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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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, Suite 1400, Downers Grove,
Illinois 60515 (Address of principal executive
offices, including zip code)
(630) 769-0033
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. ( )
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant (based upon the per share closing sale price of
$2.0625 on April 13, 2000, and for the purpose of this calculation only, the
assumption that all of the registrant's directors and executive officers are
affiliates) was approximately $13,691,000.
The number of shares outstanding of the registrant's Common Stock, par
value $.001, as of April 13, 2000, was 7,938,744.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by
reference into this report:
None.
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PART I
ITEM 1. Business
SAFE HARBOR PROVISION; RISK FACTORS
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 "intend," "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 2000 and
beyond to differ materially from those expressed in such forward-looking
statements. These risk factors include, without limitation, the following:
OPERATING LOSSES
We have experienced operating and net losses each fiscal year since
inception. For the foreseeable future we anticipate incurring operating and
net losses. There can be no assurance that we will ever achieve profitable
operations or generate significant revenue with our current products and
strategy. Unless and until we are able to resolve our liquidity issues, our
operating results will continue to be adversely affected. See "Default Under
Bank Credit Agreement; Risks of Inadequate Liquidity and Capital Resources"
below. Our future operating results depend on many factors, including demand
for our products, our ability to retain personnel and maintain adequate
staffing levels, the level of competition, our ability to acquire, develop
and market new artists and products and the ability of our officers and key
employees to manage our business and control costs.
DEFAULT UNDER BANK CREDIT AGREEMENT; RISKS OF INADEQUATE LIQUIDITY
AND CAPITAL RESOURCES
Our bank credit facility with First Source Financial, Inc. was due
in full on March 31, 2000. At April 13, 2000, we had borrowed $32,700,000
from First Source. In addition, on February 11, 2000, First Source notified
us that we were in default due to our failure to meet certain financial
covenants under the Credit Agreement as of November 30, 1999. Such default
increased our interest rate to 12.25% per annum effective February 11, 2000
and requires that 100% of all proceeds received by us from the sale of
selected titles from our master catalog be used to permanently reduce our
revolving commitment. Because of these defaults, First Source has the right
to accelerate the repayment of our obligation. To date, First Source has not
accelerated our repayment obligation.
We are negotiating with another bank to borrow additional monies for
a six month period but do not yet have an agreement. The proposed terms will
require that First Source agree to extend the due date for up to $30,000,000
of our loan for an additional six month period, and First Source has not yet
agreed to any such extension. In addition to or in lieu of the transaction
with the other bank, we may initiate a transaction or series of transactions
to sell a portion or all of our assets to satisfy our obligations to First
Source. There can be no assurance that any necessary financing from the bank
referenced above or any other bank, or from sources other than a bank, will
be available on satisfactory terms, if at all. First Source has the right to
pursue the remedies available to them, including foreclosing on the assets
that secure its obligations which constitute substantially all of our assets.
There will be a material adverse effect on our business, results of
operations and financial condition, and could be a foreclosure on our assets,
if we are unable to reach an agreement with First Source in the near term or
at the expiration of any extension granted by First Source.
In the view of our independent public accountants, the current
status of our liquidity and capital resources raises substantial doubt as to
our ability to continue as a going concern. See "Item 8. Financial Statements
and Supplementary Data, Report of Independent Auditors." In addition, our
lack of liquidity has materially adversely affected and is expected to
continue to materially adversely affect our results of operations. See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations, Liquidity and Capital Resources and Significant Matters."
HIGHLY COMPETITIVE MARKET
The recorded music industry is highly competitive. We face competition
for discretionary consumer purchases of our products from other record
companies, entertainment companies and multimedia companies that seek to offer
recorded music to the public. The market for pre-recorded music is dominated by
five major record companies in the United States (BMG Entertainment, EMI
Recorded Music, Sony Music Group, Universal Music Group and Warner Music). Our
ability to compete in this market depends largely on:
- - the skill and creativity of our employees and their relationships with
artists,
- - our ability to sign new and established artists and songwriters,
- - the expansion and utilization of our catalog,
- - the acquisition of licenses to enable us to create compilation packages,
- - the effective and efficient distribution of our products, and
- - our ability to build upon and maintain our reputation for producing,
licensing, acquiring, marketing and distributing high quality music.
Results and the future success of our sales and marketing efforts
through the Internet will be affected by existing competition and by additional
entrants to the electronic commerce market. Many of our competitors have
significantly longer operating histories, greater financial resources and larger
music catalogs. We cannot assure that we will continue to compete successfully
with our competitors in the future.
RISKS INHERENT IN THE RECORDED MUSIC INDUSTRY
The recorded music industry, like other creative industries, involves a
substantial degree of risk. Each recording is an individual artistic work, and
its commercial success is primarily determined by consumer taste, which is
unpredictable and constantly changing. As a result, we cannot assure the
financial success of any particular release, the timing of success or the
popularity of any particular artist. We may be unable to generate sufficient
revenues from successful releases to cover the costs of unsuccessful releases.
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS AND SEASONALITY
Our results of operations are subject to seasonal variations. In
particular, our revenues and operating results are affected by end-of-the-year
holiday sales. In accordance with industry practice, we record revenues for
music products when the products are shipped to retailers. In anticipation of
holiday sales, retailers purchase products from us prior to December. As a
result, our revenues and operating results 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.
RISKS RELATED TO OUR DISTRIBUTION SYSTEMS
We distribute our products through a multi-channel distribution system
comprised of:
- - PED Corp., our proprietary distribution system, headquartered in
Alpharetta, Georgia, a suburb of Atlanta,
- - International licensing agreements as well as production and distribution
agreements on a territory-by-territory basis, and
- - 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. We also serve as a distributor for various third
party music labels located in the United States and Europe.
We are significantly dependent on our existing distribution systems,
particularly PED, which generated 65% and 92% of our total gross product
sales during 1998 and 1999, respectively. We completed the opening of a new,
larger and more efficient distribution facility in Alpharetta at the end of
October 1999. In addition we consolidated our label and distribution
activities located in Downers Grove, Illinois and Nashville, Tennessee. We
believe our new distribution facility will provide us with distribution
capabilities which could potentially offset the termination of the PGD
distribution services and grow the business substantially. However, should we
encounter difficulty with our existing distribution methods, or be unable to
further develop our proprietary distribution systems successfully in the
future, our business, results of operation and financial condition may be
materially adversely affected.
We also sell our products through the Internet through our website
www.PlatinumCD.com and www.HeardOn.com. Revenues from PlatinumCD.com are not
currently a significant part of our business. The future success of on-line
sales and marketing efforts cannot be adequately determined at this time,
particularly due to the short history of the electric commerce market and the
challenges to the protection of music files transmitted through the Internet.
Results will also be affected by existing competition and by additional entrants
to the market, many of whom may have substantially greater resources.
RISKS ASSOCIATED WITH HAVING OUR INTELLECTUAL PROPERTY RIGHTS
INFRINGED UPON
We consider our trademarks, copyrights and other similar intellectual
property to be a valuable part of our business. To protect our intellectual
property rights, we rely upon copyright and trademark laws, as well as
confidentiality agreements with our employees and consultants. There can be no
assurance that our use of these contracts and the application of existing law
will provide sufficient protection from misappropriation or infringement of our
intellectual property rights. There can also be no assurance that third parties
will not claim infringement by us with respect to others' current or future
intellectual property rights. It is also possible that third parties will obtain
and use our content or technology without authorization.
RISKS ASSOCIATED WITH PRODUCT RETURNS
Our products are sold on a returnable basis which is standard music
industry practice. We set reserves for future returns of products estimated
based on return policies and experience. We typically expect that our actual
return experience will be within standard industry parameters. However,
because of problems associated with consolidation of our facilities and our
lack of liquidity, our returns experience in 1999 exceeded industry norms. We
may in the future experience an increase in returns over our established
reserves. If this occurs our business, results of operations and financial
condition could be materially adversely affected.
RISKS RELATED TO OUR LICENSING ACTIVITY
We license the rights to numerous master recordings and compositions
from third parties for recording and re-recording of music to produce
compilations and to expand our catalog. We also seek to license the rights to
our master recordings and compositions to third parties for use in albums,
films, and televisions programs for a royalty or a flat fee. These
cross-licensing arrangements are generally made possible by existing industry
practices based on reciprocity. If these practices change, we cannot assure that
we will be able to obtain licenses from third parties on satisfactory terms, or
at all, and our business, financial condition and operating results,
particularly with respect to compilation products, could be materially and
adversely affected.
DEPENDENCE ON KEY PERSONNEL
Our success depends largely on the skills, experience and efforts of
our executive officers and key employees. Our Chief Financial Officer and
Chief Operating Officer, Douglas C. Laux, resigned from the Company effective
March 24, 2000. Mr. Laux will remain a director of the Company. Mr. Laux will
act as a consultant to the Company until March 2001. The loss of the services
of Mr. Devick or other members of our senior management, could materially
adversely affect our business, financial condition or results of operations.
In addition, in large part, our success will depend on our ability to attract
and retain qualified management, marketing and sales personnel. We experience
competition for qualified personnel with other companies and organizations.
Our inability to hire or retain qualified personnel could have a material
adverse effect on our business, financial condition or results of operations.
We have entered into employment agreements with certain members of our senior
management team, including Mr. Devick, Thomas R. Leavens, Chief General
Counsel and Senior Executive Vice President and Brent Gordon, Executive Vice
President of Sales and Distribution. We also maintain a key man life
insurance policy in the aggregate of $10 million on the life of Mr. Devick.
ANTI-TAKEOVER CONSIDERATIONS
Our Certificate of Incorporation and Bylaws and Delaware law contain
provisions that may delay, defer or inhibit a future acquisition of us not
approved by the Board of Directors. This could occur even if our shareholders
are offered an attractive value for their shares or if a substantial number or
even a majority of our shareholders believe the takeover is in their best
interest. These provisions are intended to encourage any person interested in
acquiring us to negotiate with and obtain the consent of the Board of Directors.
These provisions include: limitations on our stockholders' ability to nominate
directors or act by written consent, a staggered Board of Directors and the
ability of the Board of Directors to issue shares of preferred stock with such
designations, powers, preferences and rights as it determines, without any
further vote or action by our shareholders.
These provisions also could discourage bids for your shares of common
stock at a premium and have a material adverse effect on the market price of
your shares. Also, Section 203 of the Delaware General Corporation Law restricts
certain business combinations with any "interested stockholder" as defined by
such statute.
VOLATILITY OF OUR STOCK PRICE
Our common stock is traded on the Nasdaq National Market. The market
price of our common stock has historically been volatile. We believe the market
price of our common stock could fluctuate substantially, based on a variety of
factors, including quarterly fluctuations in results of operations, timing of
product releases, announcements of new products and acquisitions or acquisitions
by our competitors, changes in earnings estimates by research analysts and
changes in accounting treatments or principles. The market price of our common
stock may be affected by our ability to meet or exceed analysts' or "street"
expectations, and any failure to meet or exceed such expectations could have a
material adverse effect on the market price of our common stock. Furthermore,
stock prices for many companies, including entertainment companies, fluctuate
widely for reasons that may be unrelated to their operating results. These
fluctuations and general economic, political and market conditions, such as
recessions or international currency fluctuations and demand for our products,
may adversely affect the market price of our common stock.
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. Expansion and
exploitation of our music catalog and publishing rights is also an integral part
of our business and growth strategy. We currently own or control a music catalog
with more than 13,000 master recordings. 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 release
music in a variety of genres including classical, urban, adult contemporary,
blues, gospel and country through our Intersound Classical, Platinum, House of
Blues, CGI Platinum and Platinum Nashville labels.
Our catalog contains releases by many established artists including those listed
below:
<TABLE>
<S> <C> <C> <C>
The Beach Boys Peter Cetera John Denver Dionne Warwick
The Blues Brothers The Band Roger Daltrey Taylor Dayne
Oak Ridge Boys Pete Townshend Suzy Bogguss Sixpence None The Richer
Juice Newton Phoebe Snow Rick Springfield Mighty Clouds of Joy
Otis Rush The Bellamy Brothers Eddie Rabbitt Crystal Gayle
Kansas T. Graham Brown George Clinton Lakeside
Cameo Dazz Band Vickie Winans Andrae Crouch
</TABLE>
Our headquarters are located in Downers Grove, Illinois, a suburb of
Chicago, our primary distribution facility is located in Alpharetta, Georgia, a
suburb of Atlanta, and we have a promotional office in Nashville, Tennessee.
We distribute our product mainly to retailers and wholesalers in the
United States through our wholly owned subsidiary, PED, based in Alpharetta,
Georgia. At the end of October 1999, we completed the opening of a new,
larger, more efficient facility in Alpharetta. Unlike most of our independent
label peers, we maintain our own proprietary distribution network, not
relying on a distribution arm of a major label or independent distributor.
Handling our own distribution allows us, like a major label, to maintain more
control over the marketing and promotion of our products. Due to our
significant distribution capacity, we also serve as a distributor for various
third party music labels located in the United States and Europe, generally
small independent record labels specializing in particular genres of music.
We distribute product internationally by various means. We distribute
products to international customers directly through PED, via licensing
agreements, and via production and distribution arrangements on a
territory-by-territory basis. We believe that such means of international
distribution allow us to maximize revenues from existing international licensing
relationships, electronic media and overseas manufacturing. We also believe that
these relationships give us a greater sales presence in the European
marketplace.
We distribute via the Internet through our website www.PlatinumCD.com,
our promotional download website www.HeardOn.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. In addition, through our affiliation with Amazon.com, a leader in the
Internet commerce industry, customers who visit our website have access to
hundreds of thousands of commercially available titles of other record
companies. We receive referral fees for sales generated by Amazon.com from such
arrangement. Under a license agreement with LiveOnTheNet.com, which hosts a
variety of video and audio programming, we offer promotional downloads of our
music through the
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www.LiveOnTheNet.com website.
We were incorporated in Delaware in 1991. Our principal executive
offices are located at 2001 Butterfield Road, Suite 1400, Downers Grove,
Illinois 60515, and our telephone number is (630) 769-0033.
MARKETS
CLASSICAL/THEMED PRODUCTIONS
Intersound Classical is a leading creator of classical and theme-based
products, releasing albums on its Intersound and Reference Gold labels.
Intersound artist John Bayless was the No. 1 Top Budget Classical Artist for
1999 and 1998. His release, BEATLES' GREATEST HITS, was the No. 1 Top Budget
Classical Album for 1999 (No. 5 in 1998). Intersound also held the No. 12 Top
Budget Classical Album position in 1999, with A NUTCRACKER CHRISTMAS (No. 1 in
1998). Reference Gold held two 1999 Top Budget Classical Album positions with
MOZART - GREATEST HITS (No. 7, No. 2 in 1998) and BEETHOVEN - GREATEST HITS (No.
9, No. 16 in 1998). These successful releases earned Reference Gold the fourth
position on the Top Budget Classical Imprints and Top Budget Classical Labels
title for 1999 (No. 4 in 1998), and Intersound the fifth position on the Top
Budget Classical Imprints and Top Budget Classical Labels title for 1999 (No. 1
in 1998). All titles and chart positions are according to BILLBOARD.
We typically utilize our extensive catalog to release existing titles
in a theme-based format, which are generally music products arranged around a
specific theme and often targeted to a specific demographic audience. Our
theme-based products range from the music of Hollywood and Broadway to
recordings by such established artists as Dizzy Gillespie, Al Hirt, Doc
Severinson and Ferrante & Teicher. We also release multi-disc packages, "best
of" packages featuring select composers and music genres, religious and ethnic
selections, music for various party themes and Christmas and various other
holiday selections.
GOSPEL
We own a catalog of master recordings of some of the best-selling
gospel music artists of all time, including The Winans, Andrae Crouch, Walter
Hawkins and Highway Q.C.s. Consistent with our belief that gospel music sales
are "artist-driven," rather than "hit-driven," we have acquired and produced
master recordings by established gospel artists who have a history of stable
sales. A successful example of this strategy is the strong sales of the
compilation RAISE DA ROOF, which was created entirely from our existing catalog
and has generated net sales in excess of 100,000 units since its January 1999
release.
In 1999, CGI Platinum and its artists were recognized for their
outstanding accomplishments. Our artists were nominated for 15 Stellar Awards.
Vickie Winans, who co-hosted this year's awards ceremony, won three awards and
the Christianaires won one award. Ms. Winans won an NAACP Image Award for Best
Traditional Gospel Artists and was nominated for a Grammy. Her 1999 release,
LIVE IN DETROIT II, was the best-selling 1999 release for the company. The
Mighty Clouds of Joy, who released IT WAS YOU during 1999, were inducted in the
Gospel Music Hall of Fame this year; they also were nominated for an NAACP Image
Award and a Dove Award.
POP/ROCK/ADULT CONTEMPORARY
In 1999, Platinum released LIVE from rock-n-roll legend Pete Townshend.
The album was recorded live at the Chicago House of Blues to benefit Maryville
Academy, an organization that treats abused children. Platinum also released
KARMA by Rick Springfield. The release contains all new material
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from this platinum-plus selling artist. Sales were driven by the top 20 hit
"Free" at adult contemporary radio along with a national tour. Also in 1999,
Platinum released SHADES OF BLUE by Francine Reed, who PEOPLE magazine
described as a "...powerhouse who deserves to be more widely heard." Ms. Reed
has spent that last 13 years as a foreground singer with Lyle Lovett's Large
Band.
BLUES
On our House of Blues label, we produce original recordings by
established blues and gospel artists, as well as blues compilations that
include music both from the House of Blues catalog and licensed from other
companies. Our joint venture is the exclusive means by which House of Blues
recordings and audio-visual works are distributed, performed and exhibited.
Our joint venture with House of Blues Records, Inc. also allows us to market,
promote and merchandise our music products in the House of Blues clubs,
venues and hotels. HOB Entertainment owns, operates or exclusively books 27
live music venues including seven widely known House of Blues clubs and 20
premier amphitheater, theatre and arena concert venues.
During 1999, The Dixie Hummingbirds' 70th anniversary release, MUSIC IN
THE AIR, featuring guest artists such as Stevie Wonder, Paul Simon and Wynonna
Judd, was nominated for a Grammy for Best Traditional Soul Gospel. Derek Trucks
and his album, OUT OF THE MADNESS, were included in the top 5 Blues Guitar
Player and Album of the Year charts in GUITAR WORLD magazine. BLUES POWER, a
collection of Eric Clapton songs performed by celebrated blues artists, peaked
at No. 7 on BILLBOARD'S Blues Chart. We also released two limited edition
collectible box sets, THE ESSENTIAL SHOEBOX FULL OF BLUES and THIS AIN'T NO
TRIBUTE BLUES CUBE, comprised of albums previously released on the House of
Blues label.
URBAN
Our urban music division focuses on several specialty niches, including
rap, hip-hop and rhythm & blues. We have employed experienced management and
staff well-versed in urban radio and promotion, including Hank Caldwell as
executive vice president of labels, who joined our company during 1999. Mr.
Caldwell was previously president of Death Row Records and senior vice president
of Epic Black Music. Until Mr. Caldwell joined Platinum Entertainment, our urban
division produced primarily compilations of licensed product. For example, our
successful BOOTY MIX series has sold over 850,000 units since the first volume
was released in 1996, according to SoundScan. We are currently producing
records by multi-platinum selling artist Johnny Gill and debut records by Smash
Task and Diamond. Both of these debut releases are being produced by Charles
Farrar and Troy Taylor, also known as the "Characters," who are well-known for
their work with Boys II Men and producing Tyrese's Grammy nominated "Sweet
Lady." We also have a two-act production deal with Kevin "Shekspere" Briggs, who
wrote and produced "No Scrubs" for TLC and "Bills, Bills, Bills" for Destiny's
Child, both of which were Grammy nominated, with "No Scrubs" winning numerous
categories at this year's Grammy awards show.
COUNTRY
In 1999, Platinum Nashville released VOICES by The Oak Ridge Boys, a
world renowned country music group with 17 No. 1 hits and 34 Top 10 singles to
their credit. VOICES was their first album featuring all four original members
of the group since 1987. We also released Suzy Bogguss' self-titled album in
1999. Suzy Bogguss comes to Platinum Nashville with both platinum and gold
records to her credit. She has also won CMA and ACM awards (Horizon Award, 1992,
Top New Female Vocalist, 1989, respectively). Another notable release for 1999
was CRYSTAL GAYLE SINGS THE HEART & SOUL OF HOAGY CARMICHAEL: A MUSICAL TRIBUTE
TO HOAGY. The release includes 15 songs penned by Mr. Carmichael and is
receiving critical acclaim and airplay nationwide. PEOPLE magazine described the
record as "Great songs, terrific singer." Platinum Nashville also licensed a
live comedy album featuring Rodney Carrington, who appears at comedy clubs and
is receiving airplay nationwide.
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DISTRIBUTION, SALES AND PROMOTION
We distribute our products through a multi-channel distribution system comprised
of:
- - PED, our proprietary distribution system, headquartered in Alpharetta,
Georgia,
- - International licensing agreements as well as production and
distribution agreements on a territory-by-territory basis, and
- - Internet distribution.
We had a distribution agreement with PGD through July 1999, at which
time we notified PGD we were terminating the agreement. We also serve as a
distributor for various third party music labels located in the United States
and Europe.
PED SALES AND DISTRIBUTION
We distribute most of our products in the United States and Canada
through PED, our distribution and warehouse facility located at our offices in
Alpharetta, Georgia. We have a salaried direct sales force that contacts
customers throughout the United States and Canada. In addition to our sales
operation at our Alpharetta facility, we have regional sales offices located
throughout the United States and Canada. Our sales personnel also support PED's
marketing efforts with large retail customers. Additionally, we have sales
personnel who cover specialty retail sectors, international customers, and
record club and catalog customers.
INTERNATIONAL DISTRIBUTION
We distribute our products internationally by various means. We
distribute products to international customers direct from PED, via licensing
agreements and via production and distribution arrangements on a
territory-by-territory basis. We believe that utilizing such means of
international distribution will allow us to exploit our existing international
licensing relationships, electronic media, and overseas manufacturing to
increase revenues derived from international distribution.
DISTRIBUTION FOR THIRD PARTIES
We utilize our distribution channels to facilitate distribution for the
following third parties, which are generally small independent record labels
specializing in particular genres of music, including those listed below:
<TABLE>
<S> <C> <C> <C>
9:11 Frequencies Adventurenet.com Badman Records Born Again
Brooklyn Music Gator Records House of Blues Loose Leaf Records
Ramblin' Records Souljah Records Symbiotic World Blue Records
</TABLE>
INTERNET DISTRIBUTION
We distribute via the Internet through our website, www.PlatinumCD.com,
our promotional download website, www.HeardOn.com, and our income sharing
arrangement with 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. On December 31, 1999,
we signed an exclusive agreement with LiveOnTheNet, Inc., which hosts a variety
of video and audio programming showcasing local and national advertisers, to
license our digital catalog for promotional downloads. In addition, through our
affiliation with Amazon.com, a leader in the Internet commerce industry,
customers who visit our website have access to hundreds of thousands of
commercially available titles of other record companies. We receive referral
fees for sales generated by Amazon.com from such arrangement.
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LIBRARY
We own or control the copyrights to over 13,000 master recordings. Our
library contains significant catalogs of classical, urban, adult contemporary,
blues, gospel and country music.
RELATIONSHIPS WITH ARTISTS
CONTRACT TERMS
We seek to contract with artists on an exclusive basis for the sales
and marketing of their recordings in return for a royalty based on the net sales
of the recordings. Generally, we seek to obtain rights on a worldwide basis. A
typical contract with an artist may provide for multiple albums to be delivered,
with advances against royalties being paid upon delivery of each album, although
advances are often made prior to recording. We generally have an option to take
each album that the artist is contracted to deliver, exercisable within an
agreed period of time, usually a few months following delivery of the previous
album. Normally, if an option is not exercised, the artist has no obligation to
deliver additional albums. Provisions in contracts with established artists vary
considerably, and may, for example, require us to release a fixed number of
albums and/or contain an option exercisable by us covering more than one album.
We seek to obtain rights to exploit product delivered by the artist for the life
of the product's copyright. Under the contracts, advances are normally
recoupable against royalties paid to the artist. We also seek to recoup a
portion of certain marketing and tour support costs, if any, against artist
royalties.
RECORDING
Recording contracts either provide that the artist deliver completed
recordings or that we undertake the recording with the artist. If the recording
costs are advanced by Platinum, they are added to the advances paid to the
artist and recouped against royalties payable to the artist. Our staff is
generally involved in selecting producers, recording studios, any additional
musicians needed and songs to be recorded, as well as supervising the output of
recording sessions. For experienced artists, such involvement may be minimal.
OPTION PROGRAM
We have granted and intend to continue to grant stock options to
certain artists as an inducement to sign with our labels. We expect that these
stock options will be granted based on the achievement of identified sales and
other performance milestones. We will evaluate the use of options on a case by
case basis based on our assessment of the cost of making cash advances to the
artist, the sales potential of the artist and the financial impact of granting
such options. Under the current industry practice, cash advances to an artist
are recouped from royalties payable to the artist from record sales. Because
artist options would not be subject to recoupment, we believe that such options
will provide a valuable method of attracting, signing and retaining artists
while maintaining appropriate economic incentives for the artists.
PRODUCTION AND MANUFACTURING
We are a full service record company with an art department that
provides design and finished film for print-ready manufacturing of record cover
design. We manufacture our finished music products through third party
arrangements. We coordinate all of our manufacturing of finished music products
through our Alpharetta facility. The facility also houses three recording
studios, providing us the ability to mix, master, sequence and enhance our
recordings.
INTELLECTUAL PROPERTY
Our business, like that of other companies involved in recorded
music, primarily rests on ownership, control and exploitation of musical works
and sound recordings. Our music products are protected under applicable domestic
and international copyright laws. In addition, we own or control the copyrights
to over 13,000 master recordings.
6
<PAGE>
Although circumstances vary from case to case, rights and royalties
relating to a particular recording typically operate as follows: When a
recording is made, copyright in that recording vests either in the recording
artist (and is licensed to the recording company) or in the record company
itself, depending on the terms of the agreement between them. Similarly, when a
musical composition is written, copyright in the composition vests either in the
writer (and is licensed to the music publishing company) or in the publishing
company itself. Artists generally record songs that are controlled by music
publishers. We obtain the rights to reproduce such songs on soundcarriers or by
means of digital phonorecord delivery from music publishers or collection
societies on their behalf. The manufacture and sale of a soundcarrier results in
royalties being payable by the record company to the publishing company at
industry agreed or statutory rates for the use of the composition (and the
publishing company in turn pays a royalty to the writer) and by the record
company to the recording artist for the use of the recording. We operate in an
industry in which revenues are adversely affected by the unauthorized
reproduction of recordings for commercial sale, commonly referred to as
"piracy," and by home taping for personal use.
LICENSING
We are engaged in licensing activity involving both the acquisition of
rights to certain master recordings and compositions for our own projects and
the granting of rights to third parties in the master recordings and
compositions we own or control. We frequently obtain an ownership or
co-ownership interest in newly-recorded compositions appearing on albums
released by Platinum that are written by the artists performing the
compositions. The rights to use all other compositions appearing on albums or
audiovisual works are obtained from the publishers of those compositions under
agreements that, for albums, are called mechanical licenses, which are often
issued through a central agency, and for audiovisual works are called
synchronization licenses. We also obtain licenses for the use of musical
compositions by means of the compulsory licensing provisions of the U.S.
Copyright Act, particularly with respect to the transmission of our master
recordings by means of digital phonorecord deliveries, or "downloads," through
the Internet. The mechanical license fee is customarily indexed to a statutory
rate established under the United States Copyright Act, which currently is 7.55
cents for a performance of up to five minutes and higher for performances of
greater length. Although fees for synchronization licenses vary from set fees to
percentages of sales price, the fee often corresponds to the statutory rate for
mechanical licenses. We typically issue our own mechanical and synchronization
licenses to third parties when compositions from our own catalog are used by
others. The availability and terms of such cross-licensing arrangements are
generally made possible by industry practices based on reciprocity.
Performance rights in compositions we own are enforced under agreements
we have with the performing rights organizations, American Society of Composers,
Authors and Publishers (ASCAP), Broadcast Music, Inc. (BMI) and SESAC, Inc.,
(SESAC) which license commercial users of music such as radio and television
broadcasters, restaurants and retailers and disburse collected fees based upon
the frequency and type of performances they identify. Print publishing rights in
our owned compositions are either directly licensed by us to third party users
or are enforced through agencies such as Christian Copyright Licensing
International, which issues print licenses to churches and other organizations
and collects and disburses the fees.
We often obtain, pursuant to license agreements, the right to use
master recordings owned by others, either in original album form or for
compilation projects. Although the terms of such agreements vary, they are
typically for a period of three to five years and involve the payment of a
royalty in the range of five to eight cents for the use of individual masters
and between 16% and 20% of suggested retail price for complete original albums.
We typically license to others only the right to use individual masters for
compilation projects under terms similar to the terms under which we obtain
master license rights. Should such industry practices change, there can be no
assurance that we will be able to obtain licenses from third parties on
satisfactory terms. If we are unable to obtain such licenses, our business,
particularly with respect to compilation products, could be adversely affected.
7
<PAGE>
EMPLOYEES
As of April 7 , 2000, we employed 101 persons, of whom 10 were located
in our Downers Grove, Illinois office, 89 were located in our Alpharetta,
Georgia facility, and 2 were located in our Nashville, Tennessee office. Of such
employees, 72 were engaged in marketing, sales and related customer services, 17
were engaged in administration and finance, 5 were engaged in legal, royalty and
publishing services and 7 were engaged in production.
None of our employees are represented by a labor union. We have not
experienced any work stoppage and we consider relations with our employees to be
good.
ITEM 2. FACILITIES
We currently lease a 12,250 square foot facility for our corporate
offices in Downers Grove, Illinois, under an agreement expiring April 30, 2003.
We are attempting to sublease the portion of our Downers Grove offices left
vacant from our recent consolidation of employees in Alpharetta, Georgia. We
also lease an 80,000 square foot facility in Alpharetta, Georgia, which lease
expires June 30, 2009. This facility houses our warehouse and distribution
centers, production studios, an art department and marketing and promotion
operations. We also lease sales offices in Minneapolis, MN, Dallas, TX, and
Toronto, Ontario under various short-term leases. In addition, we lease 3,200
square feet of office space in Nashville, Tennessee, pursuant to a lease
expiring October 31, 2000, housing the staff of Platinum Nashville. We sublease
approximately 2,000 square feet of the Nashville office to third parties.
ITEM 3. LEGAL PROCEEDINGS
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 for
alleged breaches of its distribution agreement by us. Ichiban also filed a
complaint for injunction and temporary restraining order and appointment of a
receiver under the same caption. On April 21, 1999, Ichiban 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. We subsequently 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. On June 16, 1999, the
Bankruptcy Court granted our motion to remove Ichiban as a debtor in possession
and appointed an independent trustee to operate the business of Ichiban. On
October 14, 1999, the Bankruptcy Court approved our joint motion with the
trustee to approve an amended version of the distribution agreement between us
and Ichiban to permit the further distribution of Ichiban recordings by us.
Further, the Bankruptcy Court approved a motion by the
8
<PAGE>
Trustee to consolidate the bankruptcy proceedings of Ichiban Records, Inc.
with the bankruptcy of Ichiban International, Inc., an affiliate corporation.
On March 9, 2000, the Bankruptcy Court rejected the presentation of an
agreement negotiated between us and the Trustee for acquisition of the assets
of Ichiban. Because of this decision and Ichiban's failure to execute on its
plans to become an operating company, we withdrew our support of motions to
approve a settlement of the Ichiban Claim and to approve a settlement
agreement between the bankruptcy estate and The Harry Fox Agency. As a
consequence of the failure of such motions to be entered by the Bankruptcy
Court, the amended version of the distribution agreement between us and
Ichiban became ineffective. Accordingly, we have expensed our unrecouped
distribution advance to Ichiban, which totaled $1,950,000 as of December 31,
1999. On March 27, 2000, upon the motion of the United States Trustee, the
bankruptcy proceeding was converted from Chapter 11 to Chapter 7, and the
assets of the Ichiban estate will be liquidated. We believe this matter will
not have an additional 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 PGD's claim that the distribution
agreement between us and PGD bars the distribution of recordings by us through
our own distribution facilities and requires that they be distributed by PGD. On
June 25, 1999, PGD filed an amended complaint that additionally seeks the
recovery of damages. We rejected earlier demands by PGD to cease and desist
selling our recording through our own distribution facilities on the grounds
that an amendment to the distribution agreement with PGD specifically allows us
to distribute records through our own distribution company. We filed our answer
to the complaint and filed cross-complaints against PGD seeking damages incurred
in connection with the production of a compilation album by PGD entitled
"Essential Southern Rock", for the failure of PGD'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 PGD. We also sent a notice of termination of the distribution agreement to
PGD, terminating the distribution agreement effective as of July 21, 1999, for
PGD'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. PGD filed a notice of appeal of this decision.
Prior to November 10, 1999, we filed an action against PGD in the New York state
court asserting as plaintiff the claims made as cross-complaints in the action
in California. On January 14, 2000, PGD filed an action in the United States
District Court for the Southern District of New York captioned POLYGRAM GROUP
DISTRIBUTION, INC. V. PLATINUM ENTERTAINMENT, INC., Civil Action No. 00 Civ. 282
(MBM), asserting essentially the same claims as originally asserted in the
California action with an additional claim asserting trademark infringement
arising out of the sale by us of phonorecords bearing the declaration that they
are distributed by PGD. We have reached an agreement with PGD that the appeal in
California will be abandoned, that the New York state action filed by us will be
dismissed, and our respective claims will be litigated in the New York federal
action. We are preparing our answer and counterclaims against PGD to file in the
New York federal action. Because the lawsuit is at an early stage, there can be
no assurances that the matters can be resolved in our favor. A decision adverse
to us in this matter could have a material adverse impact on our financial
position and results of operations.
We are a party in various other lawsuits which have arisen in the
normal course of business. In the opinion of management, based upon
consultation with legal counsel, the ultimate outcome of these lawsuits will
not have a material impact on our financial position or results of operations.
9
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) An Annual Meeting of Stockholders was held on August 16, 1999.
(b)
1. The Stockholders voted to elect three Class III directors to
the Company's Board of Directors for a term of two years, as
provided in the By-Laws of the Company, with the following
votes:
<TABLE>
<S> <C> <C>
Steven Devick
For Withheld Against
--- -------- -------
6,517,422 0 51,410
Craig J. Duchossois
For Withheld Against
--- -------- -------
6,517,422 0 51,410
Robert J. Morgado
For Withheld Against
--- -------- -------
6,517,422 0 51,410
</TABLE>
2. The Stockholders voted to elect four Class I directors to the
Company's Board of Directors for a term of three years, as
provided in the By-Laws of the Company, with the following
votes:
<TABLE>
<S> <C> <C>
Douglas C. Laux
For Withheld Against
--- -------- -------
6,517,422 0 51,410
David S. Bauman
For Withheld Against
--- -------- -------
6,517,422 0 51,410
Paul L. Humenansky
For Withheld Against
--- -------- -------
6,517,422 0 51,410
Mark J. Schwartz
For Withheld Against
--- -------- -------
6,517,422 0 51,410
</TABLE>
3. The Stockholders also voted to ratify the appointment by the
Board of Directors of Ernst & Young LLP as the independent
auditors of the Company's financial statements for the fiscal
year ending December 31, 1999, with the following votes:
<TABLE>
<S> <C> <C>
For Withheld Against
--- -------- -------
6,517,021 31,926 19,885
</TABLE>
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
<TABLE>
<CAPTION>
PRICE RANGE OF COMMON STOCK
---------------------------
High Low
<S> <C> <C>
Fiscal year ended December 31, 1998:
First quarter $ 7.438 $ 5.375
Second quarter 13.750 6.563
Third quarter 10.125 4.000
Fourth quarter 8.875 4.000
Fiscal year ended December 31, 1999:
First quarter $ 8.875 $ 5.063
Second quarter 13.813 5.750
Third quarter 8.969 3.875
Fourth quarter 4.813 2.000
Fiscal year ended December 31, 2000:
First quarter $ 4.875 $ 2.250
</TABLE>
Our Common Stock trades on the Nasdaq National Market under the
symbol "PTET." The following table sets forth for the periods indicated the
high and low closing prices of our Common Stock, as reported by Nasdaq. Such
quotations reflect inter-dealer prices without markup, markdown or
commissions and may not necessarily represent actual transactions.
At April 13, 2000, there were 183 stockholders of record and
7,938,744 shares outstanding.
During December 1999, we issued 64,286 shares of our Common Stock,
for consideration of $225,000, or $3.50 per share, to Brooklyn Music, Ltd.
(BML), in lieu of cash as prepayment of net sales pursuant to a distribution
agreement, dated November 12, 1999, between Platinum Entertainment and BML.
Also during December 1999, we issued BML 261,192 shares of our Common Stock
for consideration of $1,035,000, or $3.9626 per share, pursuant to the same
agreement.
During December 1999, we issued 108,480 shares of our Common Stock,
valued at $470,000 or $4.33 per share, to Diezel Muzick, Inc., in lieu of
cash as a recoupable recording fund for certain projects pursuant to
recordings agreements dated August 30, 1999, and August 31, 1999, as amended,
between Platinum Entertainment and Diezel Muzick.
These sales were exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933, as amended, as transactions not involving a
public offering.
11
<PAGE>
ITEM 6. Selected Financial Data.
The following table sets forth our selected consolidated statements
of operations and consolidated balance sheet data as of the dates and for the
periods indicated. Effective December 31, 1997, we changed our fiscal year
from May 31 to December 31. The selected consolidated financial data as of
and for the years ended December 31, 1999 and 1998, the seven months ended
December 31, 1997, and the years ended May 31, 1997, 1996 and 1995, listed
below have been derived from our audited consolidated financial statements.
The selected consolidated financial data for the unaudited years ended
December 31, 1997 and 1996 and the unaudited seven months ended December 31,
1996, were prepared in accordance with accounting principles generally
accepted in the United States; in the opinion of management, the financial
statements for these periods reflect all adjustments (of a normal and
recurring nature) which are necessary to present fairly the results of
operations shown.
The following table also reflects earnings before interest, other
financing costs, equity gain (loss), taxes, depreciation and amortization
(EBITDA). EBITDA is a non-GAAP financial metric utilized by management and is
intended solely to provide additional information to investors.
Certain prior period amounts in the financial statements and related
notes have been reclassified to conform with the current year presentation.
The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and related notes included elsewhere
herein. Particular attention should be given to "Item 1. Business, Safe
Harbor Provision; Risk Factors, "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations, Liquidity and Capital
Resources" and "Item 8. Financial Statements and Supplementary Data, Report
of Independent Auditors."
<TABLE>
<CAPTION>
Seven months ended
Year ended December 31 December 31 Year ended May 31
------------------------------------------- ------------------------- ------------------------
1999 1998 1997 1996 1997 1996 1997 1996 1995
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Gross revenues (1) $ 48,891 $ 56,314 $ 60,559 $ 21,157 $ 35,294 $ 12,878 $ 38,757 $ 20,121 $ 12,782
Net revenues 26,265 40,616 34,797 15,242 18,280 9,773 25,418 14,416 8,547
Gross profit 2,573 11,275 13,074 2,733 4,871 3,506 11,707 4,236 4,204
Merger, restructuring and one-time
costs (2) - - 5,326 6 3,100 6 2,231 - -
EBITDA (22,684) (9,515) (12,012) (6,167) (10,545) (2,195) (3,665) (3,781) (4,596)
Operating loss (25,238) (11,570) (13,847) (6,430) (11,607) (2,394) (4,638) (3,937) (4,729)
Interest expense (3,189) (2,661) (4,324) (229) (2,944) (7) (1,385) (570) (157)
Other financing costs (342) (344) (4,791) - (1,258) - (3,533) - -
Other gains (3) 6,913 - - - - - - - -
Loss from continuing operations (21,658) (14,797) (23,533) (6,417) (16,446) (2,265) (9,354) (4,401) (4,840)
Loss from discontinued operations - - - (226) - - - (226) (4,684)
Net loss (21,658) (14,797) (23,533) (6,643) (16,446) (2,265) (9,354) (4,627) (9,524)
Less: Preferred dividends
requirements (4) (4,041) (2,824) - (602) - - - (602) -
Loss applicable to common shares $(25,699) $ (17,261) $ (23,533) $ (7,245) $ (16,446) $ (2,265) $ (9,354) $ (5,229) $(9,524)
Basic and diluted loss per common
share (5):
Loss from continuing operations $ (3.62) $ (3.07) $ (4.52) $ (1.54) $ (3.14) $ (0.44) (1.82) $ (1.71) $ (2.12)
Loss from discontinued operations - - - (0.13) - - - (0.08) (2.05)
------------------------------------------- ----------------------------------------------------
Net loss $ (3.62) $ (3.07) $ (4.52) $ (1.67) $ (3.14) $ (0.44) $ (1.82) $ (1.79) $ (4.17)
=========================================== ====================================================
Weighted-average number of common
shares outstanding (5) 7,107,350 5,732,661 5,206,964 4,548,151 5,232,030 5,112,066 5,136,830 2,925,987 2,284,090
BALANCE SHEET DATA:
Cash $ 12 $ 12 $ 11 $ 53 $ 8,222 $ 87
Working capital (deficit) (40,232) (29,980) (16,469) (22,953) 12,055 (9,129)
Total assets 47,254 56,978 48,463 58,308 18,991 5,737
Long-term obligations (including
current portions) - - 25,000 5,000 - -
Redeemable preferred stock (4) - - - - - 5,423
Total stockholders' equity
(deficit) (6,389) 7,918 12,375 7,866 15,215 (12,321)
</TABLE>
1) We terminated our distribution agreement with PGD during July 1999 for
failure of PGD to perform under the agreement. At the time of the
termination, PGD was our second largest distribution channel. Our gross
revenues through PGD were $17,882 and $3,314 for 1998 and 1999,
respectively, reflecting an
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<PAGE>
81% decrease; our gross revenues through PGD were $9,686 and $3,095 for
first six months of 1998 and 1999, respectively, reflecting a 68% decrease.
Management believes that this decrease prior to our termination in July
1999, is related to the acquisition of PGD by Universal Music and Video
Distribution (Universal) during the summer of 1998 (see "Item 3. Legal
Proceedings"). This decrease was in part offset by increases in gross sales
through PED, which increased $8,606 or 24% in 1999, compared to 1998.
However, our internal distribution capabilities were insufficient to fully
offset the loss of the PGD distribution services.
2) As a result of our acquisition of Intersound during January 1997, we
incurred significant costs to merge and restructure our business with the
acquired companies. Such merger and restructuring costs included severance
costs, relocation costs, lease commitment write-offs, warehouse closing
costs and other related costs. Such costs were $251 and $1,700 during the
seven months ended December 31, 1997, and the year ended May 31, 1997,
respectively, relating primarily to severance costs and a distribution
termination fee. The restructuring was substantially completed at December
31, 1997. Such restructuring resulted in shifts in the selling and
promotion efforts of our country label and in-house sales department and a
shift in third party fulfillment of Platinum Christian Distribution. In
addition, one-time costs for the year ended May 31, 1997, included
write-offs of artist advances of approximately $600 in areas for which we
have chosen to redirect our resources. These costs were classified as
merger, restructuring and one-time costs and were included in our operating
losses.
During June 1998, we executed a settlement agreement with K-tel
International, Inc., whereby we mutually agreed to settle our claims to
$1,750 we had deposited in escrow pursuant to a purchase and sale agreement
signed by us and K-tel during March 1997, and terminated by us during
September 1997. Pursuant to this settlement agreement, each party received
50% of the escrowed amount. We fully reserved the $1,750 in escrow prior to
December 1997, and expensed approximately $1,100 of legal, accounting and
other incremental costs related to this transaction. Accordingly, our
selling, general and administrative expenses for 1998, are net of $875
received from this settlement.
3) We sold all of our 798,856 shares of musicmaker.com common stock 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. We received our stake in musicmaker.com in
exchange for $750 of our common stock and the exclusive right to our music
catalog for Internet downloads and "burn and mail" compilations for five
years, provided that the rights may be converted to non-exclusive at our
election at any time after two years.
In addition, we sold our Double J Music country publishing rights during
1999, for aggregate proceeds of $1,449, resulting in a gain of $374.
4) For the years ended December 31, 1999 and 1998, dividends of $4,041 and
$2,824, respectively, accrued on the Series B, Series C and Series D
Convertible Preferred Stock outstanding. For the year ended May 31, 1996,
dividends of $602 accrued on Series A-1 Redeemable Non-Convertible
Preferred Stock, which were paid concurrent with the redemption of that
stock during March 1996.
5) Basic loss per common share is based upon the net loss applicable to common
shares after preferred dividend requirements and upon the number of
weighted-average common shares outstanding during the period. Diluted loss
per common share adjusts for the effect of convertible securities, stock
options and warrants only in the periods presented in which such effect
would have been dilutive. The total of such securities at December 31,
1999, was 17,541,000. Such effect was not dilutive in any of the periods
indicated.
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information in this section should be read together with the
consolidated financial statements and related notes contained elsewhere
herein.
OVERVIEW
Our primary business is the production, distribution, marketing and
sale of music. Our 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. Expansion and
exploitation of our music catalog and publishing rights is also an integral
part of our business and growth strategy. We currently own or control a music
catalog with more than 13,000 master recordings. 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 release music in a variety of genres including
classical, urban, adult contemporary, blues, gospel and country through our
Intersound Classical, Platinum, House of Blues, CGI Platinum and Platinum
Nashville labels.
We distribute our products through a multi-channel distribution system
comprised of:
- - PED, our proprietary distribution system, headquartered in Alpharetta,
Georgia, a suburb of Atlanta,
- - International licensing agreements as well as production and
distribution agreements on a territory-by-territory basis, and
- - Internet distribution.
We had a distribution agreement with PGD through July 1999, at which
time we notified PGD we were terminating the agreement (see "Item 3. Legal
Proceedings").
Our operating results for 1999 were below our 1998 operating results
and significantly below our 1999 operating plan due, we believe, to several
factors:
- - We terminated our distribution agreement with PGD during July 1999, because
of PGD's failure to perform under the agreement. At the time of the
termination, PGD was our second largest distribution channel. Our gross
revenues through PGD were $17,882,000 and $3,314,000 for 1998 and 1999,
respectively, reflecting an 81% decrease; our gross revenues through PGD
were $9,686,000 and $3,095,000 for first six months of 1998 and 1999,
respectively, reflecting a 68% decrease. Management believes that this
decrease prior to our termination in July 1999 is related to the
acquisition by Universal of PGD during the summer of 1998 (see "Item 3.
Legal Proceedings").
- - We moved our distribution facility to a new building and consolidated our
offices during 1999. This move was intended to provide a larger, more
efficient distribution facility and consolidate all production, marketing,
sales and related customer service staff in one location. While we believe
this move is currently providing efficiencies and fostering productivity,
the logistics of the move hampered both efficiencies and productivity at
PED during the third and fourth quarters of 1999 and the first few months
of 2000. The move was scheduled to occur during June 1999; however, we did
not take possession of the space until October 1999, which is our busiest
time of the year, during which time we fulfill holiday orders. The physical
move between facilities delayed our distribution operations. We also
received shipments of significant quantities of our product inventory that
was being held at PGD's warehouses due to the termination of our
distribution agreement with them, which compounded the delays in
distribution operations. While our shipping capabilities have returned to
normal, our returns processing has not; we expect returns processing to be
current by June 2000.
14
<PAGE>
- - Due in part to the factors described above, our liquidity from operations
is far below our expectations. During the fourth quarter of 1999, our
liquidity issues forced us to cut back on temporary employees at PED, as
well as eliminate some permanent staffing positions. The lack of liquidity
delayed payments to certain manufacturers, resulting in product delays,
which in turn caused us to be delinquent fulfilling customer shipping date
requests on a substantial portion of our scheduled fall and holiday
shipments. Our lack of liquidity also limited our ability to market and
promote our third and fourth quarter releases, which negatively impacted
sell-through at retail. This resulted in excessive returns during the first
quarter of 2000 of product shipped during 1999, requiring a substantial
increase to our reserve for future returns at December 31, 1999. This
increase in returns, coupled with the reduction in PED staffing, has slowed
our processing of returns. Consequently, we have experienced a delay in
collecting cash receipts on receivables, since customers typically will not
remit cash receipts until their returns have been processed. Increased
returns can imply increased slow-moving inventory and brings advance
recoupments into question; accordingly, we increased the reserves for both
the inventory and artist advance balances at December 31, 1999.
Until our liquidity issues are resolved, our ability to operate will
continue to be significantly constrained. Our banking facility became due in
full on March 31, 2000. We have not secured financing to replace these
borrowings due. See "Item 1. Business, Safe Harbor Provision; Risk Factors,"
"Liquidity and Capital Resources" below, and "Item 8. Financial Statements
and Supplementary Data, Report of Independent Auditors."
We distribute via the Internet through our website,
www.PlatinumCD.com, our promotional download website, www.HeardOn.com, and
our income sharing arrangement with musicmaker.com, the first and largest
digital download and "burn and mail" company. Our agreement with
musicmaker.com was completed during September 1998, and was consummated with
an exchange of common stock in our companies. The transaction was valued at
$750,000 upon closing. We sold our shares of musicmaker.com during October
1999, for $7,289,000, resulting in a realized gain of $6,539,000. On December
31, 1999, we signed an exclusive agreement with LiveOnTheNet, Inc. to license
our digital catalog for promotional downloads. We received $1,800,000 from
LiveOnTheNet as consideration for the license during January 2000, and will
receive the remaining $200,000 upon the completion of the term. This
licensing fee will be reflected in our operations as earned. We intend to
pursue additional opportunities that exploit our digital music rights on the
Internet.
We serve as a distributor for various third party labels located in
the United States and Europe. Under these arrangements, we generate a
distribution fee of approximately 20% to 30%, depending on the volume and
range of services provided. These activities represented 17% and 19% of our
gross revenues in 1999 and 1998, respectively. We believe that increasing the
volume of products distributed for select third parties will contribute to
offsetting the fixed costs of maintaining PED as well as provide incremental
revenue and income. We intend to pursue additional third party distribution
opportunities in the future. See "Significant Matters" below. During 1999,
the SEC issued an accounting bulletin addressing the recognition of revenues
for companies that distribute other companies' products for a fee. While
these rules do not take effect until the second quarter of 2000, the
implementation of these rules may impact the presentation of revenues in our
statement of operations. See "Note 2" to the consolidated financial
statements.
As a result of our acquisition of Intersound during January 1997, we
incurred significant costs to merge and restructure our business with the
acquired companies. Such merger and restructuring costs included severance
costs, relocation costs, lease commitment write-offs, warehouse closing costs
and other related costs. Such costs were $1,700,000 during 1997, relating
primarily to severance costs and a distribution termination fee. Such
restructuring resulted in shifts in the selling and promotion efforts of our
country label and in-house sales department and a shift in third party
fulfillment of Platinum Christian Distribution. In addition, one-time costs
for 1997 include write-offs of artist advances of approximately $600,000 in
areas for which we have chosen to redirect our resources. These costs were
classified as merger, restructuring and one-time costs and were included in
our operating losses.
15
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We determined the purchase price allocation for the assets purchased
and liabilities assumed from Intersound, as disclosed in the balance sheet at
May 31, 1997, based on available information at that time. However, during
the seven months ended December 31, 1997, we ascertained that the purchase
value allocated to certain purchased assets exceeded their fair market values
by approximately $1,150,000. In addition, we identified $4,051,000 of product
returns which we believe relate to product that had been sold prior to our
purchase of Intersound. Had these matters been identified by us at the time
of purchase or shortly thereafter, such valuations would have been recorded
through purchase accounting, resulting in no subsequent impact to operations.
As these matters were not identified at the time of purchase or shortly
thereafter, we were required to reflect these amounts in our results of
operations for the year ended December 31, 1997, resulting in a nonrecurring
charge to operations of $3,500,000. The returned product of $4,051,000 is
reflected in net revenues with corresponding offsets of $1,701,000 to cost of
sales; the asset write-down of $1,150,000 was also included in cost of sales.
These matters were the subject of an action entitled JCSHO, INC. F/K/A/
INTERSOUND, INC. V. PLATINUM ENTERTAINMENT, INC., (D. Minn.) which was
settled on March 31, 1999 (see "Note 19" to the consolidated 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 based upon our historical returns, SOUNDSCAN
data, and, while our agreement with PGD was in effect, on the return rate of
PGD. Our returns as a percentage of gross revenues were 42%, 22% and 37% for
the years ended December 31, 1999, 1998 and 1997. Our historical returns
experience has been adversely impacted by several factors during both 1999
and 1997:
- - As discussed above, we experienced excessive returns during 1999, which we
believe resulted from PGD's failure to perform under our former
distribution agreement with them. In addition, we experienced
inefficiencies at PED, due in part to our lack of liquidity, prompting
excessive returns.
- - Also as discussed above, we experienced excessive returns of Intersound
product during 1997, that we believe related to Intersound prior to our
acquisition. In addition, as a result of the acquisitions completed as
discussed above, including Intersound, we terminated our relationship with
Riverside Book and Bible House, Inc. for fulfillment of Platinum Christian
Distribution, prompting excessive returns of our product through the
Riverside distribution channel. We also ceased relations with certain
customers who consistently failed to pay on a timely basis, prompting an
unusually high returns experience from these customers.
It is our policy to inventory all returned product and resell such product at
market value. We scrap excess quantities of titles we feel have no market
value.
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.
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RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the
percentage of gross revenues represented by certain items included in our
"Consolidated Statements of Operations" in the consolidated financial
statements. Operating performance for any period is not necessarily
indicative of performance for any future periods.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
1999 1998 1997
-----------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Gross revenues
Platinum labels 81% 77% 83%
Distributed labels 17% 19% 14%
Licensing, publishing and other 2% 4% 3%
-----------------------------------------------
Total gross revenues 100% 100% 100%
Less: Returns -42% -22% -37%
Less: Discounts -4% -6% -5%
-----------------------------------------------
Net revenues 54% 72% 58%
Cost of sales 48% 52% 36%
-----------------------------------------------
Gross profit 6% 20% 22%
Other operating expenses:
Selling, general and administrative 52% 37% 33%
Merger, restructuring and one-time costs - - 9%
Depreciation and amortization 5% 4% 3%
-----------------------------------------------
57% 41% 45%
-----------------------------------------------
Operating loss -51% -21% -23%
Interest expense -7% -5% -7%
Other financing costs -1% -1% -8%
Equity gain (loss) - - -1%
Other gains 14% - -
-----------------------------------------------
Net loss -45% -27% -39%
Less: Preferred dividend requirements -8% -5% -
-----------------------------------------------
Loss applicable to common shares -53% -32% -39%
===============================================
</TABLE>
YEAR ENDED DECEMBER 31, 1999, COMPARED TO YEAR ENDED DECEMBER 31, 1998
GROSS REVENUES. Gross revenues decreased $7,423,000 or 13% to
$48,891,000 for 1999, compared to $56,314,000 in the prior year. We experienced
our largest decrease in gross revenues from product distributed through PGD, our
former third party, major label distributor. Gross revenues through PGD were
down $14,568,000 or 81% in 1999, compared to the prior year. Management believes
that this decrease is related to the acquisition of PGD by Universal during the
summer of 1998. This decrease was in part offset by increases in gross sales
through PED, which increased $8,606,000 or 24% in 1999, compared to the prior
year. However, our internal distribution capabilities were insufficient to fully
offset the loss of the PGD distribution services prior to the opening of our
new, expanded facility. Our notable releases shipped during 1999 included Vickie
Winan's LIVE IN DETROIT II, Rick Springfield's KARMA, Pete Townshend's LIVE,
Suzy Bogguss' self-titled release, and numerous releases from our classical
catalog, including the No. 1 Budget Classical Album of 1999, BEATLES GREATEST
HITS by John Bayless, who was also the No. 1 Budget Classical Artist of 1999,
according to BILLBOARD.
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RETURNS. We record an estimate of future returns at the time product is
sold. Returns as a percentage of gross revenues were 42% for 1999, compared to
22% for the prior year. See "Overview" for details of this increase.
DISCOUNTS. Discounts as a percentage of gross revenues remained
relatively unchanged at 4% for 1999, compared to 6% for the prior year.
COST OF SALES. Cost of sales as a percentage of gross revenues
decreased to 48% for 1999, from 52% for the prior year. Cost of sales as a
percentage of net revenues increased to 90% for 1999, from 72% for the prior
year. Cost of sales is comprised of both variable product cost of sales and
write-offs of artist advances and slow-moving inventory. Variable product cost
of sales remained constant at 60% for 1999 and 1998; however, reserves for
artist advances increased $866,000 and reserves for slow-moving inventory
increased $2,939,000 from 1999 compared to 1998. See "Overview" for discussion
of increases to these reserves.
GROSS PROFIT. Gross profit decreased $8,702,000 or 77% to $2,573,000
for 1999, compared to $11,275,000 for the prior year. As a percentage of gross
revenues, gross profit decreased to 6% for the current year compared to 20% for
the prior year. Gross profit is impacted by both variable product gross margins
and write-offs of artist advances and slow-moving inventory. Variable product
gross margins have remained constant at 40% for 1999 and 1998; however, reserves
for artist advances increased $866,000 and reserves for slow-moving inventory
increased $2,939,000 from 1999 compared to 1998. See "Overview" for discussion
of these increased reserves.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $4,467,000 or 21% to $25,257,000 for 1999,
compared to $20,790,000 in the prior year. Selling, general and administrative
expenses as a percentage of gross revenues increased to 52% for the current year
from 37% for the prior year. The increase is due to increased costs associated
with terminating our distribution agreement with PGD, including legal fees, and
consolidating our distribution operations into a new facility. In addition, we
expensed advances on two third party distribution agreements, $1,950,000 related
to Ichiban Records, who filed bankruptcy during 1999 (see "Item 3. Legal
Proceedings") and $625,000 related to Envisage Mulitmedia, a label owned by
parties related to us, which during 1999 communicated it would not pay balances
owed us. These increased costs were offset in part by a gain of $1,185,000
realized from litigation settlements during 1999 (see "Note 19" to the
consolidated financial statements).
OPERATING LOSS. As a result of the factors described above, we incurred
an operating loss of $25,238,000 for 1999, compared to an operating loss of
$11,570,000 for the prior year.
INTEREST EXPENSE. Interest expense for 1999 totaled $3,189,000 compared
to $2,660,000 for the prior year. The current year increase resulted from a
higher outstanding line of credit balance than in the prior year. See "Liquidity
and Capital Resources" below for details of our current debt structures.
OTHER FINANCING COSTS. Other financing costs of $342,000 were incurred
during 1999, compared to $344,000 during the prior year. Other financing costs
for 1999 reflect a change in the amortization on deferred financing costs due to
the acceleration of our bank loan due date from July 2003 to March 2000. Other
financing costs for the prior year include the write-off of $660,000 of
unamortized bank fees on a previous bank facility offset in part by the reversal
of a $350,000 previously accrued extension fee on a separate, previous bank
facility which would have been due in 1998 had our stock value not met a certain
threshold; as the threshold was met, the fees were not payable and the accrual
was reversed. See "Liquidity and Capital Resources" for further discussion of
our current debt structure.
OTHER GAINS. We sold all of our 798,856 shares of musicmaker.com common
stock on October 6, 1999, for net proceeds of $7,289,000 or $9.125 per share.
The sale resulted in a realized gain of $6,539,000. We also sold our publishing
rights of Double J Music during 1999, for an aggregate $1,449,000. The book
value of Double J Music was $1,020,000 at closing, and after deducting costs
associated with the transaction, the sale resulted in a gain of $374,000. There
were no such transactions in the prior year.
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<PAGE>
INCOME TAXES. No income tax expense or benefit has been recorded
through December 31, 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 $64,693,000 at
December 31, 1999, expiring in years 2007 through 2014, is subject to annual
limitations due to a change in ownership as a result of our initial public
offering. Accordingly, approximately $3,985,000 of the net operating loss
carryforward is subject to an annual limitation of approximately $2,200,000.
PREFERRED DIVIDEND REQUIREMENTS. During 1999 and 1998, the preferred
stock outstanding accrued dividends of $4,041,000 and $2,824,000, respectively.
See "Note 15" to the financial statements for details.
LOSS APPLICABLE TO COMMON SHARES. The loss applicable to common shares
for 1999 totaled $25,699,000, including preferred dividend requirements of
$4,041,000, compared to a loss applicable to common shares of $17,261,000,
including preferred dividend requirements of $2,824,000, for the prior year. The
increased loss applicable to common shares relates primarily to a 35% decrease
in 1999 net revenues compared to 1998, increased costs associated with
terminating our distribution agreement with PGD and consolidating our facilities
at PED, increased reserves for slow-moving inventory, unrecoupable artist
advances and unrecoupable distribution advances, and increased preferred
dividend requirements.
YEAR ENDED DECEMBER 31, 1998, COMPARED TO YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
GROSS REVENUES. Gross revenues decreased $4,245,000 or 7% to
$56,314,000 for 1998, compared to $60,559,000 in the prior year; however, net
revenues increased $5,819,000 or 17% to $40,616,000 for 1998, compared to
$34,797,000 in the prior year, primarily as a result of improved returns
experience (see "Overview"). We significantly reduced our direct to consumer
sales of which approximately $3,000,000 in gross revenues were recognized during
the prior year. We also experienced decreases in gross revenues through PGD.
Gross revenues through PGD were down $4,616,000 or 66% in the fourth quarter of
1998, and $4,088,000 or 19% in 1998, compared to the prior year. Universal
purchased our former third party, major label distributor, PGD, during the
summer of 1998. These decreases were in part offset by increases in gross sales
from the distribution of third party product over the prior year, representing
19% of current year gross revenues compared to only 14% in the prior year. This
increase is primarily due to distribution of third party labels we signed during
1998. Our notable releases shipped during 1998, included the urban compilation
BOOTY MIX 3, pop artist Taylor Dayne's NAKED WITHOUT YOU, gospel Stellar Award
winner Vickie Winans' LIVE IN DETROIT, country singer T. Graham Brown's WINE
INTO WATER, and numerous releases from our classical catalog, which ranked #1 on
BILLBOARD'S Budget Classical Chart.
RETURNS. We record an estimate of future returns at the time product is
sold (see "Overview"). Returns as a percentage of gross revenues were 22% for
1998, compared to 37% for the prior year. The decrease relates to unusually high
returns activity for the prior period, as discussed in the "Overview."
DISCOUNTS. Discounts as a percentage of gross revenues remained
relatively unchanged at 6% for 1998, compared to 5% for the prior year.
COST OF SALES. Cost of sales as a percentage of gross revenues
increased to 52% for 1998, from 36% for the prior year. The increase is
partially due to the increase in third party label sales, for which we receive a
distribution fee which is less than gross margins derived from our own releases.
We also incurred significant A&R costs associated with current and future
releases by artists such as Dionne Warwick, Taylor Dayne, The Beach Boys, The
Band and Kansas, which all or a portion of such costs were expensed as incurred.
In addition, we wrote-down certain inventory titles to facilitate a planned
warehouse move. Such write-down added $1,000,000 to cost of sales.
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<PAGE>
GROSS PROFIT. Gross profit decreased $1,799,000 or 14% to $11,275,000
for 1998, compared to $13,074,000 for the prior year. As a percentage of gross
revenues, gross profit decreased slightly to 20% for the current year compared
to 22% for the prior year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1,030,000 or 5% to $20,790,000 for 1998,
compared to $19,760,000 in the prior year. Selling, general and administrative
expenses as a percentage of gross revenues increased to 37% for the current year
from 33% for the prior year. This increase relates to the expansion of our urban
label and costs associated with the development of our Internet and proprietary
distribution capabilities.
MERGER, RESTRUCTURING AND ONE-TIME COSTS. During 1997, we incurred
significant costs to merge and restructure our business through various
acquisitions. Such merger and restructuring costs include severance costs,
relocation costs, lease commitment write-offs, warehouse closing costs and other
related costs. In addition, we terminated an agreement to purchase certain
business assets of K-tel International, Inc. during September 1997. As a result,
earnest monies we deposited in escrow of $1,750,000 were fully reserved and
recorded as one-time costs in the statement of operations.
OPERATING LOSS. As a result of the factors described above, we incurred
an operating loss of $11,570,000 for 1998, compared to an operating loss of
$13,847,000 for the prior year.
INTEREST EXPENSE. Interest expense for 1998, totaled $2,660,000
compared to $4,324,000 for the prior year. The current year decrease is
primarily a result of lower interest rates under our current banking facility
compared to the banking facility outstanding during the prior year. See
"Liquidity and Capital Resources" for details of our current debt structures.
OTHER FINANCING COSTS. Other financing costs of $344,000 were incurred
1998, compared to $4,791,000 during the prior year. Other financing costs for
1998, include the write-off of $660,000 unamortized bank fees on a previous bank
facility offset in part by the reversal of a $350,000 previously accrued
extension fee on a separate, previous bank facility which would have been due in
1998, had our stock value not met a certain threshold; as the threshold was met,
the fees were not payable and the accrual was reversed. The prior period amounts
relate to the short-term financing of the acquired assets and assumed
liabilities of Intersound, Inc. and the related extension fees incurred until we
refinanced our then-outstanding debt structure. See "Liquidity and Capital
Resources" for further discussion of our current debt structure.
INCOME TAXES. No income tax expense or benefit has been recorded
through December 31, 1998, due to our net operating loss carryforward and
related valuation allowance, as required under generally accepted accounting
principles. Pursuant to Section 382 of the Internal Revenue Code of 1986, as
amended, our net operating loss carryforward of approximately $57,857,000 at
December 31, 1998, expiring in years 2008 through 2013, is subject to annual
limitations due to a change in ownership as a result of our initial public
offering. Accordingly, approximately $6,185,000 of the net operating loss
carryforward is subject to an annual limitation of approximately $2,200,000.
PREFERRED DIVIDEND REQUIREMENTS. During 1998, the preferred stock
outstanding accrued dividends of $2,824,000. The preferred stock outstanding
did not accrue any dividends in the prior year. See "Note 15" to the
consolidated financial statements.
LOSS APPLICABLE TO COMMON SHARES. The loss applicable to common shares
for 1998, totaled $17,621,000, including preferred dividend requirements of
$2,824,000, compared to a loss applicable to common shares of $23,533,000 for
the prior year. The decreased loss applicable to common shares relates primarily
to nonrecurring merger, restructuring and one-time costs related to the acquired
assets and assumed liabilities of Intersound incurred in the prior year.
20
<PAGE>
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS AND SEASONALITY
Our results of operations are subject to seasonal variations. In
particular, our revenues and operating results are affected by end-of-the-year
holiday sales. In accordance with industry practice, we record revenues for
music products when the products are shipped to retailers. In anticipation of
holiday sales, retailers purchase products from us prior to December. As a
result, our revenues and operating results 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
Our bank credit facility with First Source was due in full on March
31, 2000. At April 13, 2000, we had borrowed $32,700,000 from First Source.
In addition, on February 11, 2000, First Source notified us that we were in
default due to our failure to meet certain financial covenants under the
Credit Agreement as of November 30, 1999. Such default increased our interest
rate to 12.25% per annum effective February 11, 2000, and requires that 100%
of all proceeds received by us from the sale of selected titles from our
master catalog be used to permanently reduce our revolving commitment. This
default also gives First Source the right to accelerate the repayment of our
obligation. To date, First Source has not accelerated our repayment
obligation.
We are negotiating with another bank to borrow additional monies for
a six month period but do not yet have an agreement. The proposed terms will
require that First Source agree to extend the due date for up to $30,000,000
of our loan for an additional six month period, and First Source has not yet
agreed to pay any such extension. In addition to or in lieu of the transaction
with the other bank, we may initiate a transaction or series of
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<PAGE>
transactions to sell a portion or all of our assets to satisfy our
obligations to First Source. There can be no assurance that any necessary
financing from the banking institution referenced above or any other bank, or
from sources other than a bank will be available on satisfactory terms, if at
all. First Source has the right to pursue the remedies available to them,
including foreclosing on the assets that secure its obligations which
constitute substantially all of our assets. There will be a material adverse
effect on our business, results of operations and financial condition, and
could be a foreclosure on our assets, if we are unable to reach an agreement
with First Source in the near term or at the expiration of any extension
granted by First Source.
In the view of our independent public accountants, the current
status of our liquidity and capital resources raises substantial doubt as to
our ability to continue as a going concern. See "Item 8. Financial Statements
and Supplementary Data, Report on Independent Auditors." In addition, our
lack of liquidity has materially adversely affected and is expected to
continue to materially adversely affect our results of operations. See also
"Significant Matters."
We have experienced operating and net losses each fiscal period since
inception. We may continue to incur operating and net losses. There can be no
assurance that we will ever achieve profitable operations or generate
significant revenue with our current products and strategy. Our future operating
results depend on many factors, including sufficient levels of liquidity and
capitalization, demand for our products, the level of competition, our ability
to acquire, develop and market new artists and products and the ability of our
officers and key employees to manage our business and control costs.
Historically, we have funded our operations and other activities from a
variety of capital sources, including debt and equity financing, and more
recently through other transactions. We have implemented certain measures within
the last six months in order to improve cash flows. These measures included:
- the sale of certain assets,
- the consolidation of facilities,
- the use of our common stock, rather than cash, for payment of services
rendered to us by artists, producers and others, and
- entering into licensing and other agreements that exploit the digital
rights to our music catalog.
While these measures helped improve cash flows, our overall lack of liquidity
from operations continued and has adversely impacted our business, results of
operations and financial condition. During the fourth quarter of 1999, our
liquidity issues forced us to cut back on temporary employees at PED, as well
as eliminate some permanent staffing positions. The lack of liquidity delayed
payments to certain manufacturers, resulting in product delays, which in turn
caused us to be delinquent fulfilling customer shipping date requests on a
substantial portion of our scheduled fall and holiday shipments. This
resulted in excessive returns during the first quarter of 2000 of product
shipped during 1999, requiring a substantial increase to our reserve for
future returns at December 31, 1999. This increase in returns, coupled with
the reduction in PED staffing, has slowed our returns processing time,
resulting in delayed cash receipts on receivables for product not returned,
as customers typically will not remit cash receipts until their returns have
been processed. Increased returns can imply increased slow-moving inventory
and brings advance recoupments into question; accordingly, we increased the
reserves for both the inventory and artist advance balances at December 31,
1999.
During 1999, we experienced negative cash flow from operations of
$18,359,000. This resulted from continued operating losses, approximately
$4,928,000 of new project funding and $224,000 of distribution advances for
third party labels. Operating activities were primarily funded by net proceeds
from the sale of our investment in musicmaker.com of $7,289,000 and our Double J
publishing rights of $1,245,000, proceeds received from the sale of our Common
Stock of $5,502,000, net proceeds received from the issuance of Series D
Convertible Preferred Stock to related parties of $3,909,000, and related party
borrowings of $1,382,000 (including interest).
During 1998, we experienced negative cash flow from operations of
$11,599,000. This resulted from continued operating losses, approximately
$6,100,000 of new project funding and $3,000,000 of distribution advances for
third party labels. Investing activities for the year totaled $2,592,000,
primarily related to capital expenditures and classical catalog purchases.
Operating and investing activities were funded from our line of credit with
First Source and proceeds of $1,350,000 from a private placement of our Common
Stock to certain related parties.
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During 1997, we experienced negative cash flow from operations of
$12,162,000. This resulted from continued operating losses and approximately
$4,000,000 of new project funding. Investing activities for the year totaled
$26,360,000, related primarily to the acquisition of Intersound. Operating and
investing activities were funded from various banking facilities, related party
borrowings, a related party equity placement and the issuance of Series B and
Series C Convertible Preferred Stock to related parties.
We require significant recurring funds for A&R expenses, which include
recorded music costs. We make substantial payments each year for recording costs
and advances to artists and producers in order to maintain and enhance our
artist roster. Advances to established artists and producers and direct costs
associated with the creation of record masters are capitalized and are charged
to cost of sales as the related albums earn revenues or when the amounts are
determined to be unrecoverable. Royalties are not paid to the artist until all
advances made to the artist have been recouped by us. Also, we establish and
maintain reserves relative to royalty payments for a period of 18 to 24 months
to allow for product returns activity, as royalties are not owed on returned
product.
During July 1998, we purchased exclusive North American and
non-exclusive Central and South American rights to selected sound recordings by
The Royal Philharmonic Orchestra for $2,875,000. As consideration we issued
53,055 shares of our Common Stock, valued at $400,000 or $7.54 per share, and
committed to pay a total of $2,475,000 in cash in periodic installments through
June 30, 2000, of which $1,091,000 has been paid through December 31, 1999.
We had a net capital deficit at December 31, 1999, totaling $6,389,000
compared to stockholders' equity of $7,918,000 at December 31, 1998. The change
is due to the issuance of Series D convertible preferred stock with warrants to
purchase shares of our Common Stock to related parties providing net proceeds of
$3,909,000, a private placement with a third party of our Common Stock providing
proceeds of $3,000,000, issuances of our Common Stock to third parties for
services performed totaling $843,000 in consideration, issuances of our Common
Stock to a related party for services rendered totaling $527,000, Common Stock
issued to employees under the stock incentive plan and stock purchase plan,
totaling $255,000, offset by our net loss for 1999, of $21,658,000.
The NASDAQ National Market requires, among other criteria, that we
maintain tangible net worth of at least $4 million. As of December 31, 1999,
we were not in compliance with this requirement.
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.
SIGNIFICANT MATTERS
On November 12, 1999, we signed an exclusive distribution agreement
with BML, which features releases by popular, known artists in electronic
music. Releases scheduled for 2000 include new and licensed music, including
remixes, by artists such as Fatboy Slim, Atomic Babies, Frankie Bones and
Simply Jeff. BML's releases will be distributed by PED in the United States
and Canada for a customary distribution fee. The initial term of the
agreement is until December 31, 2002, with an option to renew the agreement
for an additional two years exercisable at our option. We agreed to pay BML
an initial $985,000 as a prepayment of net sales, payable in cash or Common
Stock, in monthly increments through April 2000. In addition, we agreed to
pay BML up to $1,000,000 in shares of our Common Stock as additional
prepayments of net sales only if certain sales goals are met. Prior to
December 31, 1999, we paid BML $75,000 in cash and issued 64,286 shares of
our Common Stock, for consideration of $225,000, or $3.50 per share,
representing the first two installments of the initial advance due BML. In
addition, we issued BML 261,192 shares of our Common Stock for consideration
of $1,035,000, or $3.9626 per share, to cover prepayments of the initial
advance and a portion of the additional advance, which are held in escrow.
The escrow agent releases shares to BML as mutually directed by us and BML in
accordance with the agreement. If the sales goals are not met, any unearned
shares remaining in escrow related to the additional advance will be returned
to us by the escrow agent.
On December 30, 1999, we signed a license agreement with
LiveOnTheNet.com, which hosts a variety of video and audio
programming. Under the terms of the agreement, we agreed to license to
LiveOnTheNet the right to reproduce, advertise, market, promote and
distribute our catalog of master recordings for free promotional
digital downloads through LiveOnTheNet.com. Our digital download site
HeardOn.com will be linked to LiveOnTheNet.com as a sub-domain. The
site will also feature streaming audio, video, graphics and photos of
live performances, interviews, recording sessions, and other events,
collectively termed "webcasting." Information concerning visitors to
HeardOn.com and LiveOnTheNet.com who download master recordings will
be jointly owned by the parties. The initial term and any renewal term
of the agreement extends for the period of time it takes to achieve
both 20,000,000 page views and 500,000 qualified visitors for the
combined sites. The initial term or any renewal term may be terminated
at our option at any time 3 years after the effective date of the
agreement. The agreement may be renewed at the option of LiveOnTheNet
for two additional terms, subject to certain limitations. In January
2000, we received $2,000,000 for the grant of rights during the
initial term of which $200,000 will be held in escrow and is payable
within 10 days of the end of the initial term of the agreement
provided we fulfill our obligations under the agreement. Accordingly,
such amount has been recorded as unearned revenues and will be
recognized in operations as earned. An additional $2,000,000 shall be
payable to us at the commencement of each renewal term, if any. Divine
interVentures, inc. has a greater than 50% ownership interest in
LiveOnTheNet. Three of our directors, Andrew Filipowski, Michael
Cullinane and Paul Humenansky, are executive officers and shareholders
of divine interVentures, inc., an Internet operating company engaged
in business-to-business e-commerce through a community of partner
companies.
The Harry Fox Agency, Inc., a subsidiary of the National Music
Publishers' Association, Inc., submitted to us a copy of an report prepared on
behalf of the Agency by its accountants identifying royalty underpayments it
asserts were found during the course of an audit of our sales for the period of
July 1, 1993 through March 31, 1998 (other than sales through Intersound). The
amount of the claim was $704,000. We have reviewed the report and have responded
by letter of December 3, 1999, acknowledging that
23
<PAGE>
$18,000 is owed but disputing the balance claimed. We also received
correspondence dated August 11, 1999, from the Agency asserting that we had
failed to execute certain license agreements issued by the Agency, and that
as a result such licenses were withdrawn. However, we have determined that
the license agreements at issue were either in fact returned to the Agency,
issued in error by the Agency and returned for correction, issued for
recordings not released by us, or have not been returned because we are
awaiting information required to complete the licenses. A response to the
Agency with this information was submitted on December 3, 1999. Further,
under cover of a letter dated September 30, 1999, the Agency submitted to us
a copy of a report prepared on behalf of the Agency by its accountants
identifying royalty underpayments it asserts were found during the course of
an audit of our sales through Intersound for the period of January 1, 1997
through March 31, 1998. The amount of the claim was $2,038,000. We are
reviewing the report, and while we have not reached any conclusions
concerning the validity of the claim, we believe the amount of the claim is
substantially overstated. On January 13, 2000, we met with representatives of
the Harry Fox Agency in an effort, among other things, to resolve the
disputed claims, but those efforts were unsuccessful. We have therefore
elected to obtain compulsory licenses, when appropriate, to reduce the extent
of further claims by the Agency. We believe the audit claims of the Agency
can be resolved without an additional material adverse impact on our
financial position and results of operations.
We have not paid publishing royalties for periods after the first
quarter of 1999, nor have we paid artist royalties for 1999, due to problems we
have experienced with our publisher royalty system and our overall lack of
liquidity. As a consequence, various publishing companies and other licensors,
including The Harry Fox Agency, have notified us that licenses that have been
granted to us will be terminated unless payment is made. We have been able to
negotiate extensions with our principal licensors. Further, the problems with
our publisher royalty system have been fixed. However, when we did not timely
pay The Harry Fox Agency for royalties due for the first quarter of 1999, the
Agency stated that it had revoked and terminated the licenses for which payment
had not been made. We believe the percentage of our mechanical licenses that are
issued by the Agency is in excess of 50%. The Agency further notified us that it
was its position that the revocation and termination continued even after the
royalties for the first quarter of 1999 were later paid. Our negotiations with
the Agency continue. See "Liquidity and Capital Resources" below. Failure to
cure our defaults with the Agency would have a material adverse effect on our
business, results of operations and financial condition.
Our Chief Financial Officer and Chief Operating Officer, Douglas C.
Laux, resigned from the Company effective March 24, 2000. Mr. Laux will remain a
director of the Company. Mr. Laux will act as a consultant to the Company until
March 2001.
In addition, see "Item 3. Legal Proceedings" for further discussion of
significant matters.
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
We did not experience any systems failures or material compliance
problems related to our computer programs due to the change in the century. We
have not been affected by systems failures or other compliance problems related
to the turn of the century with respect to our vendors, distributors or key
business partners. There can be no assurance, however, that unexpected
difficulties related to Year 2000 compliance will not still occur. Any Year 2000
compliance problems of our business operations, our current and any future
vendors, distributors or other key business partners could have a material
adverse
24
<PAGE>
effect on our business, results of operations and financial condition. Through
December 31, 1999, we spent an estimated $1,180,000 on Year 2000 compliance.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The principal market risk (i.e., the risk of loss arising from adverse
changes in market rates and prices) to which we are exposed is interest rates on
debt.
On December 31, 1999, we had $32,725,000 of debt outstanding under a
$33,025,000 revolving bank line of credit. During 1999, the line of credit
bore interest at the bank's base rate plus 1.5% per annum (10% at December
31, 1999). The line of credit expired March 31, 2000. On April 14, 2000, we
had $32,700,000 outstanding under this revolving bank line of credit, and the
interest rate increased to 12.25% effective February 11, 2000.
We do not hold and have not issued derivative financial instruments for
speculation or trading purposes.
25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Independent Auditors
Board of Directors and Stockholders
Platinum Entertainment, Inc.
We have audited the consolidated balance sheets of Platinum Entertainment, Inc.
as of December 31, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the two
years in the period ended December 31, 1999, the seven months ended December 31,
1997, and the year ended May 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Platinum
Entertainment, Inc. at December 31, 1999 and 1998, and the consolidated results
of its operations and its cash flows for each of the two years in the period
ended December 31, 1999, the seven months ended December 31, 1997, and the year
ended May 31, 1997, in conformity with accounting principles generally accepted
in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1 to
the financial statements, the Company has incurred recurring net losses and
negative operating cash flows since its inception. Also, the Company's bank
credit facility, with $32,750,000 in outstanding borrowings, became due on March
31, 2000. The Company currently lacks sufficient capital resources to repay this
amount. The failure of the Company to repay this amount on March 31, 2000,
constituted an event of default and allows the bank the right to pursue the
remedies available to it, including foreclosure on all assets that secure its
obligations which constitute substantially all assets of the Company. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Note 1 also discusses management's plans to address this issue.
The financial statements do not include any adjustments to reflect the
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
April 3, 2000, except for Note 1 and Note 10,
as to which the date is April 13, 2000
26
<PAGE>
Platinum Entertainment, Inc.
Consolidated Balance Sheets
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
--------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 12 $ 12
Accounts receivable, net 3,768 3,749
Inventories, net 5,068 7,036
Artist advances, net 1,017 1,899
Distribution advances, net 241 2,407
Other receivable - 2,500
Other 3,305 1,477
--------------------
Total current assets 13,411 19,080
Recorded music costs, net 1,009 1,251
Property and equipment, net 2,465 2,461
Investment securities - 750
Equity investment in joint venture 2,403 2,205
Music catalog, net 20,384 21,314
Music publishing rights, net 2,063 3,026
Goodwill, net 5,366 5,610
Deferred financing costs, net 41 253
Other 112 1,028
--------------------
Total assets $47,254 $56,978
====================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Revolving line of credit $32,725 $33,965
Due to related parties 1,382 -
Accounts payable 5,401 6,452
Accrued liabilities 5,297 2,647
Royalties payable 6,838 5,996
Unearned revenue 2,000 -
--------------------
Total current liabilities 53,643 49,060
Stockholders' equity (deficit):
Preferred stock:
Preferred Stock ($.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,
7,692,002 and 6,626,099 shares issued and 7,487,921 and
6,626,099 shares outstanding, respectively 7 7
Additional paid-in capital 82,770 71,378
Accumulated deficit (89,166) (63,467)
---------------------
Stockholders' equity (deficit) (6,389) 7,918
=====================
Total liabilities and stockholders' equity (deficit) $47,254 $56,978
=====================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
27
<PAGE>
Platinum Entertainment, Inc.
Consolidated Statements of Operations
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED YEAR ENDED
YEAR ENDED DECEMBER 31 DECEMBER 31 MAY 31
1999 1998 1997 1997 1996 1997
-----------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Gross product sales $47,777 $54,281 $58,980 $34,485 $12,393 $37,502
Less: Returns (20,553) (12,462) (22,446) (14,726) (2,284) (10,876)
Less: Discounts (2,073) (3,236) (3,316) (2,288) (821) (2,463)
-----------------------------------------------------------------------------
Net product sales 25,151 38,583 33,218 17,471 9,288 24,163
Licensing, publishing and other revenues 1,114 2,033 1,579 809 485 1,255
-----------------------------------------------------------------------------
Net sales 26,265 40,616 34,797 18,280 9,773 25,418
Cost of sales and services 23,692 29,341 21,723 13,409 6,267 13,711
-----------------------------------------------------------------------------
Gross profit 2,573 11,275 13,074 4,871 3,506 11,707
Other operating expenses:
Selling, general and administrative 25,257 20,790 19,760 12,316 5,695 13,141
Merger, restructuring and one-time costs - - 5,326 3,100 6 2,231
Depreciation and amortization 2,554 2,055 1,835 1,062 199 973
-----------------------------------------------------------------------------
27,811 22,845 26,921 16,478 5,900 16,345
-----------------------------------------------------------------------------
Operating loss (25,238) (11,570) (13,847) (11,607) (2,394) (4,638)
Interest income - 40 67 49 136 154
Interest expense (3,189) (2,660) (4,324) (2,944) (7) (1,385)
Other financing costs (342) (344) (4,791) (1,258) - (3,533)
Other gains 6,913 - - - - -
Equity gain (loss) 198 (263) (638) (686) - 48
-----------------------------------------------------------------------------
Net loss (21,658) (14,797) (23,533) (16,446) (2,265) (9,354)
Less: Preferred dividend requirements (4,041) (2,824) - - - -
-----------------------------------------------------------------------------
Loss applicable to common shares $ (25,699) $(17,621) $(23,533) $(16,446) $ (2,265) $ (9,354)
=============================================================================
Basic and diluted loss per common share $ (3.62) $ (3.07) $ (4.52) $ (3.14) $ (.44) $ (1.82)
Weighted-average number of common shares
outstanding 7,107,350 5,732,661 5,206,964 5,232,030 5,112,066 5,136,830
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
28
<PAGE>
Platinum Entertainment, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCKHOLDERS'
---------------------------- -------------- PAID-IN ACCUMULATED EQUITY
SERIES B SERIES C SERIES D SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
-------- -------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1996 $ - $ - $ - 5,063 $ 5 $35,254 $(20,044) $15,215
Issuance of Common Stock:
Acquisition - - - 88 - 777 - 777
Issuance of stock warrants for financing costs - - - - - 1,240 - 1,240
Comprehensive loss:
Net loss for the year ended May 31, 1997 - - - - - - (9,354) (9,354)
Other - - - 20 - (10) (2) (12)
-------- -------- -------- ------- ------ -------- --------- --------
Balance at May 31, 1997 - - - 5,171 5 37,261 (29,400) 7,866
Issuance of Common Stock:
Private placement with related party
($4.88 per share) - - - 104 - 500 - 500
Preferred Stock with warrants to related
parties, net - - - - - 20,455 - 20,455
Comprehensive loss:
Net loss for the seven months ended
December 31, 1997 - - - - - - (16,446) (16,446)
-------- -------- -------- ------- ------ -------- --------- --------
Balance at December 31, 1997 - - - 5,275 5 58,216 (45,846) 12,375
Issuance of Common Stock:
Private placement ($6.00 per share) - - - 417 1 2,499 - 2,500
Private placement with related parties
($6.75 per share) - - - 200 - 1,350 - 1,350
Acquisitions - - - 165 - 1,150 - 1,150
Professional services performed by related
parties - - - 53 - 382 - 382
Employee stock plans - - - 5 - 27 - 27
Professional services - - - 1 - 7 - 7
Conversions into Common Stock:
Convertible subordinated debentures - - - 510 1 4,999 - 5,000
Dividends:
Preferred dividend requirements - - - - - 2,824 (2,824) -
Comprehensive loss:
Net loss for the year ended December 31, 1998 - - - - - - (14,797) (14,797)
Other - - - - - (76) - (76)
-------- -------- -------- ------- ------ -------- --------- --------
Balance at December 31, 1998 - - - 6,626 7 71,378 (63,467) 7,918
</TABLE>
29
<PAGE>
Platinum Entertainment, Inc.
Consolidated Statements of Stockholders' Equity (Deficit) (continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCKHOLDERS'
---------------------------- -------------- PAID-IN ACCUMULATED EQUITY
SERIES B SERIES C SERIES D SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
-------- -------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuances of Common Stock:
Professional services $ - $ - $ - 195 $ - $ 843 $ - $ 843
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 - - - 44 - 255 - 255
Litigation settlement - - - 20 - 129 - 129
Preferred Stock with warrants to related
parties, net - - - - - 3,909 - 3,909
Redemption of Common Stock:
Litigation settlement - - - (204) - (1,314) - (1,314)
Dividends:
Preferred dividend requirements - - - - - 4,041 (4,041) -
Comprehensive loss:
Net loss for the year ended December 31, 1999 - - - - - - (21,658) (21,658)
Other - - - 50 - - - -
-------- -------- -------- ------ ------- ------- ---------- ---------
Balance at December 31, 1999 $ - $ - $ - 7,488 $ 7 $82,770 $(89,166) $ (6,389)
======== ======== ======== ====== ======= ======= ========== =========
</TABLE>
See accompanying notes to financial statements.
30
<PAGE>
Platinum Entertainment, Inc.
Consolidated Statements of Cash Flows
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED YEAR ENDED
YEAR ENDED DECEMBER 31 DECEMBER 31 MAY 31
1999 1998 1997 1997 1996 1997
------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(21,658) $(14,797) $(23,533) $(16,446) $(2,265) $ (9,354)
Adjustments to reconcile net loss to net cash used
in operating activities:
Provision for future returns 20,553 12,462 22,446 14,726 2,284 10,876
Provision for doubtful accounts 758 - 927 688 - 300
Provision for slow-moving inventory 4,377 1,438 500 240 - -
Provision for unrecoupable artist balances 4,795 3,929 3,599 3,136 308 1,714
Provision for unrecoupable distribution balances 1,990 - - - - -
Provision for unrecoupable distribution balances
from related parties 625 - - - - -
Depreciation 843 500 399 222 146 337
Amortization 1,711 1,555 1,436 840 53 636
Common Stock issued for professional services 128 - - - - -
Net litigation settlement in Common Stock (1,185) - - - - -
Amortization of loan discount - - 1,240 - - 1,240
Amortization of deferred financing costs 212 344 9 9 - -
Gain from sale of assets (6,913) - - - - -
Equity (gain) loss from joint venture (198) 263 638 686 - (48)
Write-off of one-time costs - - 2,525 2,525 - -
Changes in operating assets and liabilities:
Accounts receivable (21,330) (12,964) (19,218) (8,742) (3,378) (13,150)
Inventories (2,409) (570) (1,978) (1,598) (680) (2,308)
Notes receivable - - 123 - 1,025 1,148
Artist advances (4,769) (5,514) (3,926) (1,955) (2,301) (1,824)
Distribution advances (224) (2,407) - - - -
Recorded music costs (159) (556) (416) (208) - (208)
Accounts payable (524) 2,196 (18) 218 (5) (431)
Accrued liabilities 2,492 (2,040) 1,456 902 (1,145) (591)
Royalties payable 1,994 4,996 1,038 (571) 2,107 1,099
Other 532 (434) 591 (527) (895) (114)
------------------------------------------------------------------
Net cash used in operating activities (18,359) (11,599) (12,162) (5,855) (4,746) (10,678)
</TABLE>
31
<PAGE>
Platinum Entertainment, Inc.
Consolidated Statements of Cash Flows (continued)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED YEAR ENDED
YEAR ENDED DECEMBER 31 DECEMBER 31 MAY 31
1999 1998 1997 1997 1996 1997
------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
INVESTING ACTIVITIES
Net proceeds from sale of investment securities $ 7,289 $ - $ - $ - $ - $ -
Net proceeds from sale of music publishing rights 1,245 - - - - -
Acquisitions (466) (775) (23,983) - (100) (24,026)
Purchases of property and equipment (847) (1,486) (252) (116) (171) (307)
Prepaid acquisition costs - - - - (124) -
Investment in joint venture - - - - (3,063) (3,063)
Net proceeds from (payments to) joint venture 1,330 (331) (375) (480) - 105
Cash in escrow - - (1,750) - - (1,750)
------------------------------------------------------------------
Net cash provided by (used in) investing activities 8,551 (2,592) (26,360) (596) (3,458) (29,041)
FINANCING ACTIVITIES
Related party borrowings 1,382 - 2,650 2,650 - -
Related party payments - - (2,650) (2,650) - -
Proceeds from (payment of) revolving lines of credit (1,240) 33,165 (1,800) (8,906) - 7,106
Net proceeds from bank term loans - - 45,000 20,000 - 25,000
Payment of bank term loans - (20,000) (25,000) (25,000) - -
Employee stock plans 255 27 - - - -
Proceeds from sale of Common Stock 5,502
Proceeds from sale of Common Stock to related parties - 1,350 500 500 - -
Net proceeds from sale of preferred stock with
warrants to related parties 3,909 (76) 20,455 20,455 - -
Deferred financing costs - (274) (640) (640) - (556)
------------------------------------------------------------------
Net cash provided by financing activities 9,808 14,192 38,515 6,409 - 31,550
------------------------------------------------------------------
Net increase (decrease) in cash - 1 (7) (42) (8,204) (8,169)
Cash, beginning of period 12 11 18 53 8,222 8,222
------------------------------------------------------------------
Cash, end of period $ 12 $ 12 $ 11 $ 11 $ 18 $ 53
==================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
32
<PAGE>
Platinum Entertainment, Inc.
Notes to Consolidated Financial Statements
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
We have experienced operating and net losses each fiscal period since
inception. We may continue to incur operating and net losses. There can be no
assurance that we will ever achieve profitable operations or generate
significant revenue with our current products and strategy. Our future operating
results depend on many factors, including sufficient levels of liquidity and
capitalization, demand for our products, the level of competition, our ability
to acquire, develop and market new artists and products and the ability of our
officers and key employees to manage our business and control costs.
Our bank credit facility with First Source Financial, Inc. was due in
full on March 31, 2000. At April 13, 2000, we had borrowed $32,700 from First
Source. In addition, on February 11, 2000, First Source notified us that we were
in default due to our failure to meet certain financial covenants under the
Credit Agreement as of November 30, 1999. Such default increased our interest
rate to 12.25% per annum effective February 11, 2000, and requires that 100% of
all proceeds received by us from the sale of selected titles from our master
catalog be used to permanently reduce our revolving commitment. This default
also gives First Source the right to accelerate the repayment of our obligation.
To date, First Source has not accelerated our repayment obligation.
We are negotiating with another bank to borrow additional monies for
a six month period but do not yet have an agreement. The proposed terms will
require that First Source agree to extend the due date for up to $30,000 of
our loan for an additional six month period, and First Source has not yet
agreed to any such extension. In addition to or in lieu of the transaction
with the other bank, we may initiate a transaction or series of transactions
to sell a portion or all of our assets to satisfy our obligations to First
Source. There can be no assurance that any necessary financing from the
banking institution referenced above or any other bank, or from sources other
than a bank will be available on satisfactory terms, if at all. First Source
has the right to pursue the remedies available to them, including foreclosing
on the assets that secure its obligations which constitute substantially all
of our assets. There will be a material adverse effect on our business,
results of operations and financial condition, and could be a foreclosure on
our assets, if we are unable to reach an agreement with First Source in the
near term or at the expiration of any extension granted by First Source.
Our business operates in one segment, 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. Expansion
and exploitation of our expansive music catalog and publishing rights is also an
integral part of our business and growth strategy. We currently own or control a
music catalog with more than 13,000 master recordings. 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 release music in a variety of genres including classical, urban,
adult contemporary, blues, gospel and country through our Intersound Classical,
Platinum, House of Blues, CGI Platinum and Platinum Nashville labels.
33
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Our consolidated financial statements include the accounts and
transactions of Platinum Entertainment, Inc. and its wholly owned subsidiaries.
Significant intercompany accounts and transactions have been eliminated in
consolidation. The equity method is used to account for unconsolidated
affiliates in which we own a greater than 20 percent interest (see "Note 7").
USE OF ESTIMATES
In order to prepare our financial statements in conformity with
generally accepted accounting principles we are required to make estimates and
assumptions that affect the amounts reported in the financial statements and
related notes. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Our financial instruments consist of trade accounts receivable, trade
accounts payable and a revolving line of credit. The fair value of our financial
instruments approximates the carrying value of the instruments.
INVENTORIES
Inventories are stated at the lower of cost or market and consist
primarily of finished compact discs and tape cassettes. The cost of inventories
is determined by the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost, less accumulated
depreciation. Depreciation is determined using accelerated methods over the
estimated useful lives of the assets of five to seven years.
RECORDED MUSIC COSTS
Advances to established artists and producers and direct costs
associated with the creation of record masters are capitalized and charged to
cost of sales as the related albums earn revenues or when the amounts are
determined to be unrecoverable. Advances to artists whose past performance
and current popularity do not provide a sound basis for estimating that such
advances will be recoverable from future album revenue are charged to cost of
sales as incurred.
MUSIC CATALOG AND MUSIC PUBLISHING RIGHTS
Music catalog and music publishing rights represent the value allocated
to master recordings and copyrights recorded through the purchase method of
accounting as a result of our historical acquisitions. Such costs are amortized
using the straight-line method over the estimated period to be benefited which
ranges from 15 to 25 years. We assess the recoverability of such assets by
determining whether the carrying value of the net assets over their remaining
lives can be recovered through projected, undiscounted future cash flows.
GOODWILL
Goodwill, which represents the excess cost of purchase price over the
fair value of identifiable net assets acquired and assumed liabilities from
Intersound, Inc., is amortized over the expected period to be benefited of 25
years (see "Note 3").
INCOME TAXES
Deferred income taxes are calculated based on the differences between
the bases of assets and
34
<PAGE>
liabilities for financial statement and income tax return purposes, at the
enacted tax rates at which the resulting taxes are expected to be paid (see
"Note 11").
REVENUE RECOGNITION
Product sales, discounts and estimates for future returns are
recognized upon shipment. Licensing revenues are recognized on a cash basis
unless the cash received is for a future earning period, in which case the
revenues are deferred until earned. Publishing revenues are recognized on a cash
basis.
ADVERTISING
Promotional costs are capitalized for unreleased projects and expensed
when the related product is released. All other advertising and promotional
costs are fully expensed when incurred.
The following amounts are included in selling, general and administrative
expenses:
<TABLE>
<CAPTION>
YEAR ENDED SEVEN MONTHS YEAR ENDED
DECEMBER 31 ENDED DECEMBER 31 MAY 31
1999 1998 1997 1997 1996 1997
---------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Advertising and promotion $5,789 $6,107 $6,155 $2,776 $1,031 $3,270
</TABLE>
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.
BASIC AND DILUTED LOSS PER COMMON SHARE
Basic loss per common share is based upon the net loss applicable to
common shares after preferred dividend requirements and upon the
weighted-average of common shares outstanding during the period. Diluted loss
per common share adjusts for the effect of convertible securities, stock options
and warrants only in the periods presented in which such effect would have been
dilutive. The total of such securities at December 31, 1999, was 17,541,000.
Such effect was not dilutive in any of the periods presented herein.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards (SFAS) No. 123, ACCOUNTING
FOR STOCK-BASED COMPENSATION, encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans at fair
value. We have chosen to continue to account for stock-based compensation using
the intrinsic value method as described in Accounting Principles Board Option
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related Interpretations,
under which no compensation costs related to stock options have been recognized
since the exercise price of each option at the date of grant was equal to the
fair market value of the underlying common stock.
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
35
<PAGE>
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.
In December 1999, the Securities and Exchange Commission staff
issued SAB No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS. The SAB
provides four broad concepts that the SEC considers when assessing whether
revenue should be presented on a "gross" or "net" basis (i.e., "gross" when
acting as a principal or "net" when acting as an agent). This issue is of
particular concern to companies that distribute third party product for a
fee. We currently reflect sales activity of third-party product in gross
product sales, recording an amount in cost of sales to derive our
distribution fee reflected in gross margins. Such third party amounts
comprised 17%, 19% and 14% of our gross revenues for the years ended December
31, 1999, 1998 and 1997, respectively. We have not yet determined what effect
the SAB will have in the presentation of revenues in our financial statements.
RECLASSIFICATIONS
Certain prior period amounts in the financial statements and related
notes have been reclassified to conform with the current year presentation.
3. ACQUISITIONS
During January 1997, we purchased substantially all of the assets of
Intersound for consideration of $24,000 in cash, $5,000 in convertible
subordinated debentures and the assumption of certain liabilities. Intersound's
primary business was the production, distribution, marketing and sale of music
for classical, urban, gospel and country genres. The acquisition was accounted
for by the purchase method of accounting and the purchase price of approximately
$41,000, including assumed liabilities, exceeds the fair value of the assets
acquired by $6,098, which represents goodwill. The purchase value was allocated
to the acquired assets based upon their estimated respective fair market values.
The amounts allocated to music catalog, music publishing rights and goodwill are
being amortized over 25 years using the straight-line method.
We determined the purchase price allocation for the assets acquired
and liabilities assumed from Intersound, as disclosed in the balance sheet at
May 31, 1997, based on available information at that time. However, during
the seven months ended December 31, 1997, we ascertained that the purchase
value allocated to certain purchased assets exceeded their fair market values
by approximately $1,150. In addition, we identified $4,051 of returned
product which we believe relates to product that had been sold prior to our
purchase of Intersound. Had these matters been identified by us at the time
of purchase or shortly thereafter, such valuations would have been recorded
through purchase accounting, resulting in no subsequent impact to the income
statement. As these matters were not identified at the time of purchase or
shortly thereafter, we were required to reflect these amounts in our results
of operations for the seven months ended December 31, 1997, resulting in a
nonrecurring charge to operations of $3,500. The returned product of $4,051
was reflected in net revenues with corresponding offsets of $1,701 to cost of
sales; the asset write-down of $1,150
36
<PAGE>
was also included in cost of sales. These matters were subject of an action
entitled JSCHO, INC. F/K/A INTERSOUND, INC. V. PLATINUM ENTERTAINMENT, INC.,
which was settled on March 31, 1999 (see "Note 19").
4. SALE OF DOUBLE J
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. 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 $374. Pursuant to our bank
credit agreement, 50% of the net proceeds received from this sale permanently
reduced our revolving credit agreement with the bank (see "Note 10").
5. MERGER, RESTRUCTURING AND ONE-TIME COSTS
As a result of the acquisition discussed in "Note 3," we incurred
significant costs to merge and restructure our business with Intersound. Such
merger and restructuring costs included severance costs, relocation costs, lease
commitment write-offs, warehouse closing costs and other related costs. Such
costs were $251 and $1,700 during the seven months ended December 31, 1997, and
the year ended May 31, 1997, respectively, relating primarily to severance costs
and a distribution termination fee. The restructuring was substantially
completed at December 31, 1997. Such restructuring resulted in shifts in the
selling and promotion efforts of our country label and in-house sales department
and a shift in third party fulfillment of Platinum Christian Distribution. In
addition, one-time costs for the year ended May 31, 1997, include write-offs of
artist advances of approximately $600 in areas for which we have chosen to
redirect our resources. These costs were classified as merger, restructuring and
one-time costs and were included in our operating losses. See "Note 6" for
further discussion of one-time costs.
6. TERMINATION OF THE K-TEL AGREEMENT
During June 1998, we executed a settlement agreement with K-tel
International, Inc., whereby we mutually agreed to settle our claims to $1,750
we had deposited in escrow pursuant to a purchase and sale agreement signed by
us and K-tel International, Inc. during March 1997, and terminated by us during
September 1997. Pursuant to this settlement agreement, each party received 50%
of the escrowed amount. We fully reserved the $1,750 in escrow prior to December
1997, and expensed approximately $1,100 of legal, accounting and other
incremental costs related to this transaction. Accordingly, our selling, general
and administrative expenses for 1998, are net of $875 received from this
settlement.
7. JOINT VENTURE
During November 1996, we formed a joint venture, the House of Blues
Music Company, with House of Blues Records, Inc. We invested approximately
$3,100 for a 50% interest in the House of Blues Music Company. House of Blues
Records, Inc. contributed a license in the House of Blues trademarks, logo and
other intellectual property in consideration for its 50% interest in the House
of Blues Music Company.
The House of Blues Music Company develops and produces recordings and
related film and video properties featuring primarily blues and gospel music.
The House of Blues Music Company, exclusively through us, manufactures,
distributes, performs, exhibits and sells sound recordings and related
audiovisual works under the House of Blues label. We distribute the House of
Blues Music Company's products through our normal distribution channels for a
fee from the House of Blues Music Company.
37
<PAGE>
Gross revenues, gross profit and equity gain (loss) we recorded from
House of Blues Music Company are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEVEN MONTHS ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 MAY 31
1999 1998 1997 1997 1996 1997
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Gross revenues $5,326 $4,890 $5,878 $3,038 $563 $3,404
Gross profit 719 936 437 82 13 368
Equity gain (loss) 198 (263) (638) (686) - 48
</TABLE>
8. INVESTMENT IN MUSICMAKER.COM
During September 1998, we exchanged 111,457 shares of our Common Stock
for 1,320,000 common shares (798,856 after the affect of splits and
reverse-splits) of musicmaker.com, Inc. (musicmaker.com). Our investment was
valued at $750, which represents the fair value of the common stock relinquished
by us. In addition, we granted musicmaker.com the exclusive right to our music
catalog for Internet downloads and "burn and mail" compilations for five years,
provided that the rights may be converted to non-exclusive at our election at
any time after two years. We sold all of our 798,856 shares of musicmaker.com
common stock 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.
9. TERMINATION OF DISTRIBUTION AGREEMENT
We had an exclusive domestic distribution agreement with PolyGram
Group Distribution, Inc. through December 31, 2002. The agreement appointed
PGD exclusive distributor of certain of our products through certain retail
channels. The distribution services rendered by PGD included billing and
collecting from customers, bearing bad debts, distributing promotional items,
advertising, inventory control and processing returns. Distribution fees paid
by us for such services provided by PGD included 15% to 18% of net sales
generated by PGD. PGD had a security interest in our inventories awaiting
distribution in PGD's possession. We terminated this agreement during July
1999 (see "Note 19").
Inventories held by PGD are $193 and $617 at December 31, 1999 and
1998, respectively. Net amounts owed PGD due to product returns in excess of
product sales at December 31, 1999, are $1,703. Such amounts were a net
receivable at December 31, 1998, and totaled $1,263.
Distribution of our product through PGD is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEVEN MONTHS ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 MAY 31
1999 1998 1997 1997 1996 1997
---------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Gross product sales $3,314 $17,882 $21,010 $13,580 $9,322 $17,605
</TABLE>
10. DEBT
Our bank credit facility with First Source was due in full on March
31, 2000. At April 13, 2000, we had borrowed $32,700 from First Source. In
addition, on February 11, 2000, First Source notified us that we were in
default due to our failure to meet certain financial covenants under the
Credit Agreement as of November 30, 1999. Such default increased our interest
rate to 12.25% per annum effective February 11, 2000, and requires that 100%
of all proceeds received by us from the sale of selected titles from our
master catalog be used to permanently reduce our revolving commitment. This
default also gives First Source the right to accelerate the repayment of our
obligation. To date, First Source has not accelerated our repayment
obligation.
We are negotiating with another banking institution to borrow
additional monies for a six month period but do not yet have an agreement.
38
<PAGE>
The proposed terms will require that First Source agree to extend the due
date for up to $30,000 of our loan for an additional six month period, and
First Source has not yet agreed to any such extension. In addition to our in
lieu of the transaction with the other bank, we may initiate a transaction or
series of transactions to sell a portion or all of our assets to satisfy our
obligations to First Source. There can be no assurance that any necessary
financing from the banking institution referenced above or any other bank, or
from sources other than a bank will be available on satisfactory terms, if at
all. First Source has the right to pursue the remedies available to them,
including foreclosing on the assets that secure its obligations which
constitute substantially all of our assets. There will be a material adverse
effect on our business, results of operations and financial condition, and
could be a foreclosure on our assets, if we are unable to reach an agreement
with First Source in the near term or at the expiration of any extension
granted by First Source.
During July 1998, we entered the credit agreement with First Source for
a $35,000 revolving line of credit. Our First Source facility had an original
five year term and bore interest at the bank's base rate plus 1.5% per annum
(10% at December 31, 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 Music 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 Music, 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 8"). 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% (subsequently
adjusted to 100%) of all proceeds received by us will be used to permanently
reduce our revolving commitment.
On December 12, 1997, we entered a credit agreement with Bank of
Montreal, under which Harris Trust and Savings Bank was appointed the exclusive
lender effective March 31, 1998. Our Harris facility included a $20,000 three
year term loan bearing interest at the bank's base rate plus 1% per annum, plus
a three year $10,000 available revolving line of credit facility bearing
interest at the bank's base rate plus 0.5% per annum. Our Harris facility was
replaced during July 1998, with our First Source facility described above.
During January 1997, we entered a credit agreement with Bank of
Montreal to provide a 90-day term loan in the amount of $25,000 and a 90-day
revolving credit facility in the amount of $10,000. Our Bank of Montreal
facility was extended through December 31, 1997, and was refinanced on December
12, 1997, as discussed above. Financing costs associated with our Bank of
Montreal facility approximated 10% of the total facility, which included
warrants issued to Bank of Montreal (see "Note 15"). The interest incurred on
our Bank of Montreal facility was initially LIBOR plus 6% and was increased to
LIBOR plus 9% effective August 1, 1997.
39
<PAGE>
Interest expense, cash paid for interest and other financing costs are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED SEVEN MONTHS ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 MAY 31
1999 1998 1997 1997 1996 1997
---------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Interest expense $3,189 $2,661 $4,324 $2,944 $7 $1,385
Cash paid for interest 3,097 2,653 4,191 3,233 7 985
Other financing costs 342 344 4,791 1,258 - 3,533
</TABLE>
Other financing costs for 1999 reflect a change in the amortization on
deferred financing costs due to the acceleration of our loan due date from July
2003 to March 2000. Other financing costs for 1998, include the write-off of
$660 of unamortized bank fees on our Harris facility offset in part by the
reversal of a $350 previously accrued extension fee on our Bank of Montreal
facility which would have been due in 1998, had our stock value not met a
certain threshold; as the threshold was met, the fees were not payable and the
accrual was reversed. Other financing costs for the twelve and seven months
ended December 31, 1997, include extension fees for our Bank of Montreal
facility. Other financing costs for the year ended May 31, 1997, includes
amortization of $1,240 for the loan discount related to the warrants issued to
Bank of Montreal and $2,293 for the closing transaction and a subsequent
extension of our Bank of Montreal facility.
11. INCOME TAXES
Significant components of deferred income taxes consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
------------------------------------
<S> <C> <C>
Net operating loss carryforwards $24,583 $21,986
Reserve for unrecoupable artist advances 6,840 5,163
Reserve for future returns 3,827 1,739
Other (6,297) (5,258)
------------------------------------
28,953 23,630
Less: Valuation allowance 28,953 23,630
------------------------------------
Net deferred income tax asset $ - $ -
====================================
</TABLE>
The valuation allowance increased $5,323, $6,691, $6,228 and $3,398
during the years ended December 31, 1999 and 1998, the seven months ended
December 31, 1997, and the year ended May 31, 1997, respectively, due
principally to net operating loss carryforwards and differences between the book
and tax accounting treatment of the reserve for unrecoupable artist advances. We
have not paid any income taxes for the periods indicated.
Pursuant to Section 382 of the Internal Revenue Code of 1986, as
amended, our net operating loss carryforward of approximately $64,693, expiring
in years 2007 through 2014, is subject to annual limitations due to a change in
ownership as a result of the initial public offering. Accordingly, approximately
$3,985 of the net operating loss carryforward is subject to an annual limitation
of approximately $2,200.
12. COMMITMENTS
During July 1998, we purchased exclusive North American and
non-exclusive Central and South American rights to selected sound recordings by
The Royal Philharmonic Orchestra for $2,875. As consideration we issued 53,055
shares of our Common Stock, valued at $400 or $7.54 per share, and committed to
pay a total of $2,475 in cash in periodic installments through June 30, 2000, of
which $1,091 has been paid through December 31, 1999.
40
<PAGE>
Future minimum rental payments due under noncancelable operating leases
having an initial term of more than one year as of December 31, 1999, are $669,
$623, $631, $456 and $391 for the years ended December 31, 2000, 2001, 2002,
2003 and 2004, respectively.
Rent expense is as follows:
<TABLE>
<CAPTION>
Year ended Seven months ended Year ended
December 31 December 31 May 31
1999 1998 1997 1997 1996 1997
---------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Rent expense $1,045 $859 $720 $435 $239 $547
</TABLE>
13. CONCENTRATION OF CREDIT RISKS
We sell our music products primarily to retailers and wholesalers in
the United States. There is no one customer that comprises more than 10% of our
sales; although a significant amount of our sales in prior periods were
generated through PGD (see "Note 9").
14. CONVERTIBLE SUBORDINATED DEBENTURES
During June 1998, JSCHO, Inc., f/k/a Intersound, Inc., exercised
certain convertible subordinated debentures issued by us to JSCHO, Inc. in
connection with our acquisition of Intersound. An aggregate of $5,000 in
convertible subordinated debentures were converted to 510,203 shares of our
Common Stock at a conversion price of $9.80 per share. Pursuant to a settlement
agreement between us and JSCHO dated March 31, 1999, JSCHO has retained 306,122
(60%) of the shares issued on the conversion of the convertible subordinated
debentures and 204,081 (40%) of such shares have been returned to us (see "Note
19").
15. STOCK AND WARRANTS
Pursuant to an Investment Agreement dated October 12, 1997, as
amended, on December 12, 1997, we issued and sold to certain purchasers, for
aggregate gross consideration of $20,000, 20,000 shares of Series B
Convertible Preferred Stock and warrants to purchase 3,600,000 shares of
Common Stock (Purchaser Warrants). We also issued and sold to an affiliate,
for aggregate gross consideration of $2,500, 2,500 shares of Series C
Convertible Preferred Stock and warrants to purchase 450,000 shares of Common
Stock (the Affiliate Warrants). The initial assigned values of the Series B
Convertible Preferred Stock and Series C Convertible Preferred Stock are
approximately $17,938 and $2,242, respectively. The values of the Purchaser
Warrants and the Affiliate Warrants are $2,062 and $258, respectively. These
amounts, net of associated costs of approximately $2,121, are reflected in
additional paid-in capital on the balance sheet.
The Series B Convertible Preferred Stock and the Series C Convertible
Preferred Stock accrue dividends compounded at an annual rate of 12% for the
first year, 14% for the second year, 16% for the third year, 18% for the fourth
and fifth years and 20% at all times thereafter, of the purchase price of the
Series B Convertible Preferred Stock and the Series C Convertible Preferred
Stock, in preference to any dividends on any other class of capital stock. The
Series B Convertible Preferred Stock and the Series C Convertible Preferred
Stock is redeemable by us at any time at a price equal to the purchase price
paid by the Purchasers thereof plus accrued and unpaid dividends. The Series B
Convertible Preferred Stock and the Series C Convertible Preferred Stock is
convertible into shares of our Common Stock at $5.9375 per share. The Investment
Agreement contains certain anti-dilution protection provisions which are
discussed below.
The number of shares of our Common Stock which may be received upon
exercise of the Purchaser Warrants is increased by an amount equal to 12% of the
shares initially underlying the Purchaser Warrants on each anniversary of the
original date of issuance of the Series B Convertible Preferred Stock, so long
as any
41
<PAGE>
Series B Convertible Preferred Stock remains outstanding. The Common Stock
underlying the Purchaser Warrants and the Affiliate Warrants may be purchased
at an exercise price per share of $5.3532. The Investment Agreement contains
certain anti-dilution protection provisions which are discussed below. The
Purchasers were issued warrants to purchase an additional 432,000 shares of
our Common Stock during each of the two years ended December 31, 1999.
On April 15, 1999, we issued and sold an aggregate of 3,938 shares of
Series D Convertible Preferred Stock and warrants (the Series D Warrants) to
purchase an aggregate of 794,163 shares of Common Stock to Steven Devick, one of
our executive officers and a director, and Craig J. Duchossois and Andrew
Filipowski, each members of our Board of Directors. The terms of the Series D
Convertible Preferred Stock and Series D Warrants were determined on April 9,
1999, pursuant to approval by the Board of Directors on such date. We received
$3,938 in gross consideration in connection with this private placement. We also
paid an aggregate of $29 to Mr. Duchossois and Mr. Filipowski as a related
transaction fee. The Series D Convertible Preferred Stock accrues dividends
compounded at an annual rate of 12% for the first year, 14% for the second year,
16% for the third year, 18% for the fourth and fifth years and 20% at all times
thereafter, of the purchase price of the Series D Convertible Preferred Stock,
in preference to any dividends on any class of capital stock that is junior to
the Series D Convertible Preferred Stock. The Series D Convertible Preferred
Stock is junior to the Series B Convertible Preferred Stock and the Series C
Convertible Preferred Stock with respect to the right to receive dividends and
to participate in any distribution of assets other than by way of dividends. The
Series D Convertible Preferred Stock is redeemable by us at any time at a price
per share equal to the purchase price paid by the purchasers thereof plus
accrued and unpaid dividends. The Series D Convertible Preferred Stock is
convertible, commencing two years from the date of issue, into shares of Common
Stock at $7.00 per share, which is equal to the closing trading price of the
Common Stock on April 9, 1999. The value assigned the Series D Convertible
Preferred Stock is $3,532 and the value assigned the Series D Warrants is $406.
These amounts, net of associated costs of $29, are reflected in additional
paid-in capital on the balance sheet.
The number of shares of Common Stock obtainable upon exercise of the
Series D Warrants does not increase. If the Series D Convertible Preferred Stock
is redeemed in full during the twelve month period following the issuance of the
Series D Warrants, the holders of the Series D Warrants are required to return
1% of the Series D Warrants (or Common Stock representing shares received upon
exercise of the Series D Warrants), determined on a pro rata basis, for each
month remaining in such twelve month period; provided, however, that the holders
of the Series D Warrants are not required to return more than 12% of the
aggregate number of Series D Warrants originally issued. The Common Stock
underlying the Series D Warrants may be purchased at an exercise price per share
of $6.126, which is equal to the average of the closing trading price of the
Common Stock for the 30 consecutive trading days that commenced April 9, 1999.
The issuance of the Series D Convertible Preferred Stock and related
warrants 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.
The preferred stock accrued dividends as follows:
<TABLE>
<CAPTION>
Series B Series C Series D Total
-------- -------- -------- --------
<S> <C> <C> <C> <C>
November 30, 1999 $ 874 $ 109 $ 124 $ 1,106
August 31, 1999 845 105 120 1,070
May 31, 1999 815 102 62 979
February 28, 1999 788 98 - 886
November 30, 1998 656 82 - 738
August 31, 1998 636 80 - 716
May 31, 1998 618 77 - 695
February 28, 1998 600 75 - 675
</TABLE>
42
<PAGE>
During December 1999, we issued 108,480 shares of our Common Stock,
valued at $470 or $4.33 per share, which approximated the closing price of our
Common Stock as reported by the Nasdaq National Market on the date of issuance,
to Diezel Muzick, Inc., in lieu of cash as a recoupable recording fund for
certain projects pursuant to recordings agreements dated August 30, 1999, and
August 31, 1999, as amended, between Platinum Entertainment and Diezel Muzick.
During the fourth quarter of 1999, we issued 64,286 shares of our
Common Stock, for consideration of $225, or $3.50 per share, which
approximated the closing price of our Common Stock as reported by the Nasdaq
National Market on the date of issuance, to BML, in lieu of cash as
prepayment of net sales pursuant to a distribution agreement, dated November
12, 1999, between Platinum Entertainment and BML. In addition, we issued BML
261,192 shares of our Common Stock for consideration of $1,035, or $3.9626
per share, which approximated the closing price of our Common Stock as
reported by the Nasdaq National Market on the date of issuance, pursuant to
the same agreement. The 261,192 shares were held in escrow at December 31,
1999; accordingly, such shares are not reflected as common shares outstanding
at December 31, 1999 in the financial statements.
During December 1998, we issued 416,665 shares of our Common Stock to
Special Situations Fund III, L.P., Special Situations Private Fund, L.P.,
Special Situations Cayman Fund, L.P. and Special Situations Technology Fund,
L.P., each unrelated parties (Special Situations), for proceeds of $2,500, or $6
per share, which approximated the closing price of our Common Stock as reported
by the Nasdaq National Market on the date of sale, pursuant to an agreement
dated December 31, 1998. During May 1999, we issued an aggregate 50,343 shares
of our Common Stock pursuant to anti-dilution provisions in the agreement. In
addition, we issued an aggregate 423,280 shares of our Common Stock to Special
Situation for proceeds of $3,000, or $7.088 per share, which price approximated
the closing price of our Common Stock as reported by the Nasdaq National Market
on the date of sale.
During April 1999, we issued 8,571 shares of our Common Stock, valued
at $60 or $7 per share, which approximated the closing price of our Common Stock
as reported by the Nasdaq National Market on the date of sale, to FS Affiliate,
in connection with an amendment to our bank credit agreement. See "Note 10" for
further discussion of our banking facility.
On March 31, 1999, we settled two lawsuits resulting in the issuance of
20,000 shares of our Common Stock to Donald R. Johnson and the redemption of
204,081 shares of our Common Stock from JSCHO, Inc. See "Note 19."
During January 1997, we issued to Bank of Montreal a warrant to
purchase 258,572 shares of our Common Stock at an exercise price of $.01 per
share in connection with our Bank of Montreal facility. The value of the
warrants was $1,240, the balance of which is included in additional paid-in
capital. During February 1999, Bank of Montreal exercised their warrant in full,
resulting in an issuance of 235,366 shares of our Common Stock. In April 1997,
Bank of Montreal assigned a portion of their warrants to PPM America Special
Investments Fund L.P. During March 1999, PPM America Special Investments Fund
L.P. exercised their warrant in full, resulting in a an issuance of 23,206
shares of our Common Stock.
We engaged PLATINUM technology International, inc. (Platinum
technology), a related party, to provide consultation for the upgrade of our
computer systems. During 1998, we issued to Platinum technology 53,192 shares of
our Common Stock in consideration for $382 of consulting services which have
been capitalized as part of property and equipment. During 1999, we issued
Platinum technology 75,246 shares of our Common Stock in consideration for $527
of consulting services which have been capitalized as part of property and
equipment. An additional $361 of consulting services have been provided to us
prior to December 31, 1999, by Platinum technology or their successor Computer
Associates which is to be paid to Computer Associates in our Common Stock. We
are no longer utilizing these services. To the extent the net proceeds to
Computer Associates upon liquidation of the shares issued in consideration of
payment for such consulting services is less than the value of such shares on
the date of issuance, we have agreed to issue such additional shares to
Computer Associates as shall be necessary to make up the difference between
the initial value of the shares and their liquidation value. To the extent
the liquidation value of the shares exceeds the initial value of the shares,
Computer Associates will retain 10% of such excess value and shall allow us
to supply the remaining excess value toward outstanding invoices issued
pursuant to consulting services provided to us.
43
<PAGE>
During June 1998, we issued 100,000 shares of our Common Stock to each
of Robert J. Morgado and Geoffrey W. Holmes, both members of our Board of
Directors, for proceeds of $1,350, or $6.75 per share, which equaled the closing
price of our Common Stock as reported by the Nasdaq National Market on the date
of sale.
In addition, we issued an aggregate 13,000 shares to various vendors
for professional services rendered. The per share value of our Common Stock for
each issuance approximated the closing price of our Common Stock as reported by
the Nasdaq National Market on the date of issuance.
In addition, the following outstanding warrants to purchase our Common
Stock have been issued to related parties:
<TABLE>
<CAPTION>
NUMBER EXERCISE EXPIRATION
OF SHARES PRICE DATE
-----------------------------------------------------
<S> <C> <C> <C>
December 1997 50,000 $6.25 12/07
February 1998 100,000 6.25 02/08
April 1998 50,000 9.00 04/08
</TABLE>
At December 31, 1999, the following unissued shares of Common Stock
were reserved for future issuance:
<TABLE>
<S> <C>
Stock option plans 5,644,000
Stock purchase plan 492,165
Convertible preferred stock 5,496,358
Warrants 5,908,163
------------------
17,540,686
==================
</TABLE>
We have not paid dividends on our shares of Common Stock to date and
our First Source facility precludes us from making any dividend payments.
44
<PAGE>
16. STOCK-BASED COMPENSATION
Under our various stock option plans, options may be granted to
purchase our Common Stock at the fair market value of the shares on the date of
grant. Currently outstanding options become exercisable in three equal annual
increments and expire ten years after the grant date.
A summary of our stock option plans is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED SEVEN MONTHS ENDED YEAR ENDED MAY 31
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997 1997
-------------------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding -
Beginning of period 2,869,056 $6.50 2,173,978 $6.38 1,624,844 $7.25 937,800 $ 9.56
Granted 775,741 5.10 735,600 6.87 604,000 5.50 952,478 6.16
Exercised (40,701) 5.79 (2,000) 2.50 - - - -
Forfeited (161,125) 6.50 (38,522) 6.83 (54,866) 8.54 (265,434) 11.47
-------------------------------------------------------------------------------------
Outstanding - End of
period 3,442,971 $ 6.19 2,869,056 $ 6.50 2,173,978 $ 6.38 1,624,844 $ 7.25
=====================================================================================
Exercisable at end of
period 1,877,063 $ 6.47 1,494,852 $ 6.53 1,054,047 $ 6.50 1,063,645 $ 6.80
Weighted average fair
value of options
granted during the
period 3.47 4.47 4.13 4.27
</TABLE>
Other information regarding options as of December 31, 1999, is as follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
OPTIONS OPTIONS EXERCISE CONTRACTUAL
OUTSTANDING EXERCISABLE PRICE LIFE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
40,000 40,000 $0.25 4 years
58,500 58,500 2.50 3 years
2,972,371 1,406,463 5.91 8 years
312,100 312,100 8.96 5 years
60,000 60,000 13.00 6 years
- ------------------------------------------------------
3,442,971 1,877,063
======================================================
</TABLE>
45
<PAGE>
Pursuant to SFAS No. 123, we are required to disclose the pro forma
effects on net loss and basic and diluted earnings per common share as if we
had elected to use the fair value approach to account for all our stock-based
compensation plans. If compensation cost for our plans had been determined
consistent with the fair value approach set forth in SFAS 123, our pro forma
net loss and pro forma basic and diluted loss per common share for the
periods ended would be increased as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED SEVEN MONTHS ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31 MAY 31
1999 1998 1997 1997
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss applicable to common shares $(25,699) $(17,621) $(16,446) $ (9,354)
Pro forma net loss applicable to
common shares (27,200) (19,780) (17,769) (13,839)
Basic and diluted loss per common share (3.62) (3.07) (3.14) (1.82)
Pro forma basic and diluted loss per
common share (4.04) (3.45) (3.40) (2.69)
</TABLE>
The fair value of each option grant is estimated on the date of the
grant using the Black-Scholes option valuation model with the following
assumptions:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED SEVEN MONTHS ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31 MAY 31
1999 1998 1997 1997
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Expected dividend yield 0% 0% 0% 0%
Expected stock price volatility .56 .58 .68 .59
Risk-free interest rate 6.34 5.39 5.73 6.54
Weighted-average expected life of
options 8 years 7 years 9 years 8 years
</TABLE>
In February 1997, 200,000 options which originally had an exercise
price of $11.625 were canceled and replaced with 200,000 options with an
exercise price of $6.25, representing the market price of our Common Stock on
the date of the cancellation and new grant. In addition, approximately 395,000
options which originally vested in three equal annual increments beginning in
April 1997, were fully vested as of February 1997.
In June 1997, 39,000 options which originally had an exercise price of
$8.25 were canceled and replaced with 39,000 options with an exercise price of
$6.00, representing the market price of our Common Stock on the date of the
cancellation and new grant. In addition, 117,300 options which originally had an
exercise price of $11.625 were canceled and replaced with 117,300 options with
an exercise price of $6.00, representing the market price of our Common Stock on
the date of the cancellation and new grant.
Option valuation models require the input of highly subjective
assumptions. Because our stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate in management's
opinion, the existing model does not necessarily provide a reliable single
measure of the fair value of its stock options.
Under our Employee Stock Purchase Plan, employees are given the
opportunity to purchase our Common Stock at 85% of the closing price of our
Common Stock on the Nasdaq National Market on the date of grant or exercise,
whichever is lower. The first offering under the Plan commenced on June 1, 1997,
and
46
<PAGE>
concluded on November 30, 1997. Subsequent offerings begin on December 1 and
June 1 of each year and conclude on November 30 and May 31, respectively. A
total of 7,549 shares have been issued to date.
17. RETIREMENT PLAN
Our employees are eligible to participate in a defined-contribution
benefit plan upon completing six months of service and attaining age 21. We
have amended the Plan to provide for discretionary matching contribution with
Common Stock at a rate of $.25 per $1.00 contributed by the participant, not
to exceed, during the Plan Year, as defined in the Plan, 6% of the
participant's compensation for such Plan Year.
18. RELATED PARTY TRANSACTIONS
During the year ended December 31, 1999, we borrowed $1,028 from one of
our officers and directors. In addition, we borrowed $300 from one of our
directors. Both borrowings bore interest of 11% per annum. Interest accrued on
these loans during the year ended December 31, 1999, was approximately $54 and
is reflected in the due to related parties balance at December 31, 1999.
On December 30, 1999, we signed a license agreement with
LiveOnTheNet.com, which hosts a variety of video and audio programming
showcasing local and national advertisers. Under the terms of the agreement, we
agreed to license to LiveOnTheNet the right to reproduce, advertise, market,
promote and distribute our catalog of master recordings for free promotional
digital downloads through LiveOnTheNet.com. Our digital download site
HeardOn.com will be linked to LiveOnTheNet.com as a sub-domain. The site will
also feature streaming audio, video, graphics and photos of live performances,
interviews, recording sessions, and other events, collectively termed
"webcasting". Information concerning visitors to HeardOn.com and
LiveOnTheNet.com who download master recordings will be jointly owned by the
parties. The initial term and any renewal term of the agreement extends for the
period of time it takes to achieve both 20,000,000 page views and 500,000
qualified visitors for the combined sites. The initial term or any renewal term
may be terminated at our option at any time 3 years after the effective date of
the agreement. The agreement may be renewed at the option of LiveOnTheNet for
two additional terms, subject to certain limitations. We received $2,000 for the
grant of rights during the initial term of which $200 will be held in escrow and
is payable within 10 days of the end of the initial term of the agreement
provided we fulfill our obligations under the agreement. Accordingly, such
amount has been recorded as unearned revenues and will be recognized in
operations as earned. An additional $2,000 shall be payable to us at the
commencement of each renewal term, if any. Divine interVentures, inc. has a
greater than 50% ownership interest in LiveOnTheNet. Three of our directors,
Andrew Filipowski, Michael Cullinane and Paul Humenansky, are executive officers
and shareholders of divine interVentures, inc., an Internet operating company
engaged in business-to-business e-commerce through a community of partner
companies.
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 year ended December 31, 1999,
were immaterial. The amount due from Envisage at December 31, 1999, is
approximately $625. Envisage has indicated it will not pay the amount owed us;
accordingly, we have fully reserved the outstanding balance at December 31,
1999. Envisage is related to certain of our directors or their affiliates.
We engaged PLATINUM technology, a related party, to provide
consultation for the upgrade of our computer systems. During 1998, we issued
to Platinum technology 53,192 shares of our Common Stock in consideration for
$382 of consulting services which have been capitalized as part of property
and equipment. During 1999, we issued Platinum technology 75,246 shares of
our Common Stock in consideration for $527 of consulting services which have
been capitalized as part of property and equipment. An additional $361 of
consulting services have been provided to us prior to December 31, 1999, by
Platinum technology or their successor Computer Associates which is to be
paid to
47
<PAGE>
Computer Associates in our Common Stock. We are no longer utilizing these
services. To the extent the net proceeds to Computer Associates upon
liquidation of the shares issued in consideration of payment for such
consulting services is less than the value of such shares on the date of
issuance, we have agreed to issue such additional shares to Computer
Associates as shall be necessary to make up the difference between the
initial value of the shares and their liquidation value. To the extent the
liquidation value of the shares exceeds the initial value of the shares,
Computer Associates will retain 10% of such excess value and shall allow us
to supply the remaining excess value toward outstanding invoices issued
pursuant to consulting services provided to us.
During June 1998, we issued 100,000 shares of our Common Stock to each
of Robert J. Morgado and Geoffrey W. Holmes, both members of our Board of
Directors, for proceeds of $1,350, or $6.75 per share, which equaled the closing
price of our Common Stock as reported by the Nasdaq National Market on the date
of sale.
We entered into Consulting Agreements, each dated as of December 12,
1997, with each of MAC Music LLC and Palladin Capital Group, Inc. Each
consulting group is paid an annual fee of $200 for its services. At December 31,
1999, these consulting fees had not been paid for 2000 services; therefore, both
other current assets and accrued liabilities includes $400 related to unpaid
consulting fees. Each consulting group has agreed to render consulting services
to us in connection with (i) management and strategic planning, (ii) the
identification of financing, acquisition, divestiture, joint venture and
licensing opportunities for us and (iii) other matters relating to our
day-to-day business and operations, or any of our subsidiaries or affiliated
companies, as our Chief Executive Officer or our Board of Directors may from
time to time reasonably request. The term of each agreement is for five years.
During the seven months ended December 31, 1997, we borrowed and repaid
in full $1,500 from one of our officers and directors. In addition, we borrowed
and repaid $1,150 in full from an unrelated party during the seven months ended
December 31, 1997, which was guaranteed by certain of our officers and
directors. Both borrowings bore interest of 10% per annum. Interest accrued and
paid on these loans during the seven months ended December 31, 1997, was
approximately $34.
19. LITIGATION
During March 1999, we settled our pending litigation with JCSHO, Inc.
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 1999.
On April 7, 1999, Ichiban Records, Inc. filed a lawsuit against us
seeking termination of its distribution agreement with us and damages for
alleged breaches of its distribution agreement by us. On April 21, 1999,
Ichiban also filed a voluntary petition to commence a case under Chapter 11
of the Bankruptcy Code. On June 16, 1999, the Bankruptcy Court granted our
motion to remove Ichiban as a debtor in possession and appointed an
independent trustee to operate the business of Ichiban. On October 14, 1999,
the Bankruptcy Court approved our joint motion with the trustee to approve an
amended version of the distribution agreement between us and Ichiban to
permit the further distribution of Ichiban recordings by us. On March 9,
2000, the Bankruptcy Court rejected the presentation of an agreement
negotiated between us and the Trustee for acquisition of the assets of
Ichiban. Because of this decision and Ichiban's failure to execute on its
plans to become an operating company, we withdrew our support of motions to
approve a settlement of the Ichiban Claim and to approve a settlement
agreement between the bankruptcy estate and The Harry Fox Agency. As a
consequence of the failure of such motions to be entered by the Bankruptcy
Court, the amended version of the distribution agreement between us and
Ichiban became ineffective. Accordingly, we have expensed our unrecouped
distribution advance to Ichiban, which totaled $1,950 as of December 31,
1999. We believe the matter will not have an additional 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 Califormia seeking injunctive relief, restitution, and
disgourgement of profits arising out of PGD's claim that the distribution
agreement between us and PGD bars the distribution of recordings by us through
our own distribution facilities and requires that they be distributed by PGD. On
June 25, 1999, PGD filed an amended complaint that additionally seeks the
recovery of damages. We rejected earlier demands by PGD to cease and desist
selling our recording through our own distribution facilities on the grounds
that an amendment to the distribution agreement with PGD specifically allows us
to distribute records through our
48
<PAGE>
own distribution company. We filed our answer to the complaint and filed
cross-complaints against PGD seeking damages incurred in connection with the
production of a compilation album by PGD entitled "Essential Southern Rock",
for the failure of PGD'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 PGD. We also sent a
notice of termination of the distribution agreement to PGD, terminating the
distribution agreement effective as of July 21, 1999 for PGD's breach of the
distribution agreement. On January 14, 2000, PGD filed another action against
us, in New York, asserting essentially the same claims as originally asserted
in the California action with an additional claim asserting trademark
infringement arising out of the sale by us of phonorecords bearing the
declaration that they are distributed by PGD. Because the lawsuit is at an
early stage, there can be no assurances that the matters can be resolved in
our favor. A decision adverse to us in this matter could have a material
adverse impact on our financial position and results of operations.
We are a party in various other lawsuits which have arisen in the
normal course of business. In the opinion of management, based upon
consultation with legal counsel, the ultimate outcome of these lawsuits will
not have a material impact on our financial position or results of operations.
20. CONTINGENCY
The Harry Fox Agency, Inc., a subsidiary of the National Music
Publishers' Association, Inc., submitted to us a copy of an report prepared
on behalf of the Agency by its accountants identifying royalty underpayments
it asserts were found during the course of an audit of our sales for the
period of July 1, 1993 through March 31, 1998 (other than sales through
Intersound). The amount of the claim was $704. We have reviewed the report
and have responded by letter of December 3, 1999, acknowledging that $18 is
owed but disputing the balance claimed. We also received correspondence dated
August 11, 1999, from the Agency asserting that we had failed to execute
certain license agreements issued by the Agency, and that as a result such
licenses were withdrawn. However, we have determined that the license
agreements at issue were either in fact returned to the Agency, issued in
error by the Agency and returned for correction, issued for recordings not
released by us, or have not been returned because we are awaiting information
required to complete the licenses. A response to the Agency with this
information was submitted on December 3, 1999. Further, under cover of a
letter dated September 30, 1999, the Agency submitted to us a copy of a
report prepared on behalf of the Agency by its accountants identifying
royalty underpayments it asserts were found during the course of an audit of
our sales through Intersound for the period of January 1, 1997 through March
31, 1998. The amount of the claim was $2,038. We are reviewing the report,
and while we have not reached any conclusions concerning the validity of the
claim, we believe the amount of the claim is substantially overstated. On
January 13, 2000, we met with representatives of the Harry Fox Agency in an
effort, among other things, to resolve the disputed claims, but those efforts
were unsuccessful. We have therefore elected to obtain compulsory licenses,
when appropriate, to reduce the extent of further claims by the Agency. We
believe the audit claims of the Agency can be resolved without an additional
material adverse impact on our financial position and results of operations.
We have not paid publishing royalties for periods after the first
quarter of 1999, nor have we paid artist royalties for 1999, due to problems we
have experienced with our publisher royalty system and our overall lack of
liquidity. As a consequence, various publishing companies and other licensors,
including The Harry Fox Agency, have notified us that licenses that have been
granted to us will be terminated unless payment is made. We have been able to
negotiate extensions with our principal licensors. Further, the problems with
our publisher royalty system have been fixed. However, when we did not timely
pay The Harry Fox Agency for royalties due for the first quarter of 1999, the
Agency stated that it had revoked and terminated the licenses for which payment
had not been made. We believe the percentage of our mechanical licenses that are
issued by the Agency is in excess of 50%. The Agency further notified us that it
was its position that the revocation and termination continued even after the
royalties for the first quarter of 1999 were later paid. Our negotiations with
the Agency continue. See "Liquidity and Capital Resources". Failure to
cure our defaults with the Agency would have a material adverse effect on our
business, results of operations and financial condition.
49
<PAGE>
21. VALUATION AND QUALIFYING ACCOUNTS
Activity of our valuation and qualifying accounts are as follows:
<TABLE>
<CAPTION>
ADDITIONS
-----------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING OF COSTS AND OTHER AT END
PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Reserve for future returns $7,198 $20,553 $- $ 15,052(1) $12,699
Allowance for doubtful accounts 1,772 758 - 308(2) 2,222
Reserve for unrecoupable
artist advances 16,470 4,795 - 382(3) 20,883
Allowance for slow-moving
inventory 1,946 4,377 - 1,033(2) 5,290
Reserve for unrecoupable
distribution advances - 2,615 - - 2,615
YEAR ENDED DECEMBER 31, 1998
Reserve for future returns $12,437 $12,462 $- $17,701 (1) $7,198
Allowance for doubtful accounts 2,760 - 125 1,113 (2) 1,772
Reserve for unrecoupable
artist advances 12,936 3,929 50 445 (4) 16,470
Allowance for slow-moving
inventory 590 1,438 - 82 (5) 1,946
SEVEN MONTHS ENDED DECEMBER 31,
1997
Reserve for future returns 5,421 14,726 (6) - 7,710 (1) 12,437
Allowance for doubtful accounts 2,725 688 20 673 (2) 2,760
Reserve for unrecoupable
artist advances 9,745 3,136 55 - 12,936
Allowance for slow-moving
inventory 350 240 - - 590
YEAR ENDED MAY 31, 1997
Reserve for future returns 2,222 10,876 4,529 (7) 12,206 (1) 5,421
Allowance for doubtful accounts 58 300 2,414 (7) 47 (2) 2,725
Reserve for unrecoupable
artist advances 4,942 1,714 3,089 (7) - 9,745
Allowance for slow-moving
inventory 100 - 250 (7) - 350
</TABLE>
(1) Actual product returns.
(2) Write-offs, net of recoveries.
(3) Related to assets sold (see "Note 4").
(4) Write-offs of fully reserved assets.
(5) Miscellaneous adjustments.
(6) Amount includes $4,051 related to returns of product sold by
Intersound, prior to our acquisition (see "Note 3").
(7) Relates to amounts recorded through acquisitions.
50
<PAGE>
22. BALANCE SHEET DATA
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
------------------------------------
<S> <C> <C>
Accounts receivable $ 19,771 $ 13,608
Less: Reserve for future returns (12,699) (7,198)
Less: Allowance for doubtful accounts (2,222) (1,772)
Less: Other allowances (1,082) (889)
------------------------------------
Accounts receivable, net $ 3,768 $ 3,749
====================================
Inventories $ 10,358 $ 8,982
Less: Allowance for slow-moving inventory (5,290) (1,946)
------------------------------------
Inventories, net $ 5,068 $ 7,036
====================================
Artist advances $ 21,900 $ 18,369
Less: Reserve for unrecoupable artist advances (20,883) (16,470)
------------------------------------
Artist advances, net $ 1,017 $ 1,899
====================================
Distribution advances $ 2,856 $ 2,407
Less: Reserve for unrecoupable distribution advances (2,615) -
------------------------------------
Distribution advances, net $ 241 $ 2,407
====================================
Property and equipment:
Office equipment and computers $ 3,435 $ 2,811
Furniture and fixtures 391 324
Audio equipment 281 273
Leasehold improvements 321 257
Warehouse equipment 84 84
Autos 5 5
------------------------------------
4,517 3,754
Less: Accumulated depreciation (2,052) (1,293)
------------------------------------
Property and equipment, net $ 2,465 $ 2,461
====================================
Recorded music costs $ 1,896 $ 1,738
Less: Accumulated amortization (887) (487)
------------------------------------
Recorded music costs, net $ 1,009 $ 1,251
====================================
</TABLE>
51
<PAGE>
22. BALANCE SHEET DATA (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
------------------------------------
<S> <C> <C>
Music catalog $ 23,004 $ 23,004
Less: Accumulated amortization (2,620) (1,690)
------------------------------------
Music catalog, net $ 20,384 $ 21,314
====================================
Music publishing rights $ 2,520 $ 3,452
Less: Accumulated amortization (457) (426)
------------------------------------
Music publishing rights $ 2,063 $ 3,026
====================================
Goodwill $ 6,098 $ 6,098
Less: Accumulated amortization (732) (488)
------------------------------------
Goodwill, net $ 5,366 $ 5,610
====================================
Deferred financing costs $ 274 $ 274
Less: Accumulated amortization (233) (21)
------------------------------------
Deferred financing costs, net $ 41 $ 253
====================================
</TABLE>
52
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS
The following persons served as directors of the Company during 1999
and will continue to serve as directors until their terms of office expire (as
indicated below) or until their successors are elected and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY SERVED AS
DIRECTOR TERM
SINCE EXPIRES
- -------------------------------- ------ ----------------------------------------------
<S> <C> <C> <C> <C>
Steven Devick (1).............. 48 Chairman of the Board, Chief Executive
Officer and President 1992 2001
Douglas C. Laux(2)............. 47 Director 1995 2002
David S. Bauman(3)............. 40 Director 1998 2002
Michael P. Cullinane(1)(3)..... 50 Director 1992 2000
Craig Duchossois(1)(3)......... 55 Director 1994 2001
Andrew J. Filipowski(1)........ 49 Director 1992 2000
Carl D. Harnick(3)............. 65 Director 1998 2000
Geoffrey W. Holmes............. 54 Director 1998 2000
Paul L. Humenansky............. 42 Director 1992 2002
Robert J. Morgado(1)........... 57 Director 1997 2001
Mark J. Schwartz(1)............ 42 Director 1997 2002
</TABLE>
- ------------------
(1) Member of the Compensation Committee.
(2) Effective March 24, 2000, Mr. Laux resigned from his positions as our Chief
Operating Officer, Chief Financial Officer and Secretary.
(3) Member of the Audit Committee.
Steven Devick is our founder and has been our Chairman of the Board and
Chief Executive Officer since January 1992. On January 1, 1996, Mr. Devick
assumed the additional office of President. Mr. Devick is currently a director
of Blue Rhino Corporation.
Douglas C. Laux has been a director since September 1995. Mr. Laux
has been the Chief Financial Officer of Drinks.com since his resignation from
our Company in March 2000. Mr. Laux served as our Chief Financial Officer
from September 1995 until March 2000, and as our Chief Operating Officer from
January 1999 until March 2000. From October 1986 until September 1995, Mr.
Laux was a partner in the accounting firm of Ernst & Young, LLP.
David S. Bauman has been a Director of the Company since August 1998.
Mr. Bauman is the President, Chief Executive Officer and a Director of Investor
Broadcast Network, where he has worked since October 1997. Mr. Bauman also
presently serves as a principal of Palladin Capital Group, Inc. From
53
<PAGE>
August 1992 until June 1997, Mr. Bauman served as Senior Vice President, and
former Vice President of American Express Company.
Michael P. Cullinane has been a Director of the Company since March
1992. Mr. Cullinane has been Chief Financial Officer and Treasurer of divine
interVentures, inc. since its inception in May 1999 and an Executive Vice
President of divine interVentures, inc. since August 1999. Mr. Cullinane
served as Executive Vice President and Chief Financial Officer of PLATINUM
technology International, inc. from its inception in 1987 until it was acquired
by Computer Associates in June 1999. Mr. Cullinane is currently a director of
VASCO Data Security International Inc., Made2Manage Systems, Inc. and
Interactive Intelligence, Inc.
Craig Duchossois has been a Director of the Company since April 1994.
Mr. Duchossois has been Chief Executive Officer of Duchossois Industries, Inc.,
a privately-held diversified manufacturing and service organization with
headquarters in Elmhurst, Illinois, since 1994 and President from 1986 to 1994.
Mr. Duchossois has also been Chairman and Chief Executive Officer of Thrall Car
Manufacturing Company since 1986. Mr. Duchossois is currently a director of Blue
Rhino Corporation.
Andrew J. Filipowski has served as a Director of the Company since
January 1992. Mr. Filipowski has been Chairman of the Board of Directors and
the Chief Executive Officer of divine interVentures, inc. since its inception
in May 1999. He is also Chairman and Chief Executive Officer of Platinum
Venture Partners, Inc. Mr. Filipowski was a founder of PLATINUM technology
International, inc. and served as the Chairman of the Board of Directors,
Chief Executive Officer and President from its inception in 1987 until it was
acquired by Computer Associates in June 1999. Mr. Filipowski is currently a
director of eShare technologies, Inc., Blue Rhino Corporation, Bluestone
Software Inc. and HOB Entertainment, Inc.
Carl D. Harnick has been a Director of the Company since April 1998.
Mr. Harnick is a consultant for Alpine Equity Partners, L.P., a service he
has provided since October 1997, as well as a consultant for several other
companies. Mr. Harnick was previously a partner of the accounting firm Ernst
& Young LLP since 1967, where he provided auditing and other accounting
services to clients in the entertainment and venture capital industries.
Geoffrey W. Holmes has been a Director of the Company since November
1998. He is the President of Summit Properties International, Inc., where he has
been employed since 1996. From 1993 to 1996, Mr. Holmes was Senior Vice
President/Technology of Time Warner, Inc. and Chairman and Chief Executive
Officer of Time Warner Interactive.
Paul L. Humenansky has been a Director of the Company since March 1992.
Mr. Humenansky has been an Executive Vice President of divine interVentures,
inc. since August 1999. Mr. Humenansky served as Executive Vice President -
Product Development of PLATINUM technology International, inc. from January 1993
until it was acquired by Computer Associates in June 1999.
Robert A. Morgado has been a Director of the Company since December
1997. Mr. Morgado is the Chairman of Maroley Media Group LLC, a private equity
firm he founded in 1995. Mr. Morgado joined Warner Communications, Inc. in 1982,
and in January 1990, he became the Chairman and Chief Executive Officer of the
Warner Music Group, a position he held until June 1995. Mr. Morgado serves as a
director of Activision.
Mark J. Schwartz has been a Director of the Company since December
1997. Mr. Schwartz has been President and Chief Executive Officer of Palladin
Capital Group, Inc., a New York merchant banking group, since August 1997.
Mr. Schwartz was Chairman and Chief Executive Officer of Nine West Group,
Inc., managing its merger into Jones Apparel Group, Inc., from June 1999 to
February 2000. From April 1994 to July 1997, Mr. Schwartz was a member of
Rosecliff, Inc., serving as its President since March 1997. Mr. Schwartz is
currently a director of Jones Apparel Group.
54
<PAGE>
EXECUTIVE OFFICERS
Set forth below is a table identifying executive officers of the
Company who are not identified in the table entitled "Directors and Executive
Officers of the Registrant - Directors."
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------------ ------ -----------------------------------------------------
<S> <C> <C>
Hank Caldwell...................... 53 Executive Vice President of Labels
Brent Gordon....................... 57 Executive Vice President of Sales and Distribution
Thomas R. Leavens.................. 51 Chief General Counsel and Senior Executive Vice President
</TABLE>
Mr. Caldwell has been our Executive Vice President of Labels since
January 1, 2000, and was our VP/General Manager of Urban Music from March 1,
1999 to December 31, 1999. Mr. Caldwell was Executive Vice President of Solar
Records from 1997 until he joined our Company in March 1999. Mr. Caldwell was
President of Death Row Records from 1995 to 1996. He was Senior VP/General
Manager, Urban division of Epic Records from 1989 to 1995.
Mr. Gordon has been our Executive Vice President of Sales and
Distribution since January 1999. Mr. Gordon was the Regional Vice President -
Sales and Distribution, Marketing Operations at WEA Corp., a subsidiary of
Time-Warner, Inc., in Simi Valley, CA from May 1980 to July 1997. Mr. Gordon was
also the President of Sales and Operations for Pacific Coast One-Stop, of Simi
Valley, CA from August 1997 to December 1999.
Mr. Leavens has been our Chief General Counsel since September 1992 and
our Senior Executive Vice President since January 1999. Mr. Leavens was also our
Chief Operating Officer until January 1999. From December 1986 until he joined
the Company, Mr. Leavens was a partner in the law firm McBride, Baker & Coles.
The Board of Directors elects executive officers annually and such
officers serve at the discretion of the Board. Each of Messrs. Devick,
Leavens, Caldwell and Gordon, however, have an employment agreement. See
"Executive Compensation -- Employment Agreements." There are no family
relationships among any of our directors or officers.
SECTION 16(a) COMPLIANCE
Section 16 of the Securities Exchange Act of 1934, as amended (the
"1934 Act"), requires the Company's officers and directors and persons who own
greater than 10% of a registered class of the Company's equity securities to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission (the "Commission") and The Nasdaq Stock Market. Based solely
on a review of the forms it has received and on written representations from
certain reporting persons that no such forms were required for them, we believe
that, during 1999, all Section 16 filing requirements applicable to our
officers, directors and greater than 10% beneficial owners were complied with by
such persons; except that Messrs. Devick, Duchossois and Filipowski
inadvertently failed to timely file a Form 4 to report a purchase of shares
of our Series D Preferred Stock in April 1999.
ITEM 11. EXECUTIVE COMPENSATION.
The following table contains information with respect to all
compensation paid by us during the last three fiscal years to our chief
executive officer and our four most highly compensated executive officers
whose combined salary and bonus exceeded $100,000 for 1999.
55
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------- --------------
SECURITIES
NAME AND UNDERLYING
PRINCIPAL POSITION PERIOD SALARY ($) BONUS ($) OPTIONS (#)
- --------------------------------- ---------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
Steven Devick Fiscal 1999 625,000(1) 91,146(2) 275,000(5)
President and Chief Executive Fiscal 1998 625,000 156,250(3) 350,000(6)
Officer 06/01/97-12/31/97 329,399 156,250(4) 401,734
06/01/96-05/31/97 570,263 - 200,000(7)
268,044
Douglas C. Laux Fiscal 1999 300,000 43,750(2) 200,000(9)
Chief Financial Officer,Chief Fiscal 1998 300,000 75,000(3) 150,000(9)
Operating Officer and 06/01/97-12/31/97 146,775 62,500(4) 125,000(9)
Secretary (8) 39,000(9)(10)
117,300(9)(11)
06/01/96-05/31/97 252,911 - 125,000(9)
Thomas R. Leavens Fiscal 1999 250,000 36,458(2) 55,000(5)
Chief General Counsel Fiscal 1998 250,000 62,500(3) 55,000(6)
and Senior Executive 06/01/97-12/31/97 134,615 50,000(4) 75,000
Vice President 06/01/96-05/31/97 200,483 - 55,000
Brent Gordon Fiscal 1999 221,755 - 10,000(5)
Executive Vice President
of Sales and Distribution (12)
Hank Caldwell Fiscal 1999 111,848 - 10,000(5)
Vice President/General Manager
of Urban(13)
</TABLE>
(1) Mr. Devick elected to defer the payment of certain wages and his bonus
totaling $343,374 in the aggregate, during 1999.
(2) This amount represents a bonus for the seven months ended December 31,
1998.
(3) This amount represents a bonus for the twelve months ended May 31, 1998.
(4) This amount represents a bonus for the twelve months ended May 31, 1997.
(5) These options become exercisable in three equal annual increments beginning
August 8, 2000.
(6) These options have been cancelled and are not exercisable because these
options became exercisable only upon certain contingencies which were not
met.
(7) Options to purchase 200,000 shares of Common Stock granted to Mr. Devick
during April 1996 were cancelled and repriced with options to purchase
200,000 shares of Common Stock during February 1997 in connection with a
repricing transaction effected in consideration of a personal guaranty of
Mr. Devick of borrowings made by the Company.
(8) Mr. Laux resigned from his positions as Chief Financial Officer, Chief
Operating Officer and Secretary effective March 24, 2000.
(9) These options became fully vested, to the extent not already vested, as of
March 24, 2000, in connection with Mr. Laux's severance. These options
expire as of March 24, 2001.
(10) Options to purchase 39,000 shares of Common Stock granted to Mr. Laux
during September 1995 were cancelled and replaced with options to purchase
39,000 shares of Common Stock during June 1997 in connection with a
repricing transaction effected in consideration of financial assistance
provided by Mr. Laux. Upon exercise of these stock options, Mr. Laux will
receive a cash bonus equal to the exercise price which is $6 per share.
56
<PAGE>
(11) Options to purchase 117,300 shares of Common Stock granted to Mr. Laux
during April 1996 were cancelled and replaced with options to purchase
117,300 shares of Common Stock during June 1997 in connection with a
repricing transaction effected in consideration of financial assistance
provided by Mr. Laux.
(12) Mr. Gordon joined the Company in January 1999.
(13) Mr. Caldwell joined the Company in March 1999.
Option Grants in Last Fiscal Year -- The following table provides
information regarding our grant of stock options during the fiscal year ended
December 31, 1999, to our executive officers. We did not grant stock
appreciation rights during fiscal 1999.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
VALUE AT
ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION
FOR OPTION TERM(3)
- -----------------------------------------------------------------------------------------
NAME NUMBER OF PERCENT OF EXERCISE EXPIRATION
SECURITIES TOTAL OR DATE
UNDERLYING OPTIONS BASE PRICE
OPTIONS GRANTED TO DATE
GRANTED EMPLOYEES ($/Sh)
(#)(1) IN FISCAL
YEAR(2) 5% ($) 10% ($)
<S> <C> <C> <C> <C> <C> <C>
Steven Devick 275,000 (4) 39.7% 5.000 8/6/09 864,730 2,191,396
Douglas C. Laux 200,000 (5) 28.9% 5.000 8/6/09 628,895 1,593,742
Thomas R. Leavens 55,000 (4) 7.9% 5.000 8/6/09 172,946 438,279
Brent Gordon 10,000 (4) 1.4% 5.000 8/6/09 31,445 79,687
Hank Caldwell 10,000 (6) 1.4% 5.906 3/9/09 37,143 94,126
</TABLE>
(1) Each of these options was granted pursuant to the 1995 Employee Incentive
Compensation Plan and is subject to the terms of such plan as described
below. All options were granted at an exercise price equal to the fair
market value of the Company's Common Stock on the date of grant as
determined by the Compensation Committee of the Board of Directors of the
Company.
(2) Does not include the grant of options to purchase 78,300 shares of Common
Stock to non-employee directors under the 1995 Employee Incentive
Compensation Plan.
(3) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), shown are the hypothetical gains or "option spreads" that
would exist for the respective options. These gains are based on assumed
rates of annual compounded stock price appreciation of 5% and 10% from the
date the option was granted over the full option term of ten years. The 5%
and 10% assumed rates of appreciation are mandated by the rules of the
Commission and do not represent the Company's estimate or projection for
future increases in the price of its Common Stock.
(4) These options become exercisable in three equal annual increments beginning
August 8, 2000.
(5) These options became fully vested as of March 24, 2000, in connection with
Mr. Laux's severance. These options expire as of March 24, 2001.
(6) These options become exercisable in three equal annual increments
beginning March 9, 2000
FISCAL YEAR-END OPTION VALUES -- The following table sets forth for the
Named Executive Officers information concerning the value of unexercised stock
options at December 31, 1999. No stock options were exercised during the fiscal
year ended December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR-END (#) FISCAL YEAR-END (1)($)
------------------------------ -----------------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------------------ ------------------------------ -----------------------------
<S> <C> <C>
Steven Devick.................... 986,412/716,666 -/-
Douglas C. Laux ................. 322,967/433,333 -/-(2)
Thomas R. Leavens ............... 166,667/153,333 -/-
57
<PAGE>
Brent Gordon .................... -/10,000 -/-
Hank Caldwell ................... -/10,000 -/-
</TABLE>
(1) The value per option is calculated by subtracting the exercise price from
the closing trading price of the Common Stock on the Nasdaq National Market
on December 31, 1999 of $2.50 per share.
(2) Upon exercise of certain of these options (an option exercisable for 39,000
shares of Common Stock at an exercise price of $6 per share) Mr. Laux will
receive a cash bonus equal to the exercise price.
EMPLOYMENT AGREEMENTS
On June 1, 1997, we entered into a three year employment agreement with
Steven Devick, for the position of Chief Executive Officer. Unless terminated or
not renewed by either party, the term of the agreement will continue after the
initial three-year term on a year-to-year basis. The agreement provides for an
annual base salary of $625,000 plus certain bonus compensation. A bonus is
payable to Mr. Devick during each fiscal year equal to the sum of (i) a base
bonus equal to 25% of his base salary for such fiscal year; provided, however,
that the base bonus shall be payable only if our revenues for such fiscal year
are greater than or equal to 125% of revenues for the previous fiscal year and
(ii) an additional bonus equal to the product of (A) his base salary for such
fiscal year and (B) the amount obtained by dividing (x) the amount by which
revenues for such fiscal year exceed revenues for the previous fiscal year by
(y) revenues for the previous fiscal year; provided, that however, the
additional bonus shall only be payable if we achieve earnings before interest,
taxes, depreciation and amortization (EBITDA) in such fiscal year greater than
or equal to the plan approved by the Board of Directors for such fiscal year and
our earnings per share in such year are greater than or equal to those projected
by our primary outside analyst, as adjusted for material events occurring in
such year. Mr. Devick's employment agreement also provides for continuation of
his salary, bonus and fringe benefits for three years following termination of
employment if Mr. Devick (i) is terminated by us without Good Cause (as defined
below), (ii) terminates his employment for Good Reason (as defined below) or
(iii) is notified by us of our intent not to extend the agreement beyond its
initial term. Termination of Mr. Devick shall be deemed to have been for Good
Cause only if the termination was as a result to (an act or acts of dishonesty
by Mr. Devick which the Board of Directors reasonably believes constitute a
felony which resulted directly or indirectly in gain to or personal enrichment
of Mr. Devick at our expense, or (b) an act or acts by Mr. Devick which the
Board of Directors reasonably believes constitute a felony and as a result of
which the continued employment of Mr. Devick by us will have an adverse effect
on our business. So long as Mr. Devick does not engage in conduct giving rise to
the right to terminate employment for Good Cause, Good Reason includes (i) the
failure to elect Mr. Devick to the office previously held, the removal of Mr.
Devick of any additional duties or responsibilities or a reduction in his duties
or responsibilities which, in either case, are inconsistent with those
customarily associated with such position; (ii) our relocation of Mr. Devick's
place of employment beyond a specified area; (iii) material breach by us of the
agreement; (iv) a purported termination of Mr. Devick's employment in
contravention of the notice provisions of the agreement and (v) a change in
control.
On June 1, 1997, we entered into an employment agreement with Douglas
C. Laux, for the position of Chief Financial Officer, and Thomas R. Leavens, for
the position of General Counsel. Each of the agreements is for a three-year
term, subject to renewal on a year-to-year basis unless terminated by either
party. The agreements provide for annual salaries of $300,000 for Mr. Laux and
$250,000 for Mr. Leavens, plus certain bonus compensation. A bonus and an
additional bonus may be payable to each of Mr. Laux and Mr. Leavens based on the
identical terms as described above in Mr. Devick's agreement. The employment
agreements contain severance provisions substantially identical to those
contained in Mr. Devick's agreement except that the severance periods for
Messrs. Laux and Leavens extend until the later of (i) the end of the term of
employment agreement and (ii) the first anniversary of the date of termination.
On December 12, 1997, Messrs. Devick, Laux and Leavens' employment
agreements were amended to amend the definition of Change of Control such that a
Change in Control would not be deemed to have occurred upon or as a result of
(i) the issuance of Series B Preferred Stock of the Company or
58
<PAGE>
warrants to purchase Common Stock of the Company in connection with the
Investment Agreement dated October 12, 1997, and amended by letter amendments
dated October 28, 1997, October 30, 1997, and November 26, 1997 (the
"Investment Agreement"), between the Company and the purchasers named therein
(the "Purchasers"), (ii) upon the acquisition of any shares of Common Stock of
the Company pursuant to the Investment Agreement, (iii) upon the exercise of
any of the rights and privileges granted to each of the Purchasers pursuant to
the Investment Agreement, (iv) upon the exercise of any rights and privileges
granted to the holders of the Series B Preferred Stock pursuant to the
Certificate of Designations creating the terms of the Series B Preferred
Stock, or (v) otherwise as a result of the equity ownership or designation of
directors by the Purchasers or their affiliates, employees, partners or
members.
In addition, under a previous employment agreement, we granted Mr. Laux
options to purchase 39,000 shares of Common Stock at an exercise price of $6 per
share, which are currently fully exercisable. Such agreement further provides
that upon the exercise by Mr. Laux of any such options, he will be entitled to
receive a cash bonus equal to the exercise price.
Effective March 24, 2000, Mr. Laux resigned as our Chief Operating
Officer and Chief Financial Officer. Mr. Laux will act as a consultant until
March 2001. As severance, all of Mr. Laux's stock options became fully
vested, to the extent not already vested. In addition, he received options to
purchase 100,000 shares of Common Stock at an exercise price of $3 per share,
which will fully vest in one year; expiring in March 2010. Upon the exercise by
Mr. Laux of any portion of the 100,000 options, he will be entitled to receive
a cash bonus equal to the exercise price.
On December 17, 1998, we entered into an employment agreement with
Brent Gordon, for the position of Executive Vice President, Sales and
Distribution. The agreement is a for a three-year term beginning on January
1, 1999. The agreement provides for an annual salary of $230,000, increasing
by the amount of $10,000 in each of the second and third annual periods. The
agreement includes a bonus in the amount of 10,000 stock options to purchase
shares of our Common Stock if certain operating criteria are met each annual
period. The agreement also grants Mr. Gordon an option to purchase 10,000
shares of Common Stock pursuant to our 1995 Employee Incentive Stock Option
Plan in each of his three years of service.
On March 1, 1999, we entered into an employment agreement with Hank
Caldwell, for the position of Vice President/General Manager of our Urban
Department. In January 2000, he was promoted to Executive Vice President of
Labels. The agreement was for a one-year term. The agreement provides for an
annual salary of $135,000. A bonus was due if the Urban Department had met
established operating criteria. Under the agreement, we also granted Mr.
Caldwell an option to purchase 10,000 shares of Common Stock pursuant to our
1995 Employee Incentive Stock Option Plan.
59
<PAGE>
COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors sets and
administers the policies that govern the annual and long-term compensation of
our executive officers. The non-employee members of the Compensation Committee
(the "Incentive Plan Committee"), based in part on recommendations by Mr.
Devick, make all decisions concerning awards of stock options under our stock
option plans, except the non-discretionary plan for non-employee directors. Mr.
Devick does not participate in the Compensation Committee's determinations with
respect to his own compensation.
COMPENSATION POLICIES TOWARD EXECUTIVE OFFICERS
The Compensation Committee aims to provide competitive levels of
compensation that relate compensation with our annual and long-term performance
goals, reward above average corporate performance, recognize individual
initiative and achievements, and assist us in attracting and retaining qualified
executives. The Compensation Committee attempts to achieve these objectives
through a combination of base salary, stock options, and cash bonus awards. In
making its determination, the Compensation Committee utilizes outside
information to obtain compensation information concerning comparable companies
in the entertainment industry.
BASE SALARIES
The base salaries for Messrs. Devick, Laux, Leavens, Gordon and
Caldwell were determined by the Compensation Committee and are governed by
the terms of their respective employment agreements. See "Executive
Compensation -Employment Agreements." In establishing the terms of the
employment agreements for these officers, the Compensation Committee
discussed and considered the significant contributions made by these key
officers, including the signing of new artists to our labels, sales
accomplishments, contributions to our acquisition of capital financing, the
importance of such contributions, and the compensation packages of other
executive officers in the record industry.
INCENTIVE STOCK OPTIONS
Stock options are granted to executive officers and other employees as
a means of providing long-term incentives. The Compensation Committee believes
that stock options encourage improved performance by our employees, including
its officers, and align the interests of our employees with the interests of our
stockholders. Stock options were granted to Messrs. Devick, Laux, Leavens,
Gordon and Caldwell based on their employee level and the same criteria as were
used for setting base salaries.
60
<PAGE>
CASH BONUS AWARDS
The Compensation Committee considers on an annual basis whether to pay
cash bonuses to some or all of our employees, including our executive officers.
CHIEF EXECUTIVE OFFICER COMPENSATION
The base salary and bonus for Mr. Devick for fiscal 1999 was governed
by the term of his employment agreement dated June 1, 1997. Pursuant to such
agreement, Mr. Devick's annual salary was set at $625,000 plus an annual bonus
subject to the terms of the agreement. See "Executive Compensation - Employment
Agreements." Mr. Devick was awarded a $91,146 cash bonus during fiscal 1999. Mr.
Devick was granted certain stock options to recognize fully his contributions,
including Mr. Devick's contribution to our A&R efforts, his contribution to
successfully raising equity, and to provide him with sufficient incentives to
continue his efforts as Chief Executive Officer.
COMPLIANCE WITH SECTION 162(m)
The Compensation Committee currently intends for any compensation paid
to the Named Executive Officers to be tax deductible to the Company pursuant to
Section 162(m) ("Section 162(m)") of the Code. Section 162(m) provides that
compensation paid to the Named Executive Officers in excess of $1,000,000 cannot
be deducted by the Company for Federal income tax purposes unless, in general,
such compensation is performance based, is established by a committee of outside
directors and is objective and the plan or agreement providing for such
performance-based compensation has been approved in advance by stockholders.
Consistent with this intention, the Compensation Plan was approved by the
stockholders in 1996 and the Compensation Committee made all stock option awards
to the Named Executive Officers for fiscal 1999 pursuant to the Compensation
Plan. In the future, however, the Board may determine to adopt a compensation
program that does not satisfy the conditions of Section 162(m) if in the Board's
judgement, after considering the additional costs of not satisfying 162(m), such
program is appropriate.
COMPENSATION COMMITTEE
Steven Devick
Michael P. Cullinane
Craig Duchossois
Andrew J. Filipowski
Robert J. Morgado
Mark J. Schwartz
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Devick, Cullinane, Duchossois, Filipowski, Morgado and Schwartz
are the members of our Compensation Committee. Mr. Devick previously served on
the Compensation Committee of PLATINUM technology International, inc. until it
was acquired by Computer Associates in June 1999, of which Mr. Filipowski was
Chairman and Chief Executive Officer and Mr. Cullinane was Executive Vice
President, Chief Financial Officer and Treasurer.
61
<PAGE>
PERFORMANCE GRAPH
COMPARISON OF 48 MONTH CUMULATIVE TOTAL RETURN*
AMONG PLATINUM ENTERTAINMENT, INC.,
THE NASDAQ STOCK MARKET (U.S.) INDEX
AND A PEER GROUP
<TABLE>
<CAPTION>
3/96 5/96 8/96 11/96 2/97 5/97 8/97 11/97 12/97 3/98 6/98 9/98 12/98 3/99 6/99 9/99 12/99
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PLATINUM ENTERTAINMENT,
INC. 100 145 140 60 48 47 47 48 50 51 51 50 49 48 51 25 18
PEER GROUP 100 95 80 95 96 101 110 125 140 150 160 165 260 320 340 270 300
NASDAQ STOCK MARKET(U.S.)125 110 128 129 130 137 138 138 137 160 161 140 190 200 220 230 370
</TABLE>
* $100 INVESTED ON 3/12/96 IN STOCK OR INDEX-
INCLUDING REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDING DECEMBER 31.
62
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of April 14, 2000, certain
information with respect to the beneficial ownership of our Common Stock by (i)
each person known by us to own beneficially more than 5% of the outstanding
shares of our Common Stock, (ii) each of our directors and executive officers
and (iii) all of our directors and executive officers as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL CLASS
OWNERSHIP(1)
- -------------------------------------------------------------------------------- ---------------------- ------------
<S> <C> <C>
MAC Music LLC (2).............................................................. 4,584,737 36.6
SK-Palladin Partners, L.P. (3)................................................. 4,584,737 36.6
Steven Devick (4).............................................................. 2,451,510 24.2
Andrew J. Filipowski (5)....................................................... 1,038,122 12.3
Douglas Laux (6) .............................................................. 756,400 8.7
Craig Duchossois (7)........................................................... 492,567 6.0
Geoffrey W. Holmes (8)......................................................... 245,600 3.1
Thomas R. Leavens (9).......................................................... 197,500 2.4
Robert A. Morgado (2)......................................................... 103,900 1.3
Carl D. Harnick (10)........................................................... 52,900 *
Michael P. Cullinane (11)..................................................... 48,900 *
Paul Humenansky (12).......................................................... 46,900 *
Hank Caldwell (13)............................................................. 3,333 *
Mark J. Schwartz (3).......................................................... 2,900 *
David Bauman (14).............................................................. 2,900 *
Brent Gordon .................................................................. - -
All Executive Officers and Directors as a Group
(14 Persons) (2)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12)(13)(14) 5,443,432 45.1
</TABLE>
- ------------------
* Less than one percent
(1) Unless otherwise indicated below, the persons in the above table have
sole voting and investment power with respect to all shares shown as
beneficially owned by them.
(2) MAC Music L.L.C. ("MAC") shares voting and investment power with respect
to 10,000 shares of Series B Convertible Preferred Stock plus accrued
interest, which convert into 2,352,737 shares of Common Stock, including
interest that accrues within 60 days, and 2,232,000 shares of Common
Stock underlying a warrant to purchase Common Stock issued by us to MAC
which is currently exercisable. Alpine Equity Partners, L.P. ("AEP, LP")
and Maroley Media Group, L.L.C. ("Maroley") are the managing members of
MAC. Alpine Equity Partners, L.L.C. ("AEP, L.L.C.") is the general
partner of AEP, L.P. The executive officers of AEP, LLC (the "AEP
Executive Officers") are Oded Aboodi, Chairman, President and Chief
Executive Officer, Richard D. Goldstein, Executive Vice President and
Senior Managing Director, and Bruce M. Greenwald, Executive Vice
President and Senior Managing Director. Messrs. Aboodi, Goldstein, and
Greenwald, by virtue of their respective capacities as Chairman,
Executive Vice President, and Executive Vice President, collectively
have the ability to direct the investment and voting decisions of AEP,
LLC and as such they may be deemed to have shared investment and
voting discretion with respect to securities beneficially owned by
AEP, LLC
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<PAGE>
through AEP, LP. Accordingly, AEP, LP, AEP, LLC and Messrs. Aboodi,
Goldstein and Greenwald, in their capacities as the AEP Executive
Officers of AEP, LLC, each may be deemed a beneficial owner of the
Common Stock beneficially owned by MAC. The principal business and
principal offices of MAC, AEP, LP, AEP, LLC, Messrs. Aboodi, Goldstein
and Greenwald is 1285 Avenue of the Americas, 21st Floor, New York, New
York 10019. Mr. Morgado is the Chairman of Maroley. Mr. Morgado, by
virtue of his capacity as a managing member of Maroley, has the ability
to direct the investment and voting decisions of Maroley and as such Mr.
Morgado may be deemed to have shared investment and voting discretion
with respect to securities beneficially owned by Maroley. Accordingly,
Maroley and Mr. Morgado each may be deemed a beneficial owner of Common
Stock beneficially owned by MAC. In addition to the 4,584,737 shares of
Common Stock over which Morgado and Maroley share voting and investment
discretion as described above, each of Mr. Morgado and Maroley,
respectively, has sole power to direct the voting and disposition of
101,000 shares and 100,000 shares, respectively, of Common Stock. The
address of the principal business and principal offices of Maroley and
Mr. Morgado is 70 East 55th Street, 26th Floor, New York, New York 10022.
(3) SK-Palladin Partners, L.P. ("Palladin") shares voting and investment
power with respect to 10,000 shares of Series B Convertible Preferred
Stock plus accrued interest, which convert into 2,352,737 shares of
Common Stock, including interest that accrues within 60 days, and
2,232,000 shares of Common Stock underlying a warrant to purchase
Common Stock issued by the Company to Palladin which is currently
exercisable. SK-Palladin Holdings, L.P. ("Palladin Holdings") is the
general partner of SK-Palladin Partners, L.P. ("Palladin").
SK-Palladin Gen Par, Inc. ("Palladin Gen Par") is the general partner
of Palladin Holdings. Mr. Schwartz is the sole executive officer of
Palladin Gen Par in his capacity as Chief Executive Officer,
President, Secretary and Treasurer. Mr. Schwartz, in his capacity as
the sole executive officer and controlling stockholder of Palladin Gen
Par has discretion to direct the investment and voting decisions of
Palladin Gen Par and as such Mr. Schwartz may be deemed to have shared
investment and voting discretion with respect to securities
beneficially owned by Palladin Gen Par through Palladin Holdings and
Palladin. Accordingly, Palladin Holdings, Palladin Gen Par and Mr.
Schwartz in his capacity as the sole executive officer and controlling
stockholder of Palladin Gen Par, each may be deemed a beneficial owner
of the Common Stock owned by Palladin. The principal business and
principal offices of Palladin, Palladin Holdings, Palladin Gen Par and
Mr. Schwartz is One Rockefeller Plaza, 10th Floor, New York, New York
10020.
(4) Includes voting and investment power with respect to 2,500 shares of
Series C Convertible Preferred Stock plus accrued interest, which
convert into 588,184 shares of Common Stock, including interest that
accrues within 60 days. Includes 588,542 shares of Common Stock
underlying warrants to purchase Common Stock which are currently
exercisable. Also includes 1,032,245 shares underlying stock options
that are exercisable within 60 days. The address of Mr. Devick is c/o
Platinum Entertainment, Inc., 2001 Butterfield Road, Suite 1400,
Downers Grove, Illinois 60515.
(5) Includes 99,067 shares held by Platinum Venture Partners I, L.P. ("PVP
I"). Mr. Filipowski is the President, Chief Executive Officer and a
stockholder of the general partner of PVP I, and in such capacities may
be deemed to have voting and investment power with respect to shares held
by PVP I. Mr. Filipowski disclaims beneficial ownership of such shares.
Includes 365,625 shares of Common Stock underlying a warrant to purchase
Common Stock held in the name of PVP II, which is currently exercisable.
Mr. Filipowski disclaims beneficial ownership of such shares. Includes
88,330 shares of Common Stock underlying a warrant to purchase Common
Stock which is currently exercisable. Also includes 36,900 shares
underlying stock options that are currently exercisable. The address of
Mr. Filipowski is c/o divine interVentures, inc., 4225 Naperville Road,
Suite 400, Lisle, Illinois 60532.
(6) Includes 756,300 shares underlying stock options that are currently
exercisable.
(7) Includes 201,667 shares of Common Stock underlying a warrant to purchase
Common Stock which is currently exercisable. Also includes 41,000 shares
underlying stock options that are currently exercisable.
(8) Includes an aggregate of 100,000 shares of Common Stock underlying
warrants to purchase Common Stock issued to GWH & Associates, LLC,
("GWH"). In his capacity as President of GWH, Mr. Holmes may be deemed a
beneficial owner of the Common Stock held by GWH.
(9) Such 197,500 shares consist of shares underlying stock options that are
exercisable within 60 days.
(10) Includes 50,000 shares of Common Stock underlying a warrant to purchase
Common Stock issued to Mr. Harnick which is currently exercisable. Also
includes 2,900 shares underlying stock options that are currently
exercisable.
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(11) Includes 40,900 shares underlying stock options that are currently
exercisable.
(12) Includes 40,900 shares underlying stock options that are currently
exercisable.
(13) Such 3,333 shares consist of shares underlying stock options that are
currently exercisable.
(14) Such 2,900 shares consist of shares underlying stock options that are
currently exercisable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
We entered a distribution agreement, dated August 20, 1998, with
Envisage Multimedia LLC pursuant to 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. Envisage is a
partnership owned by two of our directors, Geoffrey Holmes and Robert Morgado.
We entered into Consulting Agreements, each dated as of December 12,
1997, with each of MAC Music LLC and Palladin Capital Group, Inc. We pay each
consulting group an annual fee in the amount of $200,000 for its services. Each
consulting group has agreed to provide us consulting services in connection with
(i) management and strategic planning, (ii) the identification of financing,
acquisition, divestiture, joint venture and licensing opportunities and (iii)
other matters relating to our day-to-day business and operations, or any of our
subsidiaries or affiliated companies, as our Chief Executive Officer or our
Board of Directors may from time to time reasonably request. The term of each
agreement is for five years.
We engaged PLATINUM technology International, inc., of which three of
our directors were executive officers, to provide consultation for the upgrade
of our computer systems. During fiscal 1999, we issued PLATINUM technology
International, inc. 75,246 shares of Common Stock in consideration for $527,000
of consulting services. PLATINUM technology International, inc. was acquired
by Computer Associates in June 1999. To the extent the net proceeds to
Computer Associates upon liquidation of the shares issued in consideration of
payment for such consulting services is less than the value of such shares on
the date of issuance, we have agreed to issue such additional shares to
Computer Associates as shall be necessary to make up the difference between
the initial value of the shares and their liquidation value. To the extent
the liquidation value of the shares exceeds the initial value of the shares,
Computer Associates will retain 10% of such excess value and shall allow us
to supply the remaining excess value toward outstanding invoices issued
pursuant to consulting services provided to us.
During the year ended December 31, 1999, we borrowed $1,028,000 from
Steve Devick, our Chairman of the Board, Chief Executive Officer and President.
In addition, we borrowed $300,000 from Craig Duchossois, a member of our Board
of Directors. Both borrowings bore interest of 11% per annum. Interest accrued
on these loans during the year ended December 31, 1999, was approximately
$54,000.
On December 30, 1999, we signed a license agreement with
LiveOnTheNet.com, which hosts a variety of video and audio programming
showcasing local and national advertisers. Under the terms of the agreement,
we agreed to license to LiveOnTheNet the right to reproduce, advertise,
market, promote and distribute our catalog of master recordings for free
promotional digital downloads through LiveOnTheNet.com. Our digital download
site HeardOn.com will be linked to LiveOnTheNet.com as a sub-domain. The site
will also feature streaming audio, video, graphics and photos of live
performances, interviews, recording sessions, and other events, collectively
termed "webcasting". Information concerning visitors to HeardOn.com and
LiveOnTheNet.com who download master recordings will be jointly owned by the
parties. The initial term and any renewal term of the agreement extends for
the period of time it takes to achieve both 20,000,000 page views and 500,000
qualified visitors for the combined sites. The initial term or any renewal
term may be terminated at our option at any time 3 years after the effective
date of the agreement. The agreement may be renewed at the option of
LiveOnTheNet for two additional terms, subject to certain limitations. In
January 2000, we received $2,000,000 for the grant of rights during the
initial term of which $200,000 will be held in escrow and is payable within
10 days of the end of the initial term of the agreement provided we fulfill
our obligations under the agreement. An additional $2,000,000 shall be
payable to us at the commencement of each renewal term, if any. Divine
interVentures, inc. has a greater than 50% ownership interest in
LiveOnTheNet. Three of our directors, Andrew Filipowski, Michael Cullinane
and Paul Humenansky, are executive officers and shareholders of divine
interVentures, inc.
65
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K.
A. Exhibits and Financial Statement Schedules
1. All financial statement schedules are omitted because such schedules
are not required or the information required has been presented in the
financial statements included in this filing.
2. The following exhibits are filed with this Report or incorporated by
reference as set forth below.
<TABLE>
<CAPTION>
Exhibit
Number
---------
<S><C>
4.1 Registration Rights Agreement, dated April 15, 1999, among
Platinum Entertainment, Inc., Steven D. Devick, Craig J.
Duchossois and Andrew J. Filipowski.
4.2 Certificate of the Powers, Designations, Preferences and Rights of
the Series D Preferred Stock, dated April 14, 1999, governing
Platinum Entertainment, Inc.'s Series D Convertible Preferred
Stock, par value $.001 per share.
4.3 Warrant, dated April 15, 1999, for 504,167 shares of Common Stock,
par value $.001 per share, of Platinum Entertainment, Inc. issued
to Steven D. Devick.
4.4 Warrant, dated April 15, 1999, for 201,667 shares of Common Stock,
par value $.001 per share, of Platinum Entertainment, Inc. issued
to Craig J. Duchossois.
4.5 Warrant, dated April 15, 1999, for 88,330 shares of Common Stock,
par value $.001 per share, of Platinum Entertainment, Inc. issued
to Andrew J. Filipowski.
10.1 Employment Agreement, dated December 15, 1998, between the
Registrant and Brent Gordon, is herein incorporated by reference
to the Quarterly Report as filed on Form 10-Q for the quarterly
period ended March 31, 1999, filed with the Commission on May 17,
1999.
10.2 Fourth Amendment to Credit Agreement, dated August 11, 1998,
between the Registrant and First Source Financial LLP (First
Source), is herein incorporated by reference to the Quarterly
Report as filed on Form 10-Q for the quarterly period ended
September 30, 1999, filed with the Commission on November 15, 1999
("Third Quarter 1999 10-Q").
10.3 Fifth Amendment to Credit Agreement, dated October 13, 1999,
between the Registrant and First Source, is herein incorporated by
reference to the Third Quarter 1999 10-Q.
10.4 Employment Agreement, dated March 1, 1999, between the Registrant
and Hank Caldwell.
23.1 Consent of Ernst & Young LLP.
27. Financial Data Schedule.
</TABLE>
B. Reports on Form 8-K. None.
66
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, we certify
that we have reasonable grounds to believe that we meet all of the requirements
for filing on Form 10-K and we have duly caused this Report to be signed on our
behalf by the undersigned, thereunto duly authorized, in the City of Downers
Grove, State of Illinois, on April 14, 2000.
Platinum Entertainment, Inc.
By: /s/ STEVEN DEVICK
---------------------------------
Steven Devick
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
In accordance with the requirements of the Securities Act of 1933, as
amended, this Annual Report was signed by the following persons in the
capacities on April 14, 2000.
<TABLE>
<CAPTION>
Signature Title
- -------------------------------------------------------------------------------
<S> <C>
/s/ STEVEN DEVICK Chairman, President and Chief Executive
- -----------------------------------
Steven Devick Officer and Director (principal executive,
financial and accounting officer)
/s/ DOUGLAS C. LAUX
- -----------------------------------
Douglas C. Laux Director
/s/ DAVID S. BAUMAN Director
- -----------------------------------
David S. Bauman
/s/ MICHAEL P. CULLINANE Director
- -----------------------------------
Michael P. Cullinane
/s/ CRAIG J. DUCHOSSOIS Director
- -----------------------------------
Craig J. Duchossois
/s/ ANDREW J. FILIPOWSKI Director
- -----------------------------------
Andrew J. Filipowski
Director
- -----------------------------------
Carl D. Harnick
Director
- -----------------------------------
Geoffrey W. Holmes
/s/ PAUL L. HUMENANSKY Director
- -----------------------------------
Paul L. Humenansky
Director
- -----------------------------------
Robert J. Morgado
/s/ MARK J. SCHWARTZ Director
- -----------------------------------
Mark J. Schwartz
</TABLE>
67
<PAGE>
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement"), dated as of
April 9, 1999, is among Platinum Entertainment, Inc., a Delaware corporation
(the "COMPANY"), Steven Devick, Andrew Filipowski, and Craig Duchossois
(collectively, the "Series D Purchasers").
WHEREAS, the Company and the Series D Purchasers deem it desirable to
enter into this Agreement in order to induce the Series D Purchasers to purchase
an aggregate of up to 4,200 shares of Series D Preferred Stock, par value $.001
per share (the "SERIES D PREFERRED STOCK") and warrants (the "WARRANTS",
together with the Series D Preferred Stock, the "SECURITIES") for up to an
aggregate of 847,000 shares of common stock of the Company, par value $.001 per
share ("COMMON STOCK"), such securities to be issued and sold to the Series D
Purchasers on Wednesday, April 14, 1999.
In consideration of the mutual promises and covenants herein contained
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto hereby agree as follows:
1. DEFINITIONS.
The terms defined in this Section 1 shall have the following meanings
for all purposes of this Agreement:
"Act" means the Securities Act of 1933, as amended, or any superseding
Federal statute, and the rules and regulations promulgated thereunder, all as
the same shall be in effect from time to time. References to a particular
section of the Securities Act of 1933, as amended, shall include a reference to
the comparable section, if any, of any such superseding Federal statute.
"Business Day" means any day other than a Saturday, Sunday or federal
holiday, and consists of the time period from 12:00 a.m. through 12:00 midnight,
New York City time.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any superseding Federal statute, and the rules and regulations promulgated
thereunder, all as the same shall be in effect at the time. Reference to a
particular section of the Securities Exchange Act of 1934, as amended, shall
include a reference to the comparable section, if any, of such superseding
Federal statute.
"Investment Agreement" means The Investment Agreement, dated October
12, 1997, as amended, among the Company, MAC Music LLC and SK-Palladin Partners,
LP.
"Investors" means MAC Music LLC together with SK-Palladin Partners,
LP.
<PAGE>
"Investor Warrants" means the warrants initially issued to the
Investors pursuant to the Investment Agreement.
"Person" means any individual, firm, corporation, partnership,
limited liability company or partnership, trust, incorporated or
unincorporated association, joint venture, joint stock company, government
(or an agency or political subdivision thereof) or other entity of any kind,
and shall include any successor (by merger or otherwise) of such entity.
"Registrable Securities" shall mean the shares of Common Stock issued
or issuable upon conversion or exercise of the Securities.
"SEC" means the Securities and Exchange Commission.
"Series B Preferred Stock" means the Series B Convertible Preferred
Stock, par value $.001 per share, initially issued to the Investors pursuant
to the Investment Agreement.
"Series D Preferred Stock" means the Series D Convertible Preferred
Stock, par value $.001 per share, issued to the Series D Purchasers.
"Transfer" means, with respect to any Securities, any sale,
assignment, transfer or disposition by gift or otherwise, including without
limitation, any distribution in liquidation or otherwise by a corporation or
partnership or other Person.
2. SECURITIES SUBJECT TO THIS AGREEMENT.
2.1. REGISTRABLE SECURITIES. Registrable Securities will cease to be
Registrable Securities when such Registrable Securities are sold pursuant to
Rule 144 under the Act or a registration statement covering such Registrable
Securities has been declared effective under the Securities Act by the SEC and
such Registrable Securities have been disposed of pursuant to such effective
registration statement.
2.2. HOLDERS OF REGISTRABLE SECURITIES. A Person is deemed to be a
holder of Registrable Securities whenever such Person owns of record
Registrable Securities, or holds a warrant to purchase, or a security
convertible into or exercisable or exchangeable for, Registrable Securities
whether or not such acquisition or conversion has actually been effected and
disregarding any legal restrictions upon the exercise of such rights. If the
Company receives conflicting instructions, notices or elections from two or
more persons with respect to the same Registrable Securities, the Company may
act upon the basis of the instructions, notice or election received from the
registered owner of such Registrable Securities. Registrable Securities
issuable upon exercise of an option or upon conversion of another security
shall be deemed outstanding.
2
<PAGE>
3. PIGGY-BACK REGISTRATION.
3.1. PIGGY-BACK RIGHTS. If the Company proposes to file a
registration statement under the Act with respect to an offering by the
Company for its own account or for the account of any other holder of
registration rights exercising demand registration rights (such other holder
or registration rights being "DEMAND HOLDER") of any class of equity
securities (other than a registration statement on Form S-4 or S-8 or any
successor or other forms not available for registering equity securities for
sale to the public), then the Company shall give written notice of such
proposed filing to each holder of Registrable Securities at least thirty (30)
days before the anticipated filing date, and such notice shall describe in
detail the proposed registration and distribution (including those
jurisdictions where registration under the securities or blue sky laws is
intended) and offer such holders the opportunity to register such number of
Registrable Securities as each such holder may request. The Company shall
use its best efforts (within ten (10) days of the notice provided for in the
preceding sentence) to cause the managing underwriter or underwriters of a
proposed underwritten offering (the "UNDERWRITER") to permit the holders of
Registrable Securities that have requested to participate in the
registration for such offering to include such Registrable Securities in such
offering on the same terms and conditions as the securities of the Company or
the Demand Holder, as the case may be, included therein. Notwithstanding the
foregoing, (x) if in the opinion of the Underwriter the total amount or kind
of securities which the holders of Registrable Securities, the Company and
any other persons or entities intend to include in such offering (the "TOTAL
SECURITIES") is sufficiently large so as to have a material adverse effect on
the distribution of the Total Securities, then the amount or kind of
securities to be offered for the account of such holders of Registrable
Securities and such other persons or entities other than (i) the Company, if
such registration is being filed for the Company's own account, or (ii) the
Demand Holders, if such registration is being made at the demand of a Demand
Holder, shall be reduced pro rata (to zero, if necessary) to the extent
necessary to reduce the Total Securities to the amount recommended by the
Underwriter and (y) holders of Registrable Securities shall have no piggyback
rights in connection with a registration statement filed as a result of the
exercise of a demand registration right by the holders of Series B Preferred
Stock or Investor Warrants (or, in each case, shares of Common Stock issued
or issuable upon exercise thereof) pursuant to the Investment Agreement
unless holders of (x) 66 2/3% of the outstanding shares of Series B Preferred
Stock, if any, and (y) 66 2/3% in interest of the shares of Common Stock
underlying the Investor Warrants consent in writing to the grant of such
piggyback rights.
3.2. EXPENSES. The Company shall bear all Registration Expenses in
connection with any registration pursuant to this Section 3.
3
<PAGE>
4. HOLDBACK AGREEMENTS.
4.1. RESTRICTIONS ON PUBLIC SALE BY HOLDERS OF REGISTRABLE SECURITIES.
To the extent not inconsistent with applicable law, each holder of Registrable
Securities participating in such registration agrees not to effect any public
sale or distribution of any Registrable Securities being registered or of any
securities convertible into or exchangeable or exercisable for such Registrable
Securities, including a sale pursuant to Rule 144 under the Securities Act,
during the ten (10) Business Days prior to, and during the ninety (90) days
beginning on, the effective date of such registration statement (except as part
of such registration), if and to the extent requested by the Company in the case
of a non-underwritten public offering or if and to the extent requested by the
Underwriter in the case of an underwritten public offering.
4.2. RESTRICTIONS ON PUBLIC SALE BY THE COMPANY. The Company
agrees not to effect any public sale or distribution of any of its equity
securities, or any securities convertible into or exchangeable or exercisable
for such equity securities (except pursuant to registrations on Form S-4 or
S-8 or any successor or other forms not available for registering equity
securities for sale to the public) during the ten (10) Business Days prior
to, and during the ninety (90) day period beginning on, the later of (i) the
effective date of any registration statement in which the holders of
Registrable Securities are participating and (ii) the commencement of a
public distribution of the Registrable Securities pursuant to such
registration statement.
5. REGISTRATION PROCEDURES.
5.1. OBLIGATIONS OF THE COMPANY. Whenever registration of
Registrable Securities has been requested pursuant to Section 3 of this
Agreement, the Company shall use reasonable efforts to effect the
registration and sale of such Registrable Securities in accordance with the
intended method of distribution thereof, and in connection with any such
request, the Company shall, as soon as reasonably practicable:
(a) prepare and file with the SEC (in any event not later than
thirty (30) business days after receipt of a request to file a registration
statement with respect to Registrable Securities) a registration statement
on any form for which the Company then qualifies which counsel for the
Company shall deem appropriate and which form shall be available for the
sale of such Registrable Securities in accordance with the intended method
of distribution thereof, and use its best efforts to cause such
registration statement to become effective under the Act; provided,
however, that before filing a registration statement or prospectus or any
amendments or supplements thereto, the Company shall (A) provide counsel
selected by the holders of a majority of the Registrable Securities being
registered
4
<PAGE>
in such registration ("HOLDERS' COUNSEL") with an opportunity to
participate in the preparation of such registration statement and each
prospectus included therein (and each amendment or supplement thereto) to
be filed with the SEC, which documents shall be subject to the review of
Holders' Counsel, and (B) notify the Holders' Counsel and each seller of
Registrable Securities of any stop order issued or threatened by the SEC
and take all reasonable action required to prevent the entry of such stop
order or to remove it if entered;
(b) prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective for a period which will terminate when all Registrable
Securities covered by such registration statement have been sold (but not
before the expiration of the ninety (90) day period referred to in
Section 4(3) of the Act and Rule 174 thereunder, if applicable), and comply
with the provisions of the Act with respect to the disposition of all
securities covered by such registration statement during such period in
accordance with the intended methods of disposition by the sellers thereof
set forth in such registration statement;
(c) furnish to each seller of Registrable Securities, prior to
filing a registration statement, copies of such registration statement as
is proposed to be filed, and thereafter such number of copies of such
registration statement, each amendment and supplement thereto (in each case
including all exhibits thereto), the prospectus included in such
registration statement (including each preliminary prospectus) and such
other documents as each such seller may reasonably request in order to
facilitate the disposition of the Registrable Securities owned by such
seller;
(d) use reasonable efforts to register or qualify such
Registrable Securities under such other securities or blue sky laws of such
jurisdictions as any seller of Registrable Securities requests, and to
continue such qualification in effect in such jurisdiction for as long as
is permissible pursuant to the laws of such jurisdiction, or for as long as
any such seller requests or until all of such Registrable Securities are
sold, whichever is shortest, and do any and all other acts and things which
may be reasonably necessary or advisable to enable any such seller to
consummate the disposition in such jurisdictions of the Registrable
Securities owned by such seller; provided, however, that the Company shall
not be required to (A) qualify generally to do business in any jurisdiction
where it would not otherwise be required to qualify but for this Section
5.1(d), (B) subject itself to taxation in any such jurisdiction or (C)
consent to general service of process in any such jurisdiction;
5
<PAGE>
(e) use reasonable efforts to cause the Registrable Securities
covered by such registration statement to be registered with or approved by
such other governmental agencies or authorities as may be necessary by
virtue of the business and operations of the Company to enable the seller
or sellers of Registrable Securities to consummate the disposition of such
Registrable Securities;
(f) notify each seller of Registrable Securities at any time
when a prospectus relating thereto is required to be delivered under the
Act, upon discovery that, or upon the happening of any event as a result of
which, the prospectus included in such registration statement contains an
untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances under which they were made,
and the Company shall promptly prepare a supplement or amendment to such
prospectus and furnish to each seller a reasonable number of copies of a
supplement to or an amendment of such prospectus as may be necessary so
that, after delivery to the purchasers of such Registrable Securities, such
prospectus shall not contain an untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the circumstances
under which they were made;
(g) enter into and perform customary agreements (including an
underwriting agreement in customary form with the Underwriter, if any,
selected as provided in Section 3) and take such other actions as are
reasonably required in order to facilitate the disposition of such
Registrable Securities;
(h) make available for inspection by any seller of Registrable
Securities, any managing underwriter participating in any disposition
pursuant to such registration statement, Holders' Counsel and any attorney,
accountant or other agent retained by any such seller or any managing
underwriter (each, an "INSPECTOR" and collectively, the "INSPECTORS"), all
financial and other records, pertinent corporate documents and properties
of the Company and its subsidiaries (collectively, the "RECORDS") as shall
be reasonably necessary to enable them to exercise their due diligence
responsibility, and cause the Company's and its subsidiaries' officers,
directors and employees, and the independent public accountants of the
Company, to supply all information reasonably requested by any such
Inspector in connection with such registration statement;
(i) if such sale is pursuant to an underwritten offering, obtain
a "cold comfort" letter from the Company's independent public accountants
in customary form and covering such matters of the type customarily covered
by
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"cold comfort" letters as Holders' Counsel or the managing underwriter
reasonably requests;
(j) furnish, at the request of any seller of Registrable
Securities on the date such securities are delivered to the underwriters
for sale pursuant to such registration or, if such securities are not being
sold through underwriters, on the date the registration statement with
respect to such securities becomes effective, an opinion, dated such date,
of counsel representing the Company for the purposes of such registration,
addressed to the underwriters, if any, and to the seller making such
request, covering such legal matters with respect to the registration in
respect of which such opinion is being given as such seller may reasonably
request and are customarily included in such opinions;
(k) otherwise use reasonable efforts to comply with all
applicable rules and regulations of the SEC, and make available to its
security holders, as soon as reasonably practicable but no later than
fifteen (15) months after the effective date of the registration statement,
an earnings statement covering a period of twelve (12) months beginning
after the effective date of the registration statement, in a manner which
satisfies the provisions of Section 11(a) of the Act;
(l) cause all such Registrable Securities to be listed on each
securities exchange on which similar securities issued by the Company are
then listed (including NASDAQ), provided, that the applicable listing
requirements are satisfied;
(m) provide officers' certificates and other customary closing
documents;
(n) cooperate with each seller of Registrable Securities and
each underwriter participating in the disposition of such Registrable
Securities and their respective counsel in connection with any filings
required to be made with the National Association of Securities Dealers,
Inc. (the "NASD"); and
(o) use reasonable efforts to take all other steps necessary to
effect the registration of the Registrable Securities contemplated hereby.
5.2. NOTICE TO DISCONTINUE. Each holder of Registrable Securities
agrees that, upon receipt of any notice from the Company of the happening of
any event of the kind described in Section 5.1(f), such holder shall
forthwith discontinue disposition of Registrable Securities pursuant to the
registration statement covering such Registrable Securities until such
holder's receipt of the copies of the supplemented or amended prospectus
contemplated by Section 5.1(f) and, if so directed by the Company, such
holder shall deliver to the Company (at the Company's expense) all copies,
other than
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permanent file copies then in such holder's possession, of the prospectus
covering such Registrable Securities which is current at the time of receipt
of such notice. If the Company shall give any such notice, the Company shall
extend the period during which such registration statement shall be
maintained effective pursuant to this Agreement (including without limitation
the period referred to in Section 5.1(b)) by the number of days during the
period from and including the date of the giving of such notice pursuant to
Section 5.1(f) to and including the date when the holder shall have received
the copies of the supplemented or amended prospectus contemplated by and
meeting the requirements of Section 5.1(f).
6. REGISTRATION EXPENSES. The Company shall pay all expenses (other
than underwriting discounts and commissions) arising from or incident to the
performance of, or compliance with, this Agreement, including without
limitation, (i) SEC, stock exchange, NASDAQ and NASD registration and filing
fees, (ii) all fees and expenses incurred in complying with securities or
blue sky laws (including reasonable fees, charges and disbursements of
counsel in connection with blue sky qualifications of the Registrable
Securities), (iii) all printing, messenger and delivery expenses, (iv) the
fees, charges and disbursements of counsel to the Company and of its
independent public accountants and any other accounting and legal fees,
charges and expenses incurred by the Company (including without limitation
any expenses arising from any special audits incident to or required by any
registration or qualification), and (v) any liability insurance or other
premiums for insurance obtained by the Company and the reasonable fees,
charges and expenses of any special experts retained by the Company in
connection with any piggy-back registration pursuant to the terms of this
Agreement, regardless of whether such registration statement is declared
effective. In connection with each registration hereunder, the Company shall
reimburse the holders of Registrable Securities being registered in such
registration for the reasonable fees, charges and disbursements of not more
than one counsel chosen by the holders of a majority of Registrable
Securities being registered in such registration. All of the expenses
described in this Section 6 are referred to herein as "REGISTRATION EXPENSES."
7. INDEMNIFICATION; CONTRIBUTION.
7.1. INDEMNIFICATION BY THE COMPANY. The Company agrees to
indemnify, to the fullest extent permitted by law, each holder of Registrable
Securities, its officers, directors, partners, employees, advisors and agents
and each Person who controls (within the meaning of the Act or the Exchange
Act) such holder from and against any and all losses, claims, damages,
liabilities and expenses (including reasonable costs of investigation)
arising out of or based upon any untrue, or alleged untrue, statement of a
material fact contained in any registration statement, prospectus or
preliminary prospectus or notification or offering circular (as amended or
supplemented if the Company shall have furnished any amendments or
supplements thereto) or arising out of or based upon any omission or alleged
omission to state therein a material fact required to
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be stated therein or necessary to make the statements therein not misleading,
except insofar as the same are caused by or contained in any information
furnished in writing to the Company by such holder expressly for use therein
and provided further that the Company will not be liable to any holder of
Registrable Securities or any person controlling such holder with respect to
any loss, claim, liability, expense, charge or damage arising out of or based
on any untrue statement or alleged untrue statement or omission or alleged
omission to state a material fact in any preliminary prospectus which is
corrected in the prospectus. The Company shall also indemnify any
underwriters of the Registrable Securities, their officers, directors and
employees and each Person who controls such underwriters (within the meaning
of the Act and the Exchange Act) to the same extent as provided above with
respect to the indemnification of the holders of Registrable Securities.
7.2. INDEMNIFICATION BY HOLDERS. In connection with any
registration statement in which a holder of Registrable Securities is
participating pursuant to Section 3 hereof, each such holder shall furnish to
the Company in writing such information with respect to such holder as the
Company may reasonably request or as may be required by law for use in
connection with any such registration statement or prospectus and each
holder, by its participation in such registration, agrees to indemnify, to
the extent permitted by law, the Company, any underwriter retained by the
Company and their respective directors, officers, employees and each Person
who controls the Company or such underwriter (within the meaning of the Act
and the Exchange Act) to the same extent as the foregoing indemnity from the
Company to the holders of Registrable Securities, but only with respect to
any such information furnished in writing by or on behalf of such holder.
7.3. CONDUCT OF INDEMNIFICATION PROCEEDINGS. Any Person entitled
to indemnification hereunder (the "REGISTRATION RIGHTS INDEMNIFIED PARTY")
agrees to give prompt written notice to the indemnifying party (the
"REGISTRATION RIGHTS INDEMNIFYING PARTY") after the receipt by the
Registration Rights Indemnified Party of any written notice of the
commencement of any action, suit, proceeding or investigation or threat
thereof made in writing for which the Registration Rights Indemnified Party
intends to claim indemnification or contribution pursuant to this Agreement;
provided, that the failure so to notify the Registration Rights Indemnifying
Party shall not relieve the Registration Rights Indemnifying Party of any
liability that it may have to the Registration Rights Indemnified Party
hereunder unless, and only to the extent that, such failure results in the
Registration Rights Indemnifying Party's forfeiture of substantial rights or
defenses. If notice of commencement of any such action is given to the
Registration Rights Indemnifying Party as above provided, the Registration
Rights Indemnifying Party shall be entitled to participate in and, to the
extent it may wish, jointly with any other Registration Rights Indemnifying
Party similarly notified, to assume the defense of such action at its own
expense, with counsel chosen by it and satisfactory to such Registration
Rights Indemnified Party. The Registration Rights
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Indemnified Party shall have the right to employ separate counsel in any such
action and participate in the defense thereof, but the fees and expenses of
such counsel (other than reasonable costs of investigation) shall be paid by
the Registration Rights Indemnified Party unless (i) the Registration Rights
Indemnifying Party agrees to pay the same, (ii) the Registration Rights
Indemnifying Party fails to assume the defense of such action with counsel
satisfactory to the Registration Rights Indemnified Party in its reasonable
judgment, (iii) the named parties to any such action (including any impleaded
parties) have been advised by such counsel that either (A) representation of
such Registration Rights Indemnified Party and the Registration Rights
Indemnifying Party by the same counsel would be inappropriate under
applicable standards of professional conduct or (B) there may be one or more
legal defenses available to the Registration Rights Indemnified Party which
are different from or additional to those available to the Registration
Rights Indemnifying Party. No Registration Rights Indemnifying Party shall,
without the prior written consent of each Registration Rights Indemnified
Party, settle, compromise or consent to the entry of any judgment unless such
settlement, compromise or consent includes an unconditional release of the
Registration Rights Indemnified Party from all liability relating thereto.
In either of such cases the Registration Rights Indemnifying Party shall not
have the right to assume the defense of such action on behalf of such
Registration Rights Indemnified Party. No Registration Rights Indemnifying
Party shall be liable for any settlement entered into without its written
consent, which consent shall not be unreasonably withheld, conditioned or
delayed.
7.4. CONTRIBUTION. If the indemnification provided for in this
Section 7 from the Indemnifying Party is unavailable to a Registration Rights
Indemnified Party hereunder in respect of any losses, claims, damages,
liabilities or expenses referred to therein, then the Indemnifying Party, in
lieu of indemnifying such Registration Rights Indemnified Party, shall
contribute to the amount paid or payable by such Registration Rights
Indemnified Party as a result of such losses, claims, damages, liabilities or
expenses in such proportion as is appropriate to reflect the relative fault
of the Registration Rights Indemnifying Party and Registration Rights
Indemnified Party in connection with the actions which resulted in such
losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative faults of such Registration
Rights Indemnifying Party and Registration Rights Indemnified Party shall be
determined by reference to, among other things, whether any action in
question, including any untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact, has been made by,
or relates to information supplied by, such Registration Rights Indemnifying
Party or Registration Rights Indemnified Party, and the parties' relative
intent, knowledge, access to information and opportunity to correct or
prevent such action. The amount paid or payable by a party as a result of
the losses, claims, damages, liabilities and expenses referred to above shall
be deemed to include, subject to the limitations set forth in Sections 7.1,
7.2 and 7.3, any legal or other
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fees, charges or expenses reasonably incurred by such party in connection
with any investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 7.4 were determined by pro rata
allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person.
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8. RULE 144. The Company covenants that it shall file any reports
required to be filed by it under the Exchange Act and the rules and
regulations adopted by the Commission thereunder; and that it shall take such
further action as each holder of Registrable Securities may reasonably
request (including providing any information necessary to comply with Rules
144 and 144A under the Securities Act), all to the extent required from time
to time to enable such holder to sell Registrable Securities without
registration under the Act within the limitation of the exemptions provided
by (a) Rule 144 or Rule 144A under the Act, as such rules may be amended from
time to time, or (b) any similar rules or regulations hereafter adopted by
the SEC. The Company shall, upon the request of any holder of Registrable
Securities, deliver to such holder a written statement as to whether it has
complied with such requirements.
9. MISCELLANEOUS.
9.1. PERFORMANCE; WAIVER. The provisions of this Agreement may be
modified or amended, and waivers and consents to the performance and
observance of the terms hereof may be given by written instrument executed
and delivered by the Company and the Purchasers. The failure at any time to
require performance of any provision hereof shall in no way affect the full
right to require such performance at any time thereafter (unless performance
thereof has been waived in accordance with the terms hereof for all purposes
and at all times by the parties to whom the benefit of such performance is to
be rendered). The waiver by any party to this Agreement of a breach of any
provision hereof shall not be taken or held to be a waiver of any succeeding
breach of such provision of any other provision or as a waiver of the
provision itself.
9.2. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the successors and permitted assigns of the
parties hereto. The Company may not assign any of its rights under this
Agreement, except to a successor-in-interest to the Company, without the
written consent of the Affiliates. No Person other than the parties hereto
and their successors and permitted assigns is intended to be a beneficiary of
this Agreement.
9.3. NOTICES. All notices or other communications given or made
hereunder shall be validly given or made if in writing and delivered by
facsimile transmission or in Person at, mailed by registered or certified
mail, return receipt requested, postage prepaid, or sent by a reputable
overnight courier to, the following addresses (and shall be deemed effective
at the time of receipt thereof).
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If to the Company:
Platinum Entertainment, Inc.
20001 Butterfield Road, Suite 1400
Downers Grove, Illinois 60515
Telecopy: (630) 769-0049
Attention: Chief Executive Officer
with a copies to:
Katten, Muchin & Zavis
525 West Monroe Street, Suite 1600
Chicago, Illinois
Telecopy: (312) 902-1061
Attention: Matthew S. Brown, Esq.
If to the holders of Registrable Securities, to the addresses set
forth on on the stock record books of the Company.
or to such other address as the party to whom notice is to be given may have
previously furnished notice in writing to the other in the manner set forth
above.
9.4. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS APPLICABLE TO
AGREEMENTS MADE AND PERFORMED ENTIRELY WITHIN SUCH STATE. EACH OF THE
PARTIES HERETO AGREES TO SUBMIT TO THE JURISDICTION OF THE STATE AND FEDERAL
COURTS IN THE STATE OF NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT.
9.5. SEVERABILITY. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to
be invalid, void or unenforceable, each of the Company and the Affiliates
directs that such court interpret and apply the remainder of this Agreement
in the manner that it determines most closely effectuates their intent in
entering into this Agreement, and in doing so particularly take into account
the relative importance of the term, provision, covenant or restriction being
held invalid, void or unenforceable.
9.6. HEADINGS; INTERPRETATION. The index and section headings
herein are for convenience only and shall not affect the construction hereof.
References to sections means sections of this Agreement unless the context
otherwise requires. References to herein or hereof mean this Agreement.
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<PAGE>
9.7. ENTIRE AGREEMENT. This Agreement embodies the entire
agreement between the parties relating to the subject matter hereof and
supersedes any and all prior oral or written agreements, representations or
warranties, contracts, understandings, correspondence, conversations, and
memoranda, whether written or oral, between the Company and the Affiliates,
or between or among any agents, representatives, parents, predecessors in
interest or successors in interest, with respect to the subject matter hereof.
9.8. NO THIRD PARTY RIGHTS. Except for the indemnified parties,
this Agreement is intended solely for the benefit of the parties hereto and
is not intended to confer any benefits upon, or create any rights in favor
of, any Person (including, without limitation, any stockholder or debtholder
of the Company) other than the parties hereto.
9.9. REMEDIES FOR BREACH. The parties agree that in addition to
any other rights or remedies which may be available at law or equity, the
parties shall be entitled to seek specific performance of any obligation of
any party hereto.
9.10. COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed to be an original and both of which together shall
be deemed to be one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
PLATINUM ENTERTAINMENT, INC.
By: /s/ Douglas C. Laux
----------------------------------------------
Name: Douglas C. Laux
Title: Chief Operating Officer and
Chief Financial Officer
/s/ Steven D. Devick
--------------------------------------------
Steven D. Devick
/s/ Andrew J. Filipowski
--------------------------------------------
Andrew J. Filipowski
/s/ Craig J. Duchossois
--------------------------------------------
Craig J. Duchossois
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<PAGE>
PLATINUM ENTERTAINMENT, INC.
CERTIFICATE OF THE POWERS, DESIGNATIONS,
PREFERENCES AND RIGHTS OF THE
SERIES D CONVERTIBLE PREFERRED STOCK,
PAR VALUE $.001 PER SHARE
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
The following resolution was duly adopted by the Board of Directors of
Platinum Entertainment Inc., a Delaware corporation (the "Corporation"),
pursuant to the provisions of Section 151 of the General Corporation Law of the
State of Delaware, on April 9, 1999:
RESOLVED that, pursuant to the authority expressly granted to the
Board of Directors of the Corporation by the Certificate of Incorporation of the
Corporation, and pursuant to Section 151(g) of the General Corporation Law of
the State of Delaware, there be created from the 10,000,000 shares of Preferred
Stock, par value $.001 per share (the "Preferred Stock"), of the Corporation
authorized to be issued pursuant to the Certificate of Incorporation, a series
of Preferred Stock consisting of 4,200 shares of Series D Convertible Preferred
Stock (the "Series D Preferred Stock"), the voting powers, designations,
preferences and relative, participating, optional or other special rights of
which, and qualifications, limitations or restrictions thereof, shall be as
follows:
1. DEFINITIONS. As used herein, the following terms shall have the
following meanings:
1.1 "Affiliate" shall mean, with respect to any Person, any
other Person that, directly or indirectly, controls, is controlled by, or is
under common control with, such first Person. For the purpose of this
definition, "control" shall mean, as to any Person, the power to direct or cause
the direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
<PAGE>
1.2 "Affiliate Warrants" shall mean the warrant for an aggregate
of 135,000 shares of Common Stock issued to Platinum Venture Partners I, L.P.,
and the warrant for an aggregate of 315,000 shares of Common Stock issued to
Platinum Venture Partners II, L.P., each such warrant issued on the Closing Date
(as defined in the Investment Agreement).
1.3 "Board of Directors" shall mean the Board of Directors of
the Corporation or, with respect to any action to be taken by the Board of
Directors, any committee of the Board of Directors duly authorized to take such
action.
1.4 "Business Day" shall mean any day other than a Saturday,
Sunday or other day on which commercial banks in the City of New York are
authorized or required by law or executive order to close.
1.5 "Series D Warrants" means the warrant for an aggregate of up
to 847,000 shares of Common Stock to be issued to the initial purchasers of the
Series D Preferred Stock, on the Issue Date.
1.7 "Certificate of Incorporation" shall mean the Certificate of
Incorporation of the Corporation, as amended from time to time.
1.8 "Change of Control" shall mean (i) the direct or indirect
sale, lease, exchange or other transfer of all or substantially all of the
assets of the Corporation to any Person or group of Persons acting in concert as
a partnership or other group within the meaning of Rule 13d-5 under the Exchange
Act (a "GROUP OF PERSONS"), (ii) the merger or consolidation of the Corporation
with or into another corporation with the effect that the then existing
stockholders of the Corporation hold less than 50% of the combined voting power
of the then outstanding securities of the surviving corporation of such merger
or the corporation resulting from such consolidation ordinarily (and apart from
rights accruing under special circumstances) having the right to vote in the
election of directors, (iii) the replacement of a majority of the Board of
Directors, over a two-year period, from the directors who constituted the Board
of Directors at the beginning of such period, and such replacement shall not
have been approved by the Board of Directors (or its replacements approved by
the Board of Directors) as constituted at the beginning of such period, or (iv)
a Person or Group of Persons (other than the Investors and their Affiliates,
employees, partners or members) shall, as a result of a tender or exchange
offer, open market purchases, privately negotiated purchases or otherwise, have
become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange
Act) of securities of the Corporation representing 49% or more of the combined
voting power of the then outstanding securities of the Corporation ordinarily
(and apart from rights accruing under special circumstances) having the right to
vote in the election of directors. Notwithstanding the foregoing, no Change of
Control shall be deemed to have occurred (a) upon the acquisition of any shares
of Common Stock of the Company pursuant to
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the exercise of any warrants issued pursuant to the Investment Agreement, (b)
upon the exercise of any of the rights and privileges granted to each of the
Purchasers pursuant to Section 6.2.5 of the Investment Agreement, (c) upon
the exercise of any rights and privileges granted to the holders of the
Series B Preferred Stock pursuant to Section 5.1 of the Series B Certificate
of Designation or (d) otherwise as a result of the equity ownership or
designation of directors by the Investors or their Affiliates, employees,
partners or members.
1.9 "Class A Common Stock" shall mean the class of Class A
Common Stock, par value $.001 per share, of the Corporation or any other class
of stock resulting from successive changes or reclassifications of such Class A
Common Stock consisting solely of changes in par value, or from par value to no
par value, or as a result of a subdivision or combination.
1.10 "Class B Common Stock" shall mean the class of Class B
Common Stock, par value $.001 per share, of the Corporation or any other class
of stock resulting from successive changes or reclassifications of such Class B
Common Stock consisting solely of changes in par value, or from par value to no
par value, or as a result of a subdivision or combination.
1.11 "Closing Price" of the Common Stock, as of any day, shall
mean (a) the last reported sale price of such stock (regular way), or, in case
no such sale takes place on such day, the average of the closing bid and asked
prices, in either case as reported on the principal national securities exchange
on which such stock is listed or admitted to trading or (b) if the Common Stock
is not listed or admitted to trading on any national securities exchange, the
last reported sale price, or in case no such sale takes place on such day, the
average of the highest reported bid and the lowest reported asked quotation for
the Common Stock, in either case reported on NASDAQ, or a similar service if
NASDAQ is no longer reporting such information.
1.12 "Common Stock" shall mean the class of Common Stock, par
value $.001 per share, of the Corporation or any other class of stock resulting
from successive changes or reclassifications of such Common Stock consisting
solely of changes in par value, or from par value to no par value, or as a
result of a subdivision or combination.
1.13 "Common Stock Conversion Rate" shall mean, as of any date, a
rate for each share of Series D Preferred Stock equal to (i) the Liquidation
Value thereof plus all accrued and unpaid dividends thereon (whether or not
declared), divided by (ii) the Conversion Price in effect as of such date.
1.14 "Conversion Price" shall mean $7.00 per share of Common
Stock. The Conversion Price as determined in accordance with the foregoing
shall be adjusted from time to time in accordance with the provisions of
Section 4.
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1.15 "Current Market Price" shall mean, with respect to each
share of Common Stock as of any date, the average of the daily Closing Prices
per share of Common Stock for the 10 consecutive Trading Days commencing 15
Trading Days prior to such date; provided that if on any such date the shares of
Common Stock are not listed or admitted for trading on any national securities
exchange or quoted by NASDAQ or a similar service, the Current Market Price for
a share of Common Stock shall be the fair market value of such share as
determined in good faith by the Board of Directors; PROVIDED, HOWEVER, that if
the holders of the shares of Series B Preferred Stock disagree with the Board's
determination of fair market value for purposes of the Series B Preferred Stock,
the fair market value for purposes of the Series D Preferred Stock shall be the
fair market value determined for purposes of the Series B Preferred Stock.
1.16 "Dividend Amount" shall mean an amount per share of Series D
Preferred Stock (rounded to the nearest $ .01) equal to (1) $30 per $1,000
Liquidation Value of Series D Preferred Stock during the first year after the
Issue Date, (2) $35 per $1,000 Liquidation Value of Series D Preferred Stock
during the second year after the Issue Date, (3) $40 per $1,000 Liquidation
Value of Series D Preferred Stock during the third year after the Issue Date,
(4) $45 per $1,000 Liquidation Value of Series D Preferred Stock during the
fourth and fifth years after the Issue Date and (5) $50 per $1,000 Liquidation
Value of Series D Preferred Stock at all times after the fifth anniversary of
the Issue Date.
1.17 "Dividend Rate" shall mean (1) 3% per quarter during the
first year after the Issue Date, (2) 3.5% per quarter during the second year
after the Issue Date, (3) 4% per quarter during the third year after the Issue
Date, (4) 4.5% per quarter during the fourth and fifth years after the Issue
Date and (5) 5% per quarter at all times after the fifth anniversary of the
Issue Date.
1.18 "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
1.19 "Excluded Securities" means (a) shares of Common Stock
issued upon conversion or exercise of convertible securities, warrants and
options of the Corporation outstanding on the Issue Date, (b) shares of Common
Stock, and options to purchase such shares, issued to officers, directors,
employees or former employees of, or consultants to, the Corporation or any of
its subsidiaries pursuant to any equity incentive plan, agreement or other
arrangement which has been approved by a vote of at least two-thirds (2/3rds) of
the Board of Directors, (c) shares of Common Stock issued upon conversion of
shares of the Company's Series B Preferred Stock, (d) shares of Common Stock
issued upon exercise of the warrants issued to the purchasers of the shares of
Series B Preferred Stock pursuant to the Investment Agreement, (e) shares of
Common Stock issued upon conversion of shares of the Series C Preferred Stock,
(f) shares of Common Stock issued upon exercise of
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<PAGE>
the Affiliate Warrants and (g) shares of Common Stock issued upon exercise of
the Harnick Warrant (h) shares of Common Stock issued upon conversion of
shares of the Series D Preferred Stock, and (i) shares of common Stock issued
upon exercise of the Series D Warrants.
1.20 "Harnick Warrant" means the warrant to purchase 50,000
shares of Common Stock to be issued to Carl D. Harnick on the Closing Date (as
defined in the Investment Agreement).
1.21 "Issue Date" shall mean April 14, 1999.
1.22 "Investment Agreement" shall mean the Investment Agreement,
dated as of October 12, 1997, as amended, between the Corporation, the Investors
and certain other parties thereto, as hereafter amended from time to time.
1.23 "Investors" shall mean MAC Music LLC, a Delaware limited
liability company, and SK-Palladin Partners, LP, a Delaware limited partnership.
1.24 "Junior Stock" shall mean the Common Stock, the Class A
Common Stock, the Class B Common Stock, the Series A-1 Preferred Stock, the
Series A-2 Preferred Stock and the shares of any other class or series of stock
of the Corporation which, by the terms of the Certificate of Incorporation or of
the instrument by which the Board of Directors, acting pursuant to authority
granted in the Certificate of Incorporation, shall fix the relative rights,
preferences and limitations thereof, shall be junior to the Series D Preferred
Stock in respect of the right to receive dividends and to participate in any
distribution of assets other than by way of dividends.
1.24 "Liquidation Value" shall have the meaning assigned to such
term in Section 6.1 hereof.
1.26 "NASDAQ" shall mean the National Association of
Securities Dealers, Inc. Automated Quotation System.
1.27 "Parity Stock" shall mean shares of any other class or
series of stock of the Corporation which, by the terms of the Certificate of
Incorporation or of the instrument by which the Board of Directors, acting
pursuant to authority granted in the Certificate of Incorporation, shall fix the
relative rights, preferences and limitations thereof, shall, in the event that
the stated dividends thereon are not paid in full, be entitled to share ratably
with the Series D Preferred Stock in the payment of dividends, including
accumulations, if any, in accordance with the sums which would be payable on
such shares if all dividends were declared and paid in full, and shall, in the
event that the amounts payable thereon on liquidation are not paid in full, be
entitled to share ratably with the Series D
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Preferred Stock in any distribution of assets other than by way of dividends
in accordance with the sums which would be payable in such distribution if
all sums payable were discharged in full; PROVIDED, HOWEVER, that the term
"Parity Stock" shall be deemed to refer (i) in Section 2.2 hereof, to any
stock which is Parity Stock in respect of the right to receive dividends and
(ii) in Section 6 hereof, to any stock which is Parity Stock in respect of
any distribution of assets other than by way of dividends.
1.28 "Person" shall mean any individual, corporation,
partnership, joint venture, association, joint-stock company, trust, limited
liability company, unincorporated organization, estate, other entity or
government or any agency or political subdivision thereof.
1.29 "Pro Rata Repurchase" shall mean any purchase of shares of
Common Stock by the Corporation or by any of its subsidiaries whether for cash,
shares of capital stock of the Corporation, other securities of the Corporation,
evidences of indebtedness of the Corporation or any other Person or any other
property (including, without limitation, shares of capital stock, other
securities or evidences of indebtedness of a subsidiary of the Corporation), or
any combination thereof, effected while any of the shares of Series D Preferred
Stock are outstanding, which purchase is subject to Section 13(e) of the
Exchange Act or is made pursuant to an offer made available to all holders of
Common Stock.
1.30 "Senior Stock" shall mean the Series B Preferred Stock, the
Series C Preferred Stock and the shares of any class or series of stock of the
Corporation which, by the terms of the Certificate of Incorporation or of the
instrument by which the Board of Directors, acting pursuant to authority granted
in the Certificate of Incorporation, shall fix the relative rights, preferences
and limitations thereof, shall be senior to the Series D Preferred Stock in
respect of the right to receive dividends or to participate in any distribution
of assets other than by way of dividends.
1.31 "Series A-1 Preferred Stock" shall mean the class of
Series A-1 Non Convertible Preferred Stock, par value $.001 per share, of the
Corporation or any other class of stock resulting from successive changes or
reclassifications of such Series A-1 Non Convertible Preferred Stock consisting
solely of changes in par value, or from par value to no par value, or as a
result of a subdivision or combination.
1.32 "Series A-2 Preferred Stock" shall mean the class of
Series A-2 Convertible Preferred Stock, par value $.001 per share, of the
Corporation or any other class of stock resulting from successive changes or
reclassifications of such Series A-2 Convertible Preferred Stock consisting
solely of changes in par value, or from par value to no par value, or as a
result of a subdivision or combination.
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1.33 "Series B Preferred Stock" shall mean the class of Series B
Convertible Preferred Stock, par value $.001 per share, of the Corporation or
any other class of stock resulting from successive changes or reclassifications
of such Series B Convertible Preferred Stock consisting solely of changes in par
value, or from par value to no par value, or as a result of a subdivision or
combination.
1.34 "Series B Certificate of Designation" shall mean the
Certificate of the Powers, Designations, Preferences and Rights of the Series B
Convertible Preferred Stock, Par Value $.001 Per Share, in the form filed by the
Corporation with the Secretary of State of Delaware, as the same may be amended
from time to time.
1.35 "Trading Day" shall mean, so long as the Common Stock is
listed or admitted to trading on a national securities exchange, a day on which
the principal national securities exchange on which the Common Stock is listed
is open for the transaction of business, or, if the Common Stock is not so
listed or admitted for trading on any national securities exchange, a day on
which NASDAQ is open for the transaction of business.
2. DIVIDENDS.
2.1 The holders of the outstanding shares of Series D Preferred
Stock shall be entitled to receive quarterly dividends, when, as and if declared
by the Board of Directors out of funds legally available therefor. Each
quarterly dividend shall be an amount per share (rounded to the nearest $.01)
equal to the Dividend Amount and shall be payable on the last Business Day of
August, November, February and May in each year (each a "Dividend Payment
Date"), to the holders of record of Series D Preferred Stock at the close of
business on the preceding Business Day, or such other dates as are fixed by the
Board Directors within ten (10) days prior to the Dividend Payment Date (each a
"Record Date"). Such dividends shall become payable beginning on the first
Dividend Payment Date for which the Record Date is subsequent to the Issue Date.
Dividends on each share of Series D Preferred Stock shall be cumulative and
shall accrue on a day-to-day basis, whether or not earned, from and after the
day immediately succeeding the date on which such share was issued, and shall be
payable in cash (except upon conversion). Dividends on the Series D Preferred
Stock that are not declared and paid when due will compound quarterly on each
Dividend Payment Date at the Dividend Rate. Dividends payable for any partial
dividend period shall be computed on the basis of actual days elapsed over a 360
day year.
2.2 Except as hereinafter provided in this Section 2.2, unless
(a) full cumulative dividends on the outstanding shares of Series D Preferred
Stock and any Parity Stock that shall have accrued and become payable as of any
date shall have been paid, or declared and funds shall have been set apart for
payment thereof, and (b) all applicable redemption, exchange and repurchase
obligations with respect to the outstanding shares of
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Series D Preferred Stock and any Parity Stock shall have been satisfied, no
dividend or other distribution (payable other than in shares of Junior Stock)
shall be paid to the holders of Junior Stock or Parity Stock, and no shares
of Series D Preferred Stock, Parity Stock or Junior Stock shall be purchased
or redeemed by the Corporation or any of its subsidiaries (except by
conversion into or exchange for, or out of the net cash proceeds from the
concurrent sale of, Junior Stock), nor shall any monies be paid or made
available for a sinking fund for the purchase or redemption of any Series D
Preferred Stock, Junior Stock or Parity Stock. When dividends are not paid
in full upon the shares of Series D Preferred Stock and any Parity Stock, all
dividends declared upon shares of Series D Preferred Stock and all Parity
Stock shall be declared pro rata so that the amount of dividends declared per
share on Series D Preferred Stock and all such Parity Stock shall in all
cases bear to each other the same ratio that accrued cumulative dividends per
share on the shares of Series D Preferred Stock and all such Parity Stock
bear to each other. Holders of shares of Series D Preferred Stock shall not
be entitled to any dividends, whether payable in cash, property or stock, in
excess of full cumulative dividends, as herein provided, on Series D
Preferred Stock.
3. REDEMPTION.
3.1 The Corporation may, at its sole option, subject to the
provisions of Section 2.2, redeem at any time after the Issue Date, out of funds
legally available therefor, all of the outstanding shares of Series D Preferred
Stock at a redemption price for each share of Series D Preferred Stock called
for redemption pursuant to this Section 3.1 equal to the Redemption Price (as
hereinafter defined). The term "Redemption Price" shall mean, with respect to
each share of Series D Preferred Stock, an amount equal to the Liquidation Value
thereof and all accrued and unpaid dividends thereon to the redemption date.
With respect to each share of Series D Preferred Stock properly tendered for
redemption, if the Corporation fails to pay the redemption price upon such
tender, the Corporation shall also pay an amount equal to interest on the amount
determined in the above sentence at 12% per annum, compounded on a quarterly
basis, from the date fixed for redemption to the date the Redemption Price is
actually paid.
3.2 In the event the Corporation shall elect to redeem shares of
Series D Preferred Stock pursuant to Section 3.1, it shall provide notice of
such redemption by first class mail, postage prepaid, mailed not less than sixty
(60) nor more than ninety (90) days prior to the redemption date, to each record
holder of the shares to be redeemed, at such holder's address as the same
appears on the books of the Corporation. Each such notice shall state: (i) the
time and date as of which the redemption shall occur; (ii) the total number of
shares of Series D Preferred Stock to be redeemed and, if fewer than all the
shares held by such holder are to be redeemed, the number of such shares to be
redeemed from such holder; (iii) the Redemption Price; (iv) that shares of
Series D Preferred Stock called for redemption may be converted at any time
prior to the time and date fixed for redemption (unless (x) the Corporation
shall default in the payment of the Redemption Price, in which case such right
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shall not terminate at such time and date or (y) the holders of such shares do
not yet have the right to convert such shares under Section 4 below); (v) the
Common Stock Conversion Rate; (vi) the place or places where certificates for
such shares are to be surrendered for payment of the Redemption Price; and
(vii) that dividends on the shares to be redeemed will cease to accrue on such
redemption date.
3.3 If notice of redemption shall have been given by the
Corporation as provided in Section 3.2, dividends on the shares of Series D
Preferred Stock so called for redemption shall cease to accrue, such shares
shall no longer be deemed to be outstanding, and all rights of the holders
thereof as stockholders of the Corporation with respect to shares so called for
redemption (except the right to receive from the Corporation the Redemption
Price without interest and except the right to convert such shares in accordance
with Section 4) shall cease (including any right to receive dividends otherwise
payable on any Dividend Payment Date that would have occurred after the time and
date of redemption) from and after the time and date fixed in the notice of
redemption as the time and date of redemption (unless the Corporation shall
default in the payment of the Redemption Price, in which case such rights shall
not terminate at such time and date). Upon surrender (in accordance with the
notice of redemption) of the certificate or certificates for any shares to be so
redeemed (properly endorsed or assigned for transfer, if the Corporation shall
so require and the notice of redemption shall so state), such shares shall be
redeemed by the Corporation at the Redemption Price. In case fewer than all the
shares represented by any such certificate are to be redeemed, a new certificate
shall be issued representing the unredeemed shares, without cost to the holder
thereof, together with the amount of cash, if any, in lieu of fractional shares.
Subject to applicable escheat laws, any moneys so set aside by the Corporation
and unclaimed at the end of one year from the redemption date shall revert to
the general funds of the Corporation, after which reversion the holders of such
shares so called for redemption shall look only to the general funds of the
Corporation for the payment of the redemption price without interest. Any
interest accrued on funds so deposited shall be paid to the Corporation from
time to time.
4. CONVERSION RIGHTS.
4.1 Each holder of a share of Series D Preferred Stock shall
have the right, at any time after the second anniversary of the Issue Date, or,
as to any share of Series D Preferred Stock called for redemption with a date
fixed for redemption which is after the second anniversary of the Issue Date, at
any time prior to the time and date fixed for such redemption (unless the
Corporation defaults in the payment of the Redemption Price, in which case such
right shall not terminate at such time and date), to convert such share into
fully paid and nonassessable shares of Common Stock at the Common Stock
Conversion Rate as of the date of conversion.
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4.2 No fractional shares or scrip representing fractions of
shares of Common Stock shall be issued upon conversion of Series D Preferred
Stock. Instead of any fractional interest in a share of Common Stock that would
otherwise be deliverable upon the conversion of a share of Series D Preferred
Stock, the Corporation shall, subject to Section 4.5(e), make a cash payment
(calculated to the nearest $.01) equal to such fraction multiplied by the
Closing Price of the Common Stock on the last Trading Day prior to the date of
conversion.
4.3 Any holder of shares of Series D Preferred Stock electing to
convert such shares into Common Stock shall surrender the certificate or
certificates for such shares at the offices of the Corporation (or at such other
place as the Corporation may designate by notice to the holders of shares of
Series D Preferred Stock) during regular business hours, duly endorsed to the
Corporation or in blank, or accompanied by instruments of transfer to the
Corporation or in blank, in form reasonably satisfactory to the Corporation, and
shall give written notice to the Corporation at such offices that such holder
elects to convert such shares of Series D Preferred Stock. As soon as
practicable after any holder deposits certificates for shares of Series D
Preferred Stock, accompanied by the written notice above prescribed, the
Corporation shall issue and deliver at such office to the holder for whose
account such shares were surrendered, or to his nominee, certificates
representing the number of shares of Common Stock and the cash in lieu of
fractional shares, if any, to which such holder is entitled upon such
conversion.
4.4 Conversion shall be deemed to have been made as of the date
that certificates for the shares of Series D Preferred Stock to be converted and
the written notice, are received by the Corporation; and the Person entitled to
receive the Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder of such Common Stock on such date. The
Corporation shall not be required to deliver certificates for shares of Common
Stock while the stock transfer books for such stock or for Series D Preferred
Stock are duly closed for any purpose, but certificates for shares of Common
Stock shall be issued and delivered as soon as practicable after the opening of
such books.
4.5 The Common Stock Conversion Rate shall be adjusted from time
to time as follows:
(a) If the Corporation shall, at any time or from time to
time while any shares of the Series D Preferred Stock are outstanding, (i) pay a
dividend on its Common Stock in shares of its capital stock, (ii) combine its
outstanding shares of Common Stock into a smaller number of shares,
(iii) subdivide its outstanding shares of Common Stock or (iv) issue by
reclassification of its shares of Common Stock any shares of capital stock of
the Corporation, then the Common Stock Conversion Rate in effect immediately
before such action shall be adjusted so that the holders of the Series D
Preferred Stock, upon conversion of shares thereof immediately following such
action, shall be entitled to receive the kind and
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amount of shares of capital stock of the Corporation which they would have
owned or been entitled to receive upon or by reason of such event if such
shares of Series D Preferred Stock had been converted immediately before the
record date or effective date for such action.
(b) If the Corporation shall, at any time or from time to
time while any of the Series D Preferred Stock is outstanding, issue or sell, or
fix a record date for the issuance of, (A) Common Stock (or securities
convertible or exchangeable into or exercisable for Common Stock) (other than
Excluded Securities) or (B) rights, options or warrants entitling the holders
thereof to subscribe for or purchase Common Stock (or securities convertible
into or exchangeable or exercisable for shares of Common Stock) (other than
Excluded Securities), in any such case, at a price per share (treating the price
per share of securities convertible into or exchangeable or exercisable for
Common Stock as equal to (x) the sum of (i) the price for a unit of the security
convertible into or exchangeable or exercisable for Common Stock plus (ii) any
additional consideration initially payable upon the conversion of such security
into or the exchange or exercise of such security for Common Stock, divided by
(y) the number of shares of Common Stock initially underlying such exercisable,
convertible or exchangeable security) that is less than the greater of the
Current Market Price of the Common Stock and the Conversion Price on the date of
such issuance or such record date (the "Measuring Price"), then the Common Stock
Conversion Rate shall be adjusted so that it shall equal the rate determined by
multiplying the Common Stock Conversion Rate in effect immediately prior to
giving effect to this Section 4.5 by a fraction, the numerator of which shall be
the number of shares of Common Stock outstanding (calculated to include the
shares of Common Stock underlying the warrants issued under the Investment
Agreement, the shares of Common Stock underlying the Affiliate Warrants, the
shares of Common Stock underlying the Harnick Warrant, the shares of Common
Stock underlying the Board Warrants and all then currently exercisable,
convertible and exchangeable securities that are "in-the-money") on the date of
issuance of such rights, options or warrants plus the number of additional
shares of Common Stock offered for subscription or purchase (or into or for
which the exercisable, convertible or exchangeable securities so offered are
initially exercisable, convertible or exchangeable), and the denominator of
which shall be the number of shares of Common Stock outstanding (calculated to
include the shares of Common Stock underlying the warrants issued under the
Investment Agreement, the shares of Common Stock underlying the Affiliate
Warrants, the shares of Common Stock underlying the Harnick Warrant, the shares
of Common Stock underlying the Board Warrants and all then currently
exercisable, convertible and exchangeable securities that are "in-the-money") on
the date of issuance of such rights, options or warrants plus the number of
shares which the aggregate offering price of the total number of shares so
offered for subscription or purchase (or the aggregate purchase price of the
exercisable, convertible or exchangeable securities so offered plus the
aggregate amount of any additional consideration initially payable upon
exercise, conversion or exchange for or into Common Stock) would purchase at
such Measuring Price.
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(c) If the Corporation shall, at any time or from time to
time while any of the Series D Preferred Stock is outstanding, distribute to all
holders of shares of its Common Stock (including any such distribution made in
connection with a consolidation or merger in which the Corporation is the
continuing or surviving corporation and the Common Stock is not changed or
exchanged) cash, evidences of indebtedness, securities or other assets
(excluding (i) ordinary course cash dividends to the extent such dividends do
not exceed the Corporation's retained earnings and (ii) dividends payable in
shares of Common Stock for which adjustment is made under Section 4.5(a)) or
rights, options or warrants to subscribe for or purchase securities of the
Corporation (excluding those for which adjustment is made under Section 4.5(b)),
then in each such case the Common Stock Conversion Rate shall be adjusted so
that it shall equal the rate determined by multiplying the Common Stock
Conversion Rate in effect immediately prior to the date of such distribution by
a fraction, the numerator of which shall be the Current Market Price of the
Common Stock on the record date referred to below, and the denominator of which
shall be such Current Market Price of the Common Stock less the then fair market
value (as determined by the Board of Directors in good faith or, if requested by
the holders of the Series B Preferred Stock in accordance with the terms of the
Series B Certificate of Designation, the fair market value determined pursuant
to the Series B Certificate of Designation) of the portion of the cash,
evidences of indebtedness, securities or other assets so distributed or of such
rights, options or warrants applicable to one share of Common Stock (provided
that such denominator shall never be less than $.01).
(d) If the Corporation or any subsidiary thereof shall, at
any time or from time to time while any of the Series D Preferred Stock is
outstanding, make a Pro Rata Repurchase, the Common Stock Conversion Rate shall
be adjusted by multiplying the Common Stock Conversion Rate in effect
immediately prior to such action by a fraction (which in no event shall be less
than one (1)), the numerator of which shall be the product of (i) the number of
shares of Common Stock outstanding immediately before such Pro Rata Repurchase
minus the number of shares of Common Stock repurchased in such Pro Rata
Repurchase and (ii) the Current Market Price of the Common Stock as of the day
immediately preceding the first public announcement by the Corporation of the
intent to effect such Pro Rata Repurchase, and the denominator of which shall be
(i) the product of (x) the number of shares of Common Stock outstanding
immediately before such Pro Rata Repurchase and (y) the Current Market Price of
the Common Stock as of the day immediately preceding the first public
announcement by the Corporation of the intent to effect such Pro Rata Repurchase
minus (ii) the aggregate purchase price of the Pro Rata Repurchase (provided
that such denominator shall never be less than $.01).
(e) All calculations under this Section 4.5 shall be
made to the nearest $.01 (with $.005 being rounded upward), one-hundredth of
a share (with .005 being rounded upward) or, in the case of a conversion
rate, one ten-thousandth (with .00005 being rounded upward). Notwithstanding
any other provision of this Section 4.5, the Corpora-
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tion shall not be required to make any adjustment of the Common Stock
Conversion Rate unless such adjustment would require an increase or decrease
of at least 0.05% of such rate. Any lesser adjustment shall be carried
forward and shall be made at the time of and together with the next
subsequent adjustment which, together with any adjustment or adjustments so
carried forward, shall amount to an increase or decrease of at least 0.05% in
such rate. Any adjustments under this Section 4.5 shall be made successively
whenever an event requiring such an adjustment occurs.
(f) Whenever an adjustment in the Common Stock Conversion
Rate is required, the Corporation shall promptly cause to be mailed (but in any
event not later than five (5) days after the date of the event giving rise to
such adjustment) first-class postage prepaid, to the holders of record of the
outstanding shares of Series D Preferred Stock, notice of such adjustment and a
certificate of a firm of independent public accountants of recognized national
standing selected by the Board of Directors (who shall be appointed at the
Corporation's expense and who may be the independent public accountants
regularly employed by the Corporation) setting forth the adjusted Common Stock
Conversion Rate in effect as of such date determined as provided herein. Such
notice and certificate shall set forth in reasonable detail such facts as shall
be necessary to show the reason for and the manner of computing such adjustment.
(g) In the event that at any time as a result of an
adjustment made pursuant to this Section 4.5, the holder of any share of Series
D Preferred Stock thereafter surrendered for conversion shall become entitled to
receive any shares of stock of the Corporation other than shares of Common
Stock, the conversion rate of such other shares so receivable upon conversion of
any such share of Series D Preferred Stock shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to Common Stock contained in subparagraphs (a) through
(f) and (h) of this Section 4.5, and the provisions of this Section 4 with
respect to the Common Stock shall apply on like or similar terms to any such
other shares and the determination of the Board of Directors as to any such
adjustment shall be conclusive.
(h) No adjustment shall be made pursuant to this Section if
the effect thereof would be to reduce the Conversion Price below the par value
of the Common Stock.
4.6 In case (a) any consolidation or merger to which the
Corporation is a party, other than a merger or consolidation in which the
Corporation is the surviving or continuing corporation and which does not result
in any reclassification of, or change (other than a change in par value or from
par value to no par value or from no par value to par value, or as a result of a
subdivision or combination) in, outstanding shares of Common Stock or (b) any
sale or conveyance of all or substantially all of the property and assets of the
Corporation is effected in such a way that the holders of Common Stock shall be
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entitled to receive stock or other securities or assets with respect to or in
exchange for Common Stock, then upon conversion of each share of Series D
Preferred Stock the holder thereof shall be entitled to receive the kind and
amount of shares of stock or other securities and property receivable upon
such consolidation, merger, sale or conveyance by a holder of the number of
shares of Common Stock into which such shares of Series D Preferred Stock
could have been converted immediately prior to such consolidation, merger,
sale or conveyance, subject to adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Section 4. The Corporation shall not enter into any of the transactions
referred to in clause (a) or (b) of the preceding sentence unless provision
shall be made so as to give effect to the provisions set forth in this
Section 4.6. The provisions of this Section 4.6 shall apply similarly to
successive consolidations, mergers, sales or conveyances.
4.7 The Corporation shall at all times reserve and keep
available, free from preemptive rights, out of its authorized but unissued
stock, for the purpose of effecting the conversion of the shares of Series D
Preferred Stock, such number of its duly authorized shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding shares of Series D Preferred Stock into such Common Stock at any
time (assuming that, at the time of the computation of such number of shares,
all such Common Stock would be held by a single holder). The Corporation shall
from time to time, in accordance with the laws of the State of Delaware, use its
best efforts to cause the authorized amount of Common Stock to be increased if
the aggregate of the authorized amount of the Common Stock remaining unissued
and the issued shares of such Common Stock in its treasury (other than any
shares of such Common Stock reserved for issuance in any other connection) shall
not be sufficient to permit the conversion of the shares of Series D Preferred
Stock into the Common Stock. The Corporation covenants that any shares of
Common Stock issued upon conversions of the Series D Preferred Stock shall be
validly issued, fully paid and nonassessable.
4.8 If any shares of Common Stock which would be issuable upon
conversion of shares of Series D Preferred Stock hereunder require registration
with or approval of any governmental authority before such shares may be issued
upon conversion, the Corporation will in good faith and as expeditiously as
possible cause such shares to be duly registered or approved, as the case may
be.
4.9 The Corporation shall pay any and all issue or other taxes
that may be payable in respect of any issue or delivery of shares of Common
Stock on conversion of shares of Series D Preferred Stock pursuant hereto. The
Corporation shall not, however, be required to pay any tax which is payable in
respect of any transfer involved in the issue or delivery of Common Stock in a
name other than that in which the shares of Series D Preferred Stock so
converted were registered, and no such issue or delivery shall be made unless
and
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until the person requesting such issue has paid to the Corporation the amount
of such tax, or has established, to the satisfaction of the Corporation, that
such tax has been paid.
4.10 For purposes of this Section 4, the number of shares of
Common Stock at any time outstanding shall not include any shares of Common
Stock then owned or held by or for the account of the Corporation or any
subsidiary. The Corporation shall not pay a dividend or make any distribution
on shares of Common Stock held in the treasury of the Corporation.
4.11 If any action or transaction would require adjustment of the
Common Stock Conversion Rate pursuant to more than one paragraph of this
Section 4, only one adjustment shall be made and each such adjustment shall be
the amount of adjustment that has the highest absolute value.
4.12 In case:
(a) of a consolidation or merger to which the Corporation
is a party and for which approval of any stockholders of the Corporation is
required; or
(b) of the voluntary or involuntary dissolution,
liquidation or winding up of the Corporation; or
(c) of any Pro Rata Repurchase;
then, in each case, the Corporation shall cause to be mailed, first-class
postage prepaid, to the holders of record of the outstanding shares of Series D
Preferred Stock, at least twenty (20) days prior to the applicable record date
hereinafter specified, a notice stating (x) the date on which a record is to be
taken for the purpose of any distribution or grant of rights or warrants
triggering an adjustment to the Common Stock Conversion Rate pursuant to this
Section 4, or, if a record is not to be taken, the date as of which the holders
of record of Common Stock entitled to such distribution, rights or warrants are
to be determined, or (y) the date on which any reclassification, consolidation,
merger, sale, conveyance, dissolution, liquidation, winding up or Pro Rata
Repurchase is expected to become effective, and the date as of which it is
expected that holders of Common Stock of record shall be entitled to exchange
their Common Stock for securities or other property deliverable upon such
reclassification, consolidation, merger, sale, conveyance, dissolution,
liquidation, winding up or Pro Rata Repurchase. Failure to give the notice
specified hereunder shall have no effect on the status or effectiveness of the
action to which the required notice relates.
5. VOTING. The shares of Series D Preferred Stock shall have no
voting rights except as required by law except as set forth below:
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(a) So long as any of the shares of the Series D Preferred Stock
remain outstanding, unless a greater percentage shall then be required by law,
the Company shall not, without the affirmative vote at a meeting or the written
consent with or without a meeting of the holders of the Series D Preferred Stock
representing at least a majority of the aggregate voting power (i) authorize or
issue any stock that is both junior to the Series B Preferred Stock and senior
to or on a parity with the Series D Preferred Stock or (ii) reclassify any stock
that is junior to the Series D Preferred Stock as both junior to the Series B
Preferred Stock and senior to or on a parity with the Series D Preferred Stock.
6. LIQUIDATION RIGHTS.
6.1 Upon the dissolution, liquidation or winding up of the
Corporation, whether voluntary or involuntary, the holders of the shares of
Series D Preferred Stock shall be entitled to receive out of the assets of the
Corporation available for distribution to stockholders, in preference to the
holders of, and before any payment or distribution shall be made on, Junior
Stock, the amount of $1,000 per share (the "Liquidation Value"), plus an amount
equal to all accrued and unpaid dividends to the date of final distribution
(whether or not declared).
6.2 Neither the sale, exchange or other conveyance (for cash,
shares of stock, securities or other consideration) of all or substantially all
the property and assets of the Corporation nor the merger or consolidation of
the Corporation into or with any other corporation, or the merger or
consolidation of any other corporation into or with the Corporation, shall be
deemed to be a dissolution, liquidation or winding up, voluntary or involuntary,
for the purposes of this Section 6.
6.3 After the payment to the holders of the shares of Series D
Preferred Stock of full preferential amounts provided for in this Section 6, the
holders of Series D Preferred Stock as such shall have no right or claim to any
of the remaining assets of the Corporation.
6.4 In the event the assets of the Corporation available for
distribution to the holders of shares of Series D Preferred Stock upon any
dissolution, liquidation or winding up of the Corporation, whether voluntary or
involuntary, shall be insufficient to pay in full all amounts to which such
holders are entitled pursuant to Section 6.1, no such distribution shall be made
on account of any shares of any Parity Stock upon such dissolution, liquidation
or winding up unless proportionate distributive amounts shall be paid on account
of the shares of Series D Preferred Stock, ratably, in proportion to the full
distributable amounts for which holders of all Parity Stock are entitled upon
such dissolution, liquidation or winding up.
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7. CHANGE OF CONTROL
7.1 In the event that the Corporation becomes aware of a Change
of Control or pending Change of Control, the Corporation shall make an offer
(the "Change of Control Offer") to purchase all of the outstanding shares of
Series D Preferred Stock at a purchase price for each share of Series D
Preferred Stock equal to the Repurchase Price (as hereinafter defined) on the
effective date of such Change of Control (the "Trigger Date"). The Repurchase
Price will be payable (x) in cash, in the case of a Change of Control pursuant
to clause (i) through (iii) of the definition of a Change of Control and (y), at
the Corporation's election, either in cash or in Common Stock, in the case of a
Change of Control pursuant to clause (iv) of the definition of a Change of
Control. In the event that the Corporation elects to pay the Repurchase Price
in Common Stock, such Common Stock shall be concurrently registered under the
Act and under the securities or blue sky laws of any jurisdiction designated by
any holder of Series D Preferred Stock which accepts the Change of Control
Offer. The term "Repurchase Price" shall mean, with respect to each share of
Series D Preferred Stock, (x) if paid in cash, 110% of the sum of the
Liquidation Value thereof and any accrued and unpaid dividends thereon to the
date of such purchase, or (y) if paid in Common Stock, 125% of the sum of the
Liquidation Value thereof and any accrued and unpaid dividends thereon to the
date of such purchase. With respect to each share of Series D Preferred Stock
properly tendered for repurchase, if the Corporation fails to pay the Repurchase
Price upon such tender, the Corporation shall also pay an amount equal to
interest on the amount determined in the above sentence at 12% per annum,
compounded on a quarterly basis, from the date fixed for repurchase to the date
the Repurchase Price is actually paid. The Change of Control Offer must be made
as soon as practicable and if possible not less than sixty (60) days prior to
the Trigger Date, shall remain open for at least orty (40) and not more than
fifty (50) days (or such longer time as may be required by applicable law or
regulation) and shall comply, to the extent required, with the applicable
requirements of Rule 14e-1 under the Exchange Act and any other applicable
securities laws and regulations.
7.2 In the event the Corporation is required to make a Change of
Control Offer pursuant to Section 7.1, it shall provide notice of such Change of
Control Offer (the "Notice of Offer") by first class mail, postage prepaid, to
each record holder of the shares of Series D Preferred Stock, at such holder's
address as the same appears on the books of the Corporation. Each such Notice
of Offer shall state: (i) that the Corporation is offering to purchase all
outstanding shares of Series D Preferred Stock and that such offer is
irrevocable; (ii) the Trigger Date, which will be the date on which any such
purchase will be consummated; (iii) the total number of shares of Series D
Preferred Stock which the Corporation is offering to purchase from such holder;
(iv) the Repurchase Price; (v) the last day on which the Change of Control Offer
may be accepted (the "Expiration Date"), (vi) the place or places where
certificates for shares of Series D Preferred Stock are to be surrendered for
payment of the Repurchase Price and (vii) in the event of a Change of Control
pursuant to clause (iv) of the definition of a Change of Control, the terms,
amount and kind of
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consideration paid and the identity, if known by the Corporation, of the
Person or Group of Persons triggering such Change of Control and whether the
Corporation is electing to pay the Repurchase Price in cash or Common Stock.
7.3 Any holder of outstanding shares of Series D Preferred Stock
may, at its sole option, elect to accept the Change of Control Offer with
respect to all or less than all of such holder's outstanding Series D Preferred
Stock by delivering written notice of such acceptance to the Corporation on or
before the Expiration Date. On the Trigger Date, the Corporation will pay to
each holder that has accepted the Change of Control Offer the Repurchase Price
for the shares of Series D Preferred Stock which such holder has elected to sell
to the Corporation against delivery (in accordance with the Notice of Offer) of
the certificate or certificates for any shares to so purchased (properly
endorsed or assigned for transfer, if the Corporation shall so require and the
Notice of Offer shall so state). In case fewer than all the shares represented
by any such certificate are to be repurchased, a new certificate shall be issued
representing the shares which are not purchased, without cost of the holder
thereof, together with the amount of cash, if any, in lieu of fractional shares.
8. OTHER PROVISIONS.
8.1 Shares of Series D Preferred Stock issued and reacquired
will, upon compliance with the applicable requirements of Delaware law, have the
status of authorized but unissued shares of Preferred Stock of the Corporation
undesignated as to series and may with any and all other authorized but unissued
shares of Preferred Stock of the Corporation be designated or redesignated and
issued or reissued, as the case may be, as part of any series of Preferred Stock
of the Corporation, except that any issuance or reissuance of shares of Series D
Preferred Stock must be in compliance with this certificate of designation.
8.2 The Corporation shall be entitled to recognize the exclusive
right of a Person registered on its records as the holder of shares of Series D
Preferred Stock, and such record holder shall be deemed the holder of such
shares for all purposes.
8.3 All notice periods referred to herein shall commence on the
date of the mailing of the applicable notice.
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IN WITNESS WHEREOF, Platinum Entertainment, Inc. has caused this
certificate to be signed and attested this 14th day of April 1999.
PLATINUM ENTERTAINMENT, INC.
By: /s/ Douglas C. Laux
------------------------------------
Name: Douglas C. Laux
Title: Chief Operating Officer
and Chief Financial Officer
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NEITHER THIS WARRANT NOR ANY SECURITIES ACQUIRED UPON THE EXERCISE OF
THIS WARRANT (THE "SECURITIES") HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND
NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD,
TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES
LAWS OR AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS AS
EVIDENCED BY AN OPINION OF COUNSEL DELIVERED AND REASONABLY ACCEPTABLE TO THE
COMPANY.
______________________________________________
PLATINUM ENTERTAINMENT, INC.
COMMON STOCK PURCHASE WARRANT
_______________________________________________
This certifies that, for good and valuable consideration, Platinum
Entertainment, Inc., a Delaware corporation (the "Company"), grants to Steven
Devick, his successors and permitted assigns (the "Warrantholder"), the right to
subscribe for and purchase from the Company Five Hundred Four Thousand One
Hundred Sixty-Six and One Sixty-Fifth (504,166.65) validly issued, fully paid
and nonassessable shares (the "Warrant Shares") of the Company's Common Stock,
par value $.001 per share (the "Common Stock"), at the purchase price per share
equal to the Exercise Price, as defined herein, at any time prior to 5:00 p.m.,
Central Standard Time, on April 15, 2009 (the "Expiration Date"), subject to the
terms, conditions and adjustments herein set forth. References herein to
"Warrants" or "Warrant" shall mean this Warrant.
This Warrant is being issued in connection with the issue and sale by
the Company of shares of its Series D Convertible Preferred Stock, par value
$.001 per share (the "Series D Preferred Stock").
The "Exercise Price" shall mean $6.126; which price is equal to the
average of the daily Closing Price per share of Common Stock for the trailing 30
consecutive trading days from and including April 9, 1999. The Exercise Price
as determined in accordance with the foregoing shall be adjusted from time to
time in accordance with the provisions of Section 6.
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1. EXERCISE OF WARRANTS.
1.1 EXERCISE OF WARRANT. This Warrant may be exercised, in
whole or in part, at any time or from time to time prior to the Expiration Date,
by surrendering to the Company at its principal office this Warrant, with an
Exercise Form (as defined herein) duly executed by the Warrantholder and
accompanied by payment of the Exercise Price for the number of shares of Common
Stock specified in such Exercise Form.
1.2 CASHLESS EXERCISE. In lieu of the payment of the Exercise
Price, the Warrantholder shall have the right (but not the obligation) to
require the Company to convert this Warrant, in whole or in part, into shares of
Common Stock (the "Conversion Right") as provided for in this Section 1.2. Upon
exercise of the Conversion Right, the Company shall deliver to the Warrantholder
(without payment by the Warrantholder of any of the Exercise Price) that number
of shares of Common Stock equal to the quotient obtained by dividing (x) the
value of the Warrant or portion thereof being exercised at the time the
Conversion Right is exercised (determined by subtracting the aggregate Exercise
Price in effect immediately prior to the exercise of the Conversion Right for
the number of shares for which the Warrant is being exercised from the aggregate
Current Market Price (as defined herein) of the shares of Common Stock issuable
upon exercise of the Warrant for the number of shares for which the Warrant is
being exercised immediately prior to the exercise of the Conversion Right) by
(y) the Current Market Price of one share of Common Stock immediately prior to
the exercise of the Conversion Right. The Conversion Right may be exercised at
any time or from time to time prior to the Expiration Date by surrendering to
the Company at its principal office this Warrant, with an Exercise Form duly
executed by the Warrantholder and indicating that the Warrantholder wishes to
exercise the Conversion Right and specifying the total number of shares of
Common Stock for which the Warrant is being exercised.
1.3 DELIVERY OF WARRANT SHARES; EFFECTIVENESS OF EXERCISE.
(a) DELIVERY OF WARRANT SHARES. A stock certificate or
certificates for the Warrant Shares specified in the Exercise Form along with a
check for the amount of cash to be paid in lieu of fractional shares, if any,
shall be delivered to the Warrantholder within 10 Business Days after the
Exercise Date (as defined herein); PROVIDED, HOWEVER, that if the Conversion
Right is exercised in accordance with Section 1.2 and a determination by the
Board of Directors is required to determine the Current Market Price of the
Common Stock, such delivery shall be made promptly after such determination is
made. If this Warrant shall have been exercised only in part, the Company
shall, at the time of delivery of the stock certificate or certificates and cash
in lieu of fractional shares, if any, deliver to the Warrantholder a
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new Warrant evidencing the rights to purchase the remaining Warrant Shares,
which new Warrant shall in all other respects be identical with this Warrant.
(b) EFFECTIVENESS OF EXERCISE. The exercise of this
Warrant shall be deemed to have been effective immediately prior to the close of
business on the Business Day on which this Warrant is exercised in accordance
with Section 1.1 or 1.2 (the "Exercise Date"). The Person in whose name any
certificate for shares of Common Stock shall be issuable upon such exercise
shall be deemed to be the record holder of such shares of Common Stock for all
purposes on the Exercise Date.
1.4 PAYMENT OF TAXES. The issuance of certificates for Warrant
Shares shall be made without charge to the Warrantholder for any stock transfer
or other issuance tax in respect thereof; PROVIDED, HOWEVER, that the
Warrantholder shall be required to pay any and all taxes that may be payable in
respect of any transfer involved in the issuance and delivery of any certificate
in a name other than that of the then Warrantholder as reflected upon the books
of the Company.
2. RESTRICTIVE LEGENDS.
2.1 WARRANTS. Except as otherwise permitted by this Section 2,
each Warrant (and each Warrant issued in substitution for any Warrant pursuant
to Section 4) shall be stamped or otherwise imprinted with a legend in
substantially the following form:
NEITHER THIS WARRANT NOR ANY SECURITIES ACQUIRED UPON THE EXERCISE OF
THIS WARRANT (THE "SECURITIES") HAVE BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES
LAWS AND NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED,
SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE
STATE SECURITIES LAWS OR AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER
SUCH ACT AND SUCH LAWS AS EVIDENCED BY AN OPINION OF COUNSEL DELIVERED AND
REASONABLY ACCEPTABLE TO THE COMPANY.
2.2 WARRANT SHARES. Except as otherwise permitted by this
Section 2, each stock certificate for Warrant Shares issued upon the exercise of
any Warrant and each stock certificate issued upon the direct or indirect
transfer of any such Warrant Shares shall be stamped or otherwise imprinted with
a legend in substantially the following form:
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<PAGE>
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAWS AND NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE
OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
AND APPLICABLE STATE SECURITIES LAWS OR AN EXEMPTION FROM REGISTRATION
UNDER SUCH ACT AND SUCH LAWS AS EVIDENCED BY AN OPINION OF COUNSEL
DELIVERED AND REASONABLY ACCEPTABLE TO THE COMPANY.
2.3 REMOVAL OF LEGENDS. Notwithstanding the foregoing, the
Warrantholder may require the Company to issue a Warrant or a stock certificate
for Warrant Shares, in each case without a legend, if either (i) such Warrant or
such Warrant Shares, as the case may be, have been registered for resale under
the Securities Act and sold pursuant to such registration or (ii) if reasonably
requested by the Company, the Warrantholder has delivered to the Company an
opinion of legal counsel (from a firm reasonably satisfactory to the Company)
which opinion shall be addressed to the Company and be reasonably satisfactory
in form and substance to the Company's counsel, to the effect that such
registration is not required with respect to such Warrant or such Warrant
Shares, as the case may be.
3. RESERVATION AND REGISTRATION OF SHARES, ETC.
The Company covenants and agrees as follows:
(a) All Warrant Shares that are issued upon the exercise of
this Warrant will, upon issuance, be validly issued, fully paid and
nonassessable, not subject to any preemptive rights, and free from all taxes,
liens, security interests, charges, and other encumbrances with respect to the
issuance thereof, other than taxes in respect of any transfer occurring
contemporaneously with such issue.
(b) During the period within which this Warrant may be
exercised, the Company will at all times have authorized and reserved, and keep
available free from preemptive rights, a sufficient number of shares of Common
Stock to provide for the exercise of the rights represented by this Warrant.
4. LOSS OR DESTRUCTION OF WARRANT.
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Subject to the terms and conditions hereof, upon receipt by the
Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant and, in the case of loss, theft or
destruction, of such bond or indemnification as the Company may reasonably
require, and, in the case of mutilation, upon surrender and cancellation of
this Warrant, the Company will execute and deliver a new Warrant of like tenor.
5. OWNERSHIP OF WARRANT.
The Company may deem and treat the Person in whose name this Warrant
is registered as the holder and owner hereof (notwithstanding any notations of
ownership or writing hereon made by anyone other than the Company) for all
purposes and shall not be affected by any notice to the contrary, until
presentation of this Warrant for registration of transfer.
6. CERTAIN ADJUSTMENTS.
6.1 The number of Warrant Shares purchasable upon the exercise
of this Warrant and the Exercise Price shall be subject to adjustment as
follows:
(a) STOCK DIVIDENDS, SUBDIVISION, COMBINATION OR
RECLASSIFICATION OF COMMON STOCK. If at any time after the date of the issuance
of this Warrant the Company shall (i) declare a stock dividend on the Common
Stock payable in shares of its capital stock (including Common Stock),
(ii) increase the number of shares of Common Stock outstanding by a subdivision
or split-up of shares of Common Stock, (iii) decrease the number of shares of
Common Stock outstanding by a combination of shares of Common Stock or
(iv) issue any shares of its capital stock in a reclassification of the Common
Stock, then, on the record date for such dividend or the effective date of such
subdivision or split-up, combination or reclassification, as the case may be,
the number and kind of shares to be delivered upon exercise of this Warrant will
be adjusted so that the Warrantholder will be entitled to receive the number and
kind of shares of capital stock that such Warrantholder would have owned or been
entitled to receive upon or by reason of such event had this Warrant been
exercised immediately prior thereto, and the Exercise Price will be adjusted as
provided below in paragraph (i).
(b) REORGANIZATION, ETC. If at any time after the date of
issuance of this Warrant any consolidation of the Company with or merger of the
Company with or into any other Person (other than a merger or consolidation in
which the Company is the surviving or continuing corporation and which does not
result in any reclassification of, or change (other than a change in par value
or from par value to no par value or from no par value to par value, or as a
result of a subdivision or
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<PAGE>
combination) in, outstanding shares of Common Stock) or any sale, lease or
other transfer of all or substantially all of the assets of the Company to
any other person (each, a "Reorganization Event"), shall be effected in such
a way that the holders of Common Stock shall be entitled to receive cash,
stock, other securities or assets (whether such cash, stock, other securities
or assets are issued or distributed by the Company or another Person) with
respect to or in exchange for Common Stock, then, upon exercise of this
Warrant the Warrantholder shall have the right to receive the kind and amount
of cash, stock, other securities or assets receivable upon such
Reorganization Event by a holder of the number of shares of Common Stock that
such Warrantholder would have been entitled to receive upon exercise of this
Warrant had this Warrant been exercised immediately before such
Reorganization Event, subject to adjustments that shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Section 6.1. Notwithstanding the foregoing, if more than 20% in aggregate
value of the cash, stock, other securities or assets deliverable to such
holder in accordance with the foregoing provisions of this Section 6(b) would
consist of cash or debt securities, then the Warrantholder shall have the
right (the "Special Reorganization Right") at its election, exercisable by
giving written notice to the Company prior to 120 days following the
consummation of such Reorganization Event to receive from the Company, and
the Company shall pay to the Warrantholder promptly after the exercise by the
Warrantholder of the Special Reorganization Right, instead of the cash,
stock, other securities or assets otherwise deliverable to such holder, an
amount of cash equal to the fair market value of this Warrant immediately
prior to the announcement of such Reorganization Event, to be determined by
an Independent Financial Expert giving due consideration to such factors as
the financial condition and prospects of the Company, the remaining unexpired
term of the Warrant and the market price of the Common Stock of the Company
after announcement of such Reorganization Event. The Company shall not enter
into any of the transactions referred to in this Section 6.1(b) unless
effective provision shall be made so as to give effect to the provisions set
forth in this Section 6.1(b).
(c) CERTAIN ISSUANCES OF COMMON STOCK. If at any time
after the date of issuance of this warrant the Company shall issue or sell, or
fix a record date for the issuance of, (A) Common Stock (or securities
convertible into or exchangeable or exercisable for Common Stock) (other than
Excluded Securities) or (B) rights, options or warrants entitling the holders
thereof to subscribe for or purchase Common Stock (or securities convertible
into or exchangeable or exercisable for Common Stock) (other than Excluded
Securities), in any such case, at a price per share (treating the price per
share of the securities convertible into or exchangeable or exercisable for
Common Stock as equal to (x) the sum of (i) the price for a unit of the security
convertible into or exchangeable or exercisable for Common Stock plus (ii) any
additional consideration initially payable upon the conversion of such security
into Common Stock or the exchange or exercise of such security for Common Stock
divided by (y) the number of shares of Common Stock initially underlying such
convertible,
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exchangeable or exercisable security) that is less than the greater of the
Current Market Price of the Common Stock and the Exercise Price on the date
of such issuance or such record date (the "Measuring Price") then,
immediately after the date of such issuance or sale or on such record date,
the number of shares of Common Stock to be delivered upon exercise of this
Warrant shall be increased so that the Warrantholder thereafter shall be
entitled to receive the number of shares of Common Stock determined by
multiplying the number of shares of Common Stock such Warrantholder would
have been entitled to receive immediately before the date of such issuance or
sale or such record date by a fraction, the denominator of which shall be the
number of shares of Common Stock outstanding (calculated to include the
shares of Common Stock underlying the Warrants, the Investor Warrants, the
Affiliate Warrants, the Harnick Warrant and all then currently exerciseable,
convertible and exchangeable securities that are "in the money") on such date
plus the number of shares of Common Stock that the aggregate offering price
of the total number of shares so offered for subscription or purchase (or the
aggregate purchase price of the convertible, exchangeable or exerciseable
securities so offered plus the aggregate of amount of any additional
consideration initially payable upon conversion into Common Stock or exchange
or exercise for Common Stock) would purchase at the Measuring Price and the
numerator of which shall be the number of shares of Common Stock outstanding
(calculated to include the shares of Common Stock underlying the Warrants,
the Investor Warrants, Affiliate Warrants, the Harnick Warrant and all then
currently exerciseable, convertible and exchangeable securities that re "in
the money") on such date plus the number of additional shares of Common Stock
offered for subscription or purchase (or into or for which the convertible or
exchangeable securities or rights, options or warrants so offered are
initially convertible or exchangeable or exercisable, as the case may be),
and the Exercise Price shall be adjusted as provided below in paragraph (i).
"Excluded Securities" means (A) shares of Common Stock issued upon conversion
or exercise of convertible securities, warrants and options of the Company,
outstanding on the date this Warrant is originally issued, (B) shares of
Common Stock, and options to purchase such shares, issued to officers,
directors, employees or former employees of, or consultants to, the Company
or any of its subsidiaries pursuant to any equity incentive plan, agreement
or other arrangement which has been approved by a vote of at least two-thirds
(2/3) of the Board of Directors of the Company, (C) shares of Common Stock
issued upon conversion of shares of the Company's Series B Convertible
Preferred Stock, par value $.001 per share (the "Series B Preferred Stock"),
(D) shares of Common Stock issued upon exercise of the Investor Warrants,
including any increase in the number of shares of Common Stock issuable under
such Investor Warrants as a result of the conditional annual increase
provision included therein, (E) shares of Common Stock issued upon conversion
of shares of the Company's Series C Convertible Preferred Stock, par value
$.001 per share (the "Series C Preferred Stock"), (F) shares of Common Stock
issued upon exercise of the Affiliate Warrants, (G) shares of Common Stock
issued upon exercise of the Harnick Warrant, (H) shares of Common Stock
issuable upon conversion of shares
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<PAGE>
of the Company's Series D Preferred Stock, and (I) shares of Common Stock
issued upon exercise of any Warrant.
(d) EXTRAORDINARY DISTRIBUTIONS. If at any time after the
date of issuance of this Warrant the Company shall distribute to all holders of
its Common Stock (including any such distribution made in connection with a
consolidation or merger in which the Company is the continuing or surviving
corporation and the Common Stock is not changed or exchanged) cash, evidences of
indebtedness, securities or other assets (excluding (i) ordinary course cash
dividends to the extent such dividends do not exceed the Company's retained
earnings and (ii) dividends payable in shares of capital stock for which
adjustment is made under Section 6.1(a)) or rights, options or warrants to
subscribe for or purchase securities of the Company (excluding those for which
adjustment is made under Section 6.1(c)), then the number of shares of Common
Stock to be delivered to such Warrantholder upon exercise of this Warrant shall
be increased so that the Warrantholder thereafter shall be entitled to receive
the number of shares of Common Stock determined by multiplying the number of
shares such Warrantholder would have been entitled to receive immediately before
such record date by a fraction, the denominator of which shall be the Current
Market Price per share of Common Stock on such record date minus the then fair
market value (as reasonably determined by the Board of Directors of the Company
in good faith) of the portion of the cash, evidences of indebtedness, securities
or other assets so distributed or of such rights or warrants applicable to one
share of Common Stock (provided that such denominator shall in no event be less
than $.01) and the numerator of which shall be the Current Market Price per
share of the Common Stock, and the Exercise Price shall be adjusted as provided
below in paragraph (h).
(e) PRO RATA REPURCHASES. If at any time after the date of
issuance of this Warrant, the Company or any subsidiary thereof shall make a Pro
Rata Repurchase, then the number of shares of Common Stock to be delivered to
such Warrantholder upon exercise of this Warrant shall be increased so that the
Warrantholder thereafter shall be entitled to receive the number of shares of
Common Stock determined by multiplying the number of shares of Common Stock such
Warrantholder would have been entitled to receive immediately before such Pro
Rata Repurchase by a fraction (which in no event shall be less than one) the
denominator of which shall be (i) the product of (x) the number of shares of
Common Stock outstanding immediately before such Pro Rata Repurchase and (y) the
Current Market Price of the Common Stock as of the day immediately preceding the
first public announcement by the Company of the intent to effect such Pro Rata
Repurchase minus (ii) the aggregate purchase price of the Pro Rata Repurchase
(provided that such denominator shall never be less than $.01), and the
numerator of which shall be the product of (i) the number of shares of Common
Stock outstanding immediately before such Pro Rata Repurchase minus the number
of shares of Common Stock repurchased in such Pro Rata Repurchase and (ii) the
Current Market Price of the Common Stock as of the day immediately
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preceding the first public announcement by the Company of the intent to
effect such Pro Rata Repurchase.
(f) FRACTIONAL SHARES. No fractional shares of Common
Stock or scrip shall be issued to any Warrantholder in connection with the
exercise of this Warrant. Instead of any fractional shares of Common Stock that
would otherwise be issuable to such Warrantholder, the Company will pay to such
Warrantholder a cash adjustment in respect of such fractional interest in an
amount equal to that fractional interest of the then Current Market Price per
share of Common Stock.
(g) CARRYOVER. Notwithstanding any other provision of this
Section 6.1, no adjustment shall be made to the number of shares of Common Stock
to be delivered to the Warrantholder (or to the Exercise Price) if such
adjustment represents less than .05% of the number of shares to be so delivered,
but any lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment that together with any
adjustments so carried forward shall amount to .05% or more of the number of
shares to be so delivered.
(h) EXERCISE PRICE ADJUSTMENT. Whenever the number of
Warrant Shares purchasable upon the exercise of the Warrant is adjusted as
provided pursuant to this Section 6.1, the Exercise Price per share payable upon
the exercise of this Warrant shall be adjusted by multiplying such Exercise
Price immediately prior to such adjustment by a fraction, of which the numerator
shall be the number of Warrant Shares purchasable upon the exercise of the
Warrant immediately prior to such adjustment, and of which the denominator shall
be the number of Warrant Shares purchasable immediately thereafter; PROVIDED,
HOWEVER, that the Exercise Price for each Warrant Share shall in no event be
less than the par value of such Warrant Share.
(i) MULTIPLE ADJUSTMENTS. If any action or transaction
would require adjustment of the number of shares of Common Stock to be delivered
to the Warrantholder upon exercise of this Warrant pursuant to more than one
paragraph of this Section 6.1, only one adjustment shall be made and each such
adjustment shall be the amount of adjustment that has the highest absolute
value.
6.2 NOTICE OF ADJUSTMENT. Whenever the number of Warrant Shares
or the Exercise Price of such Warrant Shares is adjusted, as herein provided,
the Company shall promptly mail by first class mail, postage prepaid, to the
Warrantholder, notice of such adjustment or adjustments and a certificate of a
firm of independent public accountants of recognized national standing selected
by the Board of Directors of the Company (who shall be appointed at the
Company's expense and who may be the independent public accountants regularly
employed by the Company) setting forth the number of Warrant Shares and the
Exercise Price of such Warrant Shares after such
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adjustment, setting forth a brief statement of the facts requiring such
adjustment and setting forth the computation by which such adjustment was
made.
7. PUT RIGHTS. The Warrantholder shall have the following Put
Rights:
(a) At the earlier of (i) the fifth anniversary of the date
hereof and (ii) a Change of Control, the Warrantholder may notify the Company in
writing (the "PUT NOTICE") of the Warrantholder's desire to cause the Company to
repurchase, in the case of clause (i) above, all (but not less than all) of the
Warrant Shares (issued or represented by the Warrant) at a price per share equal
to the Repurchase Price (the "Five-Year Put"), or, in the case of clause (ii)
above, the Warrant at the Change of Control Repurchase Price (the "Change of
Control Put").
(b) If the Company receives a Put Notice pursuant to
Section 7(a), it shall deliver to the Warrantholder, by first class mail,
postage prepaid, mailed as soon as practicable and if possible within thirty
(30) days of the receipt by the Company of the Put Notice, a notice stating: (i)
the date as of which such repurchase shall occur (which date (the "Put Closing")
shall be not less than ten (10) nor more than thirty (30) days following the
date of such notice, but in any event prior to the Expiration Date); (ii) in the
case of a Five-Year Put, the number of Warrant Shares (issued or represented by
this Warrant) to be purchased from the Warrantholder and the Repurchase Price
(which shall be calculated as of the date of the Put Notice) or, in the case of
a Change of Control Put, the Change of Control Repurchase Price; and (iii) the
place or places where certificate or certificates representing this Warrant or
Warrant Shares are to be surrendered for payment; PROVIDED, HOWEVER, that the
Company shall have no obligation to send the notice set forth above or to
repurchase the Warrants and Warrant Shares following the exercise of the Five
Year Put (and the provisions of paragraph (c) below shall not be applicable to
any failure by the Company to repurchase the Warrants and the Warrant Shares
following the exercise of the Five Year Put), unless the holders of not less
than a majority of the shares of Common Stock issued or issuable upon exercise
of the Investor Warrants (the "Investor Warrant Shares") shall also have
exercised the "five year put" provided for in the Investor Warrants.
(c) With respect to Warrants and Warrant Shares properly
tendered for repurchase, if the Company fails to pay the Repurchase Price or the
Change of Control Repurchase Price on the date fixed for repurchase, the
Corporation shall also pay interest thereon at the rate of 12% per annum,
compounded on a quarterly basis, until such time as such satisfaction shall have
occurred.
(d) At the Put Closing, the Warrantholder shall deliver to
the Company the certificate or certificates representing the Warrantholder's
Warrant or Warrant Shares and the Company shall deliver to the Warrantholder an
amount equal
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to, in the case of a Five-Year Put, the product obtained by multiplying (i)
the number of such Warrant Shares (issued or represented by this Warrant) by
(ii) the Repurchase Price or, in the case of a Change of Control Put, the
Change of Control Repurchase Price, by cashier's or certified check payable
to the Warrantholder or by wire transfer of immediately available funds to an
account designated by the Warrantholder.
(e) The Company shall not (and shall not permit any
Affiliate of the Company to) enter into any contract or other consensual
arrangement that by its terms restricts the Company's ability to honor the Put.
8. AMENDMENTS. Any provision of this Warrant may be amended and the
observance thereof waived only with the written consent of the Company and the
Warrantholder.
9. NOTICES OF CORPORATE ACTION. So long as this Warrant has not
been exercised in full, in the event of:
(a) any consolidation or merger involving the Company and
any other party or any transfer of all or substantially all the assets of the
Company to any other party, or
(b) any voluntary or involuntary dissolution, liquidation
or winding-up of the Company,
the Company will mail, by first class mail, postage prepaid, to the
Warrantholder a notice specifying (i) the date or expected date on which any
such record is to be taken for the purpose of a dividend, distribution or right
and the amount and character of any such dividend, distribution or right and
(ii) the date or expected date on which a reorganization, reclassification,
recapitalization, consolidation, merger, transfer, dissolution, liquidation or
winding-up is to take place and the time, if any such time is to be fixed, as of
which the holders of record of Common Stock (or other securities) shall be
entitled to exchange their shares of Common Stock (or other securities) for the
securities or other property deliverable upon such reorganization,
reclassification, recapitalization, consolidation, merger, transfer,
dissolution, liquidation or winding-up. Such notice shall be delivered as soon
as practicable and if possible at least 20 days prior to the date therein
specified in the case of any date referred to in the foregoing subdivisions (i)
and (ii). Failure to give the notice specified hereunder shall have no effect
on the status or effectiveness of the action to which the required notice
relates.
10. DEFINITIONS.
As used herein, unless the context otherwise requires, the following
terms have the following meanings:
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"Affiliate" means, with respect to any Person, any other Person that,
directly or indirectly, controls, is controlled by, or is under common control
with such first Person. For the purpose of this definition, "control" shall
mean, as to any Person, the power to direct or cause the direction of the
management and policies of such Person, whether through the ownership of voting
securities, by contract or otherwise.
"Affiliate Warrants" mean the warrants issued in connection with the
issue and sale by the Company of shares of its Series C Preferred Stock on the
Closing Date (as defined in the Investment Agreement).
"Business Day" means any day other than a Saturday, Sunday or a day on
which national banks are authorized by law or executive order to close in the
State of New York.
"Change of Control" shall mean (i) the direct or indirect sale,
lease, exchange or other transfer of all or substantially all of the assets of
the Company to any Person or entity or group of Persons or entities acting in
concert as a partnership or other group within the meaning of Rule 13d-5 under
the Exchange Act (a "GROUP OF PERSONS"), (ii) the merger or consolidation of the
Company with or into another corporation with the effect that the then existing
stockholders of the Company hold less than 50% of the combined voting power of
the then outstanding securities of the surviving corporation of such merger or
the corporation resulting from such consolidation ordinarily (and apart from
rights accruing under special circumstances) having the right to vote in the
election of directors, (iii) the replacement of a majority of the Board of
Directors of the Company, over a two-year period, from the directors who
constituted the Board of Directors at the beginning of such period, and such
replacement shall not have been approved by the Board of Directors of the
Company (or its replacements approved by the Board of Directors of the Company)
as constituted at the beginning of such period, (iv) a Person or Group of
Persons (other than the Investors and their Affiliates, employees, partners or
members) shall, as a result of a tender or exchange offer, open market
purchases, privately negotiated purchases or otherwise, have become the
beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of
securities of the Company representing 49% or more of the combined voting power
of the then outstanding securities of the Company ordinarily (and apart from
rights accruing under special circumstances) having the right to vote in the
election of directors. Notwithstanding the foregoing, no Change in Control shall
be deemed to have occurred (a) upon the acquisition of any shares of Common
Stock of the Company pursuant to the exercise of the Investor Warrants, (b) upon
the exercise of any of the rights and privileges granted to each of the
Investors pursuant to Section 6.2.5 of the Investment Agreement, (c) upon the
exercise of any rights and privileges granted to the holders of the Series B
Preferred Stock pursuant to the Certification of the Powers, Designations,
Preferences and Rights of the Series B Preferred Stock or (d) otherwise as a
result of the
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equity ownership or designation of directors by the Investors or their
Affiliates, employees, partners or members.
"Change of Control Repurchase Price" means (i) if any Investor
Warrants are then outstanding, an amount in cash, on a per Warrant Share basis,
equal to the "Change of Control Repurchase Price" (on a per Investor Warrant
Share basis) for the Investor Warrants, or (ii) if no Investor Warrants are then
outstanding, an amount of cash equal to the fair market value of this Warrant
immediately prior to the announcement of a Change of Control, to be determined
by an Independent Financial Expert selected by the Company and a majority in
interest of the Warrant Shares, giving due consideration to such factors as the
financial condition and prospects of the Company, the remaining unexpired term
of this Warrant and the market price of the Common Stock of the Company after
announcement of such Change of Control.
"Closing Price" of the Common Stock as of any day, means (a) the last
reported sale price of such stock (regular way) or, in case no such sale takes
place on such day, the average of the closing bid and asked prices, in either
case as reported on the principal national securities exchange on which the
Common Stock is listed or admitted to trading or (b) if the Common Stock is not
listed or admitted to trading on any national securities exchange, the last
reported sale price or, in case no such sale takes place on such day, the
average of the highest reported bid and lowest reported asked quotation for the
Common Stock, in either case reported on the National Association of Securities
Dealers, Inc. Automated Quotation System ("NASDAQ"), or a similar service if
NASDAQ is no longer reporting such information.
"Common Stock" has the meaning specified on the cover of this Warrant.
"Company" has the meaning specified on the cover of this Warrant.
"Current Market Price" means, with respect to each share of Common
Stock as of any date, the average of the daily Closing Prices per share of
Common Stock for the 10 consecutive trading days commencing 15 trading days
prior to such date; provided that if on any such date the shares of Common Stock
are not listed or admitted for trading on any national securities exchange or
quoted by NASDAQ or a similar service, the Current Market Price for a share of
Common Stock shall be the fair market value of such share as determined in good
faith by the Board of Directors of the Company; provided that if the holders of
a majority in interest of the Investor Warrant Shares disagree with the Board of
Director's determination of fair market value for purposes of the Investor
Warrants, the fair market value for purposes of this Warrant shall be the same
as the fair market value determined for purposes of the Investor Warrants.
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<PAGE>
"Exercise Form" means an Exercise Form in the form annexed hereto as
Exhibit A.
"Expiration Date" has the meaning specified on the cover of this
Warrant.
"Harnick Warrant" means the warrant to purchase 50,000 shares of
Common Stock issued to Carl D. Harnick at the closing of the Investment
Agreement.
"Independent Financial Expert" means an independent nationally
recognized investment banking firm.
"Investment Agreement" means the Investment Agreement, dated as of
October 12, 1997, as amended and as hereafter amended, among the Investors and
the Company.
"Investors" means MAC Music LLC, a Delaware limited liability company,
and SK-Palladin Partners, LP, a Delaware limited partnership.
"Investor Warrants" mean the warrants issued to the Investors pursuant
to the Investment Agreement.
"Investor Warrant Shares" mean the shares of Common Stock issued or
issuable upon exercise of the Investor Warrants.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, limited liability company,
unincorporated organization, estate, other entity or government or any agency or
political subdivision thereof.
"Pro Rata Repurchase" means any purchase of shares of Common Stock by
the Company or by any of its subsidiaries whether for cash, shares of capital
stock of the Company, other securities of the Company, evidences of indebtedness
of the Company or any other Person or any other property (including, without
limitation, shares of capital stock, other securities or evidences of
indebtedness of a subsidiary of the Company), or any combination thereof, which
purchase is subject to Section 13(e) of the Securities Exchange Act of 1934, as
amended, or is made pursuant to an offer made available to all holders of Common
Stock.
"Repurchase Price" means, on any date, the Current Market Price per
share of Common Stock as of such date, less the per share Exercise Price;
PROVIDED, that if at the time of determination of the Repurchase Price, the
Warrantholder shall be entitled to receive any securities or property other than
Common Stock, the Repurchase
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<PAGE>
Price shall include a cash amount per Warrant Share equal to that portion of
the fair value of such securities or property allocable to each Warrant Share.
"Securities Act" has the meaning specified on the cover of this
Warrant.
"Warrantholder" has the meaning specified on the cover of this
Warrant.
"Warrant Shares" has the meaning specified on the cover of this
Warrant; provided, however, that Warrant Shares shall not include shares sold to
the public pursuant to Rule 144 under the Securities Act of 1933, as amended, or
pursuant to an effective registration statement under the Securities Act.
11. MISCELLANEOUS.
11.1 ENTIRE AGREEMENT. This Warrant constitutes the entire
agreement between the Company and the Warrantholder with respect to this
Warrant.
11.2 BINDING EFFECT; BENEFITS. This Warrant shall inure to the
benefit of and shall be binding upon the Company and the Warrantholder and their
respective successors and assigns. Nothing in this Warrant, expressed or
implied, is intended to or shall confer on any person other than the Company and
the Warrantholder, or their respective successors or assigns, any rights,
remedies, obligations or liabilities under or by reason of this Warrant.
11.3 SECTION AND OTHER HEADINGS. The section and other headings
contained in this Warrant are for reference purposes only and shall not be
deemed to be a part of this Warrant or to affect the meaning or interpretation
of this Warrant.
11.4 NOTICES. All notices and other communications required or
permitted hereunder shall be in writing and shall be delivered personally,
telecopied or sent by certified, registered or express mail, postage prepaid.
Any such notice shall be deemed given when so delivered personally, telecopied
or sent by certified, registered or express mail, as follows:
(a) if to the Company, addressed to:
Platinum Entertainment, Inc.
2001 Butterfield Road
Downers Grove, Illinois 60515
Telecopy: (630) 769-0049
Attention: Chief Executive Officer
with a copy to:
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<PAGE>
Katten, Muchin & Zavis
525 West Monroe Street, Suite 1600
Chicago, Illinois 60661
Telecopy: (312) 902-1061
Attention: Matthew S. Brown, Esq.
(b) if to the Warrantholder, addressed to:
______________________________________
______________________________________
______________________________________
Telecopy:
Any party may by notice given in accordance with this Section 11.4 designate
another address or person for receipt of notices hereunder.
11.5 SEVERABILITY. Any term or provision of this Warrant which
is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the terms and provisions of this Warrant or
affecting the validity or enforceability of any of the terms or provisions of
this Warrant in any other jurisdiction.
11.6 GOVERNING LAW. This Warrant shall be deemed to be a
contract made under the laws of the State of Delaware and for all purposes shall
be governed by and construed in accordance with the laws of such State
applicable to such agreements made and to be performed entirely within such
State.
11.7 CERTAIN REMEDIES. The Warrantholder shall be entitled to
an injunction or injunctions to prevent breaches of the provisions of this
Warrant and to enforce specifically the terms and provisions of this Warrant in
any court of the United States or any court of any state having jurisdiction,
this being in addition to any other remedy to which the Warrantholder may be
entitled at law or in equity.
11.8 NO RIGHTS OR LIABILITIES AS STOCKHOLDER. Nothing contained
in this Warrant shall be deemed to confer upon the Warrantholder any rights as a
stockholder of the Company or as imposing any liabilities on the Warrantholder
to purchase any securities whether such liabilities are asserted by the Company
or by creditors or stockholders of the Company or otherwise.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be
signed by its duly authorized officer.
PLATINUM ENTERTAINMENT, INC.
By: /s/ Douglas C. Laux
----------------------------------------
Name: Douglas C. Laux
Title: Chief Operating Officer and
Chief Financial Officer
Dated: April 15, 1999
17
<PAGE>
EXHIBIT A
EXERCISE FORM
(To be executed upon exercise of this Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant, to purchase __________ of the Warrant Shares and
[herewith tenders payment for such Warrant Shares to the order of Platinum
Entertainment, Inc. in the amount of $__________] [hereby exercises its
Conversion Right] in accordance with the terms of this Warrant. The undersigned
requests that a certificate for [such Warrant Shares] [that number of Warrant
Shares to which the undersigned is entitled as calculated pursuant to
Section 1.2] be registered in the name of the undersigned and that such
certificates be delivered to the undersigned's address below.
Dated:__________________________
Signature____________________________
____________________________
(Print Name)
____________________________
(Street Address)
____________________________
(City) (State) (Zip Code)
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<PAGE>
NEITHER THIS WARRANT NOR ANY SECURITIES ACQUIRED UPON THE EXERCISE OF
THIS WARRANT (THE "SECURITIES") HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND
NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD,
TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES
LAWS OR AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS AS
EVIDENCED BY AN OPINION OF COUNSEL DELIVERED AND REASONABLY ACCEPTABLE TO THE
COMPANY.
----------------------------------------------
PLATINUM ENTERTAINMENT, INC.
COMMON STOCK PURCHASE WARRANT
-----------------------------------------------
This certifies that, for good and valuable consideration, Platinum
Entertainment, Inc., a Delaware corporation (the "Company"), grants to Craig J.
Duchossois, his successors and permitted assigns (the "Warrantholder"), the
right to subscribe for and purchase from the Company Two Hundred One Thousand
Six Hundred and Sixty-Six and One Sixty-Fifth (201,666.65) validly issued, fully
paid and nonassessable shares (the "Warrant Shares") of the Company's Common
Stock, par value $.001 per share (the "Common Stock"), at the purchase price per
share equal to the Exercise Price, as defined herein, at any time prior to 5:00
p.m., Central Standard Time, on April 15, 2009 (the "Expiration Date"), subject
to the terms, conditions and adjustments herein set forth. References herein to
"Warrants" or "Warrant" shall mean this Warrant.
This Warrant is being issued in connection with the issue and sale by
the Company of shares of its Series D Convertible Preferred Stock, par value
$.001 per share (the "Series D Preferred Stock").
The "Exercise Price" shall mean $6.126; which price is equal to the
average of the daily Closing Price per share of Common Stock for the trailing 30
consecutive trading days from and including April 9, 1999. The Exercise Price as
determined in accordance with the foregoing shall be adjusted from time to time
in accordance with the provisions of Section 6.
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1. EXERCISE OF WARRANTS.
1.1 EXERCISE OF WARRANT. This Warrant may be exercised, in whole
or in part, at any time or from time to time prior to the Expiration Date, by
surrendering to the Company at its principal office this Warrant, with an
Exercise Form (as defined herein) duly executed by the Warrantholder and
accompanied by payment of the Exercise Price for the number of shares of Common
Stock specified in such Exercise Form.
1.2 CASHLESS EXERCISE. In lieu of the payment of the Exercise
Price, the Warrantholder shall have the right (but not the obligation) to
require the Company to convert this Warrant, in whole or in part, into shares of
Common Stock (the "Conversion Right") as provided for in this Section 1.2. Upon
exercise of the Conversion Right, the Company shall deliver to the Warrantholder
(without payment by the Warrantholder of any of the Exercise Price) that number
of shares of Common Stock equal to the quotient obtained by dividing (x) the
value of the Warrant or portion thereof being exercised at the time the
Conversion Right is exercised (determined by subtracting the aggregate Exercise
Price in effect immediately prior to the exercise of the Conversion Right for
the number of shares for which the Warrant is being exercised from the aggregate
Current Market Price (as defined herein) of the shares of Common Stock issuable
upon exercise of the Warrant for the number of shares for which the Warrant is
being exercised immediately prior to the exercise of the Conversion Right) by
(y) the Current Market Price of one share of Common Stock immediately prior to
the exercise of the Conversion Right. The Conversion Right may be exercised at
any time or from time to time prior to the Expiration Date by surrendering to
the Company at its principal office this Warrant, with an Exercise Form duly
executed by the Warrantholder and indicating that the Warrantholder wishes to
exercise the Conversion Right and specifying the total number of shares of
Common Stock for which the Warrant is being exercised.
1.3 DELIVERY OF WARRANT SHARES; EFFECTIVENESS OF EXERCISE.
(a) DELIVERY OF WARRANT SHARES. A stock certificate or
certificates for the Warrant Shares specified in the Exercise Form along with a
check for the amount of cash to be paid in lieu of fractional shares, if any,
shall be delivered to the Warrantholder within 10 Business Days after the
Exercise Date (as defined herein); PROVIDED, HOWEVER, that if the Conversion
Right is exercised in accordance with Section 1.2 and a determination by the
Board of Directors is required to determine the Current Market Price of the
Common Stock, such delivery shall be made promptly after such determination is
made. If this Warrant shall have been exercised only in part, the Company shall,
at the time of delivery of the stock certificate or certificates and cash in
lieu of fractional shares, if any, deliver to the Warrantholder a
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new Warrant evidencing the rights to purchase the remaining Warrant Shares,
which new Warrant shall in all other respects be identical with this Warrant.
(b) EFFECTIVENESS OF EXERCISE. The exercise of this Warrant
shall be deemed to have been effective immediately prior to the close of
business on the Business Day on which this Warrant is exercised in accordance
with Section 1.1 or 1.2 (the "Exercise Date"). The Person in whose name any
certificate for shares of Common Stock shall be issuable upon such exercise
shall be deemed to be the record holder of such shares of Common Stock for all
purposes on the Exercise Date.
1.4 PAYMENT OF TAXES. The issuance of certificates for Warrant
Shares shall be made without charge to the Warrantholder for any stock transfer
or other issuance tax in respect thereof; PROVIDED, HOWEVER, that the
Warrantholder shall be required to pay any and all taxes that may be payable in
respect of any transfer involved in the issuance and delivery of any certificate
in a name other than that of the then Warrantholder as reflected upon the books
of the Company.
2. RESTRICTIVE LEGENDS.
2.1 WARRANTS. Except as otherwise permitted by this Section 2,
each Warrant (and each Warrant issued in substitution for any Warrant pursuant
to Section 4) shall be stamped or otherwise imprinted with a legend in
substantially the following form:
NEITHER THIS WARRANT NOR ANY SECURITIES ACQUIRED UPON THE EXERCISE OF
THIS WARRANT (THE "SECURITIES") HAVE BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES
LAWS AND NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED,
SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE
STATE SECURITIES LAWS OR AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER
SUCH ACT AND SUCH LAWS AS EVIDENCED BY AN OPINION OF COUNSEL DELIVERED AND
REASONABLY ACCEPTABLE TO THE COMPANY.
2.2 WARRANT SHARES. Except as otherwise permitted by this Section
2, each stock certificate for Warrant Shares issued upon the exercise of any
Warrant and each stock certificate issued upon the direct or indirect transfer
of any such Warrant Shares shall be stamped or otherwise imprinted with a legend
in substantially the following form:
3
<PAGE>
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAWS AND NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE
OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
AND APPLICABLE STATE SECURITIES LAWS OR AN EXEMPTION FROM REGISTRATION
UNDER SUCH ACT AND SUCH LAWS AS EVIDENCED BY AN OPINION OF COUNSEL
DELIVERED AND REASONABLY ACCEPTABLE TO THE COMPANY.
2.3 REMOVAL OF LEGENDS. Notwithstanding the foregoing, the
Warrantholder may require the Company to issue a Warrant or a stock certificate
for Warrant Shares, in each case without a legend, if either (i) such Warrant or
such Warrant Shares, as the case may be, have been registered for resale under
the Securities Act and sold pursuant to such registration or (ii) if reasonably
requested by the Company, the Warrantholder has delivered to the Company an
opinion of legal counsel (from a firm reasonably satisfactory to the Company)
which opinion shall be addressed to the Company and be reasonably satisfactory
in form and substance to the Company's counsel, to the effect that such
registration is not required with respect to such Warrant or such Warrant
Shares, as the case may be.
3. RESERVATION AND REGISTRATION OF SHARES, ETC.
The Company covenants and agrees as follows:
(a) All Warrant Shares that are issued upon the exercise of
this Warrant will, upon issuance, be validly issued, fully paid and
nonassessable, not subject to any preemptive rights, and free from all taxes,
liens, security interests, charges, and other encumbrances with respect to the
issuance thereof, other than taxes in respect of any transfer occurring
contemporaneously with such issue.
(b) During the period within which this Warrant may be
exercised, the Company will at all times have authorized and reserved, and keep
available free from preemptive rights, a sufficient number of shares of Common
Stock to provide for the exercise of the rights represented by this Warrant.
4. LOSS OR DESTRUCTION OF WARRANT.
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<PAGE>
Subject to the terms and conditions hereof, upon receipt by the
Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant and, in the case of loss, theft or
destruction, of such bond or indemnification as the Company may reasonably
require, and, in the case of mutilation, upon surrender and cancellation of this
Warrant, the Company will execute and deliver a new Warrant of like tenor.
5. OWNERSHIP OF WARRANT.
The Company may deem and treat the Person in whose name this Warrant
is registered as the holder and owner hereof (notwithstanding any notations of
ownership or writing hereon made by anyone other than the Company) for all
purposes and shall not be affected by any notice to the contrary, until
presentation of this Warrant for registration of transfer.
6. CERTAIN ADJUSTMENTS.
6.1 The number of Warrant Shares purchasable upon the exercise of
this Warrant and the Exercise Price shall be subject to adjustment as follows:
(a) STOCK DIVIDENDS, SUBDIVISION, COMBINATION OR
RECLASSIFICATION OF COMMON STOCK. If at any time after the date of the issuance
of this Warrant the Company shall (i) declare a stock dividend on the Common
Stock payable in shares of its capital stock (including Common Stock), (ii)
increase the number of shares of Common Stock outstanding by a subdivision or
split-up of shares of Common Stock, (iii) decrease the number of shares of
Common Stock outstanding by a combination of shares of Common Stock or (iv)
issue any shares of its capital stock in a reclassification of the Common Stock,
then, on the record date for such dividend or the effective date of such
subdivision or split-up, combination or reclassification, as the case may be,
the number and kind of shares to be delivered upon exercise of this Warrant will
be adjusted so that the Warrantholder will be entitled to receive the number and
kind of shares of capital stock that such Warrantholder would have owned or been
entitled to receive upon or by reason of such event had this Warrant been
exercised immediately prior thereto, and the Exercise Price will be adjusted as
provided below in paragraph (i).
(b) REORGANIZATION, ETC. If at any time after the date of
issuance of this Warrant any consolidation of the Company with or merger of the
Company with or into any other Person (other than a merger or consolidation in
which the Company is the surviving or continuing corporation and which does not
result in any reclassification of, or change (other than a change in par value
or from par value to no par value or from no par value to par value, or as a
result of a subdivision or
5
<PAGE>
combination) in, outstanding shares of Common Stock) or any sale, lease or
other transfer of all or substantially all of the assets of the Company to
any other person (each, a "Reorganization Event"), shall be effected in such
a way that the holders of Common Stock shall be entitled to receive cash,
stock, other securities or assets (whether such cash, stock, other securities
or assets are issued or distributed by the Company or another Person) with
respect to or in exchange for Common Stock, then, upon exercise of this
Warrant the Warrantholder shall have the right to receive the kind and amount
of cash, stock, other securities or assets receivable upon such
Reorganization Event by a holder of the number of shares of Common Stock that
such Warrantholder would have been entitled to receive upon exercise of this
Warrant had this Warrant been exercised immediately before such
Reorganization Event, subject to adjustments that shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Section 6.1. Notwithstanding the foregoing, if more than 20% in aggregate
value of the cash, stock, other securities or assets deliverable to such
holder in accordance with the foregoing provisions of this Section 6(b) would
consist of cash or debt securities, then the Warrantholder shall have the
right (the "Special Reorganization Right") at its election, exercisable by
giving written notice to the Company prior to 120 days following the
consummation of such Reorganization Event to receive from the Company, and
the Company shall pay to the Warrantholder promptly after the exercise by the
Warrantholder of the Special Reorganization Right, instead of the cash,
stock, other securities or assets otherwise deliverable to such holder, an
amount of cash equal to the fair market value of this Warrant immediately
prior to the announcement of such Reorganization Event, to be determined by
an Independent Financial Expert giving due consideration to such factors as
the financial condition and prospects of the Company, the remaining unexpired
term of the Warrant and the market price of the Common Stock of the Company
after announcement of such Reorganization Event. The Company shall not enter
into any of the transactions referred to in this Section 6.1(b) unless
effective provision shall be made so as to give effect to the provisions set
forth in this Section 6.1(b).
(c) CERTAIN ISSUANCES OF COMMON STOCK. If at any time after
the date of issuance of this warrant the Company shall issue or sell, or fix a
record date for the issuance of, (A) Common Stock (or securities convertible
into or exchangeable or exercisable for Common Stock) (other than Excluded
Securities) or (B) rights, options or warrants entitling the holders thereof to
subscribe for or purchase Common Stock (or securities convertible into or
exchangeable or exercisable for Common Stock) (other than Excluded Securities),
in any such case, at a price per share (treating the price per share of the
securities convertible into or exchangeable or exercisable for Common Stock as
equal to (x) the sum of (i) the price for a unit of the security convertible
into or exchangeable or exercisable for Common Stock plus (ii) any additional
consideration initially payable upon the conversion of such security into Common
Stock or the exchange or exercise of such security for Common Stock divided by
(y) the number of shares of Common Stock initially underlying such convertible,
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<PAGE>
exchangeable or exercisable security) that is less than the greater of the
Current Market Price of the Common Stock and the Exercise Price on the date of
such issuance or such record date (the "Measuring Price") then, immediately
after the date of such issuance or sale or on such record date, the number of
shares of Common Stock to be delivered upon exercise of this Warrant shall be
increased so that the Warrantholder thereafter shall be entitled to receive the
number of shares of Common Stock determined by multiplying the number of shares
of Common Stock such Warrantholder would have been entitled to receive
immediately before the date of such issuance or sale or such record date by a
fraction, the denominator of which shall be the number of shares of Common Stock
outstanding (calculated to include the shares of Common Stock underlying the
Warrants, the Investor Warrants, the Affiliate Warrants, the Harnick Warrant and
all then currently exerciseable, convertible and exchangeable securities that
are "in the money") on such date plus the number of shares of Common Stock that
the aggregate offering price of the total number of shares so offered for
subscription or purchase (or the aggregate purchase price of the convertible,
exchangeable or exerciseable securities so offered plus the aggregate of amount
of any additional consideration initially payable upon conversion into Common
Stock or exchange or exercise for Common Stock) would purchase at the Measuring
Price and the numerator of which shall be the number of shares of Common Stock
outstanding (calculated to include the shares of Common Stock underlying the
Warrants, the Investor Warrants, Affiliate Warrants, the Harnick Warrant and all
then currently exerciseable, convertible and exchangeable securities that are
"in the money") on such date plus the number of additional shares of Common
Stock offered for subscription or purchase (or into or for which the convertible
or exchangeable securities or rights, options or warrants so offered are
initially convertible or exchangeable or exercisable, as the case may be), and
the Exercise Price shall be adjusted as provided below in paragraph (i).
"Excluded Securities" means (A) shares of Common Stock issued upon conversion or
exercise of convertible securities, warrants and options of the Company,
outstanding on the date this Warrant is originally issued, (B) shares of Common
Stock, and options to purchase such shares, issued to officers, directors,
employees or former employees of, or consultants to, the Company or any of its
subsidiaries pursuant to any equity incentive plan, agreement or other
arrangement which has been approved by a vote of at least two-thirds (2/3) of
the Board of Directors of the Company, (C) shares of Common Stock issued upon
conversion of shares of the Company's Series B Convertible Preferred Stock, par
value $.001 per share (the "Series B Preferred Stock"), (D) shares of Common
Stock issued upon exercise of the Investor Warrants, including any increase in
the number of shares of Common Stock issuable under such Investor Warrants as a
result of the conditional annual increase provision included therein, (E) shares
of Common Stock issued upon conversion of shares of the Company's Series C
Convertible Preferred Stock, par value $.001 per share (the "Series C Preferred
Stock"), (F) shares of Common Stock issued upon exercise of the Affiliate
Warrants, (G) shares of Common Stock issued upon exercise of the Harnick
Warrant, (H) shares of Common Stock issuable upon conversion of shares
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of the Company's Series D Preferred Stock, and (I) shares of Common Stock
issued upon exercise of any Warrant.
(d) EXTRAORDINARY DISTRIBUTIONS. If at any time after the
date of issuance of this Warrant the Company shall distribute to all holders of
its Common Stock (including any such distribution made in connection with a
consolidation or merger in which the Company is the continuing or surviving
corporation and the Common Stock is not changed or exchanged) cash, evidences of
indebtedness, securities or other assets (excluding (i) ordinary course cash
dividends to the extent such dividends do not exceed the Company's retained
earnings and (ii) dividends payable in shares of capital stock for which
adjustment is made under Section 6.1(a)) or rights, options or warrants to
subscribe for or purchase securities of the Company (excluding those for which
adjustment is made under Section 6.1(c)), then the number of shares of Common
Stock to be delivered to such Warrantholder upon exercise of this Warrant shall
be increased so that the Warrantholder thereafter shall be entitled to receive
the number of shares of Common Stock determined by multiplying the number of
shares such Warrantholder would have been entitled to receive immediately before
such record date by a fraction, the denominator of which shall be the Current
Market Price per share of Common Stock on such record date minus the then fair
market value (as reasonably determined by the Board of Directors of the Company
in good faith) of the portion of the cash, evidences of indebtedness, securities
or other assets so distributed or of such rights or warrants applicable to one
share of Common Stock (provided that such denominator shall in no event be less
than $.01) and the numerator of which shall be the Current Market Price per
share of the Common Stock, and the Exercise Price shall be adjusted as provided
below in paragraph (h).
(e) PRO RATA REPURCHASES. If at any time after the date of
issuance of this Warrant, the Company or any subsidiary thereof shall make a Pro
Rata Repurchase, then the number of shares of Common Stock to be delivered to
such Warrantholder upon exercise of this Warrant shall be increased so that the
Warrantholder thereafter shall be entitled to receive the number of shares of
Common Stock determined by multiplying the number of shares of Common Stock such
Warrantholder would have been entitled to receive immediately before such Pro
Rata Repurchase by a fraction (which in no event shall be less than one) the
denominator of which shall be (i) the product of (x) the number of shares of
Common Stock outstanding immediately before such Pro Rata Repurchase and (y) the
Current Market Price of the Common Stock as of the day immediately preceding the
first public announcement by the Company of the intent to effect such Pro Rata
Repurchase minus (ii) the aggregate purchase price of the Pro Rata Repurchase
(provided that such denominator shall never be less than $.01), and the
numerator of which shall be the product of (i) the number of shares of Common
Stock outstanding immediately before such Pro Rata Repurchase minus the number
of shares of Common Stock repurchased in such Pro Rata Repurchase and (ii) the
Current Market Price of the Common Stock as of the day immediately
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preceding the first public announcement by the Company of the intent to
effect such Pro Rata Repurchase.
(f) FRACTIONAL SHARES. No fractional shares of Common Stock
or scrip shall be issued to any Warrantholder in connection with the exercise of
this Warrant. Instead of any fractional shares of Common Stock that would
otherwise be issuable to such Warrantholder, the Company will pay to such
Warrantholder a cash adjustment in respect of such fractional interest in an
amount equal to that fractional interest of the then Current Market Price per
share of Common Stock.
(g) CARRYOVER. Notwithstanding any other provision of this
Section 6.1, no adjustment shall be made to the number of shares of Common Stock
to be delivered to the Warrantholder (or to the Exercise Price) if such
adjustment represents less than .05% of the number of shares to be so delivered,
but any lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment that together with any
adjustments so carried forward shall amount to .05% or more of the number of
shares to be so delivered.
(h) EXERCISE PRICE ADJUSTMENT. Whenever the number of
Warrant Shares purchasable upon the exercise of the Warrant is adjusted as
provided pursuant to this Section 6.1, the Exercise Price per share payable upon
the exercise of this Warrant shall be adjusted by multiplying such Exercise
Price immediately prior to such adjustment by a fraction, of which the numerator
shall be the number of Warrant Shares purchasable upon the exercise of the
Warrant immediately prior to such adjustment, and of which the denominator shall
be the number of Warrant Shares purchasable immediately thereafter; PROVIDED,
HOWEVER, that the Exercise Price for each Warrant Share shall in no event be
less than the par value of such Warrant Share.
(i) MULTIPLE ADJUSTMENTS. If any action or transaction would
require adjustment of the number of shares of Common Stock to be delivered to
the Warrantholder upon exercise of this Warrant pursuant to more than one
paragraph of this Section 6.1, only one adjustment shall be made and each such
adjustment shall be the amount of adjustment that has the highest absolute
value.
6.2 NOTICE OF ADJUSTMENT. Whenever the number of Warrant Shares
or the Exercise Price of such Warrant Shares is adjusted, as herein provided,
the Company shall promptly mail by first class mail, postage prepaid, to the
Warrantholder, notice of such adjustment or adjustments and a certificate of a
firm of independent public accountants of recognized national standing selected
by the Board of Directors of the Company (who shall be appointed at the
Company's expense and who may be the independent public accountants regularly
employed by the Company) setting forth the number of Warrant Shares and the
Exercise Price of such Warrant Shares after such
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adjustment, setting forth a brief statement of the facts requiring such
adjustment and setting forth the computation by which such adjustment was
made.
7. PUT RIGHTS. The Warrantholder shall have the following Put Rights:
(a) At the earlier of (i) the fifth anniversary of the date
hereof and (ii) a Change of Control, the Warrantholder may notify the Company in
writing (the "PUT Notice") of the Warrantholder's desire to cause the Company to
repurchase, in the case of clause (i) above, all (but not less than all) of the
Warrant Shares (issued or represented by the Warrant) at a price per share equal
to the Repurchase Price (the "Five-Year Put"), or, in the case of clause (ii)
above, the Warrant at the Change of Control Repurchase Price (the "Change of
Control Put").
(b) If the Company receives a Put Notice pursuant to Section
7(a), it shall deliver to the Warrantholder, by first class mail, postage
prepaid, mailed as soon as practicable and if possible within thirty (30) days
of the receipt by the Company of the Put Notice, a notice stating: (i) the date
as of which such repurchase shall occur (which date (the "Put Closing") shall be
not less than ten (10) nor more than thirty (30) days following the date of such
notice, but in any event prior to the Expiration Date); (ii) in the case of a
Five-Year Put, the number of Warrant Shares (issued or represented by this
Warrant) to be purchased from the Warrantholder and the Repurchase Price (which
shall be calculated as of the date of the Put Notice) or, in the case of a
Change of Control Put, the Change of Control Repurchase Price; and (iii) the
place or places where certificate or certificates representing this Warrant or
Warrant Shares are to be surrendered for payment; PROVIDED, HOWEVER, that the
Company shall have no obligation to send the notice set forth above or to
repurchase the Warrants and Warrant Shares following the exercise of the Five
Year Put (and the provisions of paragraph (c) below shall not be applicable to
any failure by the Company to repurchase the Warrants and the Warrant Shares
following the exercise of the Five Year Put), unless the holders of not less
than a majority of the shares of Common Stock issued or issuable upon exercise
of the Investor Warrants (the "Investor Warrant Shares") shall also have
exercised the "five year put" provided for in the Investor Warrants.
(c) With respect to Warrants and Warrant Shares properly
tendered for repurchase, if the Company fails to pay the Repurchase Price or the
Change of Control Repurchase Price on the date fixed for repurchase, the
Corporation shall also pay interest thereon at the rate of 12% per annum,
compounded on a quarterly basis, until such time as such satisfaction shall have
occurred.
(d) At the Put Closing, the Warrantholder shall deliver to
the Company the certificate or certificates representing the Warrantholder's
Warrant or Warrant Shares and the Company shall deliver to the Warrantholder an
amount equal
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to, in the case of a Five-Year Put, the product obtained by multiplying (i)
the number of such Warrant Shares (issued or represented by this Warrant) by
(ii) the Repurchase Price or, in the case of a Change of Control Put, the
Change of Control Repurchase Price, by cashier's or certified check payable
to the Warrantholder or by wire transfer of immediately available funds to an
account designated by the Warrantholder.
(e) The Company shall not (and shall not permit any
Affiliate of the Company to) enter into any contract or other consensual
arrangement that by its terms restricts the Company's ability to honor the Put.
8. AMENDMENTS. Any provision of this Warrant may be amended and the
observance thereof waived only with the written consent of the Company and the
Warrantholder.
9. NOTICES OF CORPORATE ACTION. So long as this Warrant has not been
exercised in full, in the event of:
(a) any consolidation or merger involving the Company and
any other party or any transfer of all or substantially all the assets of the
Company to any other party, or
(b) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company,
the Company will mail, by first class mail, postage prepaid, to the
Warrantholder a notice specifying (i) the date or expected date on which any
such record is to be taken for the purpose of a dividend, distribution or right
and the amount and character of any such dividend, distribution or right and
(ii) the date or expected date on which a reorganization, reclassification,
recapitalization, consolidation, merger, transfer, dissolution, liquidation or
winding-up is to take place and the time, if any such time is to be fixed, as of
which the holders of record of Common Stock (or other securities) shall be
entitled to exchange their shares of Common Stock (or other securities) for the
securities or other property deliverable upon such reorganization,
reclassification, recapitalization, consolidation, merger, transfer,
dissolution, liquidation or winding-up. Such notice shall be delivered as soon
as practicable and if possible at least 20 days prior to the date therein
specified in the case of any date referred to in the foregoing subdivisions (i)
and (ii). Failure to give the notice specified hereunder shall have no effect on
the status or effectiveness of the action to which the required notice relates.
10. DEFINITIONS.
As used herein, unless the context otherwise requires, the following
terms have the following meanings:
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"AFFILIATE" means, with respect to any Person, any other Person that,
directly or indirectly, controls, is controlled by, or is under common control
with such first Person. For the purpose of this definition, "control" shall
mean, as to any Person, the power to direct or cause the direction of the
management and policies of such Person, whether through the ownership of voting
securities, by contract or otherwise.
"AFFILIATE WARRANTS" mean the warrants issued in connection with the
issue and sale by the Company of shares of its Series C Preferred Stock on the
Closing Date (as defined in the Investment Agreement).
"BUSINESS DAY" means any day other than a Saturday, Sunday or a day on
which national banks are authorized by law or executive order to close in the
State of New York.
"CHANGE OF CONTROL" shall mean (i) the direct or indirect sale, lease,
exchange or other transfer of all or substantially all of the assets of the
Company to any Person or entity or group of Persons or entities acting in
concert as a partnership or other group within the meaning of Rule 13d-5 under
the Exchange Act (a "GROUP OF PERSONS"), (ii) the merger or consolidation of the
Company with or into another corporation with the effect that the then existing
stockholders of the Company hold less than 50% of the combined voting power of
the then outstanding securities of the surviving corporation of such merger or
the corporation resulting from such consolidation ordinarily (and apart from
rights accruing under special circumstances) having the right to vote in the
election of directors, (iii) the replacement of a majority of the Board of
Directors of the Company, over a two-year period, from the directors who
constituted the Board of Directors at the beginning of such period, and such
replacement shall not have been approved by the Board of Directors of the
Company (or its replacements approved by the Board of Directors of the Company)
as constituted at the beginning of such period, (iv) a Person or Group of
Persons (other than the Investors and their Affiliates, employees, partners or
members) shall, as a result of a tender or exchange offer, open market
purchases, privately negotiated purchases or otherwise, have become the
beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of
securities of the Company representing 49% or more of the combined voting power
of the then outstanding securities of the Company ordinarily (and apart from
rights accruing under special circumstances) having the right to vote in the
election of directors. Notwithstanding the foregoing, no Change in Control shall
be deemed to have occurred (a) upon the acquisition of any shares of Common
Stock of the Company pursuant to the exercise of the Investor Warrants, (b) upon
the exercise of any of the rights and privileges granted to each of the
Investors pursuant to Section 6.2.5 of the Investment Agreement, (c) upon the
exercise of any rights and privileges granted to the holders of the Series B
Preferred Stock pursuant to the Certification of the Powers, Designations,
Preferences and Rights of the Series B Preferred Stock or (d) otherwise as a
result of the
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equity ownership or designation of directors by the Investors or their
Affiliates, employees, partners or members.
"CHANGE OF CONTROL REPURCHASE PRICE" means (i) if any Investor
Warrants are then outstanding, an amount in cash, on a per Warrant Share basis,
equal to the "Change of Control Repurchase Price" (on a per Investor Warrant
Share basis) for the Investor Warrants, or (ii) if no Investor Warrants are then
outstanding, an amount of cash equal to the fair market value of this Warrant
immediately prior to the announcement of a Change of Control, to be determined
by an Independent Financial Expert selected by the Company and a majority in
interest of the Warrant Shares, giving due consideration to such factors as the
financial condition and prospects of the Company, the remaining unexpired term
of this Warrant and the market price of the Common Stock of the Company after
announcement of such Change of Control.
"CLOSING PRICE" of the Common Stock as of any day, means (a) the last
reported sale price of such stock (regular way) or, in case no such sale takes
place on such day, the average of the closing bid and asked prices, in either
case as reported on the principal national securities exchange on which the
Common Stock is listed or admitted to trading or (b) if the Common Stock is not
listed or admitted to trading on any national securities exchange, the last
reported sale price or, in case no such sale takes place on such day, the
average of the highest reported bid and lowest reported asked quotation for the
Common Stock, in either case reported on the National Association of Securities
Dealers, Inc. Automated Quotation System ("NASDAQ"), or a similar service if
NASDAQ is no longer reporting such information.
"COMMON STOCK" has the meaning specified on the cover of this Warrant.
"COMPANY" has the meaning specified on the cover of this Warrant.
"CURRENT MARKET PRICE" means, with respect to each share of Common
Stock as of any date, the average of the daily Closing Prices per share of
Common Stock for the 10 consecutive trading days commencing 15 trading days
prior to such date; provided that if on any such date the shares of Common Stock
are not listed or admitted for trading on any national securities exchange or
quoted by NASDAQ or a similar service, the Current Market Price for a share of
Common Stock shall be the fair market value of such share as determined in good
faith by the Board of Directors of the Company; provided that if the holders of
a majority in interest of the Investor Warrant Shares disagree with the Board of
Director's determination of fair market value for purposes of the Investor
Warrants, the fair market value for purposes of this Warrant shall be the same
as the fair market value determined for purposes of the Investor Warrants.
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"EXERCISE FORM" means an Exercise Form in the form annexed hereto as
Exhibit A.
"EXPIRATION DATE" has the meaning specified on the cover of this
Warrant.
"HARNICK WARRANT" means the warrant to purchase 50,000 shares of
Common Stock issued to Carl D. Harnick at the closing of the Investment
Agreement.
"INDEPENDENT FINANCIAL EXPERT" means an independent nationally
recognized investment banking firm.
"INVESTMENT AGREEMENT" means the Investment Agreement, dated as of
October 12, 1997, as amended and as hereafter amended, among the Investors and
the Company.
"INVESTORS" means MAC Music LLC, a Delaware limited liability company,
and SK-Palladin Partners, LP, a Delaware limited partnership.
"INVESTOR WARRANTS" mean the warrants issued to the Investors pursuant
to the Investment Agreement.
"INVESTOR WARRANT SHARES" mean the shares of Common Stock issued or
issuable upon exercise of the Investor Warrants.
"PERSON" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, limited liability company,
unincorporated organization, estate, other entity or government or any agency or
political subdivision thereof.
"PRO RATA REPURCHASE" means any purchase of shares of Common Stock by
the Company or by any of its subsidiaries whether for cash, shares of capital
stock of the Company, other securities of the Company, evidences of indebtedness
of the Company or any other Person or any other property (including, without
limitation, shares of capital stock, other securities or evidences of
indebtedness of a subsidiary of the Company), or any combination thereof, which
purchase is subject to Section 13(e) of the Securities Exchange Act of 1934, as
amended, or is made pursuant to an offer made available to all holders of Common
Stock.
"REPURCHASE PRICE" means, on any date, the Current Market Price per
share of Common Stock as of such date, less the per share Exercise Price;
PROVIDED, that if at the time of determination of the Repurchase Price, the
Warrantholder shall be entitled to receive any securities or property other than
Common Stock, the Repurchase
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Price shall include a cash amount per Warrant Share equal to that portion of
the fair value of such securities or property allocable to each Warrant Share.
"SECURITIES ACT" has the meaning specified on the cover of this
Warrant.
"WARRANTHOLDER" has the meaning specified on the cover of this
Warrant.
"WARRANT SHARES" has the meaning specified on the cover of this
Warrant; provided, however, that Warrant Shares shall not include shares sold to
the public pursuant to Rule 144 under the Securities Act of 1933, as amended, or
pursuant to an effective registration statement under the Securities Act.
11. MISCELLANEOUS.
11.1 ENTIRE AGREEMENT. This Warrant constitutes the entire
agreement between the Company and the Warrantholder with respect to this
Warrant.
11.2 BINDING EFFECT; BENEFITS. This Warrant shall inure to the
benefit of and shall be binding upon the Company and the Warrantholder and their
respective successors and assigns. Nothing in this Warrant, expressed or
implied, is intended to or shall confer on any person other than the Company and
the Warrantholder, or their respective successors or assigns, any rights,
remedies, obligations or liabilities under or by reason of this Warrant.
11.3 SECTION AND OTHER HEADINGS. The section and other headings
contained in this Warrant are for reference purposes only and shall not be
deemed to be a part of this Warrant or to affect the meaning or interpretation
of this Warrant.
11.4 NOTICES. All notices and other communications required or
permitted hereunder shall be in writing and shall be delivered personally,
telecopied or sent by certified, registered or express mail, postage prepaid.
Any such notice shall be deemed given when so delivered personally, telecopied
or sent by certified, registered or express mail, as follows:
(a) if to the Company, addressed to:
Platinum Entertainment, Inc.
2001 Butterfield Road
Downers Grove, Illinois 60515
Telecopy: (630) 769-0049
Attention: Chief Executive Officer
with a copy to:
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Katten, Muchin & Zavis
525 West Monroe Street, Suite 1600
Chicago, Illinois 60661
Telecopy: (312) 902-1061
Attention: Matthew S. Brown, Esq.
(b) if to the Warrantholder, addressed to:
--------------------------------------
--------------------------------------
--------------------------------------
Telecopy:
Any party may by notice given in accordance with this Section 11.4 designate
another address or person for receipt of notices hereunder.
11.5 SEVERABILITY. Any term or provision of this Warrant which is
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the terms and provisions of this Warrant or
affecting the validity or enforceability of any of the terms or provisions of
this Warrant in any other jurisdiction.
11.6 GOVERNING LAW. This Warrant shall be deemed to be a contract
made under the laws of the State of Delaware and for all purposes shall be
governed by and construed in accordance with the laws of such State applicable
to such agreements made and to be performed entirely within such State.
11.7 CERTAIN REMEDIES. The Warrantholder shall be entitled to an
injunction or injunctions to prevent breaches of the provisions of this Warrant
and to enforce specifically the terms and provisions of this Warrant in any
court of the United States or any court of any state having jurisdiction, this
being in addition to any other remedy to which the Warrantholder may be entitled
at law or in equity.
11.8 NO RIGHTS OR LIABILITIES AS STOCKHOLDER. Nothing contained
in this Warrant shall be deemed to confer upon the Warrantholder any rights as a
stockholder of the Company or as imposing any liabilities on the Warrantholder
to purchase any securities whether such liabilities are asserted by the Company
or by creditors or stockholders of the Company or otherwise.
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IN WITNESS WHEREOF, the Company has caused this Warrant to be
signed by its duly authorized officer.
PLATINUM ENTERTAINMENT, INC.
By: /s/ DOUGLAS C. LAUX
--------------------------
Name: Douglas C. Laux
Title: Chief Operating Officer and
Chief Financial Officer
Dated: April 15, 1999
17
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EXHIBIT A
EXERCISE FORM
(To be executed upon exercise of this Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant, to purchase __________ of the Warrant Shares and
[herewith tenders payment for such Warrant Shares to the order of Platinum
Entertainment, Inc. in the amount of $__________] [hereby exercises its
Conversion Right] in accordance with the terms of this Warrant. The undersigned
requests that a certificate for [such Warrant Shares] [that number of Warrant
Shares to which the undersigned is entitled as calculated pursuant to Section
1.2] be registered in the name of the undersigned and that such certificates be
delivered to the undersigned's address below.
Dated:
--------------------------
Signature
-------------------------
----------------------------
(Print Name)
----------------------------
(Street Address)
----------------------------
(City) (State) (Zip Code)
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NEITHER THIS WARRANT NOR ANY SECURITIES ACQUIRED UPON THE EXERCISE OF
THIS WARRANT (THE "SECURITIES") HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND
NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD,
TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES
LAWS OR AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS AS
EVIDENCED BY AN OPINION OF COUNSEL DELIVERED AND REASONABLY ACCEPTABLE TO THE
COMPANY.
----------------------------------------------
PLATINUM ENTERTAINMENT, INC.
COMMON STOCK PURCHASE WARRANT
-----------------------------------------------
This certifies that, for good and valuable consideration, Platinum
Entertainment, Inc., a Delaware corporation (the "Company"), grants to Andrew J.
Filipowski, his successors and permitted assigns (the "Warrantholder"), the
right to subscribe for and purchase from the Company Eighty-Eight Thousand Three
Hundred and Thirty (88,330) validly issued, fully paid and nonassessable shares
(the "Warrant Shares") of the Company's Common Stock, par value $.001 per share
(the "Common Stock"), at the purchase price per share equal to the Exercise
Price, as defined herein, at any time prior to 5:00 p.m., Central Standard Time,
on April 15, 2009 (the "Expiration Date"), subject to the terms, conditions and
adjustments herein set forth. References herein to "Warrants" or "Warrant" shall
mean this Warrant.
This Warrant is being issued in connection with the issue and sale by
the Company of shares of its Series D Convertible Preferred Stock, par value
$.001 per share (the "Series D Preferred Stock").
The "Exercise Price" shall mean $6.126; which price is equal to the
average of the daily Closing Price per share of Common Stock for the trailing 30
consecutive trading days from and including April 9, 1999. The Exercise Price as
determined in accordance with the foregoing shall be adjusted from time to time
in accordance with the provisions of Section 6.
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1. EXERCISE OF WARRANTS.
1.1 EXERCISE OF WARRANT. This Warrant may be exercised, in whole
or in part, at any time or from time to time prior to the Expiration Date, by
surrendering to the Company at its principal office this Warrant, with an
Exercise Form (as defined herein) duly executed by the Warrantholder and
accompanied by payment of the Exercise Price for the number of shares of Common
Stock specified in such Exercise Form.
1.2 CASHLESS EXERCISE. In lieu of the payment of the Exercise
Price, the Warrantholder shall have the right (but not the obligation) to
require the Company to convert this Warrant, in whole or in part, into shares of
Common Stock (the "Conversion Right") as provided for in this Section 1.2. Upon
exercise of the Conversion Right, the Company shall deliver to the Warrantholder
(without payment by the Warrantholder of any of the Exercise Price) that number
of shares of Common Stock equal to the quotient obtained by dividing (x) the
value of the Warrant or portion thereof being exercised at the time the
Conversion Right is exercised (determined by subtracting the aggregate Exercise
Price in effect immediately prior to the exercise of the Conversion Right for
the number of shares for which the Warrant is being exercised from the aggregate
Current Market Price (as defined herein) of the shares of Common Stock issuable
upon exercise of the Warrant for the number of shares for which the Warrant is
being exercised immediately prior to the exercise of the Conversion Right) by
(y) the Current Market Price of one share of Common Stock immediately prior to
the exercise of the Conversion Right. The Conversion Right may be exercised at
any time or from time to time prior to the Expiration Date by surrendering to
the Company at its principal office this Warrant, with an Exercise Form duly
executed by the Warrantholder and indicating that the Warrantholder wishes to
exercise the Conversion Right and specifying the total number of shares of
Common Stock for which the Warrant is being exercised.
1.3 DELIVERY OF WARRANT SHARES; EFFECTIVENESS OF EXERCISE.
(a) DELIVERY OF WARRANT SHARES. A stock certificate or
certificates for the Warrant Shares specified in the Exercise Form along with a
check for the amount of cash to be paid in lieu of fractional shares, if any,
shall be delivered to the Warrantholder within 10 Business Days after the
Exercise Date (as defined herein); PROVIDED, HOWEVER, that if the Conversion
Right is exercised in accordance with Section 1.2 and a determination by the
Board of Directors is required to determine the Current Market Price of the
Common Stock, such delivery shall be made promptly after such determination is
made. If this Warrant shall have been exercised only in part, the Company shall,
at the time of delivery of the stock certificate or certificates and cash in
lieu of fractional shares, if any, deliver to the Warrantholder a
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new Warrant evidencing the rights to purchase the remaining Warrant Shares,
which new Warrant shall in all other respects be identical with this Warrant.
(b) EFFECTIVENESS OF EXERCISE. The exercise of this Warrant
shall be deemed to have been effective immediately prior to the close of
business on the Business Day on which this Warrant is exercised in accordance
with Section 1.1 or 1.2 (the "Exercise Date"). The Person in whose name any
certificate for shares of Common Stock shall be issuable upon such exercise
shall be deemed to be the record holder of such shares of Common Stock for all
purposes on the Exercise Date.
1.4 PAYMENT OF TAXES. The issuance of certificates for Warrant
Shares shall be made without charge to the Warrantholder for any stock transfer
or other issuance tax in respect thereof; PROVIDED, HOWEVER, that the
Warrantholder shall be required to pay any and all taxes that may be payable in
respect of any transfer involved in the issuance and delivery of any certificate
in a name other than that of the then Warrantholder as reflected upon the books
of the Company.
2. RESTRICTIVE LEGENDS.
2.1 WARRANTS. Except as otherwise permitted by this Section 2,
each Warrant (and each Warrant issued in substitution for any Warrant pursuant
to Section 4) shall be stamped or otherwise imprinted with a legend in
substantially the following form:
NEITHER THIS WARRANT NOR ANY SECURITIES ACQUIRED UPON THE
EXERCISE OF THIS WARRANT (THE "SECURITIES") HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY
STATE SECURITIES LAWS AND NEITHER THE SECURITIES NOR ANY INTEREST
THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE
DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS OR AN
AVAILABLE EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS AS
EVIDENCED BY AN OPINION OF COUNSEL DELIVERED AND REASONABLY ACCEPTABLE
TO THE COMPANY.
2.2 WARRANT SHARES. Except as otherwise permitted by this Section
2, each stock certificate for Warrant Shares issued upon the exercise of any
Warrant and each stock certificate issued upon the direct or indirect transfer
of any such Warrant Shares shall be stamped or otherwise imprinted with a legend
in substantially the following form:
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THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY
STATE SECURITIES LAWS AND NEITHER THE SECURITIES NOR ANY INTEREST
THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE
DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS OR AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS AS EVIDENCED
BY AN OPINION OF COUNSEL DELIVERED AND REASONABLY ACCEPTABLE TO THE
COMPANY.
2.3 REMOVAL OF LEGENDS. Notwithstanding the foregoing, the
Warrantholder may require the Company to issue a Warrant or a stock certificate
for Warrant Shares, in each case without a legend, if either (i) such Warrant or
such Warrant Shares, as the case may be, have been registered for resale under
the Securities Act and sold pursuant to such registration or (ii) if reasonably
requested by the Company, the Warrantholder has delivered to the Company an
opinion of legal counsel (from a firm reasonably satisfactory to the Company)
which opinion shall be addressed to the Company and be reasonably satisfactory
in form and substance to the Company's counsel, to the effect that such
registration is not required with respect to such Warrant or such Warrant
Shares, as the case may be.
3. RESERVATION AND REGISTRATION OF SHARES, ETC.
The Company covenants and agrees as follows:
(a) All Warrant Shares that are issued upon the exercise of
this Warrant will, upon issuance, be validly issued, fully paid and
nonassessable, not subject to any preemptive rights, and free from all taxes,
liens, security interests, charges, and other encumbrances with respect to the
issuance thereof, other than taxes in respect of any transfer occurring
contemporaneously with such issue.
(b) During the period within which this Warrant may be
exercised, the Company will at all times have authorized and reserved, and keep
available free from preemptive rights, a sufficient number of shares of Common
Stock to provide for the exercise of the rights represented by this Warrant.
4. LOSS OR DESTRUCTION OF WARRANT.
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Subject to the terms and conditions hereof, upon receipt by the
Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant and, in the case of loss, theft or
destruction, of such bond or indemnification as the Company may reasonably
require, and, in the case of mutilation, upon surrender and cancellation of this
Warrant, the Company will execute and deliver a new Warrant of like tenor.
5. OWNERSHIP OF WARRANT.
The Company may deem and treat the Person in whose name this Warrant
is registered as the holder and owner hereof (notwithstanding any notations of
ownership or writing hereon made by anyone other than the Company) for all
purposes and shall not be affected by any notice to the contrary, until
presentation of this Warrant for registration of transfer.
6. CERTAIN ADJUSTMENTS.
6.1 The number of Warrant Shares purchasable upon the exercise of
this Warrant and the Exercise Price shall be subject to adjustment as follows:
(a) STOCK DIVIDENDS, SUBDIVISION, COMBINATION OR
RECLASSIFICATION OF COMMON STOCK. If at any time after the date of the issuance
of this Warrant the Company shall (i) declare a stock dividend on the Common
Stock payable in shares of its capital stock (including Common Stock), (ii)
increase the number of shares of Common Stock outstanding by a subdivision or
split-up of shares of Common Stock, (iii) decrease the number of shares of
Common Stock outstanding by a combination of shares of Common Stock or (iv)
issue any shares of its capital stock in a reclassification of the Common Stock,
then, on the record date for such dividend or the effective date of such
subdivision or split-up, combination or reclassification, as the case may be,
the number and kind of shares to be delivered upon exercise of this Warrant will
be adjusted so that the Warrantholder will be entitled to receive the number and
kind of shares of capital stock that such Warrantholder would have owned or been
entitled to receive upon or by reason of such event had this Warrant been
exercised immediately prior thereto, and the Exercise Price will be adjusted as
provided below in paragraph (i).
(b) REORGANIZATION, ETC. If at any time after the date of
issuance of this Warrant any consolidation of the Company with or merger of the
Company with or into any other Person (other than a merger or consolidation in
which the Company is the surviving or continuing corporation and which does not
result in any reclassification of, or change (other than a change in par value
or from par value to no par value or from no par value to par value, or as a
result of a subdivision or
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combination) in, outstanding shares of Common Stock) or any sale, lease or other
transfer of all or substantially all of the assets of the Company to any other
person (each, a "Reorganization Event"), shall be effected in such a way that
the holders of Common Stock shall be entitled to receive cash, stock, other
securities or assets (whether such cash, stock, other securities or assets are
issued or distributed by the Company or another Person) with respect to or in
exchange for Common Stock, then, upon exercise of this Warrant the Warrantholder
shall have the right to receive the kind and amount of cash, stock, other
securities or assets receivable upon such Reorganization Event by a holder of
the number of shares of Common Stock that such Warrantholder would have been
entitled to receive upon exercise of this Warrant had this Warrant been
exercised immediately before such Reorganization Event, subject to adjustments
that shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Section 6.1. Notwithstanding the foregoing, if more than
20% in aggregate value of the cash, stock, other securities or assets
deliverable to such holder in accordance with the foregoing provisions of this
Section 6(b) would consist of cash or debt securities, then the Warrantholder
shall have the right (the "Special Reorganization Right") at its election,
exercisable by giving written notice to the Company prior to 120 days following
the consummation of such Reorganization Event to receive from the Company, and
the Company shall pay to the Warrantholder promptly after the exercise by the
Warrantholder of the Special Reorganization Right, instead of the cash, stock,
other securities or assets otherwise deliverable to such holder, an amount of
cash equal to the fair market value of this Warrant immediately prior to the
announcement of such Reorganization Event, to be determined by an Independent
Financial Expert giving due consideration to such factors as the financial
condition and prospects of the Company, the remaining unexpired term of the
Warrant and the market price of the Common Stock of the Company after
announcement of such Reorganization Event. The Company shall not enter into any
of the transactions referred to in this Section 6.1(b) unless effective
provision shall be made so as to give effect to the provisions set forth in this
Section 6.1(b).
(c) CERTAIN ISSUANCES OF COMMON STOCK. If at any time after
the date of issuance of this warrant the Company shall issue or sell, or fix a
record date for the issuance of, (A) Common Stock (or securities convertible
into or exchangeable or exercisable for Common Stock) (other than Excluded
Securities) or (B) rights, options or warrants entitling the holders thereof to
subscribe for or purchase Common Stock (or securities convertible into or
exchangeable or exercisable for Common Stock) (other than Excluded Securities),
in any such case, at a price per share (treating the price per share of the
securities convertible into or exchangeable or exercisable for Common Stock as
equal to (x) the sum of (i) the price for a unit of the security convertible
into or exchangeable or exercisable for Common Stock plus (ii) any additional
consideration initially payable upon the conversion of such security into Common
Stock or the exchange or exercise of such security for Common Stock divided by
(y) the number of shares of Common Stock initially underlying such convertible,
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exchangeable or exercisable security) that is less than the greater of the
Current Market Price of the Common Stock and the Exercise Price on the date of
such issuance or such record date (the "Measuring Price") then, immediately
after the date of such issuance or sale or on such record date, the number of
shares of Common Stock to be delivered upon exercise of this Warrant shall be
increased so that the Warrantholder thereafter shall be entitled to receive the
number of shares of Common Stock determined by multiplying the number of shares
of Common Stock such Warrantholder would have been entitled to receive
immediately before the date of such issuance or sale or such record date by a
fraction, the denominator of which shall be the number of shares of Common Stock
outstanding (calculated to include the shares of Common Stock underlying the
Warrants, the Investor Warrants, the Affiliate Warrants, the Harnick Warrant and
all then currently exerciseable, convertible and exchangeable securities that
are "in the money") on such date plus the number of shares of Common Stock that
the aggregate offering price of the total number of shares so offered for
subscription or purchase (or the aggregate purchase price of the convertible,
exchangeable or exerciseable securities so offered plus the aggregate of amount
of any additional consideration initially payable upon conversion into Common
Stock or exchange or exercise for Common Stock) would purchase at the Measuring
Price and the numerator of which shall be the number of shares of Common Stock
outstanding (calculated to include the shares of Common Stock underlying the
Warrants, the Investor Warrants, Affiliate Warrants, the Harnick Warrant and all
then currently exerciseable, convertible and exchangeable securities that are
"in the money") on such date plus the number of additional shares of Common
Stock offered for subscription or purchase (or into or for which the convertible
or exchangeable securities or rights, options or warrants so offered are
initially convertible or exchangeable or exercisable, as the case may be), and
the Exercise Price shall be adjusted as provided below in paragraph (i).
"Excluded Securities" means (A) shares of Common Stock issued upon conversion or
exercise of convertible securities, warrants and options of the Company,
outstanding on the date this Warrant is originally issued, (B) shares of Common
Stock, and options to purchase such shares, issued to officers, directors,
employees or former employees of, or consultants to, the Company or any of its
subsidiaries pursuant to any equity incentive plan, agreement or other
arrangement which has been approved by a vote of at least two-thirds (2/3) of
the Board of Directors of the Company, (C) shares of Common Stock issued upon
conversion of shares of the Company's Series B Convertible Preferred Stock, par
value $.001 per share (the "Series B Preferred Stock"), (D) shares of Common
Stock issued upon exercise of the Investor Warrants, including any increase in
the number of shares of Common Stock issuable under such Investor Warrants as a
result of the conditional annual increase provision included therein, (E) shares
of Common Stock issued upon conversion of shares of the Company's Series C
Convertible Preferred Stock, par value $.001 per share (the "Series C Preferred
Stock"), (F) shares of Common Stock issued upon exercise of the Affiliate
Warrants, (G) shares of Common Stock issued upon exercise of the Harnick
Warrant, (H) shares of Common Stock issuable upon conversion of shares
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of the Company's Series D Preferred Stock, and (I) shares of Common Stock issued
upon exercise of any Warrant.
(d) EXTRAORDINARY DISTRIBUTIONS. If at any time after the
date of issuance of this Warrant the Company shall distribute to all holders of
its Common Stock (including any such distribution made in connection with a
consolidation or merger in which the Company is the continuing or surviving
corporation and the Common Stock is not changed or exchanged) cash, evidences of
indebtedness, securities or other assets (excluding (i) ordinary course cash
dividends to the extent such dividends do not exceed the Company's retained
earnings and (ii) dividends payable in shares of capital stock for which
adjustment is made under Section 6.1(a)) or rights, options or warrants to
subscribe for or purchase securities of the Company (excluding those for which
adjustment is made under Section 6.1(c)), then the number of shares of Common
Stock to be delivered to such Warrantholder upon exercise of this Warrant shall
be increased so that the Warrantholder thereafter shall be entitled to receive
the number of shares of Common Stock determined by multiplying the number of
shares such Warrantholder would have been entitled to receive immediately before
such record date by a fraction, the denominator of which shall be the Current
Market Price per share of Common Stock on such record date minus the then fair
market value (as reasonably determined by the Board of Directors of the Company
in good faith) of the portion of the cash, evidences of indebtedness, securities
or other assets so distributed or of such rights or warrants applicable to one
share of Common Stock (provided that such denominator shall in no event be less
than $.01) and the numerator of which shall be the Current Market Price per
share of the Common Stock, and the Exercise Price shall be adjusted as provided
below in paragraph (h).
(e) PRO RATA REPURCHASES. If at any time after the date of
issuance of this Warrant, the Company or any subsidiary thereof shall make a Pro
Rata Repurchase, then the number of shares of Common Stock to be delivered to
such Warrantholder upon exercise of this Warrant shall be increased so that the
Warrantholder thereafter shall be entitled to receive the number of shares of
Common Stock determined by multiplying the number of shares of Common Stock such
Warrantholder would have been entitled to receive immediately before such Pro
Rata Repurchase by a fraction (which in no event shall be less than one) the
denominator of which shall be (i) the product of (x) the number of shares of
Common Stock outstanding immediately before such Pro Rata Repurchase and (y) the
Current Market Price of the Common Stock as of the day immediately preceding the
first public announcement by the Company of the intent to effect such Pro Rata
Repurchase minus (ii) the aggregate purchase price of the Pro Rata Repurchase
(provided that such denominator shall never be less than $.01), and the
numerator of which shall be the product of (i) the number of shares of Common
Stock outstanding immediately before such Pro Rata Repurchase minus the number
of shares of Common Stock repurchased in such Pro Rata Repurchase and (ii) the
Current Market Price of the Common Stock as of the day immediately
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preceding the first public announcement by the Company of the intent to effect
such Pro Rata Repurchase.
(f) FRACTIONAL SHARES. No fractional shares of Common Stock
or scrip shall be issued to any Warrantholder in connection with the exercise of
this Warrant. Instead of any fractional shares of Common Stock that would
otherwise be issuable to such Warrantholder, the Company will pay to such
Warrantholder a cash adjustment in respect of such fractional interest in an
amount equal to that fractional interest of the then Current Market Price per
share of Common Stock.
(g) CARRYOVER. Notwithstanding any other provision of this
Section 6.1, no adjustment shall be made to the number of shares of Common Stock
to be delivered to the Warrantholder (or to the Exercise Price) if such
adjustment represents less than .05% of the number of shares to be so delivered,
but any lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment that together with any
adjustments so carried forward shall amount to .05% or more of the number of
shares to be so delivered.
(h) EXERCISE PRICE ADJUSTMENT. Whenever the number of
Warrant Shares purchasable upon the exercise of the Warrant is adjusted as
provided pursuant to this Section 6.1, the Exercise Price per share payable upon
the exercise of this Warrant shall be adjusted by multiplying such Exercise
Price immediately prior to such adjustment by a fraction, of which the numerator
shall be the number of Warrant Shares purchasable upon the exercise of the
Warrant immediately prior to such adjustment, and of which the denominator shall
be the number of Warrant Shares purchasable immediately thereafter; PROVIDED,
HOWEVER, that the Exercise Price for each Warrant Share shall in no event be
less than the par value of such Warrant Share.
(i) MULTIPLE ADJUSTMENTS. If any action or transaction would
require adjustment of the number of shares of Common Stock to be delivered to
the Warrantholder upon exercise of this Warrant pursuant to more than one
paragraph of this Section 6.1, only one adjustment shall be made and each such
adjustment shall be the amount of adjustment that has the highest absolute
value.
6.2 NOTICE OF ADJUSTMENT. Whenever the number of Warrant Shares
or the Exercise Price of such Warrant Shares is adjusted, as herein provided,
the Company shall promptly mail by first class mail, postage prepaid, to the
Warrantholder, notice of such adjustment or adjustments and a certificate of a
firm of independent public accountants of recognized national standing selected
by the Board of Directors of the Company (who shall be appointed at the
Company's expense and who may be the independent public accountants regularly
employed by the Company) setting forth the number of Warrant Shares and the
Exercise Price of such Warrant Shares after such
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adjustment, setting forth a brief statement of the facts requiring such
adjustment and setting forth the computation by which such adjustment was made.
7. PUT RIGHTS. The Warrantholder shall have the following Put Rights:
(a) At the earlier of (i) the fifth anniversary of the date
hereof and (ii) a Change of Control, the Warrantholder may notify the Company in
writing (the "PUT NOTICE") of the Warrantholder's desire to cause the Company to
repurchase, in the case of clause (i) above, all (but not less than all) of the
Warrant Shares (issued or represented by the Warrant) at a price per share equal
to the Repurchase Price (the "Five-Year Put"), or, in the case of clause (ii)
above, the Warrant at the Change of Control Repurchase Price (the "Change of
Control Put").
(b) If the Company receives a Put Notice pursuant to Section
7(a), it shall deliver to the Warrantholder, by first class mail, postage
prepaid, mailed as soon as practicable and if possible within thirty (30) days
of the receipt by the Company of the Put Notice, a notice stating: (i) the date
as of which such repurchase shall occur (which date (the "Put Closing") shall be
not less than ten (10) nor more than thirty (30) days following the date of such
notice, but in any event prior to the Expiration Date); (ii) in the case of a
Five-Year Put, the number of Warrant Shares (issued or represented by this
Warrant) to be purchased from the Warrantholder and the Repurchase Price (which
shall be calculated as of the date of the Put Notice) or, in the case of a
Change of Control Put, the Change of Control Repurchase Price; and (iii) the
place or places where certificate or certificates representing this Warrant or
Warrant Shares are to be surrendered for payment; PROVIDED, HOWEVER, that the
Company shall have no obligation to send the notice set forth above or to
repurchase the Warrants and Warrant Shares following the exercise of the Five
Year Put (and the provisions of paragraph (c) below shall not be applicable to
any failure by the Company to repurchase the Warrants and the Warrant Shares
following the exercise of the Five Year Put), unless the holders of not less
than a majority of the shares of Common Stock issued or issuable upon exercise
of the Investor Warrants (the "Investor Warrant Shares") shall also have
exercised the "five year put" provided for in the Investor Warrants.
(c) With respect to Warrants and Warrant Shares properly
tendered for repurchase, if the Company fails to pay the Repurchase Price or the
Change of Control Repurchase Price on the date fixed for repurchase, the
Corporation shall also pay interest thereon at the rate of 12% per annum,
compounded on a quarterly basis, until such time as such satisfaction shall have
occurred.
(d) At the Put Closing, the Warrantholder shall deliver to
the Company the certificate or certificates representing the Warrantholder's
Warrant or Warrant Shares and the Company shall deliver to the Warrantholder an
amount equal
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to, in the case of a Five-Year Put, the product obtained by multiplying (i) the
number of such Warrant Shares (issued or represented by this Warrant) by (ii)
the Repurchase Price or, in the case of a Change of Control Put, the Change of
Control Repurchase Price, by cashier's or certified check payable to the
Warrantholder or by wire transfer of immediately available funds to an account
designated by the Warrantholder.
(e) The Company shall not (and shall not permit any
Affiliate of the Company to) enter into any contract or other consensual
arrangement that by its terms restricts the Company's ability to honor the Put.
8. AMENDMENTS. Any provision of this Warrant may be amended and the
observance thereof waived only with the written consent of the Company and the
Warrantholder.
9. NOTICES OF CORPORATE ACTION. So long as this Warrant has not been
exercised in full, in the event of:
(a) any consolidation or merger involving the Company and
any other party or any transfer of all or substantially all the assets of the
Company to any other party, or
(b) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company,
the Company will mail, by first class mail, postage prepaid, to the
Warrantholder a notice specifying (i) the date or expected date on which any
such record is to be taken for the purpose of a dividend, distribution or right
and the amount and character of any such dividend, distribution or right and
(ii) the date or expected date on which a reorganization, reclassification,
recapitalization, consolidation, merger, transfer, dissolution, liquidation or
winding-up is to take place and the time, if any such time is to be fixed, as of
which the holders of record of Common Stock (or other securities) shall be
entitled to exchange their shares of Common Stock (or other securities) for the
securities or other property deliverable upon such reorganization,
reclassification, recapitalization, consolidation, merger, transfer,
dissolution, liquidation or winding-up. Such notice shall be delivered as soon
as practicable and if possible at least 20 days prior to the date therein
specified in the case of any date referred to in the foregoing subdivisions (i)
and (ii). Failure to give the notice specified hereunder shall have no effect on
the status or effectiveness of the action to which the required notice relates.
10. DEFINITIONS.
As used herein, unless the context otherwise requires, the following
terms have the following meanings:
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"AFFILIATE" means, with respect to any Person, any other Person that,
directly or indirectly, controls, is controlled by, or is under common control
with such first Person. For the purpose of this definition, "control" shall
mean, as to any Person, the power to direct or cause the direction of the
management and policies of such Person, whether through the ownership of voting
securities, by contract or otherwise.
"AFFILIATE WARRANTS" mean the warrants issued in connection with the
issue and sale by the Company of shares of its Series C Preferred Stock on the
Closing Date (as defined in the Investment Agreement).
"BUSINESS DAY" means any day other than a Saturday, Sunday or a day on
which national banks are authorized by law or executive order to close in the
State of New York.
"CHANGE OF CONTROL" shall mean (i) the direct or indirect sale, lease,
exchange or other transfer of all or substantially all of the assets of the
Company to any Person or entity or group of Persons or entities acting in
concert as a partnership or other group within the meaning of Rule 13d-5 under
the Exchange Act (a "GROUP OF PERSONS"), (ii) the merger or consolidation of the
Company with or into another corporation with the effect that the then existing
stockholders of the Company hold less than 50% of the combined voting power of
the then outstanding securities of the surviving corporation of such merger or
the corporation resulting from such consolidation ordinarily (and apart from
rights accruing under special circumstances) having the right to vote in the
election of directors, (iii) the replacement of a majority of the Board of
Directors of the Company, over a two-year period, from the directors who
constituted the Board of Directors at the beginning of such period, and such
replacement shall not have been approved by the Board of Directors of the
Company (or its replacements approved by the Board of Directors of the Company)
as constituted at the beginning of such period, (iv) a Person or Group of
Persons (other than the Investors and their Affiliates, employees, partners or
members) shall, as a result of a tender or exchange offer, open market
purchases, privately negotiated purchases or otherwise, have become the
beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of
securities of the Company representing 49% or more of the combined voting power
of the then outstanding securities of the Company ordinarily (and apart from
rights accruing under special circumstances) having the right to vote in the
election of directors. Notwithstanding the foregoing, no Change in Control shall
be deemed to have occurred (a) upon the acquisition of any shares of Common
Stock of the Company pursuant to the exercise of the Investor Warrants, (b) upon
the exercise of any of the rights and privileges granted to each of the
Investors pursuant to Section 6.2.5 of the Investment Agreement, (c) upon the
exercise of any rights and privileges granted to the holders of the Series B
Preferred Stock pursuant to the Certification of the Powers, Designations,
Preferences and Rights of the Series B Preferred Stock or (d) otherwise as a
result of the
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equity ownership or designation of directors by the Investors or their
Affiliates, employees, partners or members.
"CHANGE OF CONTROL REPURCHASE PRICE" means (i) if any Investor
Warrants are then outstanding, an amount in cash, on a per Warrant Share basis,
equal to the "Change of Control Repurchase Price" (on a per Investor Warrant
Share basis) for the Investor Warrants, or (ii) if no Investor Warrants are then
outstanding, an amount of cash equal to the fair market value of this Warrant
immediately prior to the announcement of a Change of Control, to be determined
by an Independent Financial Expert selected by the Company and a majority in
interest of the Warrant Shares, giving due consideration to such factors as the
financial condition and prospects of the Company, the remaining unexpired term
of this Warrant and the market price of the Common Stock of the Company after
announcement of such Change of Control.
"CLOSING PRICE" of the Common Stock as of any day, means (a) the last
reported sale price of such stock (regular way) or, in case no such sale takes
place on such day, the average of the closing bid and asked prices, in either
case as reported on the principal national securities exchange on which the
Common Stock is listed or admitted to trading or (b) if the Common Stock is not
listed or admitted to trading on any national securities exchange, the last
reported sale price or, in case no such sale takes place on such day, the
average of the highest reported bid and lowest reported asked quotation for the
Common Stock, in either case reported on the National Association of Securities
Dealers, Inc. Automated Quotation System ("NASDAQ"), or a similar service if
NASDAQ is no longer reporting such information.
"COMMON STOCK" has the meaning specified on the cover of this Warrant.
"COMPANY" has the meaning specified on the cover of this Warrant.
"CURRENT MARKET PRICE" means, with respect to each share of Common
Stock as of any date, the average of the daily Closing Prices per share of
Common Stock for the 10 consecutive trading days commencing 15 trading days
prior to such date; provided that if on any such date the shares of Common Stock
are not listed or admitted for trading on any national securities exchange or
quoted by NASDAQ or a similar service, the Current Market Price for a share of
Common Stock shall be the fair market value of such share as determined in good
faith by the Board of Directors of the Company; provided that if the holders of
a majority in interest of the Investor Warrant Shares disagree with the Board of
Director's determination of fair market value for purposes of the Investor
Warrants, the fair market value for purposes of this Warrant shall be the same
as the fair market value determined for purposes of the Investor Warrants.
13
<PAGE>
"EXERCISE FORM" means an Exercise Form in the form annexed hereto as
Exhibit A.
"EXPIRATION DATE" has the meaning specified on the cover of this
Warrant.
"HARNICK WARRANT" means the warrant to purchase 50,000 shares of
Common Stock issued to Carl D. Harnick at the closing of the Investment
Agreement.
"INDEPENDENT FINANCIAL EXPERT" means an independent nationally
recognized investment banking firm.
"INVESTMENT AGREEMENT" means the Investment Agreement, dated as of
October 12, 1997, as amended and as hereafter amended, among the Investors and
the Company.
"INVESTORS" means MAC Music LLC, a Delaware limited liability company,
and SK-Palladin Partners, LP, a Delaware limited partnership.
"INVESTOR WARRANTS" mean the warrants issued to the Investors pursuant
to the Investment Agreement.
"INVESTOR WARRANT SHARES" mean the shares of Common Stock issued or
issuable upon exercise of the Investor Warrants.
"PERSON" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, limited liability company,
unincorporated organization, estate, other entity or government or any agency or
political subdivision thereof.
"PRO RATA REPURCHASE" means any purchase of shares of Common Stock by
the Company or by any of its subsidiaries whether for cash, shares of capital
stock of the Company, other securities of the Company, evidences of indebtedness
of the Company or any other Person or any other property (including, without
limitation, shares of capital stock, other securities or evidences of
indebtedness of a subsidiary of the Company), or any combination thereof, which
purchase is subject to Section 13(e) of the Securities Exchange Act of 1934, as
amended, or is made pursuant to an offer made available to all holders of Common
Stock.
"REPURCHASE PRICE" means, on any date, the Current Market Price per
share of Common Stock as of such date, less the per share Exercise Price;
PROVIDED, that if at the time of determination of the Repurchase Price, the
Warrantholder shall be entitled to receive any securities or property other than
Common Stock, the Repurchase
14
<PAGE>
Price shall include a cash amount per Warrant Share equal to that portion of the
fair value of such securities or property allocable to each Warrant Share.
"SECURITIES ACT" has the meaning specified on the cover of this
Warrant.
"WARRANTHOLDER" has the meaning specified on the cover of this
Warrant.
"WARRANT SHARES" has the meaning specified on the cover of this
Warrant; provided, however, that Warrant Shares shall not include shares sold to
the public pursuant to Rule 144 under the Securities Act of 1933, as amended, or
pursuant to an effective registration statement under the Securities Act.
11. MISCELLANEOUS.
11.1 ENTIRE AGREEMENT. This Warrant constitutes the entire
agreement between the Company and the Warrantholder with respect to this
Warrant.
11.2 BINDING EFFECT; BENEFITS. This Warrant shall inure to the
benefit of and shall be binding upon the Company and the Warrantholder and their
respective successors and assigns. Nothing in this Warrant, expressed or
implied, is intended to or shall confer on any person other than the Company and
the Warrantholder, or their respective successors or assigns, any rights,
remedies, obligations or liabilities under or by reason of this Warrant.
11.3 SECTION AND OTHER HEADINGS. The section and other headings
contained in this Warrant are for reference purposes only and shall not be
deemed to be a part of this Warrant or to affect the meaning or interpretation
of this Warrant.
11.4 NOTICES. All notices and other communications required or
permitted hereunder shall be in writing and shall be delivered personally,
telecopied or sent by certified, registered or express mail, postage prepaid.
Any such notice shall be deemed given when so delivered personally, telecopied
or sent by certified, registered or express mail, as follows:
(a) if to the Company, addressed to:
Platinum Entertainment, Inc.
2001 Butterfield Road
Downers Grove, Illinois 60515
Telecopy: (630) 769-0049
Attention: Chief Executive Officer
with a copy to:
15
<PAGE>
Katten, Muchin & Zavis
525 West Monroe Street, Suite 1600
Chicago, Illinois 60661
Telecopy: (312) 902-1061
Attention: Matthew S. Brown, Esq.
(b) if to the Warrantholder, addressed to:
-------------------------------------
-------------------------------------
-------------------------------------
Telecopy:
Any party may by notice given in accordance with this Section 11.4 designate
another address or person for receipt of notices hereunder.
11.5 SEVERABILITY. Any term or provision of this Warrant which is
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the terms and provisions of this Warrant or
affecting the validity or enforceability of any of the terms or provisions of
this Warrant in any other jurisdiction.
11.6 GOVERNING LAW. This Warrant shall be deemed to be a contract
made under the laws of the State of Delaware and for all purposes shall be
governed by and construed in accordance with the laws of such State applicable
to such agreements made and to be performed entirely within such State.
11.7 CERTAIN REMEDIES. The Warrantholder shall be entitled to an
injunction or injunctions to prevent breaches of the provisions of this Warrant
and to enforce specifically the terms and provisions of this Warrant in any
court of the United States or any court of any state having jurisdiction, this
being in addition to any other remedy to which the Warrantholder may be entitled
at law or in equity.
11.8 NO RIGHTS OR LIABILITIES AS STOCKHOLDER. Nothing contained
in this Warrant shall be deemed to confer upon the Warrantholder any rights as a
stockholder of the Company or as imposing any liabilities on the Warrantholder
to purchase any securities whether such liabilities are asserted by the Company
or by creditors or stockholders of the Company or otherwise.
16
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be
signed by its duly authorized officer.
PLATINUM ENTERTAINMENT, INC.
By: /s/ DOUGLAS C. LAUX
--------------------
Name: Douglas C. Laux
Title: Chief Operating Officer and
Chief Financial Officer
Dated: April 15, 1999
17
<PAGE>
EXHIBIT A
EXERCISE FORM
(To be executed upon exercise of this Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant, to purchase __________ of the Warrant Shares and
[herewith tenders payment for such Warrant Shares to the order of Platinum
Entertainment, Inc. in the amount of $__________] [hereby exercises its
Conversion Right] in accordance with the terms of this Warrant. The undersigned
requests that a certificate for [such Warrant Shares] [that number of Warrant
Shares to which the undersigned is entitled as calculated pursuant to Section
1.2] be registered in the name of the undersigned and that such certificates be
delivered to the undersigned's address below.
Dated:
-------------------------
Signature
-----------------------------------------
----------------------------
(Print Name)
----------------------------
(Street Address)
----------------------------
(City) (State) (Zip Code)
18
<PAGE>
March 1, 1999
Hank Caldwell
=========================
Dear Hank:
The following are the terms of your employment by Platinum Entertainment,
Inc. ("Platinum") as Vice President/General Manager of the Urban Department.
1. You shall exercise all of the executive and administrative
responsibilities of Vice President/General Manager, subject to the by-laws of
Platinum and the supervision of the Chief Executive Officer of Platinum. You
also agree to perform such other duties and services as may be entrusted to you
by the Chief Executive Officer and the Board of Directors of Platinum that are
consistent with your position and title and shall report to the Chief Executive
Officer of Platinum. You agree to discharge your responsibilities diligently, in
good faith, and to the best of your abilities and to at all times give Platinum
full information and truthful explanation of all matters relative to your
employment responsibilities. You shall devote all of your time during ordinary
business hours to the interests and business of Platinum and shall not, except
as otherwise agreed to by the Board of Directors, work with or receive any
compensation or consideration from any other party for services performed or to
be performed by you.
2. (a) Your employment will be for a term of one (1) year, beginning
March 1, 1999 (the "Term"), at the annual base salary of $135,000.00, less
withholding ("Base Salary"), which will be paid in accordance with Platinum's
regular payroll policies. In addition, during the term of your employment, you
and your family will be entitled to participate in Platinum's regular health and
dental insurance plan under Platinum's policies with respect to such plans.
During each annual period of your employment you shall be entitled to vacation
and personal leave days in accordance with Platinum's regular policies. You
shall also be eligible to participate in the 401(K), life insurance, and all
other benefit plans of Platinum under Platinum's policies with respect to such
plans for its employees. You shall also be reimbursed for reasonable expenses
incurred by you for promoting the business of Platinum and in performance of
your duties hereunder in accordance with Platinum's expense policies. You will
be issued a company credit card and long distance telephone charge card.
(b) Platinum hereby acknowledges that, at the date
<PAGE>
hereof, you reside in Los Angeles, California. Platinum has asked you to
relocate to Atlanta, Georgia area, and you hereby agree to such relocation.
Accordingly, promptly following any such relocation of the principal residence
of you and your family, Platinum shall reimburse you for the reasonable expense
of such relocation in accordance with Platinum's regular policies upon your
delivery to Platinum of proper documentation evidencing such expense.
3. (a) In further consideration of your services hereunder, Platinum
agrees to grant to you an option (the "Purchase Option") to purchase an
aggregate of Ten Thousand (10,000) shares of Platinum's common stock at a
purchase price established pursuant to the 1995 Employee Incentive Compensation
Plan, as amended in 1996, at the next grant date as approved by the Board of
Directors of shareholders of Platinum (the "Grant Date"). The Purchase Option
shall be exercisable with respect to a portion of the shares subject to the
Purchase Option over the course of the option period as follows: up to and
including one-third (1/3) of the shares subject to the Purchase Option shall be
exercisable on and after the first anniversary of the Grant Date; up to and
including two thirds (2/3) of the shares subject to the Purchase Option shall be
exercisable on and after the second anniversary of the Grant Date; and up to and
including one hundred percent (100%) of the shares subject to the Purchase
Option shall be exercisable on and after the third anniversary of the Grant
Date. The Purchase Option shall be subject to the provisions of a separate stock
option agreement, in the form of other Platinum employee stock options, to be
entered between Platinum and you, as well as the terms of Platinum's Stock
Option Plan existing as of the Grant Date.
(b) In further consideration of your services hereunder, Platinum
agrees that you shall be entitled to receive such bonuses, including stock
options, as are determined by the Compensation Committee of the Board of
Directors of Platinum for the term of this Agreement. Platinum agrees that the
formula for the calculation of your bonus shall be based upon the EBITDA
performance of Platinum's Urban Department, and that your bonus shall be equal
to the product of (i) Forty Thousand Dollars ($40,000) and (ii) the amount
obtained by dividing (A) the actual EBITDA results of the Urban Department in
1999 by (B) the bonus EBITDA target established for the Urban Department for the
year 1999; provided, however, that in no event shall your bonus exceed the
amount of Forty Thousand Dollars ($40,000.00).
4. Unless otherwise mutually extended, this agreement shall terminate on
March 1, 2000, or the first to occur of the following:
(a) Your death.
(b) Your absence or inability to render the services required
hereunder by reason of a state of physical or mental
<PAGE>
incapacity for more than a period of eight (8) consecutive weeks and upon
thirty (30) days prior written notice by Platinum to you of an intent to
terminate because of such absence or inability.
(c) (i) Your act or acts which constitute a felony;
(ii) Your act or acts in the course of your employment that
constitute a fraud, misappropriation of property of Platinum or any of its
affiliates, or dishonesty;
(iii) Your act or acts which constitute any crime involving moral
turpitude; or
(iv) Your willful engagement in one or more acts, or your willful
failure to act, which is damaging to Platinum or any of its affiliates in a
material manner, or your willful failure to comply with reasonable directions of
the Chief Executive Officer, Chief Operating Officer, or General Counsel of
Platinum, after (A) written notice is delivered to you describing such willful
failure or engagement in one or more acts and (B) you fail to cure such willful
failure or engagement after a reasonable period of time as determined by the
Chief Executive Officer, Chief Operating Officer, or General Counsel in their
reasonable discretion (not to be less than five (5) days).
(d) In the event Platinum terminates this Agreement for any reason
other than those reasons set forth in Paragraph 4(a), 4(b) or 4(c), Platinum
shall continue to pay you, as severance compensation, all compensation payable
hereunder in the form of Base Salary for a period beginning on the date of your
termination and ending on the end of the Term. You shall not be required to
mitigate the amount of any payment provided for pursuant to this Paragraph 4(d)
by seeking other employment or otherwise. Further, in the event Platinum
terminates this Agreement for any reason other than those reasons set forth in
Paragraph 4(a), 4(b), or 4(c), Platinum agrees to vest all unvested Purchase
Options as of the date of such termination.
5. (a) You acknowledge that the relationship between the parties hereto
is exclusively that of employer and employee and that Platinum's obligations to
you are exclusively contractual in nature. Platinum shall be the sole owner of
all the fruits and proceeds of your services hereunder, including but not
limited to all ideas, concepts, formats, suggestions, developments,
arrangements, designs, packages, programs, promotions, musical compositions,
inventions pertaining to or useful in or to the activities of Platinum, and
other such intellectual properties which you may create during the Term of your
employment hereunder (all of the foregoing being collectively referred to herein
as "Work Product"), free and clear of any claims by you (or anyone claiming
under you) of any kind or character whatsoever, other than your right to
compensation hereunder, provided however that this shall only apply to Work
Product that is conceived or made on Platinum's time or with the use of
Platinum's facilities or
<PAGE>
materials. You shall, at the request of Platinum, execute such assignments,
certificates or other instruments as Platinum may from time to time deem
necessary or desirable to evidence, establish, maintain, perfect, protect,
enforce or defend its right, title and interest in or to any Work Product of
which Platinum shall be the sole owner as hereinabove provided.
(b) All memoranda, notes, business records and other documents made
or compiled by you or made available to you during the Term of this Agreement
concerning the business of Platinum shall be Platinum's property and on request
shall be delivered to Platinum on the termination or expiration of this
Agreement or at any other time on request.
(c) You agree that, during the term of this agreement and at all
times thereafter, you will maintain the confidentiality of all Confidential
Information regarding Platinum and its subsidiaries, affiliates, successors, and
assigns (hereinafter collectively the "Protected Entities") that you have, or
will have received or had access to as an employee, officer or director and that
you will not make any disclosure thereof to anyone else except as to matters
that have been the subject of public announcement or disclosure, is generally
available to the public from sources not subject to confidentiality agreements
with Platinum, or except as required by law. "Confidential Information" shall
mean any information relating to the business or affairs of the Protected
Entities, including but not limited to information relating to plans,
developments, financial statements, customer identities, potential customers,
employees, suppliers, servicing methods, equipment, programs, strategies and
information, analyses, profit margins, inventions, improvements, copyrightable
work, or other proprietary information used by the Protected Entities in
connection with their businesses. Nothing herein shall prevent you subsequent to
the termination or expiration of your employment pursuant to this Agreement from
using and availing yourself of your general technical skills, knowledge and
experience, including that pertaining to or derived from the non-secret or
non-confidential aspects of the Protected Entities.
(d) For a period of one year after the Term of this Agreement, unless
approved by the Board of Directors of Platinum, you will not, directly or
indirectly, except for secretarial or clerical employees who have theretofore
rendered services for you:
(i) solicit any employee of the Protected Entities, or any
performing artist or other person then under contract with or rendering
services to or making phonograph or other recordings for the Protected
Entities to terminate his or her employment by, or contractual relationship
with, the Protected Entities, or to refrain from extending or renewing the
same (upon the same or new terms) or to refrain from rendering services to
or making phonograph or other recordings for the Protected Entities, or to
become employed
<PAGE>
by or to enter into contractual relations with, or to make phonograph or
other recordings for, persons other than the Protected Entities;
(ii) approach any such employee, performing artist, producer or
other person for any of the foregoing purposes; or
(iii) authorize or knowingly approve or assist in the taking of
any such actions by any other person.
(e) Platinum shall be entitled, in addition to any other right or
remedy it may have, to an injunction, without the posting of any bond or
other security, enjoining or restraining you from any violation or threatened
violation of any part of Paragraphs 5(a), 5(b), 5(c), or 5(d).
6. This agreement (a) represents the entire agreement between you and
Platinum; (b) is not to be amended, supplemented, varied or discharged except by
an instrument in writing; (c) may be executed in counterparts, each of which
shall be deemed an original; and (d) shall be interpreted in accordance with and
in all respects governed by the laws of the State of Illinois. If any provision
of this agreement is declared void, or otherwise unenforceable, such provision
shall be deemed to have been severed from this agreement, which shall otherwise
remain in full force and effect.
If the foregoing correctly states our agreement, please so confirm by
signing below where indicated.
Platinum Entertainment, Inc.
By:/s/ THOMAS R. LEAVENS
-----------------------
Accepted and Agreed:
/s/ HANK CALDWELL
- -----------------
Hank Caldwell
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 333-83751 and Form S-3 No. 333-95137) of Platinum
Entertainment, Inc. and in the related Prospectuses and to the incorporation
by reference in the Registration Statement (Form S-8 No. 333-68635)
pertaining to the 1993 Stock Option Plan, Amended and Restated 1995
Director's Stock Option Plan, Amended and Restated 1995 Employee Incentive
Compensation Plan and the 1997 Employee Stock Purchase Plan of Platinum
Entertainment, Inc. of our report dated April 3, 2000 (except for Note 1 and
Note 10, as to which the date is April 13, 2000), with respect to the
consolidated financial statements of Platinum Entertainment, Inc. included in
this Annual Report (Form 10-K) for the year ended December 31, 1999.
/s/ERNST & YOUNG LLP
Chicago, Illinois
April 14, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 OF PLATINUM
ENTERTAINMENT, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 12
<SECURITIES> 0
<RECEIVABLES> 19,771
<ALLOWANCES> (16,003)<F1>
<INVENTORY> 5,068
<CURRENT-ASSETS> 3,305
<PP&E> 4,517
<DEPRECIATION> (2,052)
<TOTAL-ASSETS> 47,254
<CURRENT-LIABILITIES> 53,643<F2>
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> (6,396)
<TOTAL-LIABILITY-AND-EQUITY> 47,254
<SALES> 47,777
<TOTAL-REVENUES> 48,891
<CGS> 23,282
<TOTAL-COSTS> 23,692
<OTHER-EXPENSES> 27,811
<LOSS-PROVISION> 3,373<F3>
<INTEREST-EXPENSE> (3,189)
<INCOME-PRETAX> (21,658)
<INCOME-TAX> 0
<INCOME-CONTINUING> (21,658)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,658)
<EPS-BASIC> (3.62)
<EPS-DILUTED> (3.62)
<FN>
<F1>Receivable allowances include reserves for future returns, allowances for
doubtful accounts, and other allowances.
<F2>Includes $32,725 revolving line of credit.
<F3>Includes provision for unrecoupable distribution advances.
</FN>
</TABLE>
