred twenty
(120) days after the date of the original invoice with respect thereto (other
than Accounts generated by Christmas season sales approved by
<PAGE>
Agent in its sole discretion);
(c) Section 11.33(a) of the Secured Credit Agreement is hereby amended
by deleting it in its entirety and replacing it with the following:
(a) NET WORTH. Maintain Net Worth at all times during each
period listed below of at least the amounts set forth opposite such period:
<TABLE>
<CAPTION>
MINIMUM
PERIOD NET WORTH
------ ---------
<S> <C>
Fiscal Quarter ending September 30, 1998 $17,500,000
Fiscal Quarter ending December 31, 1998 $14,700,000
Fiscal Quarter ending March 31, 1999 $19,000,000
Fiscal Quarter ending June 30, 1999 $19,500,000
Fiscal Quarter ending September 30, 1999 $20,500,000
December 31, 1999 through September 30, 2000 $22,000,000
December 31, 2000 $24,500,000
March 31, 2001 and each Fiscal Quarter thereafter $24,500,000 plus fifty
percent (50%) of cumulative
quarterly Net Income (without
giving effect to any quarterly
net losses in determining
Net Income)
</TABLE>
(d) Section 11.33(b) of the Secured Credit Agreement is hereby amended
by deleting it in its entirety and replacing it with the following:
(b) INTEREST COVERAGE RATIO. Not permit the Interest Coverage
Ratio measured on the last day of a Fiscal Quarter for the twelve (12) month
period (or, in the case of the Fiscal Quarter ending on September 30, 1998, for
the previous nine (9) months, and in the case of the Fiscal Quarter ended on
December 31, 1998, for the previous three (3) months) ending on the last day of
such Fiscal Quarter to be less than the ratio listed below opposite such period:
<TABLE>
<CAPTION>
PERIODS RATIO
------- -----
<S> <C>
September 30, 1998 2.0 to 1.0
December 31, 1998 1.3 to 1.0
March 31, 1999 through September 30, 1999 2.4 to 1.0
December 31, 1999 and thereafter 3.0 to 1.0
</TABLE>
4. REPRESENTATIONS AND WARRANTIES. To induce Agent to enter into this
Agreement and to make all future Loans under the Secured Credit Agreement,
Borrower represents and warrants to Agent that:
(a) DUE AUTHORIZATION, ETC. The execution, delivery and performance by
Borrower of this Agreement executed as of the date hereof are within its
corporate powers, have been duly authorized by all necessary corporate action,
have received all necessary governmental approval (if any shall be required),
and do not and will not contravene or conflict with any Requirement of Law or
Contractual Obligation binding upon such entity. This Agreement is the legal,
valid, and binding obligation of Borrower enforceable against Borrower in
accordance with its respective terms.
(b) CERTAIN AGREEMENTS. To the best of Borrower's knowledge, on the
date hereof all warranties of the Borrower thereto set forth in the Secured
Credit Agreement are true and correct in all material respects, without any
waiver or modification thereof and no default of any party exists under the
Secured Credit Agreement or any
-2-
<PAGE>
Related Document.
(c) FINANCIAL INFORMATION. All balance sheets, all statement of
operations, of shareholders' equity and of changes in financial position, and
other financial data which have been or shall hereafter be furnished to Agent
for the purposes of or in connection with this Agreement have been and will be
prepared in accordance with GAAP consistently applied throughout the periods
involved and do and will, present fairly the financial condition of the entities
involved as of the dates thereof and the results of their operations for the
periods covered thereby.
(d) LITIGATION. No material litigation (including, without limitation,
derivative actions), arbitrations, governmental investigation or proceeding or
inquiry shall, on the date hereof, be pending which was not previously disclosed
in writing to Agent and no material adverse development shall have occurred in
any litigation (including, without limitation, derivative actions), arbitration,
government investigations, or proceeding or inquiry previously disclosed to
Agent in writing.
5. CONDITIONS TO EFFECTIVENESS. This Agreement shall be effective as of
September 30, 1998 upon the satisfaction of the conditions set forth in this
Section 5 and delivery of the following documents to Agent on or prior to the
date hereof (unless another date is specified), in form and substance
satisfactory to Agent.
(a) AMENDMENT. Borrower shall have delivered to Agent executed
originals of this Agreement.
(b) CONSENTS AND ACKNOWLEDGMENTS. Borrower shall have obtained all
consents, approvals and acknowledgments which may be required with respect to
the execution, delivery and performance of this Agreement.
(c) NO DEFAULT. As of the date hereof after giving effect to this
Agreement and the waiver set forth in Section 2 hereof, no Unmatured Event of
Default or Event of Default under any Related Document shall have occurred and
be continuing.
(d) AMENDMENT FEE. Agent shall have received payment on or before
November 16, 1998, of an amendment fee of $15,000.
6. AFFIRMATION OF GUARANTIES.
Each Guarantor (i) consents to and approves the execution and delivery
of this Agreement by Borrower and Agent, (ii) agrees that this Agreement does
not and shall not limit or diminish in any manner its obligations under its
Guaranty or under any of the other Related Documents to which it is a party,
(iii) agrees that this Agreement shall not be construed as requiring the consent
of any Guarantor in any other circumstance, (iv) reaffirms its obligations under
its Guaranty and all of the other Related Documents to which it is a party, and
(v) agrees that its Guaranty and such other Related Documents remain in full
force and effect and are each hereby ratified and confirmed.
7. MISCELLANEOUS.
(a) CAPTIONS. Section captions used in this Agreement are for
convenience only, and shall not affect the construction of this Agreement.
(b) GOVERNING LAW. This Agreement shall be a contract made under and
governed by the laws of the State of Illinois, without regard to conflict of
laws principles. Wherever possible each provision of this Agreement shall be
interpreted in such manner to be effective and valid under applicable law, but
if any provision of this Agreement shall be prohibited by or invalid under such
law, such provision shall be ineffective to the extent of such prohibition or
invalidity, without invalidating the remainder of such provisions or the
remaining provision of this Agreement.
(c) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the
-3-
<PAGE>
different parties on separate counterparts, and each such counterpart shall
be deemed to be an original, but all such counterparts shall together
constitute one and the same Agreement. Delivery of an executed counterpart of
a signature page to this Agreement by telecopy shall be effective as delivery
of a manually executed counterpart of this Agreement.
(d) SUCCESSORS AND ASSIGNEES. This Agreement shall be binding upon
Borrower, the Lenders and Agent and their respective successors and assignees,
and shall inure to the sole benefit of Borrower and Agent and their successors
and assignees.
(e) REFERENCES. Any reference to the Secured Credit Agreement contained
in any notice, request, certificate, or other document executed concurrently
with or after the execution and delivery of this Agreement shall be deemed to
include this Agreement unless the context shall otherwise require.
(f) CONTINUED EFFECTIVENESS. Notwithstanding anything contained herein,
the terms of this Agreement are not intended to and do not serve to effect a
novation as to the Secured Credit Agreement, any Note or any of the Collateral
Documents provided to furnish security therefor. The parties hereto expressly do
not intend to extinguish the Secured Credit Agreement, any Note or the
Collateral Documents. Instead, it is the express intention of the parties hereto
to reaffirm the existence of the indebtedness created under the Secured Credit
Agreement which is evidenced by Notes and secured by the various Collateral
Documents. The Secured Credit Agreement and each of the Related Documents as
amended hereby remain in full force and effect. The execution, delivery and
effectiveness of this Agreement shall not operate as a waiver of any right,
power or remedy of the Lenders or Agent under the Secured Credit Agreement or
any Related Document to which the Lenders and Agent are a party nor, except as
set forth in Section 2 hereof, constitute a waiver of any provision in or Event
of Default or Unmatured Event of Default (now or hereafter existing) under the
terms of the Secured Credit Agreement or any Related Document.
(g) FEES AND EXPENSES. In accordance with Section 14.4 of the Secured
Credit Agreement, Borrower agrees to pay on demand all fees, costs and expenses
incurred by Agent and the Lenders in connection with the preparation, execution
and delivery of this Agreement.
Delivered at Rolling Meadows, Illinois as of the day and year first above
written.
PLATINUM ENTERTAINMENT, INC.
as Borrower:
By: /s/ Thomas Leavens
------------------------------
Name Printed: Tom Leavens
-------------------
Its: Chief Operating Officer
-----------------------------
FIRST SOURCE FINANCIAL LLP,
as a Lender and as Agent
By: First Source Financial, Inc.,
Its: Manager
By: /s/ Gregory R. Cooper
------------------------------
Name Printed: Gregory R. Cooper
--------------------
Its: Senior Vice President
-----------------------------
LEXICON MUSIC, INC., as Guarantor
By: /s/ Thomas Leavens
------------------------------
Name Printed: Tom Leavens
--------------------
Its: Chief Operating Officer
-----------------------------
-4-
<PAGE>
PEG PUBLISHING, INC., as Guarantor
By: /s/ Thomas Leavens
------------------------------
Name Printed: Tom Leavens
--------------------
Its: Chief Operating Officer
-----------------------------
ROYCE PUBLISHING, INC., as Guarantor
By: /s/ Thomas Leavens
------------------------------
Name Printed: Tom Leavens
--------------------
Its: Chief Operating Officer
-----------------------------
JUSTMIKE MUSIC, INC., as Guarantor
By: /s/ Thomas Leavens
------------------------------
Name Printed: Tom Leavens
--------------------
Its: Chief Operating Officer
-----------------------------
-5-
<PAGE>
Exhibit 10.16
SECOND AMENDMENT TO CREDIT AGREEMENT
This Second Amendment to Secured Credit Agreement (this "AGREEMENT") is
dated as of January ___, 1999, and is between Platinum Entertainment, Inc., a
Delaware corporation (the "BORROWER"), and First Source Financial LLP, an
Illinois limited liability partnership, as Agent and Lender (the "AGENT").
RECITALS
WHEREAS, the parties hereto are parties to that certain Secured Credit
Agreement, dated as of July 31, 1998 (as amended by that certain First
Amendment to Credit Agreement, dated as of November 1, 1998 and as from time
to time further amended, restated, supplemented or otherwise modified and in
effect, the "SECURED CREDIT AGREEMENT"); and
WHEREAS, Borrower and Agent desire to amend the Secured Credit Agreement
to make certain changes thereto and to correct certain matters, all as set
forth below.
NOW THEREFORE, in consideration of the mutual agreements contained
herein, the parties hereto agree as follows:
AGREEMENT
1. DEFINITIONS. Capitalized terms used but not otherwise defined
herein shall have the meanings as set forth in the Secured Credit Agreement.
2. WAIVER.
Lenders and Agent hereby waive any Unmatured Event of Default or Event
of Default caused by Borrower's failure to comply with the restrictions on
investments set forth in Section 11.11 of the Secured Credit Agreement
through September 30, 1998.
3. AMENDMENT TO SECURED CREDIT AGREEMENT. Section 11.11 of the
Secured Credit Agreement is hereby amended by deleting it in its entirety and
replacing it with the following:
SECTION 11.11 LOANS, ADVANCES OR INVESTMENTS. Not make or permit any
Subsidiary to make any loans or advances to, investments in, or
contributions to the capital of, any other Person, except for (i) the
endorsement, in the ordinary course of collection, of instruments payable
to it or to its order, (ii) loans and royalty advances to recording artists
in the ordinary course of business, (iii) investments in Cash Equivalents,
(iv) investments in Subsidiaries and other investments existing on the
Closing Date and disclosed on SCHEDULE 11.11 and
<PAGE>
(v) investments made on or before September 30, 1998 by Borrower in Music
Connection Corporation in connection with the exchange of 1,320,000 shares
of common stock of Music Connection Corporation for 11,457 shares of common
stock of Borrower.
4. REPRESENTATIONS AND WARRANTIES. To induce Agent to enter into this
Agreement and to make all future Loans under the Secured Credit Agreement,
Borrower represents and warrants to Agent that:
(a) DUE AUTHORIZATION, ETC. The execution, delivery and performance by
Borrower of this Agreement and the First Amendment to Pledge Agreement (as
hereinafter defined) executed as of the date hereof are within its corporate
powers, have been duly authorized by all necessary corporate action, have
received all necessary governmental approval (if any shall be required), and
do not and will not contravene or conflict with any Requirement of Law or
Contractual Obligation binding upon such entity. Each of this Agreement and
the First Amendment to Pledge Agreement is the legal, valid, and binding
obligation of Borrower enforceable against Borrower in accordance with its
respective terms.
(b) CERTAIN AGREEMENTS. To the best of Borrower's knowledge, on the
date hereof all warranties of the Borrower thereto set forth in the Secured
Credit Agreement are true and correct in all material respects, without any
waiver or modification thereof and no default of any party exists under the
Secured Credit Agreement or any Related Document.
(c) FINANCIAL INFORMATION. All balance sheets, all statement of
operations, of shareholders' equity and of changes in financial position, and
other financial data which have been or shall hereafter be furnished to Agent
for the purposes of or in connection with this Agreement have been and will
be prepared in accordance with GAAP consistently applied throughout the
periods involved and do and will, present fairly the financial condition of
the entities involved as of the dates thereof and the results of their
operations for the periods covered thereby.
(d) LITIGATION. No material litigation (including, without limitation,
derivative actions), arbitrations, governmental investigation or proceeding
or inquiry shall, on the date hereof, be pending which was not previously
disclosed in writing to Agent and no material adverse development shall have
occurred in any litigation (including, without limitation, derivative
actions), arbitration, government investigations, or proceeding or inquiry
previously disclosed to Agent in writing.
5. CONDITIONS TO EFFECTIVENESS. This Agreement shall be effective as
of September 30, 1998 upon the satisfaction of the conditions set forth in
this SECTION 5 and delivery of the following documents to Agent on or prior
to the date hereof (unless another date is specified), in form and substance
satisfactory to Agent:
2
<PAGE>
(a) AMENDMENTS. Borrower shall have delivered to Agent executed
originals of this Agreement and of that certain First Amendment to Pledge
Agreement of even date herewith (the "FIRST AMENDMENT TO PLEDGE AGREEMENT")
between Borrower and Agent.
(b) CONSENTS AND ACKNOWLEDGMENTS. Borrower shall have obtained all
consents, approvals and acknowledgments which may be required with respect to
the execution, delivery and performance of this Agreement and the First
Amendment to Pledge Agreement.
(c) NO DEFAULT. As of the date hereof after giving effect to this
Agreement, the First Amendment to Pledge Agreement and the waiver set forth
in SECTION 2 hereof, no Unmatured Event of Default or Event of Default under
any Related Document shall have occurred and be continuing.
(d) STOCK CERTIFICATES AND STOCK POWERS. Borrower shall have delivered
to Agent such stock certificates, stock powers, assignments, financing
statements, endorsements, instruments and other documents as are necessary in
order to perfect Agent's Lien on the shares of common stock of Music
Connection Corporation pledged by Borrower to Agent pursuant to the First
Amendment to Pledge Agreement.
6. AFFIRMATION OF GUARANTIES.
Each Guarantor (i) consents to and approves the execution and delivery
of this Agreement and the First Amendment to Pledge Agreement by Borrower and
Agent, (ii) agrees that neither this Agreement nor the First Amendment to
Pledge Agreement does and nor shall limit or diminish in any manner its
obligations under its Guaranty or under any of the other Related Documents
to which it is a party, (iii) agrees that neither this Agreement nor the
First Amendment to Pledge Agreement shall be construed as requiring the
consent of any Guarantor in any other circumstance, (iv) reaffirms its
obligations under its Guaranty and all of the other Related Documents to
which it is a party, and (v) agrees that its Guaranty and such other Related
Documents remain in full force and effect and are each hereby ratified and
confirmed.
7. MISCELLANEOUS.
(a) CAPTIONS. Section captions used in this Agreement are for
convenience only, and shall not affect the construction of this Agreement.
(b) GOVERNING LAW. This Agreement shall be a contract made under and
governed by the laws of the State of Illinois, without regard to conflict of
laws principles. Wherever possible each provision of this Agreement shall be
interpreted in such manner to be effective and valid under applicable law,
but if any provision of this Agreement shall be prohibited by or invalid
under such law, such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such
provisions or the remaining provision of this Agreement.
3
<PAGE>
(c) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the different parties on separate counterparts, and each
such counterpart shall be deemed to be an original, but all such counterparts
shall together constitute one and the same Agreement. Delivery of an
executed counterpart of a signature page to this Agreement by telecopy shall
be effective as delivery of a manually executed counterpart of this Agreement.
(d) SUCCESSORS AND ASSIGNEES. This Agreement shall be binding upon
Borrower, the Lenders and Agent and their respective successors and
assignees, and shall inure to the sole benefit of Borrower, Agent and each
Lender and their successors and assignees.
(e) REFERENCES. Any reference to the Secured Credit Agreement
contained in any notice, request, certificate, or other document executed
concurrently with or after the execution and delivery of this Agreement shall
be deemed to include this Agreement unless the context shall otherwise
require.
(f) CONTINUED EFFECTIVENESS. Notwithstanding anything contained
herein, the terms of this Agreement are not intended to and do not serve to
effect a novation as to the Secured Credit Agreement, any Note or any of the
Collateral Documents provided to furnish security therefor. The parties
hereto expressly do not intend to extinguish the Secured Credit Agreement,
any Note or the Collateral Documents. Instead, it is the express intention
of the parties hereto to reaffirm the existence of the indebtedness created
under the Secured Credit Agreement which is evidenced by Notes and secured by
the various Collateral Documents. The Secured Credit Agreement and each of
the Related Documents as amended hereby remain in full force and effect. The
execution, delivery and effectiveness of this Agreement shall not operate as
a waiver of any right, power or remedy of the Lenders or Agent under the
Secured Credit Agreement or any Related Document to which the Lenders and
Agent are a party nor, except as set forth in SECTION 2 hereof, constitute a
waiver of any provision in or Event of Default or Unmatured Event of Default
(now or hereafter existing) under the terms of the Secured Credit Agreement
or any Related Document.
(g) FEES AND EXPENSES. In accordance with Section 14.4 of the Secured
Credit Agreement, Borrower agrees to pay on demand all fees, costs and
expenses incurred by Agent and the Lenders in connection with the
preparation, execution and delivery of this Agreement.
[signature pages follow]
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their duly authorized officers on the date first
above written.
PLATINUM ENTERTAINMENT, INC.,
as Borrower:
By: /s/ Steven Devick
-----------------------------------------
Name Printed: Steven Devick
-------------------------------
Title: President
--------------------------------------
FIRST SOURCE FINANCIAL LLP,
as a Lender and as Agent
By: First Source Financial, Inc.,
Its: Manager
By: /s/ John P. Thacker
------------------------------------
Name Printed: John P. Thacker
--------------------------
Title: Senior Vice President
---------------------------------
LEXICON MUSIC, INC., as Guarantor
By: /s/ Steven Devick
-----------------------------------------
Name Printed: Steven Devick
-------------------------------
Title: President
--------------------------------------
PEG PUBLISHING, INC., as Guarantor
By: /s/ Steven Devick
-----------------------------------------
Name Printed: Steven Devick
-------------------------------
Title: President
--------------------------------------
S-1
[TO SECOND AMENDMENT TO SECURED CREDIT AGREEMENT]
<PAGE>
ROYCE PUBLISHING, INC., as Guarantor
By: /s/ Steven Devick
-----------------------------------------
Name Printed: Steven Devick
-------------------------------
Title: President
--------------------------------------
JUSTMIKE MUSIC, INC., as Guarantor
By: /s/ Steven Devick
-----------------------------------------
Name Printed: Steven Devick
-------------------------------
Title: President
--------------------------------------
S-2
[TO SECOND AMENDMENT TO SECURED CREDIT AGREEMENT]
<PAGE>
Exhibit 10.17
THIRD AMENDMENT TO SECURED CREDIT AGREEMENT
This Third Amendment to Secured Credit Agreement (this "AGREEMENT") is
dated as of April 14, 1999, and is between Platinum Entertainment, Inc., a
Delaware corporation (the "BORROWER"), and First Source Financial LLP, an
Illinois limited liability partnership, as Agent for Lenders party to the
Secured Credit Agreement (as defined below) (the "AGENT").
RECITALS
WHEREAS, the parties hereto are parties to that certain Secured Credit
Agreement, dated as of July 31, 1998 (as amended by that certain First
Amendment to Credit Agreement, dated as of November 1, 1998, and that certain
Second Amendment to Credit Agreement, dated as of January ___, 1999, and as
from time to time further amended, restated, supplemented or otherwise
modified and in effect, the "SECURED CREDIT AGREEMENT"); and
WHEREAS, Borrower and Lenders desire to amend the Secured Credit
Agreement to make certain changes thereto and to correct certain matters, all
as set forth below.
NOW THEREFORE, in consideration of the mutual agreements contained
herein, the parties hereto agree as follows:
AGREEMENT
1. DEFINITIONS. Capitalized terms used but not otherwise defined
herein shall have the meanings as set forth in the Secured Credit Agreement.
2. WAIVERS.
(a) AUDIT OPINION. Lenders and Agent hereby waive any Unmatured Event
of Default or Event of Default caused by Borrower's breach of Section 11.1(a)
of the Secured Credit Agreement arising from the qualification by Ernst &
Young, LLP of Borrower's 1998 annual audit report relating to Borrower's
failure to comply with the Net Worth and Interest Coverage Ratio covenants
set forth in Sections 11.33(a) and 11.33(b) of the Secured Credit Agreement.
(b) MONTHLY FINANCIAL STATEMENTS. Lenders and Agent hereby waive any
Unmatured Event of Default or Event of Default caused by Borrower's failure
to deliver the financial statements required by Section 11.1(c) for the
months of January 1999 and February 1999, on a timely basis;
<PAGE>
PROVIDED, that such financial statements shall be delivered to Agent no later
than April 20, 1999 and April 30, 1999, respectively.
(c) FINANCIAL COVENANTS. Lenders and Agent hereby waive any Unmatured
Event of Default or Event of Default caused by Borrower's failure to comply
with the Net Worth and Interest Coverage Ratio covenants set forth in
Sections 11.33(a) and 11.33(b) of the Secured Credit Agreement through
December 31, 1998.
3. AMENDMENTS TO SECURED CREDIT AGREEMENT. The Secured Credit
Agreement is hereby amended as follows:
(a) Section 4.1 of the Secured Credit Agreement is hereby amended by
deleting it in its entirety and replacing it with the following:
SECTION 4.1 INTEREST RATES. Subject to SECTION 4.3, Borrower
hereby promises to pay interest on the outstanding principal amount of each
Loan for the period commencing on the date thereof until such Loan is
paid in full, at a rate per annum determined by reference to the Prime Rate
or the LIBOR Rate, respectively. The applicable basis for determining the
rate of interest shall be selected by Borrower at the time a borrowing is
requested pursuant to SECTION 2.3 or at the time a Notice of LIBOR Activity
is given pursuant to SECTION 4.3, as the case may be. If on any day any
portion of any Loan is outstanding with respect to which notice has not
been given to Agent in accordance with the terms of this Agreement
specifying the basis for determining the rate of interest thereon, then
for that day, such portion of such Loan shall be a Prime Rate Loan and
shall bear interest at a rate determined by reference to the Prime Rate.
Subject to SECTION 4.3, each Prime Rate Revolving Loan and LIBOR Rate
Revolving Loan shall bear interest at a rate per annum determined as
follows: (a) if it is a Prime Rate Revolving Loan, then at the sum of
the Prime Rate in effect from time to time PLUS the Prime Revolver Margin;
or (b) if it is a LIBOR Rate Revolving Loan, then at the sum of the LIBOR
Rate for the applicable Interest Period PLUS the LIBOR Revolving Margin.
From and after March 25, 1999, the Prime Revolver Margin and LIBOR
Revolving Margin will be 1.50% and 3.00% per annum, respectively.
Notwithstanding anything contained in this SECTION 4.1, in
SECTION 4.3 or any other provision of this Agreement to the contrary, from
and after March 25, 1999 (the "PRIME RATE EFFECTIVE DATE"), Borrower may
not borrow or continue any Loan at the LIBOR Rate or convert any Loan to
the LIBOR Rate. Upon the expiration of the Interest Period with respect
to each LIBOR Rate Loan in effect on the Prime Rate Effective Date, such
LIBOR Rate Loan shall automatically be converted into a Prime Rate Loan.
If Borrowing Availability is equal to or greater
2
<PAGE>
than $2,500,000 for thirty (30) consecutive days occurring on or after the
Prime Rate Effective Date, then Borrower's option to borrower, continue
and convert Loans at the LIBOR Rate in accordance with the terms of
this Agreement shall be reinstated; PROVIDED, HOWEVER, that if Borrowing
Availability is less than $2,500,000 at any time thereafter, then Borrower
may not borrow or continue any Loan at the LIBOR Rate or convert any Loan
to the LIBOR Rate until such time as Borrowing Availability is equal to or
greater than $2,500,000 for thirty (30) consecutive days.
(b) Section 5.6 of the Secured Credit Agreement is hereby amended by
deleting it in its entirety and replacing it with the following:
SECTION 5.6 APPRAISAL FEES. Borrower shall pay to Agent all
appraisal costs and expenses related to the following appraisals of
Borrower's music catalog prepared after the Closing Date at the request
of Agent: (i) any appraisals conducted during the occurrence and
continuance of a Default or Event of Default; (ii) the appraisal
requested by Agent on April 9, 1999, and (iii) in addition to any
appraisal referenced in clauses (i) and (ii) above, one appraisal
conducted after the second anniversary of the Closing Date.
(c) Section 11.33(a) of the Secured Credit Agreement is hereby amended by
deleting it in its entirety and replacing it with the following:
(a) NET WORTH. Maintain Net Worth at all times during each period
listed below of at least the amounts set forth opposite such period:
<TABLE>
<CAPTION>
Period Minimum
Net Worth
<S> <C>
Fiscal Quarter ending March 31, 1999 $6,000,000
Fiscal Quarter ending June 30, 1999 $5,000,000
Fiscal Quarter ending September 30, 1999 $7,800,000
Fiscal Quarter ending December 31, 1999 $9,200,000
Fiscal Quarter ending March 31, 2000 $22,000,000
Fiscal Quarter ending June 30, 2000 $22,000,000
Fiscal Quarter ending September 30, 2000 $22,000,000
Fiscal Quarter ending December 31, 2000 $24,500,000
Fiscal Quarter ending March 31, 2000 and
each Fiscal Quarter thereafter $24,500,000 plus fifty
percent (50%) of
cumulative quarterly Net
Income (without
</TABLE>
3
<PAGE>
giving effect to any
quarterly net losses in
determining Net Income)
(d) Section 11.33(b) of the Secured Credit Agreement is hereby amended by
deleting it in its entirety and replacing it with the following:
(b) INTEREST COVERAGE RATIO. Not permit the Interest Coverage Ratio
measured on the last day of a Fiscal Quarter for the twelve (12) month period
ending on the last day of such Fiscal Quarter to be less than the ratio listed
below opposite such period:
<TABLE>
<CAPTION>
PERIODS RATIO
<S> <C>
Fiscal Quarter ending December 31, 1999 2.3 to 1.0
Fiscal Quarter ending March 31, 2000
and each Fiscal Quarter thereafter 3.0 to 1.0
</TABLE>
(e) Section 11.33 of the Secured Credit Agreement is hereby amended by
adding the following new Section 11.33(d) immediately following Section
11.33(c):
(d) EBITDA. Not permit EBITDA measured on the last day of a Fiscal
Quarter for the twelve (12) month period (or, in the case of the Fiscal
Quarters ending before December 31, 1999, for the period from and
including January 1, 1999, to and including the last day of such Fiscal
Quarter) ending on the last day of such Fiscal Quarter to be less than
the amount listed below opposite such period:
<TABLE>
<CAPTION>
PERIODS MINIMUM EBITDA
<S> <C>
Fiscal Quarter ending March 31, 1999 ($315,000)
Fiscal Quarter ending June 30, 1999 $170,000
Fiscal Quarter ending September 30, 1999 $4,300,000
Fiscal Quarter ending December 31, 1999 $7,000,000
</TABLE>
(f) The Secured Credit Agreement is hereby amended by adding the following
new Section 11.34 immediately following Section 11.33:
SECTION 11.34 STOCK ISSUANCE. In consideration for the execution by
Agent and Lenders of that certain Third Amendment to Credit
4
<PAGE>
Agreement, dated as of April 14, 1999, among Borrower, Agent and Lenders,
Borrower agrees to issue Agent, or Agent's designated Affiliate ("FS
AFFILIATE"), for the benefit of Lenders, Eight Thousand Seven Hundred
Fifty-One (8,751) shares of common stock of Borrower, par value $.001 per
share (the "SHARES"), subject to the terms and conditions hereinafter set
forth.
(a) DELIVERY OF SHARES. A stock certificate for the Shares shall be
delivered to FS Affiliate within ten (10) days after the execution of this
Agreement by the parties hereto.
(b) PAYMENT OF TAXES. The issuance of certificates for the Shares
shall be made without charge to Agent, any Lender or FS Affiliate for any
stock transfer or other issuance tax in respect thereof; PROVIDED, HOWEVER,
that FS Affiliate shall be required to pay any and all taxes that may be
payable in respect of any transfer involved in the issuance and delivery of
any certificate in a name other than that of the then FS Affiliate as
reflected upon the books of Borrower.
(c) PUT RIGHT. FS Affiliate shall have the following Put Right:
(i) FS Affiliate shall have the right to cause Borrower to
repurchase all (but not less than all) of the Shares (the "PUT RIGHT")
at a price equal to $60,000.00 (the "REPURCHASE PRICE"); PROVIDED,
HOWEVER, that (1) no Put Closing (as hereinafter defined) shall occur
prior to December 31, 1999 (the "EXERCISE DATE"), and (2) the Put
Right shall expire if, at any time from April 14, 1999 until the
Exercise Date, the closing price per share of the Common Stock is
greater than or equal to $8.00 per share for 15 consecutive trading
days as quoted by NASDAQ or a similar service.
(ii) If FS Affiliate desires to exercise the Put Right, FS
Affiliate shall provide notice in writing (the "PUT NOTICE") by first
class mail, postage prepaid, to Borrower, on or prior to the Exercise
Date. The Put Right shall be exercised, if at all, on or before the
Exercise Date.
(iii) If Borrower receives a Put Notice pursuant to
CLAUSE (C)(II) above, it shall deliver to FS Affiliate, by first class
mail, postage prepaid, mailed as soon as practicable and if possible
within ten (10) days of the receipt by Borrower of the Put Notice, a
notice stating: (A) the date as of which such repurchase shall occur
(which
5
<PAGE>
date (the "PUT CLOSING") shall not be more than ten (10) days
following the Exercise Date); and (B) the place where the certificate
or certificates representing the Shares are to be surrendered for
payment.
(iv) At the Put Closing, FS Affiliate shall deliver to Borrower
the certificate or certificates representing the Shares and Borrower
shall deliver to FS Affiliate an amount equal to the "Repurchase
Price" by wire transfer of immediately available funds to an account
designated by FS Affiliate.
(v) Borrower shall not (and shall not permit any Affiliate of
Borrower to) enter into any contract or other consensual arrangement
that by its terms restricts Borrower's ability to honor the Put Right.
(vi) No Person other than FS Affiliate (for the benefit of Agent
and Lenders) is intended to be a beneficiary of the Put Right. FS
Affiliate may not assign the Put Right without the written consent of
Borrower.
(d) REGISTERED SHARES. The Shares shall have been registered under
the Securities Act of 1933, as amended, and each of the Shares is duly
authorized, validly issued, fully paid and non-assessable.
(e) LEGEND. Each certificate representing the Shares shall be
stamped or otherwise imprinted with a legend in the following form:
"The reoffer and resale of the securities represented by this certificate
have been registered under the Securities Act of 1933, as amended (the
"ACT"), pursuant to a Registration Statement on Form S-3, and may not be
offered or sold except (i) pursuant to a current prospectus under the
Registration Statement, (ii) pursuant to a separate effective registration
statement under the Act, (iii) to the extent applicable, pursuant to
Rule 144 under the Act (or similar rule under such Act relating to the
disposition of securities), or (iv) upon the delivery by the holder to the
issuer of an opinion of counsel, reasonably satisfactory to counsel for the
issuer, stating that an exemption from registration under such Act is
unavailable."
6
<PAGE>
(f) REMOVAL OF LEGEND. Notwithstanding the foregoing, FS Affiliate
may require Borrower to issue a stock certificate for the Shares without a
legend if the Shares are sold pursuant to any of clauses (e)(i) through
(e)(iv) above.
4. REPRESENTATIONS AND WARRANTIES. To induce Agent to enter into this
Agreement and to make all future Loans under the Secured Credit Agreement,
Borrower represents and warrants to Agent that:
(a) DUE AUTHORIZATION, ETC. The execution, delivery and performance by
Borrower of this Agreement are within its corporate powers, have been duly
authorized by all necessary corporate action, have received all necessary
governmental approval (if any shall be required), and do not and will not
contravene or conflict with any Requirement of Law or Contractual Obligation
binding upon such entity. This Agreement is the legal, valid, and binding
obligation of Borrower enforceable against Borrower in accordance with its
respective terms.
(b) CERTAIN AGREEMENTS. To the best of Borrower's knowledge, on the date
hereof all warranties of the Borrower thereto set forth in the Secured Credit
Agreement are true and correct in all material respects, without any waiver or
modification thereof and no default of any party exists under the Secured Credit
Agreement or any Related Document.
(c) FINANCIAL INFORMATION. All balance sheets, all statement of
operations, of shareholders' equity and of changes in financial position, and
other financial data which have been or shall hereafter be furnished to Agent
for the purposes of or in connection with this Agreement have been and will be
prepared in accordance with GAAP consistently applied throughout the periods
involved and do and will, present fairly the financial condition of the entities
involved as of the dates thereof and the results of their operations for the
periods covered thereby.
(d) LITIGATION. No material litigation (including, without limitation,
derivative actions), arbitrations, governmental investigation or proceeding or
inquiry shall, on the date hereof, be pending which was not previously disclosed
in writing to Agent and no material adverse development shall have occurred in
any litigation (including, without limitation, derivative actions), arbitration,
government investigations, or proceeding or inquiry previously disclosed to
Agent in writing.
5. CONDITIONS TO EFFECTIVENESS. This Agreement shall be effective as of
(a) October 1, 1998 with respect to SECTION 2 hereof and (b) the date hereof
with respect to all other Sections of this Agreement, upon the satisfaction of
the conditions set forth in this SECTION 5 and delivery of the following
documents to Agent on or prior to the date hereof (unless another date is
specified), in form and substance satisfactory to Agent:
7
<PAGE>
(a) AMENDMENT. Borrower shall have delivered to Agent executed
originals of this Agreement.
(b) CONSENTS AND ACKNOWLEDGMENTS. Borrower shall have obtained all
consents, approvals and acknowledgments which may be required with respect to
the execution, delivery and performance of this Agreement.
(c) NO DEFAULT. As of the date hereof after giving effect to this
Agreement and the waiver set forth in SECTION 2 hereof, no Unmatured Event of
Default or Event of Default under any Related Document shall have occurred and
be continuing.
6. AFFIRMATION OF GUARANTIES.
Each Guarantor (i) consents to and approves the execution and delivery of
this Agreement by Borrower and Agent, (ii) agrees that this Agreement does not
nor shall it limit or diminish in any manner its obligations under its Guaranty
or under any of the other Related Documents to which it is a party, (iii) agrees
that this Agreement shall not be construed as requiring the consent of any
Guarantor in any other circumstance, (iv) reaffirms its obligations under its
Guaranty and all of the other Related Documents to which it is a party, and (v)
agrees that its Guaranty and such other Related Documents remain in full force
and effect and are each hereby ratified and confirmed.
7. MISCELLANEOUS.
(a) CAPTIONS. Section captions used in this Agreement are for convenience
only, and shall not affect the construction of this Agreement.
(b) GOVERNING LAW. This Agreement shall be a contract made under and
governed by the laws of the State of Illinois, without regard to conflict of
laws principles. Wherever possible each provision of this Agreement shall be
interpreted in such manner to be effective and valid under applicable law, but
if any provision of this Agreement shall be prohibited by or invalid under such
law, such provision shall be ineffective to the extent of such prohibition or
invalidity, without invalidating the remainder of such provisions or the
remaining provision of this Agreement.
(c) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the different parties on separate counterparts, and each
such counterpart shall be deemed to be an original, but all such counterparts
shall together constitute one and the same Agreement. Delivery of an executed
counterpart of a signature page to this Agreement by telecopy shall be effective
as delivery of a manually executed counterpart of this Agreement.
8
<PAGE>
(d) SUCCESSORS AND ASSIGNEES. This Agreement shall be binding upon
Borrower, the Lenders and Agent and their respective successors and assignees,
and shall inure to the sole benefit of Borrower, Agent and each Lender and their
successors and assignees.
(e) REFERENCES. Any reference to the Secured Credit Agreement contained
in any notice, request, certificate, or other document executed concurrently
with or after the execution and delivery of this Agreement shall be deemed to
include this Agreement unless the context shall otherwise require.
(f) CONTINUED EFFECTIVENESS. Notwithstanding anything contained herein,
the terms of this Agreement are not intended to and do not serve to effect a
novation as to the Secured Credit Agreement, any Note or any of the Collateral
Documents provided to furnish security therefor. The parties hereto expressly
do not intend to extinguish the Secured Credit Agreement, any Note or the
Collateral Documents. Instead, it is the express intention of the parties
hereto to reaffirm the existence of the indebtedness created under the Secured
Credit Agreement which is evidenced by Notes and secured by the various
Collateral Documents. The Secured Credit Agreement and each of the Related
Documents as amended hereby remain in full force and effect. The execution,
delivery and effectiveness of this Agreement shall not operate as a waiver of
any right, power or remedy of the Lenders or Agent under the Secured Credit
Agreement or any Related Document to which the Lenders and Agent are a party
nor, except as set forth in SECTION 2 hereof, constitute a waiver of any
provision in or Event of Default or Unmatured Event of Default (now or hereafter
existing) under the terms of the Secured Credit Agreement or any Related
Document.
(g) FEES AND EXPENSES. In accordance with Section 14.4 of the Secured
Credit Agreement, Borrower agrees to pay on demand all fees, costs and expenses
incurred by Agent and the Lenders in connection with the preparation, execution
and delivery of this Agreement.
(h) AMENDMENT FEE. Borrower agrees to issue to FS Affiliate the Shares
described in SECTION 3(F) hereof.
[signature pages follow]
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their duly authorized officers on the date first
above written.
PLATINUM ENTERTAINMENT, INC.,
as Borrower:
By: /s/Douglas C. Laux
-----------------------------------
Name Printed: Douglas C. Laux
------------------------
Title: Chief Financial Officer
--------------------------------
FIRST SOURCE FINANCIAL LLP,
as a Lender and as Agent
By: First Source Financial, Inc.,
Its: Manager
By: /s/Gregory R. Cooper
------------------------------
Name Printed: Gregory R. Cooper
--------------------
Title: Senior Vice President
---------------------------
LEXICON MUSIC, INC., as Guarantor
By: /s/Douglas C. Laux
-----------------------------------
Name Printed: Douglas C. Laux
------------------------
Title: Chief Financial Officer
--------------------------------
PEG PUBLISHING, INC., as Guarantor
By: /s/Douglas C. Laux
-----------------------------------
Name Printed: Douglas C. Laux
------------------------
Title: Chief Financial Officer
--------------------------------
S-1
[TO THIRD AMENDMENT TO SECURED CREDTI AGREEMENT]
<PAGE>
ROYCE PUBLISHING, INC., as Guarantor
By: /s/Douglas C. Laux
-----------------------------------
Name Printed: Douglas C. Laux
------------------------
Title: Chief Financial Officer
--------------------------------
JUSTMIKE MUSIC, INC., as Guarantor
By: /s/Douglas C. Laux
-----------------------------------
Name Printed: Douglas C. Laux
------------------------
Title: Chief Financial Officer
--------------------------------
By: /s/Douglas C. Laux
-----------------------------------
Name Printed: Douglas C. Laux
------------------------
Title: Chief Financial Officer
--------------------------------
S-2
[TO THIRD AMENDMENT TO SECURED CREDTI AGREEMENT]
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation in the Post-Effective Amendment No. 1 to the
Registration Statement (Form S-3 No. 333-69595) of Platinum Entertainment
Inc. and related Prospectus of our report dated April 14, 1999, with respect
to the consolidated financial statements and schedules of Platinum
Entertainment included in this annual report (Form 10-K) for the year ended
December 31, 1998.
ERNST & YOUNG LLP
Chicago, Illinois
April 14, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF PLATINUM ENTERTAINMENT, INC. FOR THE YEAR
ENDED AND AS OF DECEMBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 12
<SECURITIES> 750
<RECEIVABLES> 15,506
<ALLOWANCES> (1,772)
<INVENTORY> 8,982
<CURRENT-ASSETS> 19,080
<PP&E> 3,754
<DEPRECIATION> (1,293)
<TOTAL-ASSETS> 56,978
<CURRENT-LIABILITIES> 49,060
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 7,911
<TOTAL-LIABILITY-AND-EQUITY> 56,978
<SALES> 38,583
<TOTAL-REVENUES> 56,314
<CGS> 28,608
<TOTAL-COSTS> 29,341
<OTHER-EXPENSES> 22,845
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,004
<INCOME-PRETAX> (14,797)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,797)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,797)
<EPS-PRIMARY> (3.07)<F1>
<EPS-DILUTED> (3.07)<F1>
<FN>
<F1>Includes $2,824 of preferred dividend requirements
</FN>
</TABLE>
