-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JyLC/4L5zn8mAAxYWHr/1OPJ97d0cKn6nVIjlN98N4Yz0BUiQ6L9VKDl+NDjM9ag QSD2kmVvbEVQUHlP1X5m2A== 0000883558-99-000021.txt : 19990817 0000883558-99-000021.hdr.sgml : 19990817 ACCESSION NUMBER: 0000883558-99-000021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PLATINUM ENTERTAINMENT INC CENTRAL INDEX KEY: 0000883558 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-DURABLE GOODS, NEC [5099] IRS NUMBER: 363802328 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27852 FILM NUMBER: 99691953 BUSINESS ADDRESS: STREET 1: 2001 BUTTERFIELD RD STREET 2: STE 1400 CITY: DOWNERS GROVE STATE: IL ZIP: 60515 BUSINESS PHONE: 7087690033 MAIL ADDRESS: STREET 1: 2001 BUTTERFIELD RD CITY: DOWNERS GROVE STATE: IL ZIP: 60515 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission File Number 000-27852 PLATINUM ENTERTAINMENT, INC. (Exact name of registrant as specified in its charter) Delaware 36-3802328 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2001 Butterfield Road Downers Grove, Illinois 60515 (Address of principal executive offices, including zip code) (630) 769-0033 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 7,313,754 Common Stock, par value $.001 per share, at August 16, 1999. PART I - FINANCIAL INFORMATION Item 1. Financial Statements. Platinum Entertainment, Inc. Consolidated Balance Sheets (In thousands, except share and per share amounts)
June 30 December 31 1999 1998 ________________________________ Assets (Unaudited) Current assets: Cash $ 47 $ 12 Accounts receivable, net 7,765 5,647 Artist advances, net 2,269 1,899 Inventories, net 6,828 7,036 Other receivable - 2,500 Other 2,469 1,986 ________________________________ Total current assets 19,378 19,080 Investment securities 750 750 Property and equipment, net 2,578 2,461 Recorded music costs, net 1,178 1,251 Music catalog, net 20,849 21,314 Music publishing rights, net 2,950 3,026 Goodwill, net 5,488 5,610 Deferred financing costs, net 225 253 Equity investment in joint venture 2,088 2,205 Other 977 1,028 ________________________________ Total assets $ 56,461 $ 56,978 ================================ Liabilities and Stockholders' Equity Current liabilities: Revolving line of credit $ 34,247 $ 33,965 Accounts payable 5,084 6,452 Accrued liabilities 2,239 3,233 Royalties payable 7,798 5,410 ________________________________ Total current liabilities 49,368 49,060 Stockholders' equity: Preferred stock: Preferred Stock ($.001 par value); 10,000,000 shares authorized: Series B Convertible Preferred Stock, 20,000 shares issued and outstanding - - Series C Convertible Preferred Stock, 2,500 shares issued and outstanding - - Series D Convertible Preferred Stock, 3,938 shares issued and outstanding - - Common stock: Common Stock ($.001 par value); 40,000,000 shares authorized, 7,514,502 and 6,626,099 shares issued and 7,310,421 and 6,626,099 shares outstanding, respectively 7 7 Additional paid-in capital 79,870 71,378 Accumulated deficit (72,784) (63,467) ________________________________ Stockholders' equity 7,093 7,918 _________________________________ Total liabilities and stockholders' equity $ 56,461 $ 56,978 =================================
See accompanying notes to financial statements. Platinum Entertainment, Inc. Consolidated Statements of Operations (Unaudited - in thousands, except share and per share amounts)
Quarter ended June 30 Six months ended June 30 1999 1998 1999 1998 _____________________ _________________________ Gross product sales $ 10,739 $ 12,942 $ 23,097 $ 26,607 Less: Returns (2,739) (2,847) (5,452) (4,271) Less: Discounts (276) (603) (852) (1,208) ______________________ _________________________ Net product sales 7,724 9,492 16,793 21,128 Licensing, publishing and other revenues 364 976 525 1,327 ______________________ _________________________ Net sales 8,088 10,468 17,318 22,455 Cost of sales and services 6,613 6,316 11,794 13,922 ______________________ _________________________ Gross profit 1,475 4,152 5,524 8,533 Other operating expenses: Selling, general and administrative 5,837 4,820 10,136 8,440 Depreciation and amortization 536 410 1,187 905 ______________________ _________________________ 6,373 5,230 11,323 9,345 ______________________ _________________________ Operating loss (4,898) (1,078) (5,799) (812) Interest income - 22 - 41 Interest expense (773) (695) (1,433) (1,263) Other financing costs (70) 275 (103) 205 Equity loss (79) (199) (117) (29) _______________________ _________________________ Net loss (5,820) (1,675) (7,452) (1,858) Less: Preferred dividend requirements (979) (695) (1,865) (1,370) _______________________ _________________________ Loss applicable to common shares $ (6,799) $ (2,370) $ (9,317) $ (3,228) ======================= =========================== Basic and diluted loss per common share $ (0.97) $ (0.44) $ (1.36) $ (0.60) Weighted average number of common shares outstanding 7,016,134 5,401,138 6,866,653 5,338,437
See accompanying notes to financial statements. Platinum Entertainment, Inc. Consolidated Statement of Stockholders' Equity (Unaudited - in thousands, except share and per share amounts)
Additional Preferred stock Common Stock paid-In Stockholders' Series B Series C Series D Shares Amount capital Deficit equity Balance at December 31, 1998 $ - $ - $ - 6,626 $ 7 $ 71,378 $ (63,467) $ 7,918 Issuances of Common Stock: Private placement ($7.09 per share) - - - 423 - 3,000 - 3,000 Warrant exercises - - - 259 - 2 - 2 Professional services by related parties - - - 75 - 527 - 527 Employee stock plans - - - 43 - 251 - 251 Litigation settlement - - - 20 - 129 - 129 Professional services - - - 18 - 123 - 123 Issuances of preferred stock: Series D with warrants - - - - - 3,909 - 3,909 Redemption of Common Stock: Litigation settlement - - - (204) - (1,314) - (1,314) Dividends: Preferred dividend requirements - - - - - 1,865 (1,865) - Net loss for the six months ended June 30, 1999 - - - - - - (7,452) (7,452) Other - - - 50 - - - - ______________________________ _______________________________________________________ Balance at June 30, 1999 $ - $ - $ - 7,310 $ 7 $ 79,870 $ (72,784) $ 7,093 ============================== =======================================================
See accompanying notes to financial statements. Platinum Entertainment, Inc. Consolidated Statements of Cash Flows (Unaudited - in thousands) Six months ended June 30 1999 1998 _______________________________ Operating activities Net loss $ (7,452) $ (1,858) Adjustments to reconcile net loss to net cash used in operating activities: Provision for future returns 5,452 4,271 Provision for unrecoupable artist balances 2,039 1,303 Provision for slow-moving inventory 100 - Depreciation 337 190 Amortization 849 716 Deferred financing costs 103 126 Equity loss from joint venture 117 28 Professional services by related parties paid in common stock 527 - Professional services paid in common stock 123 - Litigation settlement, net (1,185) - Changes in operating assets and liabilities: Accounts receivable (7,570) (7,492) Inventories 108 (725) Artist advances (2,389) (2,879) Recorded music costs (113) (264) Accounts payable (1,490) 67 Accrued liabilities (994) (1,161) Royalties payable 2,388 1,420 Other (403) (624) _______________________________ Net cash used in operating activities (9,453) (6,882) Investing activities Cash paid for acquisition - (150) Purchases of property and equipment (454) (733) _______________________________ Net cash used in investing activities (454) (883) Financing activities Net proceeds from revolving lines of credit 282 9,107 Payment on bank term loan - (1,000) Net proceeds from sale of preferred stock with warrants to related parties 3,909 - Proceeds from sale of Common Stock 5,500 - Employee stock plans 251 - Other - (76) _______________________________ Net cash provided by financing activities 9,942 8,031 _______________________________ Net increase in cash 35 266 Cash, beginning of period 12 11 _______________________________ Cash, end of period $ 47 $ 277 ===============================
See accompanying notes to financial statements. Platinum Entertainment, Inc. Notes to Consolidated Financial Statements (Unaudited - in thousands, except share and per share amounts) 1. Basis of Presentation The financial statements included herein are unaudited and have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial reporting and Securities and Exchange Commission regulations. Accordingly, the financial statements do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the financial statements reflect all adjustments which are necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented. Certain prior period amounts in the financial statments have been reclassified to conform with the current period presentation. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 1998, of Platinum Entertainment, Inc. included in the Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 15, 1999. The interim results presented are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. We have incurred significant net losses and negative cash flows from operations since our inception, including a net loss of $7,452 ($9,317 after preferred dividend requirements) and negative cash flows from operations of $9,453 in the six months ended June 30, 1999. We have historically sustained net losses and negative cash flows, in part due to the high costs associated with the establishment and expansion of our activities. For the quarter ended June 30, 1999, we were in violation of one of the financial covenants contained in our bank credit agreement. This violation was waived by the bank in July 1999. Our fiscal 1999 plan, if achieved, would allow us to comply with our financial covenants. However, under the current provisions of the bank credit agreement and based on actual results to date, it is likely that we will be in violation of the same financial covenant for the third and fourth quarters of fiscal 1999. If so, we would seek to have these violations waived. If we are unsuccessful in obtaining a waiver, the lender could declare the facility in default. A default could have a material adverse effect on the Company's business as there is no assurance that alternative financing could be obtained on terms satisfactory to the Company, if at all. Historically, we have funded our operations and other activities from a variety of capital sources, including debt and equity financing. We have continued to obtain equity financing from time-to-time. On December 31, 1998, a private placement of our Common Stock occurred, providing proceeds of $2,500 in January 1999. We have formulated plans and instituted specific measures which we believe will improve cash flows and liquidity and enable us to continue in existence without a significant curtailment of operations. * We established a fiscal 1999 business plan and adopted a fiscal 1999 budget which includes, among other things, (i) a focus on the efficiency of internal operations, (ii) implementation of procedures to reduce costs and improve margins, (iii) the addition of new releases in a variety of genres and (iv) the hiring of experienced music industry executives to supplement the efforts of management. * During April 1999, we issued shares of a new series of preferred stock and warrants to purchase shares of our Common Stock to one of our executive officers and certain other members of our Board of Directors, providing net proceeds of approximately $3,900 (see "Note 5"). * During May 1999, a private placement of our Common Stock occurred, providing proceeds of $3,000 (see "Note 7"). * During July 1999, musicmaker.com, Inc. (musicmaker.com) completed its initial public offering (IPO). Based on the pro forma assumptions discussed in "Note 2," the value of our investment in musicmaker.com is $8,039. Pursuant to a lock-up agreement with the underwriters of the IPO, we are unable to sell the musicmaker.com shares until January 2000. However, we have secured permission to use the shares as collateral for the purpose of generating additional liquidity in the near term. * We have agreed to sell our country music publishing rights originally purchased from Double J Music Group for $1,449. We anticipate this sale to be completed by the end of August 1999. The events described above should allow us to complete our 1999 plan. In addition to the events described above, we may need additional equity financing in order to achieve our fiscal 2000 plan. While we have been successful in the past in raising equity as needed, there can be no assurance that additional equity financing may be available on satisfactory terms, if at all. The financial statements and related notes included elsewhere herein do not include any adjustments which might result from the outcome of this uncertainty. Our plans for fiscal 1999 and beyond are subject to uncertainties, many of which are beyond our control, such as general economic conditions and competitive factors, and actual results may vary significantly from our plans. 2. Musicmaker.com We own 798,856 shares of common stock of musicmaker.com. Musicmaker.com completed its IPO on July 7, 1999, for an IPO price of $14 per share under the symbol "HITS." We obtained our equity interest in musicmaker.com, the Internet's largest music download and custom CD vendor, on September 30, 1998, in exchange for $750 of our common stock, par value $.001 per share. In addition, we granted musicmaker.com the exclusive right to our music catalog for Internet downloads and "burn and mail" compilations for two years, and thereafter a non-exclusive right to our music catalog for Internet downloads and "burn and mail" compilations for five years. We retained the exclusive rights to our music catalog for promotional Internet downloads. Effective July 7, 1999, and prospectively, the accounting treatment for our investment in musicmaker.com will require us to record the investment at its fair market value which has a significant affect on our assets and net worth. The pro forma information following assumes musicmaker.com's IPO occurred on June 30, 1999, and reflects the value of our investment as of August 13, 1999, at the per share price of $10.063, which price equals the closing price of musicmaker.com's common stock as reported by the Nasdaq National Market on that date.
June 30 June 30 1999 1999 (Unaudited) (Pro forma) Total assets $ 56,461 $ 63,750 Total liabilities 49,368 49,368 Total stockholders' equity 7,093 14,382 Total liabilities and stockholders' equity $ 56,461 $ 63,750
3. Basic and Diluted Loss Per Common Share Basic loss per common share is based upon the net loss applicable to common shares after preferred dividend requirements and upon the weighted-average number of common shares outstanding during the period. Diluted loss per common share adjusts for the effect of convertible securities, stock options and warrants only in the periods presented in which such effect would have been dilutive. The total of such securities at June 30, 1999, was 13,399,271. Such effect was not dilutive in any of the periods presented herein. 4. Debt During July 1998, we entered a credit agreement with First Source Financial, Inc. (First Source) for a $35,000 revolving line of credit. Our First Source facility has a five year term and bears interest at the bank's base rate plus 1.5% per annum (9.25% at June 30, 1999). Borrowings under our First Source facility are limited to the Borrowing Base, as defined, which is based upon eligible accounts receivable, inventory and music catalog. Our First Source facility contains certain financial covenants, requires a lockbox arrangement and is secured by substantially all of our assets. Because the facility contains a subjective acceleration clause, the entire balance is classified as current in the balance sheet. The First Source agreement was amended during April 1999, providing for revised financial covenants through December 31, 1999. For the quarter ended June 30, 1999, we were in violation of one of the financial covenants contained in this amendment. This violation was waived by the bank during July 1999. The First Source agreement was amended again during August 1999, to allow the sale of our Double J publishing rights. Pursuant to this amendment, the revolving line of credit will be permanently reduced by 50% of the net proceeds from the sale of Double J, or approximately $700. 5. Preferred Stock On April 15, 1999, we issued and sold an aggregate of 3,938 shares of Series D Convertible Preferred Stock and warrants (the Series D Warrants) to purchase an aggregate of 794,163 shares of Common Stock to Steven Devick, one of our executive officers and a director, and Craig J. Duchossois and Andrew Filipowski, each members of our Board of Directors. The terms of the Series D Convertible Preferred Stock and Series D Warrants were determined on April 9, 1999, pursuant to approval by the Board of Directors on such date. We received $3,938 in gross consideration in connection with this private placement. We also paid an aggregate of $29 to Mr. Duchossois and Mr. Filipowski as a related transaction fee. The Series D Convertible Preferred Stock accrues dividends compounded at an annual rate of 12% for the first year, 14% for the second year, 16% for the third year, 18% for the fourth and fifth years and 20% at all times thereafter, of the purchase price of the Series D Convertible Preferred Stock, in preference to any dividends on any class of capital stock that is junior to the Series D Convertible Preferred Stock. The Series D Convertible Preferred Stock is junior to the Series B Convertible Preferred Stock and the Series C Convertible Preferred Stock with respect to the right to receive dividends and to participate in any distribution of assets other than by way of dividends. The Series D Convertible Preferred Stock is redeemable by us at any time at a price per share equal to the purchase price paid by the purchasers thereof plus accrued and unpaid dividends. The Series D Convertible Preferred Stock is convertible, commencing two years from the date of issue, into shares of Common Stock at $7.00 per share, which is equal to the closing trading price of the Common Stock on April 9, 1999. The value assigned the Series D Convertible Preferred Stock is $3,532 and the value assigned the Series D Warrants is $406. These amounts, net of associated costs of $29, are reflected in additional paid-in capital on the balance sheet. The number of shares of Common Stock obtainable upon exercise of the Series D Warrants does not increase. If the Series D Convertible Preferred Stock is redeemed in full during the twelve month period following the issuance of the Series D Warrants, the holders of the Series D Warrants are required to return 1% of the Series D Warrants (or Common Stock representing shares received upon exercise of the Series D Warrants), determined on a pro rata basis, for each month remaining in such twelve month period; provided, however, that the holders of the Series D Warrants are not required to return more than 12% of the aggregate number of Series D Warrants originally issued. The Common Stock underlying the Series D Warrants may be purchased at an exercise price per share of $6.126, which is equal to the average of the closing trading price of the Common Stock for the 30 consecutive trading days that commenced April 9, 1999. 6. Preferred Dividend Requirements The preferred stock accrued dividends as follows:
Series B Series C Series D Total May 31, 1999 $ 815 $ 102 $ 62 $ 979 February 28, 1999 788 98 - 886 May 31, 1998 618 77 - 695 February 28, 1998 600 75 - 675
The dividends reflect a compounding per annum rate of 14% (effective December 1998; prior to such date the per annum rate was 12%) of the initial costs of the Series B Convertible Preferred Stock and Series C Convertible Preferred Stock and 12% of the initial costs of the Series D Convertible Preferred Stock. 7. Common Stock During May 1999, we issued 423,280 shares of our Common Stock to unrelated parties at a per share price of $7.088, which approximated the closing price of our Common Stock as reported by the Nasdaq National Market on the date of sale. We received $3,000 in consideration for this sale. 8. Related Party Transactions We entered a distribution agreement, dated August 1998, with Envisage Multimedia LLC pursuant to which we are the exclusive distributor of Envisage recorded music products, in certain territories, for a period of three years. For such services, we receive a distribution fee from Envisage. We also have paid certain manufacturing and promotional costs on behalf of Envisage, to be fully repaid to us by Envisage. Gross product sales of Envisage product reflected in the statement of operations for the quarter and six months ended June 30, 1999 were immaterial. The amount due from Envisage at June 30, 1999 reflected in the balance sheet is approximately $749. Envisage is a partnership owned by parties related to us. During April 1999, we issued 75,246 shares of our Common Stock, valued at $527 or $7 per share, to Platinum technology Interational, Inc. (Platinum technology), of which certain shareholders, directors and officers are members of the Company's Board of Directors, in connection with computer consulting services. Pursuant to an agreement accompanying the issuance, if Platinum technology sells the shares below the initial value of the shares at time of issuance, we are required to issue Platinum technology additional shares of our Common Stock equal to their loss on the sale. To the extent Platinum technology sells the stock for greater than such initial value, Platinum technology shall retain 10% of such excess value and shall remit the remaining excess value to the Company to be applied on a priority basis to future invoices for additional services, if any. Such arrangement also applies to the initial payment of 53,192 shares issued to Platinum technology on November 20, 1998 valued at $7.188 per share. 9. Litigation During March 1999, we settled our pending litigation with JCSHO, Inc. (see "Part II - Other Information - Item 1. Legal Proceedings"). The settlement resulted in an offset of charges previously expensed by us in connection with the acquired assets and assumed liabilities of Intersound, Inc. through the recognition of a gain of $1,185. This amount is included as an offset to our operating expenses in the statement of operations for the six months ended June 30, 1999. On April 7, 1999, Ichiban Records, Inc. filed a lawsuit in the Superior Court of Fulton County, State of Georgia, captioned "Ichiban Records, Inc. v. Platinum Entertainment, Inc.," Civil Action No. 1999 CV 07215 ("Ichiban Claim"), seeking termination of its distribution agreement with us and damages in excess of $10,000,000, for alleged breaches of its distribution agreement by us. Ichiban Records, Inc. also filed a complaint for injunction and temporary restraining order and appointment of a receiver under the same caption. On April 21, 1999, Ichiban Records, Inc. also filed a voluntary petition to commence a case under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Georgia, Atlanta Division, Case No. 99-66017. Further, we removed the Ichiban Claim from the State of Georgia court to the United States District Court for the Northern District of Georgia, Atlanta Division, Case No. 1:99 CV-1113. The Ichiban Claim will now be asserted through the bankruptcy action. We are presently in discussions with Ichiban Records, Inc. concerning a restructuring of the distribution relationship between the parties in order to recover advances and other monies owed by Ichiban Records, Inc. to us. A settlement agreement to dismiss the Ichiban Claim and an agreement amending the distribution agreement with Ichiban has been reached with the trustee for the bankruptcy estate. We anticipate filing a joint motion soon with the trustee to approve the settlement and amendment agreement. We believe the claims of Ichiban Records, Inc. are without merit and that the matter will be successfully resolved without a material impact on our financial position or results of operations. However, because the bankruptcy is at an early stage, there can be no assurances that the matter can be resolved in our favor. A decision adverse to us in this matter could have a material adverse impact on our financial position and results of operations. On May 28, 1999, PolyGram Group Distribution, Inc. filed an action against us in the Superior Court of the State of California for the County of Los Angeles captioned "PolyGram Group Distribution, Inc. -v- Platinum Entertainment, Inc.," Case No. B C211091, seeking injunctive relief, restitution, and disgorgement of profits arising out of PolyGram's claim that the distribution agreement between us and PolyGram Group Distribution bars the distribution of our recordings through our own distribution facilities and requires that they be distributed by PolyGram. On June 25, 1999, PolyGram filed an amended complaint that additionally seeks the recovery of an unspecified amount of damages. We have filed an answer to this complaint denying the claims of PolyGram and asserting cross-claims for damages arising out of PolyGram's breach of the distribution agreement, for damages incurred in connection with the production of a compilation album by PolyGram entitled "Essential Southern Rock" and for the failure of PolyGram's successor, Universal Music, to properly pay royalties to us pursuant to the terms of a foreign licensing agreement between us and Universal. We have rejected earlier demands to cease and desist selling our recording through our own distribution facilities on the grounds that an amendment to the distribution agreement with PolyGram Group Distribution specifically allows us to distribute records through our own distribution company. In addition, on July 21, 1999, we provided PolyGram with a notification of termination of the distribution agreement. Because this litigation is at a very early stage, we are unable to predict its outcome with any accuracy. However, we believe PolyGram's claims are without merit and we intend to vigorously defend this action and pursue our claims against PolyGram. The Company is also a plaintiff in a copyright infringement action against MCA, Inc. and MCA Records, Inc., subsidiaries of Universal Music, now pending in the United States District Court for the Southern District of New York, captioned "Platinum Entertainment, Inc. v. MCA, Inc., et al," Civil Action No. 99 Civ.1521. This action seeks damages and injunctive relief by the Company for the wrongful use by the defendants of one of the Company's published musical compositions. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The information in this section should be read together with the consolidated financial statements and related notes contained elsewhere herein. Overview Our primary business is the production, distribution, marketing and sale of music. Our pre-recorded music products include new releases, typically by established artists, as well as compilations featuring various artists and repackagings of previously recorded music from our master music catalog and under licenses from third party record companies. We sell music products, including compact discs, tape cassettes and digital versatile discs (DVDs) mainly to retailers and wholesalers primarily in the United States. We currently release music in a variety of genres including classical, urban, adult contemporary, blues, gospel and country and on our Intersound Classical, Platinum, River North, House of Blues, CGI Platinum and Platinum Nashville labels. Our headquarters are located in Downers Grove, Illinois, our primary distribution facility is located in Roswell, Georgia, and we have a promotional office in Nashville, Tennessee. We distribute our products through a multi-channel system comprised of (i) PED Corp (formerly named Platinum Distribution), our proprietary distribution system, (ii) international licensing agreements as well as production and distribution agreements on a territory-by-territory basis and (iii) Internet distribution. We had a distribution agreement with PolyGram Group Distribution, Inc. (PGD) through July 1999, at which time we notified PGD we were terminating the agreement (see "Part II - Other Information - Item 1. Legal Proceedings"). Our gross revenues through PGD were $1,006,000 and $4,185,000 for the second quarter of 1999 and 1998, respectively, reflecting a 76% decrease. Our gross revenues through PGD were $3,095,000 and $8,801,000 for the first six months of 1999 and 1998, respectively, reflecting a 65% decrease. Management believes that this decrease is related to the acquisition by Universal Music and Video Distribution (Universal) of PGD during the summer of 1998. This decrease was offset in part by increased sales volume through PED. Gross revenues through PED were $9,162,000 and $7,998,000 for the second quarter of 1999 and 1998, respectively, reflecting a 15% increase. Gross revenues through PED were $19,148,000 and $14,806,000 for the first six months of 1999 and 1998, respectively, reflecting a 29% increase. As a result of the termination of the PGD agreement, we increased our reserve for future returns related to product distributed by PGD by $400,000 effective June 30, 1999. In addition, effective June 30, 1999, we increased artist advance and inventory reserves related to product distributed by PGD by approximately $1,200,000. An additional $390,000 in costs were incurred during the second quarter of 1999, primarily due to increased handling fees, freight charges, etc. to transfer product from PGD to PED. We are currently moving PED to a new, larger facility which we anticipate will enable us to more efficiently distribute product. This is expected to result in increased gross margins with the elimination of PGD's distribution fee of approximately 18%, and additional miscellaneous fees representing another 5% on average. While we have historically distributed records for a limited number of outside labels, it is our strategy to increase the volume of outside labels we distribute in order to generate additional revenues and to expand our PED system. Under these arrangements, we generate a distribution fee of approximately 20% to 30%, depending on the volume and range of services provided. The gross margin from these sales has ranged from as low as 6% (for third party product distributed by PGD to which we owed a distribution fee) to 27% (for product distributed through our proprietary systems). Additional gross margin benefits are expected to occur as PED assumes the distribution responsibilities of additional third party labels. These third party activities represented 6% of our gross revenues in the second quarter of 1999, as compared to 9% in the second quarter of 1998, and 8% during the six months ended June 30, 1999, as compared to 7% in the six months ended June 30, 1998. The decrease in the second quarter of 1999 resulted from decreased activity with Ichiban Records, which filed for bankruptcy during April 1999 (see "Part II - Other Information - Item 1. Legal Proceedings"). We distribute via the Internet through our website, www.PlatinumCD.com, and our equity investment and revenue sharing arrangement with musicmaker.com, Inc. (musicmaker.com), the first and largest digital download and "burn and mail" company. Musicmaker.com completed its initial public offering (IPO) on July 7, 1999 under the symbol "HITS." "Note 2" to the financial statement included herein discloses the pro forma impact to our assets and net worth at June 30, 1999, relating to this offering. Through musicmaker.com our customers can create custom compilation CDs or download songs onto the hard drive of their own computers using Liquid Audio and Secure-MP3, two downloading formats used to protect the copyrights of the record label and the recording artist. We also are an affiliate with Amazon.com, a leader in the Internet commerce industry, to provide customers who visit our website access to hundreds of thousands of commercially available titles. Product sales are recognized upon shipment. In accordance with industry practice, our music products are sold on a returnable basis. Our allowance for future returns is primarily based upon our historical returns and "SoundScan" data. Our returns were 25% of our gross revenues in the second quarter of 1999, as compared to 20% in the second quarter of 1998. The current quarter is higher than the comparable prior period due to increase future returns for product distributed by PGD as discussed above. Our returns were 23% during the six months ended June 30, 1999, as compared to 15% in the six months ended June 30, 1998. The return rate for the first half of 1998, was unusually low; the return rate for the six months ended June 30, 1999, is the same as our overall 1998 return rate and we believe this return rate approximates our anticipated future returns. It is our policy to inventory returned product and resell such product at market value. During March 1999, we settled our pending litigation with JCSHO, Inc. (see "Part II - Other Information - Item 1. Legal Proceedings"). The settlement resulted in an offest of charges previously expensed by us in connection with the acquired assets and assumed liabilities of Intersound, Inc. through the recognition of a gain of $1,185,000. This amount is included as an offset to our operating expenses in the statement of operations for the six months ended June 30, 1999. We have historically sustained losses and negative operating cash flows, in part due to the high costs associated with the establishment and expansion of our activities. We require significant recurring funds for artist and repertoire (A&R) expenses, which include recorded music costs. We make substantial payments each year for recording costs and advances to artists and producers in order to maintain and enhance our artist roster. Advances to established artists and producers and direct costs associated with the creation of record masters are capitalized and are charged to cost of sales as the related albums earn revenues or when the amounts are determined to be unrecoverable. See "Liquidity and Capital Resources" following. Results of Operations The following table sets forth for the periods indicated the percentage of gross revenues represented by certain items included in our "Consolidated Statements of Operations." Operating performance for any period is not necessarily indicative of performance for any future periods.
Quarter ended Six months ended June 30 June 30 1999 1998 1999 1998 ________________ _________________ Gross revenues Platinum labels 91% 84% 90% 88% Distributed labels 6% 9% 8% 7% Licensing, publishing and other 3% 7% 2% 5% ________________ _________________ Total gross revenues 100% 100% 100% 100% Less: Returns -25% -20% -23% -15% Less: Discounts -2% -4% -4% -4% ________________ _________________ Net revenues 73% 76% 73% 81% Cost of sales 60% 45% 50% 50% ________________ _________________ Gross profit 13% 31% 23% 31% Other operating expenses: Selling, general and administrative 53% 35% 43% 30% Depreciation and amortization 5% 3% 5% 3% _________________ _________________ 57% 38% 48% 33% _________________ _________________ Operating income (loss) -44% -7% -25% -2% Interest expense -7% -5% -6% -5% Other financing costs -1% 2% - 1% Equity gain (loss) -1% -1% - - _________________ _________________ Net loss -53% -11% -31% -6% Less: Preferred dividend requirements -9% -5% -8% -5% _________________ _________________ Loss applicable to common shares -62% -16% -39% -11% ================= =================
Gross Revenues. Gross revenues decreased $2,815,000 or 20% to $11,103,000 for the second quarter of 1999, compared to $13,918,000 for the second quarter of 1998, and decreased $4,311,000 or 15% to $23,622,000 for the six months ended June 30, 1999, compared to $27,933,000 for the same period of the prior year. Gross revenues through PGD were down $3,179,000 or 76% in the second quarter of 1999, compared to the second quarter of 1998, and down $5,706,000 or 65% in the six months ended June 30, 1999, compared to the same period of the prior year. Management believes that this decrease is related to the acquisition by Universal of our former third party, major label distributor, PolyGram Group Distribution, during the summer of 1998. During July 1999, we provided PGD with a notification of termination of the distribution agreement. See "Part II - Other Information - Item 1. Legal Proceedings." This decrease was offset in part by increased sales through our own distribution system, particularly in the classical genre. Gross revenues through PED were up $1,164,000 or 15% in the second quarter of 1999, compared to the second quarter of 1998, and up $4,342,000 or 29% in the six months ended June 30, 1999, compared to the same period of the prior year. Notable releases shipped during the current periods include Rick Springfield's first release in over ten years, "Karma", Vickie Winans' second live album on CGI Platinum, "Live in Detroit II", initial shipments of "Blues Power: Songs of Eric Clapton" performed by blues greats such as Buddy Guy, Otis Rush and Bo Diddley, and catalog titles such as urban compilation "Booty Mix 4" and country singer T. Graham Brown's "Wine into Water". Returns. We record an estimate of future returns at the time product is sold (see "Overview"). Returns as a percentage of gross revenues were 25% of gross revenues in the second quarter of 1999, as compared to 20% in the second quarter of 1998. The current quarter is higher than the comparable prior period due to increased returns for product distributed by PGD as discussed above. Returns as a percentage of gross revenues were 23% during the six months ended June 30, 1999, as compared to 15% in the same period of the prior year. The return rate for the first half of 1998 was unusually low; the return rate for the six months ended June 30, 1999, is the same as our overall 1998 return rate and we believe this return rate approximates our anticipated future returns. Discounts. Discounts as a percentage of gross revenues decreased slightly to 2% for the second quarter of 1999, compared to 4% for the second quarter of 1998, and remained unchanged at 4% for the six months ended June 30, 1999 and 1998. Cost of Sales. Cost of sales as a percentage of gross revenues increased to 60% for the second quarter of 1999, compared to 45% for the second quarter of 1998, and remained unchanged at 50% for the six month periods ended June 30, 1999 and 1998. The increase for the second quarter of 1999, relates to additional artist advance and inventory reserves relative to records distributed by PGD - see "Overview" above. Without these increased costs, cost of sales as a percentage of gross revenues would have been 45% for the six months ended June 30, 1999. Gross Profit. Gross profit decreased $2,677,000 or 64% to $1,475,000 for the second quarter of 1999, compared to $4,152,000 for the second quarter of 1998, and decreased $3,009,000 or 35% to $5,524,000 for the six months ended June 30, 1999, compared to $8,533,000 for the same period of the prior year. As a percentage of gross revenues, gross profit decreased to 13% for the second quarter of 1999, compared to 31% for the second quarter of 1998, and decreased to 23% for the six months ended June 30, 1999, compared to 31% for the same period of the prior year. The decreases are primarily a result of the increased reserves for future returns, artist advances and inventory relative to product distributed by PGD as described above. The remaining decrease relates to decreased sales volume as described above. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $1,017,000 or 21% to $5,837,000 for the second quarter of 1999, compared to $4,820,000 for the second quarter of 1998, and increased $1,696,000 or 20% to $10,136,000 for the six months ended June 30, 1999, compared to $8,440,000 for the same period of the prior year. The six month period ended June 30, 1999, includes a net gain from litigation settlements of $1,185,000 (see "Overview"). Excluding these settlements, selling general and administrative expenses increased 34%. This increase is primarily attributable to increased promotional spending on our urban releases, a genre which management believes requires significant promotional expenditures in order for us to capitalize on the opportunities for significant sales in this genre. In addition, we have incurred additional costs, including compensation expense, as we have expanded our sales staff and distribution capabilities in preparation for the shift to proprietary distribution for product formerly distributed by PGD. Operating Loss. Primarily as a result of the factors described above, we incurred an operating loss of $4,898,000 for the second quarter of 1999, compared to an operating loss of $1,078,000 for the second quarter of 1998, and incurred an operating loss of $5,799,000 for the six months ended June 30, 1999, compared to an operating loss of $813,000 for the same period of the prior year. As discussed above, as a result of the termination of the PGD agreement, we increased our reserve for future returns related to product distributed by PGD by $400,000 effective June 30, 1999. In addition, effective June 30, 1999, we increased artist advance and inventory reserves related to product distributed by PGD by approximately $1,200,000. An additional $390,000 in estimated costs were incurred during the second quarter of 1999, primarily due to increased handling fees, freight charges, etc. to transfer product from PGD to PED. Interest Expense. Interest expense for the second quarter of 1999, totaled $772,000 compared to $695,000 for the second quarter of 1998, and totaled $1,431,000 for the six months ended June 30, 1999, compared to $1,263,000 for the same period of the prior year. The current period increase resulted from a higher outstanding line of credit balance than in the prior periods. See "Liquidity and Capital Resources" below for details of our current debt structures. Income Taxes. No income tax expense or benefit has been recorded through June 30, 1999, due to our net operating loss carryforward and related valuation allowance, as required under generally accepted accounting principles. Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, our net operating loss carryforward of approximately $57,857,000 at December 31, 1998, expiring in years 2008 through 2013, is subject to annual limitations due to a change in ownership as a result of our initial public offering. Accordingly, approximately $6,185,000 of the net operating loss carryforward is subject to an annual limitation of approximately $2,200,000. Preferred Dividend Requirements. During the first and second quarters of 1999, the preferred stock outstanding accrued dividends of $886,000 and $979,000, respectively. See "Note 6" to the financial statements for details. Loss Applicable to Common Shares. The loss applicable to common shares for the second quarter of 1999, totaled $6,799,000, including preferred dividend requirements of $979,000, compared to a loss applicable to common shares of $2,370,000, including preferred dividend requirements of $695,000, for the second quarter of 1998. The loss applicable to common shares for the six months ended June 30, 1999, totaled $9,317,000, including preferred dividend requirements of $1,865,000, compared to a loss applicable to common shares of $3,228,000, included preferred dividend requirements of $1,370,000, for the same period of the prior year. As discussed above, as a result of the termination of the PGD agreement, we increased our reserve for future returns related to product distributed by PGD by $400,000 effective June 30, 1999. In addition, effective June 30, 1999, we increased artist advance and inventory reserves related to product distributed by PGD by approximately $1,200,000. An additional $390,000 in estimated costs were incurred during the second quarter of 1999, primarily due to increased handling fees, freight charges, etc. to transfer product from PGD to PED. Fluctuations in Our Quarterly Operating Results and Seasonality Our results of operations are subject to seasonal variations. In particular, our revenues and operating income are affected by end-of-the-year holiday sales. In accordance with industry practice, we record product sales when products are shipped to retailers. In anticipation of holiday sales, retailers purchase products from us prior to December. As a result, our revenues and operating income typically decline during December, January and February. In addition, timing of a new release may materially affect our business, financial condition and results of operations. For example, if releases planned for the peak holiday season are delayed, our business, financial results and operating results could be materially adversely affected. Liquidity and Capital Resources We have incurred significant net losses and negative cash flows from operations since our inception, including a net loss of $7,452,000 ($9,317,000 after preferred dividend requirements) and negative cash flows from operations of $9,453,000 in the six months ended June 30, 1999. We have historically sustained net losses and negative cash flows, in part due to the high costs associated with the establishment and expansion of our activities. For the quarter ended June 30, 1999, we were in violation of one of the financial covenants contained in our bank credit agreement. This violation was waived by the bank in July 1999. Our fiscal 1999 plan, if achieved, would allow us to comply with our financial covenants. However, under the current provisions of the bank credit agreement and based on actual results to date, it is likely that we will be in violation of the same financial covenant for the third and fourth quarters of fiscal 1999. If so, we would seek to have these violations waived. If we are unsuccessful in obtaining a waiver, the lender could declare the facility in default. A default could have a material adverse effect on the Company's business as there is no assurance that alternative financing could be obtained on terms satisfactory to the Company, if at all. Historically, we have funded our operations and other activities from a variety of capital sources, including debt and equity financing. We have continued to obtain equity financing from time-to-time. On December 31, 1998, a private placement of our Common Stock occurred, providing proceeds of $2,500,000 in January 1999. We have formulated plans and instituted specific measures which we believe will improve cash flows and liquidity and enable us to continue in existence without a significant curtailment of operations. * We established a fiscal 1999 business plan and adopted a fiscal 1999 budget which includes, among other things, (i) a focus on the efficiency of internal operations, (ii) implementation of procedures to reduce costs and improve margins, (iii) the addition of new releases in a variety of genres and (iv) the hiring of experienced music industry executives to supplement the efforts of management. * During April 1999, we issued shares of a new series of preferred stock and warrants to purchase shares of our Common Stock to one of our executive officers and certain other members of our Board of Directors, providing net proceeds of approximately $3,900,000 (see "Note 5" to the financial statements). * During May 1999, a private placement of our Common Stock occurred, providing proceeds of $3,000,000 (see "Note 7" to the financial statements). * During July 1999, musicmaker.com completed its IPO. Based on the pro forma assumptions discussed in "Note 2" to the financial statements, the value of our investment in musicmaker.com is $8,039,000. Pursuant to a lock-up agreement with the underwriters of the IPO, we are unable to sell the musicmaker.com shares until January 2000. However, we have secured permission to use the shares as collateral for the purpose of generating additional liquidity in the near term. * We have agreed to sell our country music publishing rights originally purchased from Double J Music Group for $1,449,000. We anticipate this sale to be completed by the end of August 1999. The events described above should allow us to complete our 1999 plan. In addition to the events described above, we may need additional equity financing in order to achieve our fiscal 2000 plan. While we have been successful in the past in raising equity as needed, there can be no assurance that additional equity financing may be available on satisfactory terms, if at all. The financial statements and related notes included elsewhere herein do not include any adjustments which might result from the outcome of this uncertainty. Our plans for fiscal 1999 and beyond are subject to uncertainties, many of which are beyond our control, such as general economic conditions and competitive factors, and actual results may vary significantly from our plans. During the six months ended June 30, 1999, we experienced negative cash flow from operations of $9,453,000. This resulted from continued operating losses and approximately $2,505,000 of new project funding. Investing activities for the six months ended June 30, 1999, totaled $454,000 and related to capital expenditures. Operating and investing activities were funded primarily from two equity placements with unrelated parties totaling $5,500,000, an equity placement with certain related parties totaling $3,909,000 and from our line of credit with First Source Financial, Inc. During the six months ended June 30, 1998, we experienced negative cash flow from operations of $6,882,000. This resulted from continued operating losses and approximately $3,143,000 of new project funding. Investing activities for the period totaled $883,000, related to capital expenditures and the purchase of a classical catalog. Operating and investing activities were funded from our then-outstanding banking line of credit. We require significant recurring funds for A&R expenses, which include recorded music costs. We make substantial payments each period for recording costs and advances to artists and producers in order to maintain and enhance our artist roster. Advances to established artists and producers and direct costs associated with the creation of record masters are capitalized and are charged to cost of sales as the related albums earn revenues or when the amounts are determined to be unrecoverable. Royalties are not paid to the artist until all advances made to the artist have been recouped by us. Also, we establish and maintain reserves relative to royalty payments for a period of 18 to 24 months to allow for product returns activity, as royalties are not owed on returned product. During July 1998, we entered a credit agreement with First Source Financial, Inc. (First Source) for a $35,000,000 revolving line of credit. Our First Source facility has a five year term and bears interest at the bank's base rate plus 1.5% per annum (9.25% at June 30, 1999). Borrowings under our First Source facility are limited to the Borrowing Base, as defined, which is based upon eligible accounts receivable, inventory and music catalog. Our First Source facility contains certain financial covenants, requires a lockbox arrangement and is secured by substantially all of our assets. Because the facility contains a subjective acceleration clause, the entire balance is classified as current in the balance sheet. The First Source agreement was amended during April 1999, providing for revised financial covenants through December 31, 1999. For the quarter ended June 30, 1999, we were in violation of one of the financial covenants contained in this amendment. This violation was waived by the bank during July 1999. The First Source agreement was amended again during August 1999, to allow the sale of our Double J publishing rights. Pursuant to this amendment, the revolving line of credit will be permanently reduced by 50% of the net proceeds from the sale of Double J, or approximately $700,000. Stockholders' equity at June 30, 1999, totaled $7,093,000 compared to $7,918,000 at December 31, 1998. This net decrease of $825,000 or 11% is the net effect of continued operating net losses, the redemption of shares of our Common Stock in connection with a certain litigation settlement (see "Part II - - Other Information - Item 1. Legal Proceedings") and the issuances of both preferred and common stock as discussed above. As discussed above, as a result of the termination of the PGD agreement, we increased our reserve for future returns related to product distributed by PGD by $400,000 effective June 30, 1999. In addition, effective June 30, 1999, we increased artist advance and inventory reserves related to product distributed by PGD by approximately $1,200,000. An additional $390,000 in estimated costs were incurred during the second quarter of 1999, primarily due to increased handling fees, freight charges, etc. to transfer product from PGD to PED. "Note 2" to the financial statements included herein discloses the pro forma impact of the IPO of musicmaker.com. Such impact results in pro forma stockholders' equity at June 30, 1999, of $14,382,000. Our near and long-term capital requirements will depend on numerous factors, including the rate at which we grow and acquire new artists and products. We have various on-going needs for capital, including working capital for operations, artist advances and recorded music costs, and capital expenditures to maintain and expand our operations. In addition, as part of our strategy, we evaluate potential acquisitions of music catalogs, publishing rights and labels. We may in the future consummate acquisitions which may require us to make additional capital expenditures, and such expenditures may be significant. Future acquisitions, as well as other on-going capital needs, may be funded with institutional financing, seller financing and/or additional equity or debt offerings. We currently do not have any material commitments for capital expenditures for the next twelve months. Inflation The impact of inflation on our operating results has been moderate in recent years, reflecting generally lower rates of inflation in the economy. While inflation has not had a material impact on operating results, there is no assurance that our business will not be affected by inflation in the future. Year 2000 Risks Many existing computer programs use only two digits (rather than four) to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the Year 2000. In 1998, we started analyzing, reprogramming and replacing our computer systems to address the Year 2000 problem. We have completed a significant portion of the reprogramming, replacing and testing, but have not yet completed our review of the significant software and equipment used in our business operations and the operations of our key business partners. Until these reviews are complete, we cannot be sure that our efforts to address Year 2000 issues are appropriate, adequate or complete. Based on our current assessment of our Year 2000 issues detailed below, we plan to be Year 2000 compliant by September 30, 1999: * We are dependent on personal computer systems for internal electronic information processing. To bring our systems into Year 2000 compliance we have spent approximately $250,000 since January 1, 1998, to replace existing hardware. * We have recently completed the implementation of new financial accounting software that is Year 2000 compliant. We have spent approximately $330,000 on software since January 1, 1998. We have also paid $500,000 in consulting services since January 1, 1998. * We are currently assessing the state of readiness for Year 2000 of our material vendors, suppliers, customers and other material third parties. We expect to have sent the letters by September 30, 1999. If any of our material vendors, suppliers or customers has a serious Year 2000 problem, we could experience a loss of revenues from their operations and/or incur a significant amount of expenses. If we are unable to manage the Year 2000 date change successfully, we may suffer the following consequences: * We may experience a significant number of operational inconveniences and inefficiencies for us and our customers that may divert our time and attention and financial and human resources from our ordinary business activities. * We may suffer serious systems failures that may require significant efforts by us or our customers to prevent or alleviate material business disruptions. * We may be in default of a number of agreements, including our credit agreement, if we fail to respond to our Year 2000 issues in a timely manner. * We may experience significant loss of revenues or incur a significant amount of unanticipated expenses. * We may incur liability for the losses incurred by our customers or others where business is disrupted by our system failures or incur significant costs of defending claims made against us for the recovery of such losses. Safe Harbor Provision Some of the information in this filing contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as "anticipate," "believe," "estimate" and "expect" or similar words. You should read statements that contain these words because they (1) discuss our future expectations, (2) contain projections of our future results of operations or of our financial condition or (3) state other "forward-looking" information. We believe it is important to communicate our expectations to our investors. There may be events in the future, however, that we are not accurately able to predict or over which we have no control. A number of important factors could cause our actual results, performance and achievements for fiscal 1999, and beyond to differ materially from those expressed in such forward-looking statements. Reference is made to our prior filings with the Securities and Exchange Commission, in particular the "Risk Factors" section of our Prospectus effective August 9, 1999, for a discussion of some of these factors. These risk factors include, without limitation, commercial success of our repertoire, risks of inadequate financing, charges and costs related to acquisitions, management of growth, relationships with artists, producers and licensees, attraction and retention of key personnel, general economic and business conditions and competition in the recorded music industry. ITEM 3. Quantitative and Qualitative Disclosures about Market Risk. The principal market risk (i.e., the risk of loss arising from adverse changes in market rates and prices) to which we are exposed is interest rates on debt. On June 30, 1999, we had $34,247,000 of debt outstanding under a $35,000,000 revolving bank line of credit. The line of credit expires during July 2003. The line of credit bears interest at the bank's base rate plus 1.5% per annum (9.25% at June 30, 1999). We do not hold and have not issued derivative financial instruments for speculation or trading purposes. PART II - OTHER INFORMATION Item 1. Legal Proceedings. On March 31, 1999, we settled our pending litigation with JCSHO, Inc. entitled "JCSHO, Inc. f/k/a Intersound, Inc. v. Platinum Entertainment, Inc.," No. 97-2479 MJD/AJB (D. Minn.). The parties determined that JSCHO would retain 306,122 shares (60%) of the 510,203 shares of our Common Stock issued to JCSHO in connection with our acquisition of Intersound in 1997 which were held in escrow pending resolution of this litigation and that JSCHO would return 204,081 shares (40%) to us. We also agreed to issue Donald R. Johnson, a shareholder and former employee of Intersound, Inc., 20,000 shares of our Common Stock. The settlement resulted in an offset of charges previously expensed by us in connection with the acquired assets and assumed liabilities of Intersound, Inc. through the recognition of a gain of $1,185,000 during the first quarter of 1999. This settlement results in the mutual release of all claims and actions the parties have or ever had against each other arising from conduct occurring before March 31, 1999, including all claims that were asserted or that could have been asserted by Donald R. Johnson, a shareholder and former employee of Intersound, Inc., in the action entitled "Donald R. Johnson v. Intersound, Inc. (Del), f/k/a River North Studios, Inc.," No. E-64885, Superior Court in Fulton County Georgia. The lawsuit has been dismissed with prejudice. On April 7, 1999, Ichiban Records, Inc. filed a lawsuit in the Superior Court of Fulton County, State of Georgia, captioned "Ichiban Records, Inc. v. Platinum Entertainment, Inc.," Civil Action No. 1999 CV 07215 ("Ichiban Claim"), seeking termination of its distribution agreement with us and damages in excess of $10,000,000, for alleged breaches of its distribution agreement by us. Ichiban Records, Inc. also filed a complaint for injunction and temporary restraining order and appointment of a receiver under the same caption. On April 21, 1999, Ichiban Records, Inc. also filed a voluntary petition to commence a case under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Georgia, Atlanta Division, Case No. 99-66017. Further, we removed the Ichiban Claim from the State of Georgia court to the United States District Court for the Northern District of Georgia, Atlanta Division, Case No. 1:99 CV-1113. The Ichiban Claim will now be asserted through the bankruptcy action. We are presently in discussions with Ichiban Records, Inc. concerning a restructuring of the distribution relationship between the parties in order to recover advances and other monies owed by Ichiban Records, Inc. to us. A settlement agreement to dismiss the Ichiban Claim and an agreement amending the distribution agreement with Ichiban has been reached with the trustee for the bankruptcy estate. We anticipate filing a joint motion soon with the trustee to approve the settlement and amendment agreement. We believe the claims of Ichiban Records, Inc. are without merit and that the matter will be successfully resolved without a material impact on our financial position or results of operations. However, because the bankruptcy is at an early stage, there can be no assurances that the matter can be resolved in our favor. A decision adverse to us in this matter could have a material adverse impact on our financial position and results of operations. On May 28, 1999, PolyGram Group Distribution, Inc. filed an action against us in the Superior Court of the State of California for the County of Los Angeles captioned "PolyGram Group Distribution, Inc. -v- Platinum Entertainment, Inc.," Case No. B C211091, seeking injunctive relief, restitution, and disgorgement of profits arising out of PolyGram's claim that the distribution agreement between us and PolyGram Group Distribution bars the distribution of our recordings through our own distribution facilities and requires that they be distributed by PolyGram. On June 25, 1999, PolyGram filed an amended complaint that additionally seeks the recovery of an unspecified amount of damages. We have filed an answer to this complaint denying the claims of PolyGram and asserting cross-claims for damages arising out of PolyGram's breach of the distribution agreement, for damages incurred in connection with the production of a compilation album by PolyGram entitled "Essential Southern Rock" and for the failure of PolyGram's successor, Universal Music, to properly pay royalties to us pursuant to the terms of a foreign licensing agreement between us and Universal. We have rejected earlier demands to cease and desist selling our recording through our own distribution facilities on the grounds that an amendment to the distribution agreement with PolyGram Group Distribution specifically allows us to distribute records through our own distribution company. In addition, on July 21, 1999, we provided PolyGram with a notification of termination of the distribution agreement. Because this litigation is at a very early stage, we are unable to predict its outcome with any accuracy. However, we believe PolyGram's claims are without merit and we intend to vigorously defend this action and pursue our claims against PolyGram. The Company is also a plaintiff in a copyright infringement action against MCA, Inc. and MCA Records, Inc., subsidiaries of Universal Music, now pending in the United States District Court for the Southern District of New York, captioned "Platinum Entertainment, Inc. v. MCA, Inc., et al," Civil Action No. 99 Civ.1521. This action seeks damages and injunctive relief by the Company for the wrongful use by the defendants of one of the Company's published musical compositions. We are a party in various other lawsuits which have arisen in the normal course of business. In the opinion of management, after consultation with legal counsel, the ultimate outcome of these lawsuits will not have a material impact on our financial position or results of operations. Item 2. Changes in Securities and Use of Proceeds. During April 1999, we issued 75,246 shares of our Common Stock, valued at $526,724 or $7 per share, to Platinum technology International, Inc., in connection with computer consulting services. During April 1999, we issued 8,571 shares of our Common Stock, valued at $60,000 or $7 per share, to FS Affiliate, in connection with an amendment to our bank credit agreement. During May 1999, we issued 3,333 shares of our Common Stock, valued at $20,000 or $6 per share, to Michael Lloyd, in connection with professional services rendered. During May 1999, we issued an aggregate 3,000 shares of our Common Stock, valued at $18,000 or $6 per share, to Web Solutions, Robert Pappas and Michael Vena, in connection with professional services rendered. During May 1999, we issued an aggregate 50,343 shares of our Common Stock to Special Situations Fund III, L.P., Special Situations Private Fund, L.P., Special Situations Cayman Fund, L.P. and Special Situations Technology Fund, L.P., each unrelated parties (Special Situations), pursuant to an agreement dated December 31, 1998. In addition, order to raise additional capital, we issued an aggregate 423,280 shares of our Common Stock to Special Situations, at a per share price of $7.088, which price approximated the closing price of our Common Stock as reported by the Nasdaq National Market on the date of sale. We received $3,000,000 in consideration for this sale. During June 1999, we issued 3,333 shares of our Common Stock, valued at $25,000 or $7.50 per share, to William Benedict, in connection with professional services rendered. These transactions were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 as transactions not involving a public offering. Item 6. Exhibits and Reports on Form 8-K. A. Exhibits. 27. Financial Data Schedule. B. Reports on Form 8-K. None. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, we have duly caused this Report to be signed on our behalf by the undersigned, thereunto duly authorized, in the City of Downers Grove, State of Illinois, on August 16, 1999. Platinum Entertainment, Inc. By: /s/STEVEN DEVICK Steven Devick Chairman, President and Chief Executive Officer /s/DOUGLAS C. LAUX Douglas C. Laux Chief Operating Officer, Chief Financial Officer and Director EX-27 2 EXHIBIT 27. FINANCIAL DATA SCHEDULE.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOR PLATINUM ENTERTAINMENT, INC. AND THE ACCOMPANYING NOTES THERETO FOR THE PERIOD INDICATED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1999 APR-01-1999 JUN-30-1999 47 0 14,940 (7,175) 8,085 19,378 4,203 (1,625) 56,461 49,368 0 0 0 7 7,086 56,461 10,739 11,103 6,401 6,613 6,373 0 773 (5,820) 0 (5,820) 0 0 0 (5,820) (0.97) (0.97)
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