UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 000-27852
PLATINUM ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3802328
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2001 Butterfield Road
Downers Grove, Illinois 60515
(Address of principal executive offices, including zip code)
(630) 769-0033
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
7,313,754 Common Stock, par value $.001 per share, at November 15, 1999
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Platinum Entertainment,Inc.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
September 30 December 31
1999 1998
<S> <C> <C>
________________________________
Assets (Unaudited)
Current assets:
Cash $ 23 $ 12
Accounts receivable, net 11,168 5,647
Artist advances, net 2,982 1,899
Inventories, net 7,026 7,036
Investment securities 8,239 750
Other receivable - 2,500
Other 2,483 1,986
________________________________
Total current assets 31,921 19,830
Property and equipment, net 2,655 2,461
Recorded music costs, net 1,102 1,251
Music catalog, net 20,617 21,314
Music publishing rights, net 2,084 3,026
Goodwill, net 5,427 5,610
Deferred financing costs, net 212 253
Equity investment in joint venture 2,496 2,205
Other - 1,028
________________________________
Total assets $ 66,514 $ 56,978
================================
Liabilities and Stockholders' Equity
Current liabilities:
Revolving line of credit $ 34,337 $ 33,965
Due to related parties 1,481 -
Accounts payable 9,386 6,452
Accrued liabilities 2,014 3,233
Royalties payable 7,619 5,410
________________________________
Total current liabilities 54,837 49,060
Stockholders' equity:
Preferred stock:
Preferred Stock ($.001 par value); 10,000,000
shares authorized: - -
Series B Convertible Preferred Stock,
20,000 shares issued and outstanding - -
Series C Convertible Preferred Stock,
2,500 shares issued and outstanding - -
Series D Convertible Preferred Stock,
3,938 shares issued and outstanding - -
Common stock:
Common Stock ($.001 par value); 40,000,000
shares authorized, 7,517,835 and 6,626,099
shares issued and 7,313,754 and 6,626,099
shares outstanding, respectively 7 7
Additional paid-in capital 80,964 71,378
Accumulated deficit (76,783) (63,467)
Accumulated other compreshensive income 7,489 -
________________________________
Stockholders' equity 11,677 7,918
_________________________________
Total liabilities and stockholders' equity $ 66,514 $ 56,978
=================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Platinum Entertainment, Inc.
Consolidated Statements of Operations
(Unaudited - in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Quarter ended September 30 Nine months ended September 30
1999 1998 1999 1998
_____________________ _________________________
<S> <C> <C> <C> <C>
Gross product sales $ 15,675 $ 15,966 $ 38,772 $ 42,572
Less: Returns (5,136) (4,457) (10,588) (8,727)
Less: Discounts (771) (995) (1,624) (2,203)
______________________ _________________________
Net product sales 9,768 10,514 26,560 31,642
Licensing, publishing
and other revenues 228 258 754 1,584
______________________ _________________________
Net sales 9,996 10,772 27,314 33,226
Cost of sales and
services 5,661 6,303 17,456 20,224
______________________ _________________________
Gross profit 4,335 4,469 9,858 13,002
Other operating expenses:
Selling, general and
administrative 6,302 5,943 16,438 14,384
Depreciation and
amortization 594 495 1,781 1,400
______________________ _________________________
6,896 6,438 18,219 15,784
______________________ _________________________
Operating loss (2,561) (1,969) (8,361) (2,782)
Interest income - - - 41
Interest expense (879) (726) (2,312) (1,989)
Other financing costs (27) (564) (130) (360)
Equity loss 408 (63) 292 (91)
other gain 130 - 130 -
_______________________ _________________________
Net loss (2,929) (3,322) (10,381) (5,181)
Less: Preferred
dividend requirements (1,070) (716) (2,935) (2,086)
_______________________ _________________________
Loss applicable to
common shares $ (3,999) $ (4,038) $(13,316) $ (7,267)
======================= ===========================
Basic and diluted
loss per common share $ (0.55) $ (0.67) $ (1.90) $ (1.30)
Weighted average number
of common shares
outstanding 7,313,211 6,028,759 7,017,142 5,571,073
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Platinum Entertainment, Inc.
Consolidated Statement of Stockholders' Equity
(Unaudited - in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Accumulated
Additional other
Preferred stock Accumu- Compreh- Stock-
Common Stock Paid-In lated ensive holders'
Series B Series C Series D Shares Amount capital Deficit Income equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ - $ - $ - 6,626 $ 7 $ 71,378 $ (63,467) - $ 7,918
Issuances of Common Stock:
Private placement ($7.09 per share) - - - 423 - 3,000 - - 3,000
Warrant exercises - - - 259 - 2 - - 2
Professional services by related parties - - - 75 - 527 - - 527
Employee stock plans - - - 43 - 250 - - 250
Professional services - - - 22 - 148 - - 148
Litigation settlement - - - 20 - 129 - - 129
Issuances of preferred stock:
Series D with warrants - - - - - 3,909 - - 3,909
Redemption of Common Stock:
Litigation settlement - - - (204) - (1,314) - - (1,314)
Dividends:
Preferred dividend requirements - - - - - 2,935 (2,935) - -
Comprehensive loss:
Net loss for the nine months ended
September 30, 1999 - - - - - - (10,381) - (10,381)
Unrealized gain on investment - - - - - - - 7,489 7,489
__________
Comprehensive loss - - - - - - - - (2,892)
Other - - - 50 - - - - -
___________________________________________________________________________________________
Balance at September 30, 1999 $ - $ - $ - 7,314 $ 7 $ 80,964 $ (76,783) $7,489 $ 11,677
===========================================================================================
</TABLE>
<PAGE>
Platinum Entertainment, Inc.
Consolidated Statements of Cash Flows
(Unaudited - in thousands)
<TABLE>
Nine months ended September 30
1999 1998
_______________________________
<S> <C> <C>
Operating activities
Net loss $ (10,381) $ (5,181)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for future returns 10,588 8,727
Provision for doubtful accounts 625 -
Provision for slow-moving inventory 100 -
Provision for unrecoupable artist balances 2,681 1,750
Depreciation 506 285
Amortization 1,275 1,115
Deferred financing costs 41 200
Equity loss from joint venture (292) 91
Professional services by related parties paid in common stock 527 -
Professional services paid in common stock 148 -
Litigation settlement, net (1,185) -
Changes in operating assets and liabilities:
Accounts receivable (16,108) (15,555)
Inventories (91) 318
Artist advances (3,987) (4,591)
Recorded music costs (131) (535)
Accounts payable 2,934 280
Accrued liabilities (824) (1,605)
Royalties payable 2,210 3,812
Other (142) (550)
_______________________________
Net cash used in operating activities (11,506) (11,439)
Investing activities
Net proceeds from sale of music publishing rights 1,150 -
Cash paid for acquisition (450) (775)
Purchases of property and equipment (695) (931)
_______________________________
Net cash used in investing activities 5 (1,706)
Financing activities
Net proceeds from revolving lines of credit 372 32,079
Proceeds from related parties 1,480 -
Payment on bank term loan - (20,000)
Net proceeds from sale of preferred stock with warrants
to related parties 3,909 -
Proceeds from sale of Common Stock 5,500 -
Proceeds from sale of Common Stock to related parties - 1,350
Employee stock plans 251 -
Financing costs - (214)
Other - (74)
_______________________________
Net cash provided by financing activities 11,512 13,141
_______________________________
Net increase in cash 11 (4)
Cash, beginning of period 12 11
_______________________________
Cash, end of period $ 23 $ 7
===============================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Platinum Entertainment, Inc.
Notes to Consolidated Financial Statements
(Unaudited - in thousands, except share and per share amounts)
1. Basis of Presentation
The financial statements included herein are unaudited and have been
prepared in accordance with generally accepted accounting principles (GAAP) for
interim financial reporting and Securities and Exchange Commission regulations.
Accordingly, the statements do not include all the information and footnotes
required by GAAP for complete financial statements. In the opinion of
management, the financial statements reflect all adjustments which are necessary
to present fairly the financial position, results of operations and cash
flows for the interim periods presented. Certain prior period amounts
in the financial statements have been reclassified to conform with the
current period presentation. These financial statements should be read
in conjunction with the audited consolidated financial statements and
notes thereto for the year ended December 31, 1998, of Platinum
Entertainment, Inc. included in the Annual Report on Form 10-K filed
with the Securities and Exchange Commission on April 15, 1999. The
interim results presented are not necessarily indicative of the results
that may be expected for the year ending December 31, 1999.
We have incurred significant net losses and negative cash flows from
operations since our inception, including a net loss of $10,381 ($13,316 after
preferred dividend requirements) and negative cash flows from operations of
$11,506 in the nine months ended September 30, 1999. We have
historically sustained net losses and negative cash flows, in part due
to the high costs associated with the establishment and expansion of our
activities.
Historically, we have funded our operations and other activities from a
variety of capital sources, including debt and equity financing. We
have continued to obtain equity financing from time-to-time. As the
likelihood of securing additional debt and equity financing is
uncertain, we have formulated and begun implementing specific measures
we believe will improve cash flows and enable us to continue in
existence without a significant curtailment of operations.
* During August 1999,we sold certain country music publishing rights
for $1,449 (see "Note 4").
* On October 6, 1999, we sold 798,856 common shares of musicmaker.com,
Inc. (Nasdaq: HITS) for net proceeds of $7,289 (see "Note 3").
* During October 1999, we began a consolidation of our Downers Grove,
Illinois and Nashville, Tennessee offices into our new 80,000 square
foot Alpharetta, Georgia distribution and office facility. We
believe this consolidation will result in a significant reduction in
overhead costs. We expect the consolidation to be complete by
December 31, 1999.
* We are increasingly arranging for payment to our artists, producers
and distributed labels for services rendered in shares of our Common
Stock in lieu of cash.
* We are aggressively seeking strategic partnerships with Internet
companies to exploit the use of digital rights to our extensive music
catalog, exemplified by our deal with musicmaker.com.
While we have been successful in the past in raising equity as
needed, there can be no assurance that additional equity financing may be
available on satisfactory terms, if at all. The financial statements and related
notes included elsewhere herein do not include any adjustments which might
result from the outcome of this uncertainty. Our plans for fiscal 1999 and
beyond are subject to uncertainties, many of which are beyond our control, such
as general economic conditions and competitive factors, and actual results may
vary significantly from our plans.
<PAGE>
2. Accounting Policies
Comprehensive Loss
Comprehensive income is defined by Financial Accounting Standard No.
130, Reporting Comprehensive Income, as net loss plus other comprehensive
income, which, under existing accounting standards, includes foreign currency
items, minimum pension liability and unrealized gains and losses on
certain investments in debt and equity securities. We report
comprehensive loss in the consolidated statement of stockholders' equity.
New Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) No. 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use. SOP No. 98-1
requires entities to capitalize certain costs related to internal-use software
once certain criteria have been met. We implemented SOP No. 98-1 on January 1,
1999. The adoption of SOP No. 98-1 did not have a material impact on our
financial position or results of operations.
In April 1998, the AICPA issued SOP 98-5,Reporting on the Costs of
Start-Up Activities. SOP No. 98-5 requires that all start-up costs related
to new operations must be expensed as incurred. In addition, all start-up
costs that were capitalized in the past must be written-off when SOP
No. 98-5 is adopted. We implemented SOP No. 98-5 on January 1, 1999.
The adoption of SOP No. 98-5 did not have a material impact on our financial
position or results of operations.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard (SFAS) No. 133, Accounting
for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes methods for derivative financial instruments and hedging
activities related to those instruments, as well as other hedging
activities. We will be required to implement SFAS No. 133 for the year
ending December 31, 2000. Because we do not currently hold any
derivative instruments and do not engage in hedging activities, we do
not expect the adoption of SFAS No. 133 will have a material impact on
our financial position or results of operations.
3. MUSICMAKER.COM
musicmaker.com began publicly trading its common stock on July 7, 1999.
Accordingly, we adjusted our investment in musicmaker.com's common stock to
market at September 30,1999, using the closing price as reported by Nasdaq on
that date.
We sold all of our 798,856 shares of common stock of musicmaker.com on
October 6, 1999, for net proceeds of $7,289, or $9.125 per share. The sale
resulted in a realized gain of $6,539 to be recognized during the fourth
quarter. We received our stake in musicmaker.com, the Internet's
largest music download and custom CD vendor, in exchange for $750 of our
common stock in September 1998. In addition, we granted musicmaker.com
the exclusive right to our music catalog for Internet downloads and
"burn and mail" compilations for five years with automatic renewals for
one year until terminated by either party. We retained the rights to
our music catalog for promotional Internet downloads.
<PAGE>
The pro forma information following assumes we sold our shares of
musicmaker.com on September 30, 1999, for $9.125 per share:
<TABLE>
<CAPTION>
Nine months
Quarter ended ended
September 30 September 30
1999 1999
<S> <C> <C>
Gross revenues $ 15,903 $ 39,526
Net revenues 9,996 27,314
Gross profit 4,335 9,858
Operating loss (2,561) (8,361)
Income (loss) applicable to common shares 2,540 (6,777)
Basic loss per common share 0.35 (0.97)
Diluted loss per common share 0.28 (0.97)
</TABLE>
We used $1,400 of the proceeds to permanently pay-down our revolving
bank credit commitment with First Source (see "Note 6"). In addition, we
immediately paid $3,811 to certain vendors. The remainder of the proceeds were
applied to our credit facility with First Source for general corporate
purposes.
4. Double J Music Publishing Rights
On August 26, 1999, effective as of June 30, 1999, we sold certain
country music publishing rights, collectively referred to as Double J Music, to
HoriPro Entertainment Group, Inc. for an aggregate $1,449. Pursuant to the
agreement with HoriPro, we received $1,204 at closing, an additional $95 placed
in escrow at closing was received during October 1999, and $150 was placed
in an indemnity escrow account, which shall be released to us in full in
February 2000, subject to any post-closing adjustments. The book value
of Double J Music was $1,020 at closing, and after deducting costs
associated with the transaction, the sale resulted in a gain of $130
recognized during the third quarter of 1999. The amount received in
October will be reflected as a gain during the fourth quarter of 1999,
and any amounts received in February 2000, will be reflected as a gain
during the first quarter of 2000. Pursuant to our banking agreement,
50% of the net proceeds received from this sale shall permanently reduce
our revolving credit agreement with the bank (see "Note 6").
5. Basic and Diluted Loss Per Common Share
Basic loss per common share is based upon the net loss applicable to
common shares after preferred dividend requirements and upon the
weighted-average number of common shares outstanding during the period.
Diluted loss per common share adjusts for the effect of convertible securities,
stock options and warrants only in the periods presented in which such effect
would have been dilutive. The total of such securities at September 30,
1999, was 14,305,708. Such effect was not dilutive in any of the periods
presented herein, with the exception of the pro forma information in
"Note 3".
<PAGE>
6. 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 had an original five year term and bears
interest at the bank's base rate plus 1.5% per annum (9.75% at September
30, 1999). Borrowings under our First Source facility are limited to
the Borrowing Base, as defined, which is based upon eligible accounts
receivable, inventory and music catalog. Our First Source facility
contains certain financial covenants, requires a lockbox arrangement and
is secured by substantially all of our assets.
The First Source agreement was amended during April 1999 to provide
for revised financial covenants through December 31, 1999. The First Source
agreement was amended again during August 1999, to allow the sale of our
Double J publishing rights (see "Note 4"). Pursuant to this amendment, the
revolving line of credit was permanently reduced by 50% of the net proceeds
from the sale of Double J, or approximately $575. The First Source agreement
was also amended during October 1999, to release First Source's security
interest in our investment in musicmaker.com, allowing us to sell our shares of
musicmaker.com (see "Note 3"). Pursuant to this amendment, $1,400 of
the musicmaker.com proceeds were used to permanently reduce our
revolving commitment with First Source. This amendment also adjusted
the termination date of the agreement from July 31, 2003, to March 31,
2000, and certain financial covenants in violation at September 30,
1999, were waived and adjusted for the future. In addition, selected
titles from our master catalog were approved for potential sale by us to
willing third parties; if such sales occur, 50% of all proceeds received
by us will be used to permanently reduce our revolving
commitment.
At September 30, 1999, the revolving facility totaled $34,337 of
which we had $88 available under that facility. On October 6, 1999, we
sold our shares of musicmaker.com for net proceeds of $7,289 (see "Note
3"). After applying a permanent reduction to our revolving facility and
paying certain vendors, the revolving facility totaled $30,859 of which
we had $2,166 available under that facility. The funds available under
the facility have subsequently been significantly depleted for current
working capital funding needs.
7. Preferred Stock
The issuance of an aggregate 3,938 shares of Series D Convertible
Preferred Stock and related warrants to purchase an aggregate of 794,163 shares
of Common Stock during April 1999 triggered the antidilution protection
provisions contained in the Series B and Series C Preferred Stock and
related warrants. We gave the holders of the Series B and Series C
Preferred Stock and related warrants notice of an adjustment of the
Conversion Rate (as defined) of the Series B and Series C Preferred
Stock and the Exercise Price (as defined) of the related warrants, but
the holders of the Series B and Series C Preferred Stock and related
warrants have not accepted our manner of calculation and the adjustment
required. If the holders of the Series B and Series C Preferred Stock
and related warrants do not accept our manner of calculation and
adjustment required, the adjustment will be determined by an independent
financial expert.
<PAGE>
8. Preferred Dividend Requirements
The preferred stock accrued dividends as follows:
Series B Series C Series D Total
August 31, 1999 $ 845 $ 105 $120 $1,070
May 31, 1999 815 102 62 979
Febuary 28, 1999 788 98 - 886
May 31, 1998 618 77 - 695
Febuary 28, 1998 600 75 - 675
The dividends reflect a compounding per annum rate of 14%
(effective December 1998; prior to such date the per annum rate was 12%)
of the initial costs of the Series B Convertible Preferred Stock and
Series C Convertible Preferred Stock and a compounding per annum rate of
12% of the initial costs of the Series D Convertible Preferred Stock.
The dividends have been accrued in stockholders' equity.
9. Related Party Transactions
We entered a distribution agreement, dated August 1998,
with Envisage Multimedia LLC pursuant to which we are the exclusive
distributor of Envisage recorded music products, in certain territories,
for a period of three years. For such services, we receive a
distribution fee from Envisage. We also have paid certain manufacturing
and promotional costs on behalf of Envisage, to be fully repaid to us by
Envisage. Gross product sales of Envisage product reflected in the
statement of operations for the quarter and nine months ended September
30, 1999 were immaterial. The amount due from Envisage at September 30,
1999 is approximately $625. Envisage has indicated they will not pay
the amount owed us; accordingly, we have fully reserved the outstanding
balance at September 30, 1999. Envisage is related to three of our
directors or their affiliates, namely Carl Harnick, Geoffrey Holmes and
Robert Morgado.
During April 1999, we issued 75,246 shares of our Common Stock,
valued at $527 or $7 per share, to Platinum technology International,
Inc. (Platinum technology), in connection with previously provided
computer consulting services. As of the date of this transaction,
certain members of our board of directors were shareholders, directors
and officers of Platinum technology. Pursuant to an agreement
accompanying the issuance, if Platinum technology sells the shares below
the initial value of the shares at time of issuance, we are required to
issue Platinum technology additional shares of our Common Stock equal to
their loss on the sale. To the extent Platinum technology sells the
stock for greater than such initial value, Platinum technology shall
retain 10% of such excess value and shall remit the remaining excess
value to us to be applied on a priority basis to future invoices for
additional services, if any. Such arrangement also applies to the
initial payment of 53,192 shares issued to Platinum technology on
November 20, 1998 valued at $7.188 per share. As of September 30, 1999,
Platinum technology had not sold any of these shares.
During the third quarter of 1999, we borrowed $1,181 from
Steven Devick, an officer, director and shareholder of the Company, and
$300 from Craig Duchossois, a director and shareholder of the Company,
for general corporate purposes. Such amount was outstanding at
September 30, 1999.
<PAGE>
10. Litigation
During March 1999, we settled our pending litigation with JCSHO, Inc.
(see "Part II - Other Information - Item 1. Legal Proceedings"). The
settlement resulted in an offset of charges previously expensed by us in
connection with the acquired assets and assumed liabilities of Intersound, Inc.
through the recognition of a gain of $1,185. This amount is included as an
offset to our operating expenses in the statement of operations for the nine
months ended September 30, 1999.
On April 7, 1999, Ichiban Records, Inc. filed a lawsuit in the
Superior Court of Fulton County, State of Georgia, captioned Ichiban Records,
Inc. v. Platinum Entertainment, Inc., Civil Action No. 1999 CV 07215 ("Ichiban
Claim"), seeking termination of its distribution agreement with us and damages
in excess of $10,000, for alleged breaches of its distribution agreement by us.
Ichiban Records, Inc. also filed a complaint for injunction and
temporary restraining order and appointment of a receiver under the same
caption. On April 21, 1999, Ichiban Records, Inc. also filed a
voluntary petition to commence a case under Chapter 11 of the Bankruptcy
Code in the United States Bankruptcy Court for the Northern District of
Georgia, Atlanta Division, Case No. 99-66017. Further, we removed the
Ichiban Claim from the State of Georgia court to the United States
District Court for the Northern District of Georgia, Atlanta Division,
Case No. 1:99 CV-1113. The Ichiban Claim will now be asserted through
the bankruptcy action. We have restructured the distribution agreement
with Ichiban Records, Inc. in order to recover advances and other monies
owed by Ichiban Records, Inc. to us, and the restructure agreement has
been approved by the Bankruptcy Court. A settlement agreement to
dismiss the Ichiban Claim also has been reached with the trustee for the
bankruptcy estate and has been presented to the Bankruptcy Court for
approval. We believe the claims of Ichiban Records, Inc. are without
merit and that the matter will be successfully resolved without a
material impact on our financial position or results of operations.
However, because the bankruptcy is at an early stage, there can be no
assurances that the matter can be resolved in our favor. A decision
adverse to us in this matter could have a material adverse impact on our
financial position and results of operations.
On May 28, 1999, PolyGram Group Distribution, Inc. filed an action
against us in the Superior Court of the State of California for the County
of Los Angeles captioned PolyGram Group Distribution, Inc. -v- Platinum
Entertainment, Inc., Case No. B C211091, seeking injunctive relief,
restitution, and disgourgement of profits arising out of PolyGram's claim
that the distribution agreement between us and PolyGram Group Distribution
bars the distribution of recordings by us through our own distribution
facilities and requires that they be distributed by PolyGram. On June 25, 1999,
PolyGram filed an amended complaint that additionally seeks the recovery
of damages. We have rejected earlier demands to cease and desist
selling our recordings through our own distribution facilities on the
grounds that an amendment to the distribution agreement with PolyGram
Group Distribution specifically allows us to distribute records through
our own distribution company. We have filed our answer to the complaint
and have filed cross-complaints against PolyGram seeking damages
incurred in connection with the production of a compilation album by
PolyGram entitled "Essential Southern Rock", for the failure of
PolyGram's successor, Universal Music, to properly pay royalties to us
pursuant to the terms of a foreign licensing agreement between Universal
and us, and for breach of the distribution agreement by PolyGram. We
have also sent a notice of termination of the distribution agreement to
PolyGram, terminating the distribution agreement effective as of July
21, 1999 for PolyGram's breach of the distribution agreement. On
November 10, 1999, the action in California was stayed on the grounds
that the forum for the lawsuit should be in New York rather than
California. We had earlier filed an action in New York asserting as
plaintiff the claims made as cross-complaints in the action in
California, so to the extent PolyGram elects to continue pursuing its
claims against us, those claims will be litigated in New York.
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The information in this section should be read together with the
consolidated financial statements and related notes contained elsewhere
herein.
OVERVIEW
Our primary business is the production,distribution, marketing and sale
of music. Our strategy is to fully utilize our distribution capabilities
through predictable releases, hit releases from our urban division, catalog
compilations and distribution contracts with third parties. Our music products
include new releases,typically by artists established in a particular genre,
compilations featuring various artists and repackagings of previously recorded
music from our master music catalog and 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 Alpharetta, Georgia, and we have a
promotional office in Nashville, Tennessee. We completed the opening of
a new, larger and more efficient distribution facility in Alpharetta at
the end of October. In addition, we are consolidating our label and
distribution activities currently located in Downers Grove and Nashville
into the new Alpharetta facility.
We distribute our products through a multi-channel system comprised of
(i) PED Corp, our proprietary distribution system, (ii) international licensing
agreements as well as production and distribution agreements on a
territory-by-territory basis and (iii) Internet distribution. We had a
distribution agreement with PolyGram Group Distribution, Inc. (PGD) through July
1999, at which time we notified PGD we were terminating the agreement (see "Part
II - Other Information - Item 1. Legal Proceedings"). Our gross revenues
through PGD were $216,000 and $6,106,000 for the third quarter of 1999 and 1998,
respectively, reflecting a 96% decrease. Our gross revenues through PGD
were $3,310,000 and $15,522,000 for the first nine months of 1999 and
1998, respectively, reflecting a 79% decrease. Management believes that
this decrease prior to our termination in July 1999 is related to the
acquisition by Universal Music and Video Distribution (Universal) of PGD
during the summer of 1998. This decrease was offset in part by
increased sales volume through PED. However, during these periods, our
internal distribution capabilities were insufficient to fully offset the
loss of the PGD distribution services. Our new distribution facility,
which became fully operational near the end of October 1999, will
provide us with distribution capabilities which could potentially both
offset the termination of the PGD distribution services and grow the
business substantially. Gross revenues through PED were $15,268,000 and
$9,702,000 for the third quarter of 1999 and 1998, respectively,
reflecting a 57% increase. Gross revenues through PED were $35,080,000
and $26,203,000 for the first nine months of 1999 and 1998,
respectively, reflecting a 34% increase.
As a result of PGD's failure to perform and the resulting termination
of the PGD agreement, we increased our reserve for future returns related to
product distributed by PGD by $1,000,000 during the nine months ended September
30, 1999. In addition, we increased artist advance and inventory reserves
related to product distributed by PGD by approximately $1,200,000 during the
same period. An additional $390,000 in costs were incurred during the nine
months ended September 30, 1999, primarily due to increased handling
fees, freight charges, etc. to transfer product from PGD to PED. As
discussed above, we moved PED to a new, larger and more efficient
facility at the end of October 1999, which we anticipate will enable us
to more efficiently distribute product and increase gross margins
through the elimination of PGD's distribution fee of approximately 18%,
and miscellaneous fees representing an additional 5% on average.
<PAGE>
While we have historically distributed records for a limited
number of outside labels, it is our strategy to increase the volume of
outside labels we distribute in order to generate additional revenues
and to expand our PED system. Under these arrangements, we generate a
distribution fee of approximately 20% to 30%, depending on the volume
and range of services provided. The gross margin from these sales has
ranged from as low as 6% (for third party product distributed by PGD)
to 27% (for product distributed through our proprietary systems). We
anticipate additional increases in gross margins as PED assumes the
distribution responsibilities of additional third party labels.
These third party activities represented 16% of our gross revenues in the
third quarter of 1999, as compared to 18% in the third quarter of 1998,
and 16% during the nine months ended September 30, 1999 and September 30,
1998. The decrease in the third quarter of 1999 resulted from decreased
activity of Ichiban Records, which filed for bankruptcy during April 1999 (see
"Part II - Other Information - Item 1. Legal Proceedings").
We distribute via the Internet through our website,www.PlatinumCD.com ,
and our income 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 are an
affiliate with Amazon.com, a leader in the Internet commerce industry,
to provide customers who visit our website access to hundreds of
thousands of commercially available titles. We have retained the rights
to our music catalog for promotional Internet downloads. Revenues
related to Internet related items have been immaterial through the end
of the third quarter 1999; however, on October 6, 1999, we realized a
$6,539,000 gain from our investment in musicmaker.com (see "Note 3" to
the financial statements).
Product sales are recognized upon shipment. In accordance with industry
practice, our music products are sold on a returnable basis. Our allowance for
future returns is primarily based upon our historical returns and SoundScan
data. Our returns were 32% of our gross revenues in the third quarter of 1999,
as compared to 27% in the third quarter of 1998. Our returns were 27% during the
nine months ended September 30, 1999, as compared to 20% in the nine months
ended September 30, 1998. The current periods are higher than the comparable
prior periods due to the increase in future returns for product
distributed by PGD as discussed above. It is our policy to inventory
returned product and resell such product at market value.
During March 1999, we settled our pending litigation with JCSHO, Inc.
(see "Part II - Other Information - Item 1. Legal Proceedings"). The
settlement resulted in an offset of charges previously expensed by us in
connection with the acquired assets and assumed liabilities of Intersound, Inc.
through the recognition of a gain of $1,185,000. This amount is included as an
offset to our operating expenses in the statement of operations for the
nine months ended September 30, 1999.
We have historically sustained losses and negative operating cash flows,
in part due to the high costs associated with the establishment and expansion of
our activities. We require significant recurring funds for artist and
repertoire (A&R) expenses, which include recorded music costs. We make
substantial payments each year for recording costs and advances to artists and
producers in order to maintain and enhance our artist roster. Advances
to established artists and producers and direct costs associated with
the creation of record masters are capitalized and are charged to cost
of sales as the related albums earn revenues or when the amounts are
determined to be unrecoverable. See "Liquidity and Capital Resources"
following
<PAGE>
Result of Operations
The following table sets forth for the periods indicated the
percentage of gross revenues represented by certain items included in
our "Consolidated Statements of Operations." Operating performance for
any period is not necessarily indicative of performance for any future
periods.
<TABLE>
<CAPTION>
Quarter ended Nine months ended
September 30 September 30
1999 1998 1999 1998
________________ _________________
<S> <C> <C> <C> <C>
Gross revenues
Platinum labels 83% 80% 82% 80%
Distributed labels 16% 18% 16% 16%
Licensing, publishing and other 1% 2% 2% 4%
________________ _________________
Total gross revenues 100% 100% 100% 100%
Less: Returns -32% -27% -27% -20%
Less: Discounts -5% -6% -4% -5%
________________ _________________
Net revenues 63% 67% 69% 75%
Cost of sales 36% 39% 44% 46%
________________ _________________
Gross profit 27% 28% 25% 29%
Other operating expenses:
Selling, general and administrative 40% 37% 42% 33%
Depreciation and amortization 4% 3% 5% 3%
_________________ _________________
44% 40% 47% 36%
_________________ _________________
Operating income (loss) -17% -12% -22% -7%
Interest expense -6% -4% -6% -5%
Other financing costs - -3% - 1%
Equity gain (loss) 3% - 1% -
Other gain (loss) 1% - - -
_________________ _________________
Net loss -19% -19% -27% -13%
Less: Preferred dividend requirements -7% -4% -7% -5%
_________________ _________________
Loss applicable to common shares -26% -23% -34% -18%
================= =================
</TABLE>
Gross Revenues. Gross revenues decreased $321,000 or 2% to
$15,903,000 for the third quarter of 1999, compared to $16,224,000 for
the third quarter of 1998, and decreased $4,630,000 or 10% to
$39,526,000 for the nine months ended September 30, 1999, compared to
$44,156,000 for the same period of the prior year. Gross revenues
through PGD were down $5,890,000 or 96% in the third quarter of 1999,
compared to the third quarter of 1998, and down $12,212,000 or 79% in
the nine months ended September 30, 1999, compared to the same period of
the prior year. Management believes that this decrease is related to
the acquisition by Universal of our former third party, major label
distributor, PolyGram Group Distribution, during the summer of 1998.
During July 1999, we provided PGD with a notification of termination of
the distribution agreement. See "Part II - Other Information - Item 1.
Legal Proceedings." This decrease was offset in part by increased sales
through our own distribution system. However, our internal distribution
capabilities were insufficient to fully offset the loss of the PGD
distribution services. Our new distribution facility, which became fully
operational near the end of October 1999, will provide us with
distribution capabilities which could potentially both offset the
termination of the PGD distribution services and grow the business
substantially. Gross revenues through PED were up $5,566,000 or 57% in
the third quarter of 1999, compared to the third quarter of 1998, and up
$8,877,000 or 34% in the nine months ended September 30, 1999, compared
to the same period of the prior year. Notable releases shipped during
the current periods include Rick Springfield's first release in over ten
years, "Karma", Vickie Winans' second live album on CGI Platinum, "Live in
Detroit II", initial shipments of "Pete Townshend Live", a benefit for
Chicago's Maryville Academy, a charity for disadvantaged youths,
recorded live at the House of Blues in Chicago with special guest Eddie
Vedder, multi-platinum country artist Suzy Bogguss' self-titled debut
Platinum Nashville release, and catalog titles such as urban compilation
"Booty Mix 4" and country singer T. Graham Brown's "Wine into Water".
<PAGE>
Returns. We record an estimate of future returns at the time
product is sold (see "Overview"). Returns as a percentage of gross revenues
were 32% of gross revenues in the third quarter of 1999, as compared to 27%
in the third quarter of 1998. Returns as a percentage of gross revenues were
27% during the nine months ended September 30, 1999, as compared to 20% in
the same period of the prior year. The current periods are higher than
the comparable prior periods due to increased returns for product
distributed by PGD as discussed above.
Discounts. Discounts as a percentage of gross revenues remained
relatively unchanged at 5% for the third quarter of 1999, compared to 6% for
the third quarter of 1998, and 4% for the nine months ended September 30, 1999,
as compared to 5% in the same period of the prior year.
Cost of Sales. Cost of sales as a percentage of
gross revenues decreased to 36% for the third quarter of 1999, compared
to 39% for the third quarter of 1998, and decreased to 44% for the nine
months ended September 30, 1999, as compared to 46% in the same period
of the prior year. As a percentage of net revenues, cost of sales
decreased to 57% for the third quarter of 1999, compared to 59% for the
third quarter of 1998, and increased to 64% for the nine months ended
September 30, 1999, as compared to 61% in the same period of the prior
year. The decrease is primarily due to lower third party distribution
fees due from PGD as this volume is significantly lower in the current
periods than the prior periods - see "Overview" above. This decrease is
despite required increases to the future returns, artist advance and
slow-moving inventory reserves related to PGD distributed product also
described above, with the exception of the nine months ended September
30, 1999, for which these costs caused an increase. Without these
increased costs, cost of sales as a percentage of gross and net revenues
would have been 40% and 58%, respectively, for the nine months ended
September 30, 1999.
Gross Profit. Gross profit decreased $134,000 or 3% to
$4,335,000 for the third quarter of 1999, compared to $4,469,000 for the
third quarter of 1998, and decreased $3,144,000 or 24% to $9,858,000 for
the nine months ended September 30, 1999, compared to $13,002,000 for
the same period of the prior year. As a percentage of gross revenues,
gross profit remained relatively unchanged at 27% for the third quarter
of 1999, compared to 28% for the third quarter of 1998, and decreased to
25% for the nine months ended September 30, 1999, compared to 29% for
the same period of the prior year. As a percentage of net revenues,
gross profit increased to 43% for the third quarter of 1999, compared to
41% for the third quarter of 1998, and decreased to 36% for the nine
months ended September 30, 1999, compared to 39% for the same period of
the prior year. The decreases are primarily a result of the increased
reserves for future returns, artist advances and inventory relative to
product distributed by PGD as described above. Without these increased
costs, gross margin as a percentage of gross and net revenues would have
been 29% and 42%, respectively, for the nine months ended September 30,
1999. The remaining decrease relates to decreased sales volume also
described above. The increase as a percentage of net revenues for the
quarter is primarily due to lower third party distribution fees due from
PGD as this volume is significantly lower in the current periods than
the prior periods - see "Overview" above.
<PAGE>
Selling, General and Administrative Expenses. Selling, general
and administrative expenses increased $359,000 or 6% to $6,302,000 for the
third quarter of 1999, compared to $5,943,000 for the third quarter of 1998,
and increased $2,054,000 or 14% to $16,438,000 for the nine months ended
September 30, 1999, compared to $14,384,000 for the same period of the prior
year. During the third quarter of 1999, Envisage Multimedia LLC, a third party
distributed label owned by parties related to us, indicated they would
not be paying balances owed us totaling $625,000; accordingly, this
amount has been reserved in full. Without this write-off, the current
quarter's selling, general and administrative expenses actually
decreased, relating to management's on-going efforts to reduce costs and
overhead. In conjunction with the new, larger distribution facility in
Alpharetta, Georgia, we have begun the process of reducing our sales and
distribution activities currently located in Downers Grove, Illinois and
Nashville, Tennessee. In addition to reduced leasing costs, utility
costs, travel and entertainment, etc., this effort will eliminate
several duplicate positions and result in a more efficient and cost-
effective administration of our operations. The nine month period ended
September 30, 1999, includes a net gain from litigation settlements of
$1,185,000 (see "Overview"). Excluding these settlements, selling
general and administrative expenses increased 23%. This increase is
primarily attributable to the third party write-off described above and
increased promotional spending on our urban releases, a genre which
management believes requires significant promotional expenditures in
order for us to capitalize on the opportunities for significant sales in
this genre. The first significant releases in the urban genre will
occur in fiscal 2000, including releases by platinum-selling Johnny
Gill, award winning producer She'kspere and a two-act production deal
with Charles Farrar and Troy Taylor. In addition, we have incurred
additional costs, including compensation expense, as we have expanded
our sales staff and distribution capabilities in preparation for the
shift to proprietary distribution for product formerly distributed by
PGD.
Operating Loss. Primarily as a result of the factors described
above, we incurred an operating loss of $2,561,000 for the third quarter of
1999, compared to an operating loss of $1,969,000 for the third quarter of
1998, and incurred an operating loss of $8,361,000 for the nine months
ended September 30, 1999, compared to an operating loss of $2,782,000
for the same period of the prior year. As a result of the termination
of the PGD agreement discussed above, we increased our reserve for
future returns related to product distributed by PGD by $1,000,000
during the nine months ended September 30, 1999. In addition, we
increased artist advance and inventory reserves related to product
distributed by PGD by approximately $1,200,000 during the same period.
An additional $390,000 in estimated costs were incurred during the nine
months ended September 30, 1999, primarily due to increased handling
fees, freight charges, etc. to transfer product from PGD to PED. Our
new distribution facility, which became fully operational near the end
of October 1999, will provide us with distribution capabilities which
could potentially both offset the termination of the PGD distribution
services and grow the business substantially.
Interest Expense. Interest expense for the third quarter of 1999,
totaled $879,000 compared to $726,000 for the third quarter of 1998, and
totaled $2,312,000 for the nine months ended September 30, 1999, compared
to $1,989,000 for the same period of the prior year. The current period
increase resulted from a higher outstanding line of credit balance than in
the prior periods. See "Liquidity and Capital Resources" below for details
of our current debt structures.
Income Taxes. No income tax expense or benefit has been recorded
through September 30, 1999, due to our net operating loss carryforward
and related valuation allowance, as required under generally accepted
accounting principles. Pursuant to Section 382 of the Internal Revenue
Code of 1986, as amended, our net operating loss carryforward of
approximately $57,857,000 at December 31, 1998, expiring in years 2008
through 2013, is subject to annual limitations due to a change in
ownership as a result of our initial public offering. Accordingly,
approximately $6,185,000 of the net operating loss carryforward is
subject to an annual limitation of approximately $2,200,000.
<PAGE>
Perferred Dividend Requirements. During the first three quarters of
1999, the preferred stock outstanding accrued dividends of $886,000, $979,000
and $1,070,000, respectively. See "Note 8" to the financial statements for
details.
Loss Applicable to Common Shares. The loss applicable to common
shares for the third quarter of 1999, totaled $3,999,000, including
preferred dividend requirements of $1,070,000, compared to a loss
applicable to common shares of $4,038,000, including preferred dividend
requirements of $716,000, for the third quarter of 1998. The loss
applicable to common shares for the nine months ended September 30,
1999, totaled $13,316,000, including preferred dividend requirements of
$2,935,000, compared to a loss applicable to common shares of
$7,267,000, included preferred dividend requirements of $2,086,000, for
the same period of the prior year. As a result of the termination of the
PGD agreement discussed above, we increased our reserve for future
returns related to product distributed by PGD by $1,000,000 during the
nine months ended September 30, 1999. In addition, we increased artist
advance and inventory reserves related to product distributed by PGD by
approximately $1,200,000 during the same period. An additional $390,000
in estimated costs were incurred during the nine months ended September
30, 1999, primarily due to increased handling fees, freight charges,
etc. to transfer product from PGD to PED. Our new distribution
facility, which became fully operational near the end of October 1999,
will provide us with distribution capabilities which could potentially
both offset the termination of the PGD distribution services and grow
the business substantially.
Fluctuations in Our Quarterly Operating Results and Seasonality
Our results of operations are subject to seasonal variations. In
particular, our revenues and operating income are affected by end-of-
the-year holiday sales. In accordance with industry practice, we record
product sales when products are shipped to retailers. In anticipation
of holiday sales, retailers purchase products from us prior to December.
As a result, our revenues and operating income typically decline during
December, January and February. In addition, timing of a new release
may materially affect our business, financial condition and results of
operations. For example, if releases planned for the peak holiday
season are delayed, our business, financial results and operating
results could be materially adversely affected.
Liquidity and Capital Resources
We have incurred significant net losses and negative cash flows
from operations since our inception, including a net loss of $10,381,000
($13,316,000 after preferred dividend requirements) and negative cash flows from
operations of $11,506,000 in the nine months ended September 30, 1999.
We have historically sustained net losses and negative cash flows, in
part due to the high costs associated with the establishment and
expansion of our activities.
Historically, we have funded our operations and other
activities from a variety of capital sources, including debt and equity
financing. We have continued to obtain equity financing from time-to-
time. As the likelihood of securing additional debt and equity
financing is uncertain, we have formulated and begun implementing
specific measures we believe will improve cash flows and enable us to
continue in existence without a significant curtailment of operations.
* During August 1999, we sold certain country music publishing rights
for $1,449,000 (see "Note 4" to the financial statements).
<PAGE>
* October 6, 1999, we sold 798,856 common shares of musicmaker.com
(Nasdaq: HITS) for net proceeds of $7,289,000 (see "Note 3" to the
financial statements).
* October 1999, we began a consolidation of our Downers Grove,
Illinois and Nashville, Tennessee offices into our new 80,000 square
foot Alpharetta, Georgia distribution and office facility. We
believe this consolidation will result in a significant reduction in
overhead costs. We expect the consolidation to be complete by
December 31,1999.
* We are increasingly arranging for payment to our artists, producers
and distributed labels for services rendered in shares of our Common
Stock in lieu of cash.
* We are aggressively seeking strategic partnerships
with Internet companies to exploit the use of digital rights to our
extensive music catalog, exemplified by our deal with musicmaker.com.
While we have been successful in the past in raising equity as
needed, there can be no assurance that additional equity financing may be
available on satisfactory terms, if at all. The financial statements and related
notes included elsewhere herein do not include any adjustments which
might result from the outcome of this uncertainty. Our plans for fiscal
1999 and beyond are subject to uncertainties, many of which are beyond
our control, such as general economic conditions and competitive
factors, and actual results may vary significantly from our plans.
During the nine months ended September 30, 1999, we experienced
negative cash flow from operations of $11,506,000. This resulted from continued
operating losses and $4,118,000 of new project funding. Investing activities
for the nine months ended September 30, 1999, included $1,150,000 received
from the sale of certain country music publishing rights, $450,000
related to catalog acquisitions and $695,000 of capital expenditures.
Operating and investing activities were funded primarily from two equity
placements with unrelated parties totaling $5,500,000, an equity
placement with certain related parties totaling $3,909,000, related
party borrowings of $1,480,000 and from our line of credit with First
Source Financial, Inc.
During the nine months ended September 30, 1998, we
experienced negative cash flow from operations of $11,439,000. This
resulted from continued operating losses and $5,126,000 of new project
funding. Investing activities for the period totaled $1,556,000,
related to capital expenditures and the purchase of a classical catalog.
Operating and investing activities were primarily funded from our
banking facilities and an equity placement with related parties totaling
$1,350,000.
We require significant recurring funds for A&R expenses, which
include recorded music costs. We make substantial payments each period
for recording costs and advances to artists and producers in order to
maintain and enhance our artist roster. Advances to established artists
and producers and direct costs associated with the creation of record
masters are capitalized and are charged to cost of sales as the related
albums earn revenues or when the amounts are determined to be
unrecoverable. Royalties are not paid to the artist until all advances
made to the artist have been recouped by us. Also, we establish and
maintain reserves relative to royalty payments for a period of 18 to 24
months to allow for product returns activity, as royalties are not owed
on returned product.
<PAGE>
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 had an original five year term and
bears interest at the bank's base rate plus 1.5% per annum (9.75% at
September 30, 1999). Borrowings under our First Source facility are
limited to the Borrowing Base, as defined, which is based upon eligible
accounts receivable, inventory and music catalog. Our First Source
facility contains certain financial covenants, requires a lockbox
arrangement and is secured by substantially all of our assets.
The First Source agreement was amended during April 1999 to provide
for revised financial covenants through December 31, 1999. The First Source
agreement was amended again during August 1999, to allow the sale of our
Double J publishing rights (see "Note 4" to the financial statements).
Pursuant to this amendment, the revolving line of credit was permanently
reduced by 50% of the net proceeds from the sale of Double J, or
approximately $575,000. The First Source agreement was also amended
during October 1999, to release First Source's security interest in our
investment in musicmaker.com, allowing us to sell our shares of
musicmaker.com (see "Note 3" to the financial statements). Pursuant to
this amendment, $1,400,000 of the musicmaker.com proceeds were used to
permanently reduce our revolving commitment with First Source. This
amendment also adjusted the termination date of the agreement from July
31, 2003, to March 31, 2000, and certain financial covenants in
violation at September 30, 1999 were waived and adjusted for the future.
In addition, selected titles from our master catalog were approved for
potential sale by us to willing third parties; if such sales occur, 50%
of all proceeds received by us will be used to permanently reduce our
revolving commitment.
At September 30, 1999, the revolving facility totaled
$34,337,000 of which we had $88,000 available under that facility. On
October 6, 1999, we sold our shares of musicmaker.com for net proceeds
of $7,289,000 (see "Note 3" to the financial statements). After
applying a permanent reduction to our revolving facility and paying
certain vendors, the revolving facility totaled $30,859,000 of which we
had $2,166,000 available under that facility. The funds available under
the facility have subsequently been significantly depleted for current
working capital funding needs.
Stockholders' equity at September 30, 1999, totaled
$11,677,000 compared to $7,918,000 at December 31, 1998. This net
increase of $3,759,000 or 47% is the net effect of continued operating
net losses, the redemption of shares of our Common Stock in connection
with a certain litigation settlement (see "PartII - Other Information -
Item 1. Legal Proceedings") and the issuances of both preferred and
common stock as discussed above. As a result of the termination of the
PGD agreement discussed above, we increased our reserve for future
returns related to product distributed by PGD by $1,000,000 during the
nine months ended September 30, 1999. In addition, we increased artist
advance and inventory reserves related to product distributed by PGD by
approximately $1,200,000 during the same period. An additional $390,000
in estimated costs were incurred during the nine months ended September
30, 1999, primarily due to increased handling fees, freight charges,
etc. to transfer product from PGD to PED. In addition, our investment
in musicmaker.com was adjusted to market. The unrealized gain of
$7,489,000 is reflected in our stockholders' equity. This investment
was sold during October 1999 (see "Note 3" to the financial
statements).
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.
<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.
In 1998, we started analyzing, reprogramming and replacing
our computer systems to address the Year 2000 problem. We have
completed a significant portion of the reprogramming, replacing and
testing, but have not yet completed our review of the significant
software and equipment used in our business operations and the
operations of our key business partners. Until these reviews are
complete, we cannot be sure that our efforts to address Year 2000 issues
are appropriate, adequate or complete.
Based on our current assessment of our
Year 2000 issues detailed below, we plan to be Year 2000 compliant:
* We are dependent on personal computer systems for internal
electronic information processing. To bring our systems into Year
2000 compliance we have spent approximately $250,000 since
January 1, 1998, to replace existing hardware.
* We have recently completed the implementation of new
financial accounting software that is Year 2000 compliant. We have
spent approximately $330,000 on software since January 1, 1998. We
have also paid $600,000 in consulting services since January 1, 1998.
* We are currently assessing the state of readiness for Year 2000 of
our material vendors, suppliers, customers and other material third
parties. We have sent letters prior to the date of this filing.
The responses received to date have not indicated any Year 2000
problems. If any of our material vendors, suppliers or customers
has a serious Year 2000 problem, we could experience a loss of
revenues from their operations and/or incur a significant amount of
expenses.
If we are unable to manage the Year 2000 date change successfully,
we may suffer the following consequences:
* We may experience a significant number of operational inconveniences
and inefficiencies for us and our customers that may divert our time
and attention and financial and human resources from our ordinary
business activities.
<PAGE>
* We may suffer serious systems failures that may require significant
efforts by us or our customers to prevent or alleviate material
business disruptions.
* We may be in default of a number of agreements, including our credit
agreement, if we fail to respond to our Year 2000 issues in a timely
manner.
* We may experience significant loss of revenues or incur a
significant amount of unanticipated expenses.may incur liability for
the losses incurred by our customers or others where business is
disrupted by our system failures or incur significant costs of
defending claims made against us for the recovery of such losses.
Safe Harbor Provision
Some of the information in this filing contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "anticipate," "believe,"
"estimate" and "expect" or similar words. You should read statements
that contain these words because they (1) discuss our future
expectations, (2) contain projections of our future results of
operations or of our financial condition or (3) state other "forward-
looking" information. We believe it is important to communicate our
expectations to our investors. There may be events in the future,
however, that we are not accurately able to predict or over which we
have no control. A number of important factors could cause our actual
results, performance and achievements for fiscal 1999, and beyond to
differ materially from those expressed in such forward-looking
statements. Reference is made to our prior filings with the Securities
and Exchange Commission, in particular the "Risk Factors" section of our
Prospectus effective August 9, 1999, for a discussion of some of these
factors. These risk factors include, without limitation, commercial
success of our repertoire, risks of inadequate financing, charges and
costs related to acquisitions, management of growth, relationships with
artists, producers and licensees, attraction and retention of key
personnel, general economic and business conditions and competition in
the recorded music industry.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.
The principal market risk (i.e., the risk of
loss arising from adverse changes in market rates and prices) to which
we are exposed is interest rates on debt.
On September 30, 1999, we had $34,247,000 of debt outstanding under
a $34,425,000 revolving bank line of credit. The line of credit expires on
March 31, 2000. The line of credit bears interest at the bank's base rate
plus 1.5% per annum (9.75% at September 30, 1999).
We do not hold and have not issued derivative financial instruments
for speculation or trading purposes.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
On March 31, 1999, we settled our pending litigation with JCSHO, Inc.
entitled JCSHO, Inc. f/k/a Intersound, Inc. v. Platinum Entertainment, Inc.,
No. 97-2479 MJD/AJB (D. Minn.). The parties determined that JSCHO would retain
306,122 shares (60%) of the 510,203 shares of our Common Stock issued to JCSHO
in connection with our acquisition of Intersound in 1997 which were held in
escrow pending resolution of this litigation and that JSCHO would return 204,081
shares (40%) to us. We also agreed to issue Donald R. Johnson, a shareholder
and former employee of Intersound, Inc., 20,000 shares of our Common
Stock. The settlement resulted in an offset of charges previously
expensed by us in connection with the acquired assets and assumed
liabilities of Intersound, Inc. through the recognition of a gain of
$1,185,000 during the first quarter of 1999. This settlement results in
the mutual release of all claims and actions the parties have or ever
had against each other arising from conduct occurring before March 31,
1999, including all claims that were asserted or that could have been
asserted by Donald R. Johnson, a shareholder and former employee of
Intersound, Inc., in the action entitled Donald R. Johnson v.
Intersound, Inc. (Del), f/k/a River North Studios, Inc., No. E-64885,
Superior Court in Fulton County Georgia. The lawsuit has been dismissed
with prejudice.
On April 7, 1999, Ichiban Records, Inc. filed a lawsuit in
the Superior Court of Fulton County, State of Georgia, captioned Ichiban
Records, Inc. v. Platinum Entertainment, Inc., Civil Action No. 1999 CV
07215 ("Ichiban Claim"), seeking termination of its distribution
agreement with us and damages in excess of $10,000,000 for alleged
breaches of its distribution agreement by us. Ichiban Records, Inc.
also filed a complaint for injunction and temporary restraining order
and appointment of a receiver under the same caption. On April 21,
1999, Ichiban Records, Inc. also filed a voluntary petition to commence
a case under Chapter 11 of the Bankruptcy Code in the United States
Bankruptcy Court for the Northern District of Georgia, Atlanta Division,
Case No. 99-66017. Further, we removed the Ichiban Claim from the State
of Georgia court to the United States District Court for the Northern
District of Georgia, Atlanta Division, Case No. 1:99 CV-1113. The
Ichiban Claim will now be asserted through the bankruptcy action. We
have restructured the distribution agreement with Ichiban Records, Inc.
in order to recover advances and other monies owed by Ichiban Records,
Inc. to us, and the restructure agreement has been approved by the
Bankruptcy Court. A settlement agreement to dismiss the Ichiban Claim
also has been reached with the trustee for the bankruptcy estate and has
been presented to the Bankruptcy Court for approval. We believe the
claims of Ichiban Records, Inc. are without merit and that the matter
will be successfully resolved without a material impact on our financial
position or results of operations. However, because the bankruptcy is
at an early stage, there can be no assurances that the matter can be
resolved in our favor. A decision adverse to us in this matter could
have a material adverse impact on our financial position and results of
operations.
<PAGE>
On May 28, 1999, PolyGram Group Distribution, Inc. filed an
action against us in the Superior Court of the State of California for
the County of Los Angeles captioned PolyGram Group Distribution, Inc. -
v- Platinum Entertainment, Inc., Case No. B C211091, seeking injunctive
relief, restitution, and disgourgement of profits arising out of
PolyGram's claim that the distribution agreement between us and PolyGram
Group Distribution bars the distribution of recordings by us through our
own distribution facilities and requires that they be distributed by
PolyGram. On June 25, 1999, PolyGram filed an amended complaint that
additionally seeks the recovery of damages. We have rejected earlier
demands to cease and desist selling our recordings through our own
distribution facilities on the grounds that an amendment to the
distribution agreement with PolyGram Group Distribution specifically
allows us to distribute records through our own distribution company.
We have filed our answer to the complaint and have filed cross-
complaints against PolyGram seeking damages incurred in connection with
the production of a compilation album by PolyGram entitled "Essential
Southern Rock", for the failure of PolyGram's successor, Universal
Music, to properly pay royalties to us pursuant to the terms of a
foreign licensing agreement between Universal and us, and for breach of
the distribution agreement by PolyGram. We have also sent a notice of
termination of the distribution agreement to PolyGram, terminating the
distribution agreement effective as of July 21, 1999 for PolyGram's
breach of the distribution agreement. On November 10, 1999, the action
in California was stayed on the grounds that the forum for the
lawsuit should be in New York rather than California. We had earlier
filed an action in New York asserting as plaintiff the claims made as
cross-complaints in the action in California, so to the extent PolyGram
elects to continue pursuing its claims against us, those claims will be
litigated in New York.
We are a party in various other lawsuits which have
arisen in the normal course of business. In the opinion of management,
after consultation with legal counsel, the ultimate outcome of these
lawsuits will not have a material impact on our financial position or
results of operations.
ITEM 2. Changes in Securities and Use of Proceeds.
During July 1999, we issued 3,333 shares of our Common Stock, valued
at $25,000 or $7.50 per share, to William Benedict, in connection with
professional services rendered.
This transaction was exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933 as a transaction not involving a public offering.
ITEM 6. Exhibits and Reports on Form 8-K.
A. Exhibits.
10.1 Fouth Amendment to Credit Agreement, dated August 11, 1998,
between the Registrant and First Source Financial LLP
(First Source).
10.2 Fifth Amendment to Credit Agreement, dated October 13, 1999,
between the Registrant and First Source.
27. Financial Data Schedule
Platinum Entertainment, Inc. agrees to furnish supplementally to the
Securities Exchange Commission, upon request, a copy of any omitted exhibit or
schedule to any agreement.
B. Reports on Form 8-K.
On July 1, 1999, we filed a Current Report on Form 8-K: (i) confirming
our equity investment in musicmaker.com, Inc.; (ii) announcing the purchase by
Steven Devick, our Chairman, President and Chief Executive Officer, of
2,500 shares of our Series C Preferred Stock plus accrued dividends and
warrants to purchase 84, 375 shares of Common Stock held in the name of
Platinum Venture Partners, II L.P. for consideration of $3,014,000;
(iii) announcing the sale of 423,280 shares of our Common Stock to
Special Situations Fund III, L.P., Special Situations Private Fund,
L.P., Special Situations Cayman Fund, L.P. and Special Situations
Technology Fund, L.P., at a per share price of $7.088, for total
consideration of $3,000,000 and (iv) announcing the total shares of
outstanding Common Stock.
On July 19, 1999, we filed a Current Report on
Form 8-K to provide the pro forma effect of the musicmaker.com, Inc.
initial public offering on our investment in musicmaker.com, Inc
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, we
have duly caused this Report to be signed on our behalf by the
undersigned, thereunto duly authorized, in the City of Downers Grove,
State of Illinois, on November 15, 1999.
Platinum Entertainment, Inc.
BY:/s/STEVEN DEVICK
Steven Devick
Chairman, President and Chief
Executive Officer
/s/DOUGLAS C. LAUX
Douglas C. Laux
Chief Operating Officer, Chief
Financial Officer and Director
Exhibit 10.1
FOURTH AMENDMENT TO SECURED CREDIT AGREEMENT
This Fourth Amendment to Secured Credit Agreement (this "Agreement") is
dated as of August 11, 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 Secured Credit Agreement, dated as of November 1, 1998, that
certain Second Amendment to Secured Credit Agreement, dated as of
January ___, 1999, and that certain Third Amendment to Secured Credit Agreement,
dated as of April 14, 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. Amendments to Secured Credit Agreement. The Secured Credit Agreement is
hereby amended as follows:
(a) The definition of "Borrowing Base" set forth in Section 1.1 of the
Secured Credit Agreement is hereby amended by deleting it in its entirety
and replacing it with the following:
"Borrowing Base" shall mean an amount equal to: (i) eighty
percent (80%) of the face amount (less maximum discounts, credits
and allowances which may have been taken by or granted to Account
Debtors in connection therewith) then outstanding of existing
Eligible Accounts minus (ii) the then current Return Credit Reserve,
plus (iii) the lesser of (x) fifty percent (50%) of the book value
of Borrower's then existing finished goods portion of Eligible
Inventory and (y) the Inventory Sublimit (the book value of Eligible
Inventory to be determined at the lower of cost (determined on a
first-in-first-out ("FIFO") basis) or market), plus (iii) the lesser
of (x) fifty percent (50%) of the Music Catalog Appraised Value and
(y) $25,000,000.
(b) Section 2.7 of the Secured Credit Agreement is hereby amended by
inserting the following new Section 2.7(c) immediately following
Section 2.7(b):
(c) Upon receipt by Borrower of the Assets Sale Proceeds from
the Country Publishing Sale, Borrower shall make a mandatory prepayment
of Revolving Loans outstanding in an amount equal to 50% of such Asset
Sale Proceeds. Each such payment shall be accompanied by accrued
interest on such principal amount and amounts payable under
Section 4.4(f), if any. Concurrently with the payment set forth in this
Section 2.7(c), the Revolving Commitment shall be reduced by an amount
equal to such payment. As used in this Section 2.7(c), "Asset Sale
Proceeds" shall mean the aggregate cash proceeds payable to Borrower in
connection with the Country Publishing Sale after deduction of all
reasonable, customary and documented costs and expenses (including,
without limitation, taxes) of such Country Publishing Sale.
(c) Section 11.12 of the Secured Credit Agreement is hereby amended by
deleting it in its entirety and replacing it with the following:
SECTION 11.12 Mergers, Consolidations, Sales. Not, nor
shall it permit any Subsidiary to, (a) be a party to any merger or
consolidation or purchase or otherwise acquire all or substantially all
of the assets or stock of any class of, or any partnership or joint
venture interest or other interest in, any other Person other than (i)
the House of Blues Venture and (ii) other joint ventures entered into
in Borrower's ordinary course of business with respect to the music or
related entertainment business; provided, that Borrower continues to
won, free and clear of any interest of the joint venture (other than
allocation of profits therefrom), all music rights and recording product
used in such joint venture; or (b) sell, transfer, convey or lease all
or any substantial part of its assets or sell or assign with or without
recourse any Account, other than (i) any sale of inventory in the
ordinary course of business; provided, that the sale, transfer,
conveyance or lease of assets shall be in addition subject to the
limitations set forth in the Collateral Documents and (ii) a sale of all
or substantially all of the assets of the Double J Music, Victoria Kay
Music (ASCAP) and John Juan Music (BMI) divisions of Borrower (the
"Country Publishing Sale") for cash at a price determined to be fair and
reasonable by Borrower's board of directors; provided, that no Event of
Default or Unmatured Event of Default exists after giving effect to such
sale.
(d) Exhibit 1.2 of the Secured Credit Agreement is hereby amended by
deleting it in its entirety and replacing it with Exhibit 1.2 attached
hereto and made a part hereof.
3. 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.
4. Conditions to Effectiveness. This Agreement shall be effective as of the
date hereof upon the satisfaction of the conditions set forth in this Section 4
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 no Unmatured Event of Default or Event of Default under any
Related Document shall have occurred and be continuing.
5. 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.
6. 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.
(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 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]
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/ JOHN P. THACKER
Name Printed: JOHN P. THACKER
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
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
Exhibit 10.2
FIFTH AMENDMENT, CONSENT AND WAIVER
TO SECURED CREDIT AGREEMENT
This Fifth Amendment, Consent and Waiver to Secured Credit Agreement (this
"Agreement") is dated as of October 13, 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, restated, supplemented
or otherwise modified from time to time, 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. Amendments to Secured Credit Agreement. The Secured Credit Agreement is
hereby amended as follows:
(a) Section 1.1 of the Secured Credit Agreement is hereby amended by adding
the following definitions in their proper alphabetical order:
"* Library" shall mean any and all sound recordings listed on
Exhibit A attached hereto and any and all masters, videos and any materials
associated with such sound recordings.
"* Sale Proceeds" shall mean the aggregate cash proceeds payable
to Borrower in connection with the sale of the * Library after deduction
of all reasonable, customary and documented costs and expenses (including,
without limitation, taxes) of such sale.
(b) Section 2.1(a) of the Secured Credit Agreement is hereby amended by
deleting the date "July 31, 2003" in the third line thereof and
replacing it with the date "March 31, 2000".
(c) Section 2.7 of the Secured Credit Agreement is hereby amended by
inserting the following new Section 2.7(d) immediately following
Section 2.7(c):
(d) Upon receipt by Borrower of the * Sale Proceeds, Borrower
shall immediately deposit the * Sale Proceeds into the Master
Account for application to the outstanding Liabilities in accordance
with the terms of this Agreement. Concurrently with the payment set
forth in this Section 2.7(d), the Revolving Commitment shall be
reduced by an amount equal to 50% of the * Sale Proceeds.
(d) Section 2.8 of the Secured Credit Agreement is hereby amended by
deleting it in its entirety.
(e) 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 an Unmatured Event of Default or
Event of Default; (ii) an appraisal conducted by Valuation
Research Corporation at the request of the Agent made in
September 1999; and (iii) an appraisal conducted by Kagan
Media Appraisals, Inc. at the request of the Agent made in
September 1999; provided that the aggregate fees payable by
Borrower to Agent with respect to the appraisals referenced in
clauses (ii) and (iii) above shall not exceed $60,000 plus
out-of-pocket expenses of the appraisers.
[FN]
* Confidential portions omitted and filed separately with the commission.
</FN>
<PAGE>
(f) Section 11.12 of the Secured Credit Agreement is hereby amended by
inserting the following in the eighth line thereof immediately following
the word "assets":
(unless in connection and concurrently with such sale, Borrower
indefeasibly pays in full in cash all outstanding Liabilities hereunder)
(g) Section 11.30 of the Secured Credit Agreement is hereby amended by
inserting the following in the fifth line thereof immediately following
the amount "$50,000":
and (iii) sales of Property the proceeds of which are concurrently
used by the Borrower to indefeasibly pay in full in cash all outstanding
Liabilities hereunder.
(h) Section 11.33 of the Secured Credit Agreement is hereby amended by
deleting it in its entirety and replacing it with the following:
SECTION 11.33 Financial Covenants.
(a) EBITDA. Not permit EBITDA measured on the last day of each month
set forth below for the month ended on such day to be less than the
amount listed below opposite such period:
Periods Minimum EBITDA
October 1999 $5,400,000
November 1999 $0
December 1999 ($250,000)
January 2000 ($450,000)
February 2000 $0
(b) Gross Capital Expenditures. Not, nor shall it permit any Subsidiary
to, directly or indirectly (by way of the acquisition of the
securities of a Person or otherwise), make or commit to make Gross
Capital Expenditures, except that Borrower may, so long as no Event
of Default or Unmatured Event of Default shall exist or would result
therefrom, make Gross Capital Expenditures (excluding any permitted
acquisitions) in the ordinary course of business in an aggregate
amount not to exceed $1,000,000 during (a) the period from the
Closing Date through December 31, 1998 and (ii) any Fiscal Year
thereafter.
(i) Section 11 of the Secured Credit Agreement is hereby amended by adding
the following at the end thereof:
SECTION 11.35 Borrowing Availability. Borrower shall maintain at all
times Borrowing Availability of at least $300,000.
SECTION 11.36 Board Resolution. As soon as possible and in no event
later than November 15, 1999, Borrower shall deliver to Agent
a certified copy of the unanimous resolution of the full
Board of Directors of each of the Borrower and the Guarantors
in form and substance satisfactory to Agent ratifying the
execution and delivery by Borrower and the Guarantors of the
Fifth Amendment, Consent and Waiver to Secured Credit
Agreement in its final form and the consummation of the
transactions contemplated by such agreement and each other
Related Document to be executed and delivered in connection
therewith and the performance of their respective obligations
thereunder.
(j) Section 13.1(f) of the Secured Credit Agreement is hereby amended by
deleting it in its entirety and replacing it with the following:
(f) Failure by Borrower to comply with or to perform (x) any provision
contained in clause (i) of Section 11.1(h), Section 11.4 or
Section 11.10 through 11.34 or (y) any provision contained in any
Section of this Agreement (other than occurrences referred to or
embodied in other clauses of this Section 13.1) for a period of
five (5) Business Days after the earlier of (i) Borrower's receipt
of notice from Agent or (ii) actual knowledge of such failure by
Borrower.
(k) The Secured Credit Agreement is hereby amended by deleting in their
entirety the headings "Commitments" and "Aggregate Commitments" and all
amounts listed thereunder set forth on the signature page of the Secured
Credit Agreement.
(l) Schedule 1 to the Credit Agreement is hereby amended by deleting it in
its entirety and replacing it with Schedule 1 attached to this
Agreement.
(m) Schedule 10.16 to the Secured Credit Agreement is hereby amended to
delete the address "11810 Willis Road, Alpharetta, GA 30004" and adding
the address "11415 Old Roswell Rd., Alpharetta, GA 30201".
3. Waivers.
(a) Indebtedness. Lenders and Agent hereby waive any Unmatured Event of
Default or Event of Default caused by Borrower's breach of Section 11.19
or 11.21 of the Secured Credit Agreement arising from Borrower's
incurrence of the Indebtedness set forth on Exhibit A attached to this
Agreement. Schedules 11.19 and 11.21 of the Secured Credit Agreement
are hereby amended to include the Indebtedness set forth on Exhibit A
attached hereto.
(b) Financial Covenants. Lenders and Agent hereby waive any Unmatured Event
of Default or Event of Default caused by Borrower's failure to comply
with Sections 11.33(a) and 11.33(b) of the Secured Credit Agreement, as
they existed before the date of this Agreement, through and including
September 30, 1999.
(c) Polygram. Lenders and Agent hereby waive any Unmatured Event of Default
or Event of Default arising under Section 13.1(n) of the Secured Credit
Agreement as a result of the termination of the Polygram Distribution
Agreement.
(d) Commitment Reduction. Lenders and Agent hereby waive the five Business
Days' notice under Section 2.6 of the Secured Credit Agreement and any
Prepayment Premium that would otherwise be applicable with respect to
the $1,400,000 reduction of the Revolving Commitment required by
Section 6(d) of this Agreement.
(e) Legal Fees. Lenders and Agent hereby waive all fees and out-of-pocket
fees otherwise payable under Section 14.4 of the Secured Credit
Agreement incurred with respect to the negotiations regarding the sale
of the Borrower's 1,320,000 shares of Music Connection Corporation (or,
as exchanged, Musicmaker.com) and the preparation, negotiations and
execution of this Agreement.
(f) Default Interest. Lenders and Agent hereby waive all accrued and unpaid
interest on the Loans outstanding on the date hereof in excess of the
non-default contract rate per annum applicable to the Loans.
(g) Interest Payment. Lenders and Agent hereby waive the Event of Default
arising under Section 13.1(a) of the Secured Credit Agreement as a
result of Borrower's late payment of the interest due on the Loans on
September 15, 1999.
(h) Limited Waivers. The foregoing waivers are limited to the specific
purpose for which they were granted, and except as set forth in this
Section 3, such waivers shall not be construed as a waiver or other
modification with respect to any other term, condition or other
provisions of any Related Document.
4. Consent.
(a) Lenders and Agent hereby consent to the sale of the Borrower's 1,320,000
shares of Music Connection Corporation (or as exchanged, Musicmaker.com)
for a purchase price of $9.125 per share provided that the Asset Sale
Proceeds of such stock shall be immediately delivered to Agent by wire
transfer of immediately available funds to the Master Account for
application to the outstanding Liabilities in accordance with the terms
of Section 7.3 of the Secured Credit Agreement.
(b) Lenders and Agent hereby consent to the sale of the * Library;
provided that such sale is made by the Borrower to an unaffiliated party
on an arms length basis for cash only; provided further that all cash
proceeds of such sale are deposited into the Master Account in
accordance with the terms of Section 2.7(d) of the Secured Credit
Agreement.
5. Representations and Warranties. To induce Agent and Lenders to enter into
this Agreement and to extend Loans and L/C Guaranties 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, after giving effect to this
Agreement, no Unmatured Event of Default or Event of Default exists
under the Secured Credit Agreement or any other 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. Except as set forth on Exhibit C to this Agreement, 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.
6. Conditions to Effectiveness. This Agreement shall be effective as of the
date hereof upon the satisfaction of the conditions set forth in this Section 6
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 no Unmatured Event of Default or Event of Default under any
Related Document shall have occurred and be continuing.
(d) Commitment Reduction. Agent shall have received $1,400,000 in cash as a
permanent reduction of the Revolving Commitment to $33,024,986.
(e) Interest and Fees. Agent shall have received payment in full of all
interest and fees that would otherwise be due and payable on October 15,
1999.
(f) Resolutions. A certified copy of the unanimous resolutions of the full
Board of Directors of each of the Borrower and the Guarantors in form
and substance satisfactory to Agent authorizing the execution and
delivery of, and the consummation of the transactions contemplated by,
this Agreement and each other Related Document to be executed and
delivered in connection herewith and the performance of their respective
obligations hereunder.
(g) Incumbency Certificate. A certificate of the Secretary or Assistant
Secretary of Borrower certifying the names and true signatures of the
officers of Borrower authorized to execute, deliver and perform this
Agreement and each other Loan Document to be executed and delivered in
connection herewith, upon which certificate Agent and Lenders shall be
entitled to rely.
(h) Other Documents. All other documents, certificates and agreements as
Agent may reasonably request to accomplish the purposes of this
Agreement.
7. 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.
8. Release.
In consideration of Agent's and Lenders' execution of this Agreement, the
consent set forth in Section 4 hereof and the waivers set forth in Section 3
hereof, each of Borrower and the Guarantors, individually and on behalf of its
successors, assigns, subsidiaries and affiliates, hereby forever releases,
acquits and discharges Agent and Lenders and their respective successors,
assigns, parents, subsidiaries, affiliates, officers, employees, directors,
agents and attorneys (collectively, the "Releasees") from any and all debts,
claims, demands, liabilities, responsibilities, disputes, actions and causes of
action (whether at law or in equity) and obligations of every nature whatsoever,
whether liquidated or unliquidated, known or unknown, matured or unmatured,
fixed or contingent (collectively, "Claims") that Borrower may have against the
Releasees which arise from or relate to any act of commission or omission of the
Releasees existing or occurring on or prior to the date hereof with respect to
any attempted sale or disposition and the actual sale or disposition by Borrower
of the shares of Music Connection Corporation or, as exchanged, Musicmaker.com
including, without limitation, all allegations set forth, referenced or alluded
to in that certain letter, dated October 8, 1999, from John R. Weiss of Bell,
Boyd & Lloyd, Borrower's legal counsel, to Jim L. Blanco of Winston & Strawn,
Agent's and Lenders' legal counsel.
9. 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.
(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 3 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) Entire Agreement. This Agreement and all schedules, exhibits and other
documents attached hereto or incorporated by reference herein constitute
the entire agreement of the parties hereto with respect to the subject
matter hereof and supersede all other understandings, oral or written,
with respect to the subject matter hereof.
(h) Conflict of Terms. Except as provided in this Agreement, if any
provision contained in this Agreement is in conflict or is inconsistent
with any provision in any of the other Related Documents, the provision
contained in this Agreement shall govern and control.
(i) Incorporation of Secured Credit Agreement. The provisions contained in
Sections 14.7 and 14.11 of the Secured Credit Agreement are incorporated
herein by reference to the same extent as if produced herein in their
entirety.
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/ JOHN P. THACKER
Name Printed: JOHN P. THACKER
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
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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOR
PLATINUM ENTERTAINMENT, INC. AND THE ACCOMPANYING NOTES THERETO FOR THE
PERIOD INDICATED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 23
<SECURITIES> 8,239
<RECEIVABLES> 19,192
<ALLOWANCES> (8,024)
<INVENTORY> 8,276
<CURRENT-ASSETS> 31,921
<PP&E> 4,449
<DEPRECIATION> (1,794)
<TOTAL-ASSETS> 66,514
<CURRENT-LIABILITIES> 54,837
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 11,670
<TOTAL-LIABILITY-AND-EQUITY> 66,514
<SALES> 15,675
<TOTAL-REVENUES> 15,903
<CGS> 5,567
<TOTAL-COSTS> 5,661
<OTHER-EXPENSES> 6,896
<LOSS-PROVISION> 650
<INTEREST-EXPENSE> 879
<INCOME-PRETAX> (3,999)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,999)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,999)
<EPS-BASIC> (0.55)
<EPS-DILUTED> (0.55)
</TABLE>
