-----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, JVcKxQI98FI3m2fgmP0fa/2a4Cl4edRfca3mbyHYJo0n4aHuIjR1zx6SetRkkNBT tAMVB9zg2I/8iJnKYx+2bw== 0000883558-99-000029.txt : 19991117 0000883558-99-000029.hdr.sgml : 19991117 ACCESSION NUMBER: 0000883558-99-000029 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99756958 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 September 30, 1999 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission File Number 000-27852 PLATINUM ENTERTAINMENT, INC. (Exact name of registrant as specified in its charter) Delaware 36-3802328 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2001 Butterfield Road Downers Grove, Illinois 60515 (Address of principal executive offices, including zip code) (630) 769-0033 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 7,313,754 Common Stock, par value $.001 per share, at November 15, 1999 PART I - FINANCIAL INFORMATION Item 1. Financial Statements. Platinum Entertainment,Inc. Consolidated Balance Sheets (In thousands, except share and per share amounts)
September 30 December 31 1999 1998 ________________________________ Assets (Unaudited) Current assets: Cash $ 23 $ 12 Accounts receivable, net 11,168 5,647 Artist advances, net 2,982 1,899 Inventories, net 7,026 7,036 Investment securities 8,239 750 Other receivable - 2,500 Other 2,483 1,986 ________________________________ Total current assets 31,921 19,830 Property and equipment, net 2,655 2,461 Recorded music costs, net 1,102 1,251 Music catalog, net 20,617 21,314 Music publishing rights, net 2,084 3,026 Goodwill, net 5,427 5,610 Deferred financing costs, net 212 253 Equity investment in joint venture 2,496 2,205 Other - 1,028 ________________________________ Total assets $ 66,514 $ 56,978 ================================ Liabilities and Stockholders' Equity Current liabilities: Revolving line of credit $ 34,337 $ 33,965 Due to related parties 1,481 - Accounts payable 9,386 6,452 Accrued liabilities 2,014 3,233 Royalties payable 7,619 5,410 ________________________________ Total current liabilities 54,837 49,060 Stockholders' equity: Preferred stock: Preferred Stock ($.001 par value); 10,000,000 shares authorized: - - Series B Convertible Preferred Stock, 20,000 shares issued and outstanding - - Series C Convertible Preferred Stock, 2,500 shares issued and outstanding - - Series D Convertible Preferred Stock, 3,938 shares issued and outstanding - - Common stock: Common Stock ($.001 par value); 40,000,000 shares authorized, 7,517,835 and 6,626,099 shares issued and 7,313,754 and 6,626,099 shares outstanding, respectively 7 7 Additional paid-in capital 80,964 71,378 Accumulated deficit (76,783) (63,467) Accumulated other compreshensive income 7,489 - ________________________________ Stockholders' equity 11,677 7,918 _________________________________ Total liabilities and stockholders' equity $ 66,514 $ 56,978 =================================
See accompanying notes to financial statements. Platinum Entertainment, Inc. Consolidated Statements of Operations (Unaudited - in thousands, except share and per share amounts)
Quarter ended September 30 Nine months ended September 30 1999 1998 1999 1998 _____________________ _________________________ Gross product sales $ 15,675 $ 15,966 $ 38,772 $ 42,572 Less: Returns (5,136) (4,457) (10,588) (8,727) Less: Discounts (771) (995) (1,624) (2,203) ______________________ _________________________ Net product sales 9,768 10,514 26,560 31,642 Licensing, publishing and other revenues 228 258 754 1,584 ______________________ _________________________ Net sales 9,996 10,772 27,314 33,226 Cost of sales and services 5,661 6,303 17,456 20,224 ______________________ _________________________ Gross profit 4,335 4,469 9,858 13,002 Other operating expenses: Selling, general and administrative 6,302 5,943 16,438 14,384 Depreciation and amortization 594 495 1,781 1,400 ______________________ _________________________ 6,896 6,438 18,219 15,784 ______________________ _________________________ Operating loss (2,561) (1,969) (8,361) (2,782) Interest income - - - 41 Interest expense (879) (726) (2,312) (1,989) Other financing costs (27) (564) (130) (360) Equity loss 408 (63) 292 (91) other gain 130 - 130 - _______________________ _________________________ Net loss (2,929) (3,322) (10,381) (5,181) Less: Preferred dividend requirements (1,070) (716) (2,935) (2,086) _______________________ _________________________ Loss applicable to common shares $ (3,999) $ (4,038) $(13,316) $ (7,267) ======================= =========================== Basic and diluted loss per common share $ (0.55) $ (0.67) $ (1.90) $ (1.30) Weighted average number of common shares outstanding 7,313,211 6,028,759 7,017,142 5,571,073
See accompanying notes to financial statements. Platinum Entertainment, Inc. Consolidated Statement of Stockholders' Equity (Unaudited - in thousands, except share and per share amounts)
Accumulated Additional other Preferred stock Accumu- Compreh- Stock- Common Stock Paid-In lated ensive holders' Series B Series C Series D Shares Amount capital Deficit Income equity Balance at December 31, 1998 $ - $ - $ - 6,626 $ 7 $ 71,378 $ (63,467) - $ 7,918 Issuances of Common Stock: Private placement ($7.09 per share) - - - 423 - 3,000 - - 3,000 Warrant exercises - - - 259 - 2 - - 2 Professional services by related parties - - - 75 - 527 - - 527 Employee stock plans - - - 43 - 250 - - 250 Professional services - - - 22 - 148 - - 148 Litigation settlement - - - 20 - 129 - - 129 Issuances of preferred stock: Series D with warrants - - - - - 3,909 - - 3,909 Redemption of Common Stock: Litigation settlement - - - (204) - (1,314) - - (1,314) Dividends: Preferred dividend requirements - - - - - 2,935 (2,935) - - Comprehensive loss: Net loss for the nine months ended September 30, 1999 - - - - - - (10,381) - (10,381) Unrealized gain on investment - - - - - - - 7,489 7,489 __________ Comprehensive loss - - - - - - - - (2,892) Other - - - 50 - - - - - ___________________________________________________________________________________________ Balance at September 30, 1999 $ - $ - $ - 7,314 $ 7 $ 80,964 $ (76,783) $7,489 $ 11,677 ===========================================================================================
Platinum Entertainment, Inc. Consolidated Statements of Cash Flows (Unaudited - in thousands) Nine months ended September 30 1999 1998 _______________________________ Operating activities Net loss $ (10,381) $ (5,181) Adjustments to reconcile net loss to net cash used in operating activities: Provision for future returns 10,588 8,727 Provision for doubtful accounts 625 - Provision for slow-moving inventory 100 - Provision for unrecoupable artist balances 2,681 1,750 Depreciation 506 285 Amortization 1,275 1,115 Deferred financing costs 41 200 Equity loss from joint venture (292) 91 Professional services by related parties paid in common stock 527 - Professional services paid in common stock 148 - Litigation settlement, net (1,185) - Changes in operating assets and liabilities: Accounts receivable (16,108) (15,555) Inventories (91) 318 Artist advances (3,987) (4,591) Recorded music costs (131) (535) Accounts payable 2,934 280 Accrued liabilities (824) (1,605) Royalties payable 2,210 3,812 Other (142) (550) _______________________________ Net cash used in operating activities (11,506) (11,439) Investing activities Net proceeds from sale of music publishing rights 1,150 - Cash paid for acquisition (450) (775) Purchases of property and equipment (695) (931) _______________________________ Net cash used in investing activities 5 (1,706) Financing activities Net proceeds from revolving lines of credit 372 32,079 Proceeds from related parties 1,480 - Payment on bank term loan - (20,000) Net proceeds from sale of preferred stock with warrants to related parties 3,909 - Proceeds from sale of Common Stock 5,500 - Proceeds from sale of Common Stock to related parties - 1,350 Employee stock plans 251 - Financing costs - (214) Other - (74) _______________________________ Net cash provided by financing activities 11,512 13,141 _______________________________ Net increase in cash 11 (4) Cash, beginning of period 12 11 _______________________________ Cash, end of period $ 23 $ 7 ===============================
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 statements do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the financial statements reflect all adjustments which are necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented. Certain prior period amounts in the financial statements have been reclassified to conform with the current period presentation. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 1998, of Platinum Entertainment, Inc. included in the Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 15, 1999. The interim results presented are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. We have incurred significant net losses and negative cash flows from operations since our inception, including a net loss of $10,381 ($13,316 after preferred dividend requirements) and negative cash flows from operations of $11,506 in the nine months ended September 30, 1999. We have historically sustained net losses and negative cash flows, in part due to the high costs associated with the establishment and expansion of our activities. Historically, we have funded our operations and other activities from a variety of capital sources, including debt and equity financing. We have continued to obtain equity financing from time-to-time. As the likelihood of securing additional debt and equity financing is uncertain, we have formulated and begun implementing specific measures we believe will improve cash flows and enable us to continue in existence without a significant curtailment of operations. * During August 1999,we sold certain country music publishing rights for $1,449 (see "Note 4"). * On October 6, 1999, we sold 798,856 common shares of musicmaker.com, Inc. (Nasdaq: HITS) for net proceeds of $7,289 (see "Note 3"). * During October 1999, we began a consolidation of our Downers Grove, Illinois and Nashville, Tennessee offices into our new 80,000 square foot Alpharetta, Georgia distribution and office facility. We believe this consolidation will result in a significant reduction in overhead costs. We expect the consolidation to be complete by December 31, 1999. * We are increasingly arranging for payment to our artists, producers and distributed labels for services rendered in shares of our Common Stock in lieu of cash. * We are aggressively seeking strategic partnerships with Internet companies to exploit the use of digital rights to our extensive music catalog, exemplified by our deal with musicmaker.com. While we have been successful in the past in raising equity as needed, there can be no assurance that additional equity financing may be available on satisfactory terms, if at all. The financial statements and related notes included elsewhere herein do not include any adjustments which might result from the outcome of this uncertainty. Our plans for fiscal 1999 and beyond are subject to uncertainties, many of which are beyond our control, such as general economic conditions and competitive factors, and actual results may vary significantly from our plans. 2. Accounting Policies Comprehensive Loss Comprehensive income is defined by Financial Accounting Standard No. 130, Reporting Comprehensive Income, as net loss plus other comprehensive income, which, under existing accounting standards, includes foreign currency items, minimum pension liability and unrealized gains and losses on certain investments in debt and equity securities. We report comprehensive loss in the consolidated statement of stockholders' equity. New Accounting Pronouncements In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP No. 98-1 requires entities to capitalize certain costs related to internal-use software once certain criteria have been met. We implemented SOP No. 98-1 on January 1, 1999. The adoption of SOP No. 98-1 did not have a material impact on our financial position or results of operations. In April 1998, the AICPA issued SOP 98-5,Reporting on the Costs of Start-Up Activities. SOP No. 98-5 requires that all start-up costs related to new operations must be expensed as incurred. In addition, all start-up costs that were capitalized in the past must be written-off when SOP No. 98-5 is adopted. We implemented SOP No. 98-5 on January 1, 1999. The adoption of SOP No. 98-5 did not have a material impact on our financial position or results of operations. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes methods for derivative financial instruments and hedging activities related to those instruments, as well as other hedging activities. We will be required to implement SFAS No. 133 for the year ending December 31, 2000. Because we do not currently hold any derivative instruments and do not engage in hedging activities, we do not expect the adoption of SFAS No. 133 will have a material impact on our financial position or results of operations. 3. MUSICMAKER.COM musicmaker.com began publicly trading its common stock on July 7, 1999. Accordingly, we adjusted our investment in musicmaker.com's common stock to market at September 30,1999, using the closing price as reported by Nasdaq on that date. We sold all of our 798,856 shares of common stock of musicmaker.com on October 6, 1999, for net proceeds of $7,289, or $9.125 per share. The sale resulted in a realized gain of $6,539 to be recognized during the fourth quarter. We received our stake in musicmaker.com, the Internet's largest music download and custom CD vendor, in exchange for $750 of our common stock in September 1998. In addition, we granted musicmaker.com the exclusive right to our music catalog for Internet downloads and "burn and mail" compilations for five years with automatic renewals for one year until terminated by either party. We retained the rights to our music catalog for promotional Internet downloads. The pro forma information following assumes we sold our shares of musicmaker.com on September 30, 1999, for $9.125 per share:
Nine months Quarter ended ended September 30 September 30 1999 1999 Gross revenues $ 15,903 $ 39,526 Net revenues 9,996 27,314 Gross profit 4,335 9,858 Operating loss (2,561) (8,361) Income (loss) applicable to common shares 2,540 (6,777) Basic loss per common share 0.35 (0.97) Diluted loss per common share 0.28 (0.97)
We used $1,400 of the proceeds to permanently pay-down our revolving bank credit commitment with First Source (see "Note 6"). In addition, we immediately paid $3,811 to certain vendors. The remainder of the proceeds were applied to our credit facility with First Source for general corporate purposes. 4. Double J Music Publishing Rights On August 26, 1999, effective as of June 30, 1999, we sold certain country music publishing rights, collectively referred to as Double J Music, to HoriPro Entertainment Group, Inc. for an aggregate $1,449. Pursuant to the agreement with HoriPro, we received $1,204 at closing, an additional $95 placed in escrow at closing was received during October 1999, and $150 was placed in an indemnity escrow account, which shall be released to us in full in February 2000, subject to any post-closing adjustments. The book value of Double J Music was $1,020 at closing, and after deducting costs associated with the transaction, the sale resulted in a gain of $130 recognized during the third quarter of 1999. The amount received in October will be reflected as a gain during the fourth quarter of 1999, and any amounts received in February 2000, will be reflected as a gain during the first quarter of 2000. Pursuant to our banking agreement, 50% of the net proceeds received from this sale shall permanently reduce our revolving credit agreement with the bank (see "Note 6"). 5. Basic and Diluted Loss Per Common Share Basic loss per common share is based upon the net loss applicable to common shares after preferred dividend requirements and upon the weighted-average number of common shares outstanding during the period. Diluted loss per common share adjusts for the effect of convertible securities, stock options and warrants only in the periods presented in which such effect would have been dilutive. The total of such securities at September 30, 1999, was 14,305,708. Such effect was not dilutive in any of the periods presented herein, with the exception of the pro forma information in "Note 3". 6. Debt During July 1998, we entered a credit agreement with First Source Financial, Inc. (First Source) for a $35,000 revolving line of credit. Our First Source facility had an original five year term and bears interest at the bank's base rate plus 1.5% per annum (9.75% at September 30, 1999). Borrowings under our First Source facility are limited to the Borrowing Base, as defined, which is based upon eligible accounts receivable, inventory and music catalog. Our First Source facility contains certain financial covenants, requires a lockbox arrangement and is secured by substantially all of our assets. The First Source agreement was amended during April 1999 to provide for revised financial covenants through December 31, 1999. The First Source agreement was amended again during August 1999, to allow the sale of our Double J publishing rights (see "Note 4"). Pursuant to this amendment, the revolving line of credit was permanently reduced by 50% of the net proceeds from the sale of Double J, or approximately $575. The First Source agreement was also amended during October 1999, to release First Source's security interest in our investment in musicmaker.com, allowing us to sell our shares of musicmaker.com (see "Note 3"). Pursuant to this amendment, $1,400 of the musicmaker.com proceeds were used to permanently reduce our revolving commitment with First Source. This amendment also adjusted the termination date of the agreement from July 31, 2003, to March 31, 2000, and certain financial covenants in violation at September 30, 1999, were waived and adjusted for the future. In addition, selected titles from our master catalog were approved for potential sale by us to willing third parties; if such sales occur, 50% of all proceeds received by us will be used to permanently reduce our revolving commitment. At September 30, 1999, the revolving facility totaled $34,337 of which we had $88 available under that facility. On October 6, 1999, we sold our shares of musicmaker.com for net proceeds of $7,289 (see "Note 3"). After applying a permanent reduction to our revolving facility and paying certain vendors, the revolving facility totaled $30,859 of which we had $2,166 available under that facility. The funds available under the facility have subsequently been significantly depleted for current working capital funding needs. 7. Preferred Stock The issuance of an aggregate 3,938 shares of Series D Convertible Preferred Stock and related warrants to purchase an aggregate of 794,163 shares of Common Stock during April 1999 triggered the antidilution protection provisions contained in the Series B and Series C Preferred Stock and related warrants. We gave the holders of the Series B and Series C Preferred Stock and related warrants notice of an adjustment of the Conversion Rate (as defined) of the Series B and Series C Preferred Stock and the Exercise Price (as defined) of the related warrants, but the holders of the Series B and Series C Preferred Stock and related warrants have not accepted our manner of calculation and the adjustment required. If the holders of the Series B and Series C Preferred Stock and related warrants do not accept our manner of calculation and adjustment required, the adjustment will be determined by an independent financial expert. 8. Preferred Dividend Requirements The preferred stock accrued dividends as follows: Series B Series C Series D Total August 31, 1999 $ 845 $ 105 $120 $1,070 May 31, 1999 815 102 62 979 Febuary 28, 1999 788 98 - 886 May 31, 1998 618 77 - 695 Febuary 28, 1998 600 75 - 675 The dividends reflect a compounding per annum rate of 14% (effective December 1998; prior to such date the per annum rate was 12%) of the initial costs of the Series B Convertible Preferred Stock and Series C Convertible Preferred Stock and a compounding per annum rate of 12% of the initial costs of the Series D Convertible Preferred Stock. The dividends have been accrued in stockholders' equity. 9. Related Party Transactions We entered a distribution agreement, dated August 1998, with Envisage Multimedia LLC pursuant to which we are the exclusive distributor of Envisage recorded music products, in certain territories, for a period of three years. For such services, we receive a distribution fee from Envisage. We also have paid certain manufacturing and promotional costs on behalf of Envisage, to be fully repaid to us by Envisage. Gross product sales of Envisage product reflected in the statement of operations for the quarter and nine months ended September 30, 1999 were immaterial. The amount due from Envisage at September 30, 1999 is approximately $625. Envisage has indicated they will not pay the amount owed us; accordingly, we have fully reserved the outstanding balance at September 30, 1999. Envisage is related to three of our directors or their affiliates, namely Carl Harnick, Geoffrey Holmes and Robert Morgado. During April 1999, we issued 75,246 shares of our Common Stock, valued at $527 or $7 per share, to Platinum technology International, Inc. (Platinum technology), in connection with previously provided computer consulting services. As of the date of this transaction, certain members of our board of directors were shareholders, directors and officers of Platinum technology. Pursuant to an agreement accompanying the issuance, if Platinum technology sells the shares below the initial value of the shares at time of issuance, we are required to issue Platinum technology additional shares of our Common Stock equal to their loss on the sale. To the extent Platinum technology sells the stock for greater than such initial value, Platinum technology shall retain 10% of such excess value and shall remit the remaining excess value to us to be applied on a priority basis to future invoices for additional services, if any. Such arrangement also applies to the initial payment of 53,192 shares issued to Platinum technology on November 20, 1998 valued at $7.188 per share. As of September 30, 1999, Platinum technology had not sold any of these shares. During the third quarter of 1999, we borrowed $1,181 from Steven Devick, an officer, director and shareholder of the Company, and $300 from Craig Duchossois, a director and shareholder of the Company, for general corporate purposes. Such amount was outstanding at September 30, 1999. 10. Litigation During March 1999, we settled our pending litigation with JCSHO, Inc. (see "Part II - Other Information - Item 1. Legal Proceedings"). The settlement resulted in an offset of charges previously expensed by us in connection with the acquired assets and assumed liabilities of Intersound, Inc. through the recognition of a gain of $1,185. This amount is included as an offset to our operating expenses in the statement of operations for the nine months ended September 30, 1999. On April 7, 1999, Ichiban Records, Inc. filed a lawsuit in the Superior Court of Fulton County, State of Georgia, captioned Ichiban Records, Inc. v. Platinum Entertainment, Inc., Civil Action No. 1999 CV 07215 ("Ichiban Claim"), seeking termination of its distribution agreement with us and damages in excess of $10,000, for alleged breaches of its distribution agreement by us. Ichiban Records, Inc. also filed a complaint for injunction and temporary restraining order and appointment of a receiver under the same caption. On April 21, 1999, Ichiban Records, Inc. also filed a voluntary petition to commence a case under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Georgia, Atlanta Division, Case No. 99-66017. Further, we removed the Ichiban Claim from the State of Georgia court to the United States District Court for the Northern District of Georgia, Atlanta Division, Case No. 1:99 CV-1113. The Ichiban Claim will now be asserted through the bankruptcy action. We have restructured the distribution agreement with Ichiban Records, Inc. in order to recover advances and other monies owed by Ichiban Records, Inc. to us, and the restructure agreement has been approved by the Bankruptcy Court. A settlement agreement to dismiss the Ichiban Claim also has been reached with the trustee for the bankruptcy estate and has been presented to the Bankruptcy Court for approval. We believe the claims of Ichiban Records, Inc. are without merit and that the matter will be successfully resolved without a material impact on our financial position or results of operations. However, because the bankruptcy is at an early stage, there can be no assurances that the matter can be resolved in our favor. A decision adverse to us in this matter could have a material adverse impact on our financial position and results of operations. On May 28, 1999, PolyGram Group Distribution, Inc. filed an action against us in the Superior Court of the State of California for the County of Los Angeles captioned PolyGram Group Distribution, Inc. -v- Platinum Entertainment, Inc., Case No. B C211091, seeking injunctive relief, restitution, and disgourgement of profits arising out of PolyGram's claim that the distribution agreement between us and PolyGram Group Distribution bars the distribution of recordings by us through our own distribution facilities and requires that they be distributed by PolyGram. On June 25, 1999, PolyGram filed an amended complaint that additionally seeks the recovery of damages. We have rejected earlier demands to cease and desist selling our recordings through our own distribution facilities on the grounds that an amendment to the distribution agreement with PolyGram Group Distribution specifically allows us to distribute records through our own distribution company. We have filed our answer to the complaint and have filed cross-complaints against PolyGram seeking damages incurred in connection with the production of a compilation album by PolyGram entitled "Essential Southern Rock", for the failure of PolyGram's successor, Universal Music, to properly pay royalties to us pursuant to the terms of a foreign licensing agreement between Universal and us, and for breach of the distribution agreement by PolyGram. We have also sent a notice of termination of the distribution agreement to PolyGram, terminating the distribution agreement effective as of July 21, 1999 for PolyGram's breach of the distribution agreement. On November 10, 1999, the action in California was stayed on the grounds that the forum for the lawsuit should be in New York rather than California. We had earlier filed an action in New York asserting as plaintiff the claims made as cross-complaints in the action in California, so to the extent PolyGram elects to continue pursuing its claims against us, those claims will be litigated in New York. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The information in this section should be read together with the consolidated financial statements and related notes contained elsewhere herein. OVERVIEW Our primary business is the production,distribution, marketing and sale of music. Our strategy is to fully utilize our distribution capabilities through predictable releases, hit releases from our urban division, catalog compilations and distribution contracts with third parties. Our music products include new releases,typically by artists established in a particular genre, compilations featuring various artists and repackagings of previously recorded music from our master music catalog and licenses from third party record companies. We sell music products, including compact discs, tape cassettes and digital versatile discs (DVDs) mainly to retailers and wholesalers primarily in the United States. We currently release music in a variety of genres including classical, urban, adult contemporary, blues, gospel and country and on our Intersound Classical, Platinum, River North, House of Blues, CGI Platinum and Platinum Nashville labels. Our headquarters are located in Downers Grove, Illinois, our primary distribution facility is located in Alpharetta, Georgia, and we have a promotional office in Nashville, Tennessee. We completed the opening of a new, larger and more efficient distribution facility in Alpharetta at the end of October. In addition, we are consolidating our label and distribution activities currently located in Downers Grove and Nashville into the new Alpharetta facility. We distribute our products through a multi-channel system comprised of (i) PED Corp, our proprietary distribution system, (ii) international licensing agreements as well as production and distribution agreements on a territory-by-territory basis and (iii) Internet distribution. We had a distribution agreement with PolyGram Group Distribution, Inc. (PGD) through July 1999, at which time we notified PGD we were terminating the agreement (see "Part II - Other Information - Item 1. Legal Proceedings"). Our gross revenues through PGD were $216,000 and $6,106,000 for the third quarter of 1999 and 1998, respectively, reflecting a 96% decrease. Our gross revenues through PGD were $3,310,000 and $15,522,000 for the first nine months of 1999 and 1998, respectively, reflecting a 79% decrease. Management believes that this decrease prior to our termination in July 1999 is related to the acquisition by Universal Music and Video Distribution (Universal) of PGD during the summer of 1998. This decrease was offset in part by increased sales volume through PED. However, during these periods, our internal distribution capabilities were insufficient to fully offset the loss of the PGD distribution services. Our new distribution facility, which became fully operational near the end of October 1999, will provide us with distribution capabilities which could potentially both offset the termination of the PGD distribution services and grow the business substantially. Gross revenues through PED were $15,268,000 and $9,702,000 for the third quarter of 1999 and 1998, respectively, reflecting a 57% increase. Gross revenues through PED were $35,080,000 and $26,203,000 for the first nine months of 1999 and 1998, respectively, reflecting a 34% increase. As a result of PGD's failure to perform and the resulting termination of the PGD agreement, we increased our reserve for future returns related to product distributed by PGD by $1,000,000 during the nine months ended September 30, 1999. In addition, we increased artist advance and inventory reserves related to product distributed by PGD by approximately $1,200,000 during the same period. An additional $390,000 in costs were incurred during the nine months ended September 30, 1999, primarily due to increased handling fees, freight charges, etc. to transfer product from PGD to PED. As discussed above, we moved PED to a new, larger and more efficient facility at the end of October 1999, which we anticipate will enable us to more efficiently distribute product and increase gross margins through the elimination of PGD's distribution fee of approximately 18%, and miscellaneous fees representing an additional 5% on average. While we have historically distributed records for a limited number of outside labels, it is our strategy to increase the volume of outside labels we distribute in order to generate additional revenues and to expand our PED system. Under these arrangements, we generate a distribution fee of approximately 20% to 30%, depending on the volume and range of services provided. The gross margin from these sales has ranged from as low as 6% (for third party product distributed by PGD) to 27% (for product distributed through our proprietary systems). We anticipate additional increases in gross margins as PED assumes the distribution responsibilities of additional third party labels. These third party activities represented 16% of our gross revenues in the third quarter of 1999, as compared to 18% in the third quarter of 1998, and 16% during the nine months ended September 30, 1999 and September 30, 1998. The decrease in the third quarter of 1999 resulted from decreased activity of Ichiban Records, which filed for bankruptcy during April 1999 (see "Part II - Other Information - Item 1. Legal Proceedings"). We distribute via the Internet through our website,www.PlatinumCD.com , and our income sharing arrangement with musicmaker.com, Inc. (musicmaker.com), the first and largest digital download and "burn and mail" company. Through musicmaker.com our customers can create custom compilation CDs or download songs onto the hard drive of their own computers using Liquid Audio and Secure-MP3, two downloading formats used to protect the copyrights of the record label and the recording artist. We also are an affiliate with Amazon.com, a leader in the Internet commerce industry, to provide customers who visit our website access to hundreds of thousands of commercially available titles. We have retained the rights to our music catalog for promotional Internet downloads. Revenues related to Internet related items have been immaterial through the end of the third quarter 1999; however, on October 6, 1999, we realized a $6,539,000 gain from our investment in musicmaker.com (see "Note 3" to the financial statements). Product sales are recognized upon shipment. In accordance with industry practice, our music products are sold on a returnable basis. Our allowance for future returns is primarily based upon our historical returns and SoundScan data. Our returns were 32% of our gross revenues in the third quarter of 1999, as compared to 27% in the third quarter of 1998. Our returns were 27% during the nine months ended September 30, 1999, as compared to 20% in the nine months ended September 30, 1998. The current periods are higher than the comparable prior periods due to the increase in future returns for product distributed by PGD as discussed above. It is our policy to inventory returned product and resell such product at market value. During March 1999, we settled our pending litigation with JCSHO, Inc. (see "Part II - Other Information - Item 1. Legal Proceedings"). The settlement resulted in an offset of charges previously expensed by us in connection with the acquired assets and assumed liabilities of Intersound, Inc. through the recognition of a gain of $1,185,000. This amount is included as an offset to our operating expenses in the statement of operations for the nine months ended September 30, 1999. We have historically sustained losses and negative operating cash flows, in part due to the high costs associated with the establishment and expansion of our activities. We require significant recurring funds for artist and repertoire (A&R) expenses, which include recorded music costs. We make substantial payments each year for recording costs and advances to artists and producers in order to maintain and enhance our artist roster. Advances to established artists and producers and direct costs associated with the creation of record masters are capitalized and are charged to cost of sales as the related albums earn revenues or when the amounts are determined to be unrecoverable. See "Liquidity and Capital Resources" following Result of Operations The following table sets forth for the periods indicated the percentage of gross revenues represented by certain items included in our "Consolidated Statements of Operations." Operating performance for any period is not necessarily indicative of performance for any future periods.
Quarter ended Nine months ended September 30 September 30 1999 1998 1999 1998 ________________ _________________ Gross revenues Platinum labels 83% 80% 82% 80% Distributed labels 16% 18% 16% 16% Licensing, publishing and other 1% 2% 2% 4% ________________ _________________ Total gross revenues 100% 100% 100% 100% Less: Returns -32% -27% -27% -20% Less: Discounts -5% -6% -4% -5% ________________ _________________ Net revenues 63% 67% 69% 75% Cost of sales 36% 39% 44% 46% ________________ _________________ Gross profit 27% 28% 25% 29% Other operating expenses: Selling, general and administrative 40% 37% 42% 33% Depreciation and amortization 4% 3% 5% 3% _________________ _________________ 44% 40% 47% 36% _________________ _________________ Operating income (loss) -17% -12% -22% -7% Interest expense -6% -4% -6% -5% Other financing costs - -3% - 1% Equity gain (loss) 3% - 1% - Other gain (loss) 1% - - - _________________ _________________ Net loss -19% -19% -27% -13% Less: Preferred dividend requirements -7% -4% -7% -5% _________________ _________________ Loss applicable to common shares -26% -23% -34% -18% ================= =================
Gross Revenues. Gross revenues decreased $321,000 or 2% to $15,903,000 for the third quarter of 1999, compared to $16,224,000 for the third quarter of 1998, and decreased $4,630,000 or 10% to $39,526,000 for the nine months ended September 30, 1999, compared to $44,156,000 for the same period of the prior year. Gross revenues through PGD were down $5,890,000 or 96% in the third quarter of 1999, compared to the third quarter of 1998, and down $12,212,000 or 79% in the nine months ended September 30, 1999, compared to the same period of the prior year. Management believes that this decrease is related to the acquisition by Universal of our former third party, major label distributor, PolyGram Group Distribution, during the summer of 1998. During July 1999, we provided PGD with a notification of termination of the distribution agreement. See "Part II - Other Information - Item 1. Legal Proceedings." This decrease was offset in part by increased sales through our own distribution system. However, our internal distribution capabilities were insufficient to fully offset the loss of the PGD distribution services. Our new distribution facility, which became fully operational near the end of October 1999, will provide us with distribution capabilities which could potentially both offset the termination of the PGD distribution services and grow the business substantially. Gross revenues through PED were up $5,566,000 or 57% in the third quarter of 1999, compared to the third quarter of 1998, and up $8,877,000 or 34% in the nine months ended September 30, 1999, compared to the same period of the prior year. Notable releases shipped during the current periods include Rick Springfield's first release in over ten years, "Karma", Vickie Winans' second live album on CGI Platinum, "Live in Detroit II", initial shipments of "Pete Townshend Live", a benefit for Chicago's Maryville Academy, a charity for disadvantaged youths, recorded live at the House of Blues in Chicago with special guest Eddie Vedder, multi-platinum country artist Suzy Bogguss' self-titled debut Platinum Nashville release, and catalog titles such as urban compilation "Booty Mix 4" and country singer T. Graham Brown's "Wine into Water". Returns. We record an estimate of future returns at the time product is sold (see "Overview"). Returns as a percentage of gross revenues were 32% of gross revenues in the third quarter of 1999, as compared to 27% in the third quarter of 1998. Returns as a percentage of gross revenues were 27% during the nine months ended September 30, 1999, as compared to 20% in the same period of the prior year. The current periods are higher than the comparable prior periods due to increased returns for product distributed by PGD as discussed above. Discounts. Discounts as a percentage of gross revenues remained relatively unchanged at 5% for the third quarter of 1999, compared to 6% for the third quarter of 1998, and 4% for the nine months ended September 30, 1999, as compared to 5% in the same period of the prior year. Cost of Sales. Cost of sales as a percentage of gross revenues decreased to 36% for the third quarter of 1999, compared to 39% for the third quarter of 1998, and decreased to 44% for the nine months ended September 30, 1999, as compared to 46% in the same period of the prior year. As a percentage of net revenues, cost of sales decreased to 57% for the third quarter of 1999, compared to 59% for the third quarter of 1998, and increased to 64% for the nine months ended September 30, 1999, as compared to 61% in the same period of the prior year. The decrease is primarily due to lower third party distribution fees due from PGD as this volume is significantly lower in the current periods than the prior periods - see "Overview" above. This decrease is despite required increases to the future returns, artist advance and slow-moving inventory reserves related to PGD distributed product also described above, with the exception of the nine months ended September 30, 1999, for which these costs caused an increase. Without these increased costs, cost of sales as a percentage of gross and net revenues would have been 40% and 58%, respectively, for the nine months ended September 30, 1999. Gross Profit. Gross profit decreased $134,000 or 3% to $4,335,000 for the third quarter of 1999, compared to $4,469,000 for the third quarter of 1998, and decreased $3,144,000 or 24% to $9,858,000 for the nine months ended September 30, 1999, compared to $13,002,000 for the same period of the prior year. As a percentage of gross revenues, gross profit remained relatively unchanged at 27% for the third quarter of 1999, compared to 28% for the third quarter of 1998, and decreased to 25% for the nine months ended September 30, 1999, compared to 29% for the same period of the prior year. As a percentage of net revenues, gross profit increased to 43% for the third quarter of 1999, compared to 41% for the third quarter of 1998, and decreased to 36% for the nine months ended September 30, 1999, compared to 39% for the same period of the prior year. The decreases are primarily a result of the increased reserves for future returns, artist advances and inventory relative to product distributed by PGD as described above. Without these increased costs, gross margin as a percentage of gross and net revenues would have been 29% and 42%, respectively, for the nine months ended September 30, 1999. The remaining decrease relates to decreased sales volume also described above. The increase as a percentage of net revenues for the quarter is primarily due to lower third party distribution fees due from PGD as this volume is significantly lower in the current periods than the prior periods - see "Overview" above. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $359,000 or 6% to $6,302,000 for the third quarter of 1999, compared to $5,943,000 for the third quarter of 1998, and increased $2,054,000 or 14% to $16,438,000 for the nine months ended September 30, 1999, compared to $14,384,000 for the same period of the prior year. During the third quarter of 1999, Envisage Multimedia LLC, a third party distributed label owned by parties related to us, indicated they would not be paying balances owed us totaling $625,000; accordingly, this amount has been reserved in full. Without this write-off, the current quarter's selling, general and administrative expenses actually decreased, relating to management's on-going efforts to reduce costs and overhead. In conjunction with the new, larger distribution facility in Alpharetta, Georgia, we have begun the process of reducing our sales and distribution activities currently located in Downers Grove, Illinois and Nashville, Tennessee. In addition to reduced leasing costs, utility costs, travel and entertainment, etc., this effort will eliminate several duplicate positions and result in a more efficient and cost- effective administration of our operations. The nine month period ended September 30, 1999, includes a net gain from litigation settlements of $1,185,000 (see "Overview"). Excluding these settlements, selling general and administrative expenses increased 23%. This increase is primarily attributable to the third party write-off described above and increased promotional spending on our urban releases, a genre which management believes requires significant promotional expenditures in order for us to capitalize on the opportunities for significant sales in this genre. The first significant releases in the urban genre will occur in fiscal 2000, including releases by platinum-selling Johnny Gill, award winning producer She'kspere and a two-act production deal with Charles Farrar and Troy Taylor. In addition, we have incurred additional costs, including compensation expense, as we have expanded our sales staff and distribution capabilities in preparation for the shift to proprietary distribution for product formerly distributed by PGD. Operating Loss. Primarily as a result of the factors described above, we incurred an operating loss of $2,561,000 for the third quarter of 1999, compared to an operating loss of $1,969,000 for the third quarter of 1998, and incurred an operating loss of $8,361,000 for the nine months ended September 30, 1999, compared to an operating loss of $2,782,000 for the same period of the prior year. As a result of the termination of the PGD agreement discussed above, we increased our reserve for future returns related to product distributed by PGD by $1,000,000 during the nine months ended September 30, 1999. In addition, we increased artist advance and inventory reserves related to product distributed by PGD by approximately $1,200,000 during the same period. An additional $390,000 in estimated costs were incurred during the nine months ended September 30, 1999, primarily due to increased handling fees, freight charges, etc. to transfer product from PGD to PED. Our new distribution facility, which became fully operational near the end of October 1999, will provide us with distribution capabilities which could potentially both offset the termination of the PGD distribution services and grow the business substantially. Interest Expense. Interest expense for the third quarter of 1999, totaled $879,000 compared to $726,000 for the third quarter of 1998, and totaled $2,312,000 for the nine months ended September 30, 1999, compared to $1,989,000 for the same period of the prior year. The current period increase resulted from a higher outstanding line of credit balance than in the prior periods. See "Liquidity and Capital Resources" below for details of our current debt structures. Income Taxes. No income tax expense or benefit has been recorded through September 30, 1999, due to our net operating loss carryforward and related valuation allowance, as required under generally accepted accounting principles. Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, our net operating loss carryforward of approximately $57,857,000 at December 31, 1998, expiring in years 2008 through 2013, is subject to annual limitations due to a change in ownership as a result of our initial public offering. Accordingly, approximately $6,185,000 of the net operating loss carryforward is subject to an annual limitation of approximately $2,200,000. Perferred Dividend Requirements. During the first three quarters of 1999, the preferred stock outstanding accrued dividends of $886,000, $979,000 and $1,070,000, respectively. See "Note 8" to the financial statements for details. Loss Applicable to Common Shares. The loss applicable to common shares for the third quarter of 1999, totaled $3,999,000, including preferred dividend requirements of $1,070,000, compared to a loss applicable to common shares of $4,038,000, including preferred dividend requirements of $716,000, for the third quarter of 1998. The loss applicable to common shares for the nine months ended September 30, 1999, totaled $13,316,000, including preferred dividend requirements of $2,935,000, compared to a loss applicable to common shares of $7,267,000, included preferred dividend requirements of $2,086,000, for the same period of the prior year. As a result of the termination of the PGD agreement discussed above, we increased our reserve for future returns related to product distributed by PGD by $1,000,000 during the nine months ended September 30, 1999. In addition, we increased artist advance and inventory reserves related to product distributed by PGD by approximately $1,200,000 during the same period. An additional $390,000 in estimated costs were incurred during the nine months ended September 30, 1999, primarily due to increased handling fees, freight charges, etc. to transfer product from PGD to PED. Our new distribution facility, which became fully operational near the end of October 1999, will provide us with distribution capabilities which could potentially both offset the termination of the PGD distribution services and grow the business substantially. Fluctuations in Our Quarterly Operating Results and Seasonality Our results of operations are subject to seasonal variations. In particular, our revenues and operating income are affected by end-of- the-year holiday sales. In accordance with industry practice, we record product sales when products are shipped to retailers. In anticipation of holiday sales, retailers purchase products from us prior to December. As a result, our revenues and operating income typically decline during December, January and February. In addition, timing of a new release may materially affect our business, financial condition and results of operations. For example, if releases planned for the peak holiday season are delayed, our business, financial results and operating results could be materially adversely affected. Liquidity and Capital Resources We have incurred significant net losses and negative cash flows from operations since our inception, including a net loss of $10,381,000 ($13,316,000 after preferred dividend requirements) and negative cash flows from operations of $11,506,000 in the nine months ended September 30, 1999. We have historically sustained net losses and negative cash flows, in part due to the high costs associated with the establishment and expansion of our activities. Historically, we have funded our operations and other activities from a variety of capital sources, including debt and equity financing. We have continued to obtain equity financing from time-to- time. As the likelihood of securing additional debt and equity financing is uncertain, we have formulated and begun implementing specific measures we believe will improve cash flows and enable us to continue in existence without a significant curtailment of operations. * During August 1999, we sold certain country music publishing rights for $1,449,000 (see "Note 4" to the financial statements). * October 6, 1999, we sold 798,856 common shares of musicmaker.com (Nasdaq: HITS) for net proceeds of $7,289,000 (see "Note 3" to the financial statements). * October 1999, we began a consolidation of our Downers Grove, Illinois and Nashville, Tennessee offices into our new 80,000 square foot Alpharetta, Georgia distribution and office facility. We believe this consolidation will result in a significant reduction in overhead costs. We expect the consolidation to be complete by December 31,1999. * We are increasingly arranging for payment to our artists, producers and distributed labels for services rendered in shares of our Common Stock in lieu of cash. * We are aggressively seeking strategic partnerships with Internet companies to exploit the use of digital rights to our extensive music catalog, exemplified by our deal with musicmaker.com. While we have been successful in the past in raising equity as needed, there can be no assurance that additional equity financing may be available on satisfactory terms, if at all. The financial statements and related notes included elsewhere herein do not include any adjustments which might result from the outcome of this uncertainty. Our plans for fiscal 1999 and beyond are subject to uncertainties, many of which are beyond our control, such as general economic conditions and competitive factors, and actual results may vary significantly from our plans. During the nine months ended September 30, 1999, we experienced negative cash flow from operations of $11,506,000. This resulted from continued operating losses and $4,118,000 of new project funding. Investing activities for the nine months ended September 30, 1999, included $1,150,000 received from the sale of certain country music publishing rights, $450,000 related to catalog acquisitions and $695,000 of capital expenditures. Operating and investing activities were funded primarily from two equity placements with unrelated parties totaling $5,500,000, an equity placement with certain related parties totaling $3,909,000, related party borrowings of $1,480,000 and from our line of credit with First Source Financial, Inc. During the nine months ended September 30, 1998, we experienced negative cash flow from operations of $11,439,000. This resulted from continued operating losses and $5,126,000 of new project funding. Investing activities for the period totaled $1,556,000, related to capital expenditures and the purchase of a classical catalog. Operating and investing activities were primarily funded from our banking facilities and an equity placement with related parties totaling $1,350,000. We require significant recurring funds for A&R expenses, which include recorded music costs. We make substantial payments each period for recording costs and advances to artists and producers in order to maintain and enhance our artist roster. Advances to established artists and producers and direct costs associated with the creation of record masters are capitalized and are charged to cost of sales as the related albums earn revenues or when the amounts are determined to be unrecoverable. Royalties are not paid to the artist until all advances made to the artist have been recouped by us. Also, we establish and maintain reserves relative to royalty payments for a period of 18 to 24 months to allow for product returns activity, as royalties are not owed on returned product. During July 1998, we entered a credit agreement with First Source Financial, Inc. (First Source) for a $35,000,000 revolving line of credit. Our First Source facility had an original five year term and bears interest at the bank's base rate plus 1.5% per annum (9.75% at September 30, 1999). Borrowings under our First Source facility are limited to the Borrowing Base, as defined, which is based upon eligible accounts receivable, inventory and music catalog. Our First Source facility contains certain financial covenants, requires a lockbox arrangement and is secured by substantially all of our assets. The First Source agreement was amended during April 1999 to provide for revised financial covenants through December 31, 1999. The First Source agreement was amended again during August 1999, to allow the sale of our Double J publishing rights (see "Note 4" to the financial statements). Pursuant to this amendment, the revolving line of credit was permanently reduced by 50% of the net proceeds from the sale of Double J, or approximately $575,000. The First Source agreement was also amended during October 1999, to release First Source's security interest in our investment in musicmaker.com, allowing us to sell our shares of musicmaker.com (see "Note 3" to the financial statements). Pursuant to this amendment, $1,400,000 of the musicmaker.com proceeds were used to permanently reduce our revolving commitment with First Source. This amendment also adjusted the termination date of the agreement from July 31, 2003, to March 31, 2000, and certain financial covenants in violation at September 30, 1999 were waived and adjusted for the future. In addition, selected titles from our master catalog were approved for potential sale by us to willing third parties; if such sales occur, 50% of all proceeds received by us will be used to permanently reduce our revolving commitment. At September 30, 1999, the revolving facility totaled $34,337,000 of which we had $88,000 available under that facility. On October 6, 1999, we sold our shares of musicmaker.com for net proceeds of $7,289,000 (see "Note 3" to the financial statements). After applying a permanent reduction to our revolving facility and paying certain vendors, the revolving facility totaled $30,859,000 of which we had $2,166,000 available under that facility. The funds available under the facility have subsequently been significantly depleted for current working capital funding needs. Stockholders' equity at September 30, 1999, totaled $11,677,000 compared to $7,918,000 at December 31, 1998. This net increase of $3,759,000 or 47% is the net effect of continued operating net losses, the redemption of shares of our Common Stock in connection with a certain litigation settlement (see "PartII - Other Information - Item 1. Legal Proceedings") and the issuances of both preferred and common stock as discussed above. As a result of the termination of the PGD agreement discussed above, we increased our reserve for future returns related to product distributed by PGD by $1,000,000 during the nine months ended September 30, 1999. In addition, we increased artist advance and inventory reserves related to product distributed by PGD by approximately $1,200,000 during the same period. An additional $390,000 in estimated costs were incurred during the nine months ended September 30, 1999, primarily due to increased handling fees, freight charges, etc. to transfer product from PGD to PED. In addition, our investment in musicmaker.com was adjusted to market. The unrealized gain of $7,489,000 is reflected in our stockholders' equity. This investment was sold during October 1999 (see "Note 3" to the financial statements). Our near and long-term capital requirements will depend on numerous factors, including the rate at which we grow and acquire new artists and products. We have various on-going needs for capital, including working capital for operations, artist advances and recorded music costs, and capital expenditures to maintain and expand our operations. In addition, as part of our strategy, we evaluate potential acquisitions of music catalogs, publishing rights and labels. We may in the future consummate acquisitions which may require us to make additional capital expenditures, and such expenditures may be significant. Future acquisitions, as well as other on-going capital needs, may be funded with institutional financing, seller financing and/or additional equity or debt offerings. We currently do not have any material commitments for capital expenditures for the next twelve months. Inflation The impact of inflation on our operating results has been moderate in recent years, reflecting generally lower rates of inflation in the economy. While inflation has not had a material impact on operating results, there is no assurance that our business will not be affected by inflation in the future. Year 2000 Risks Many existing computer programs use only two digits (rather than four) to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the Year 2000. In 1998, we started analyzing, reprogramming and replacing our computer systems to address the Year 2000 problem. We have completed a significant portion of the reprogramming, replacing and testing, but have not yet completed our review of the significant software and equipment used in our business operations and the operations of our key business partners. Until these reviews are complete, we cannot be sure that our efforts to address Year 2000 issues are appropriate, adequate or complete. Based on our current assessment of our Year 2000 issues detailed below, we plan to be Year 2000 compliant: * We are dependent on personal computer systems for internal electronic information processing. To bring our systems into Year 2000 compliance we have spent approximately $250,000 since January 1, 1998, to replace existing hardware. * We have recently completed the implementation of new financial accounting software that is Year 2000 compliant. We have spent approximately $330,000 on software since January 1, 1998. We have also paid $600,000 in consulting services since January 1, 1998. * We are currently assessing the state of readiness for Year 2000 of our material vendors, suppliers, customers and other material third parties. We have sent letters prior to the date of this filing. The responses received to date have not indicated any Year 2000 problems. If any of our material vendors, suppliers or customers has a serious Year 2000 problem, we could experience a loss of revenues from their operations and/or incur a significant amount of expenses. If we are unable to manage the Year 2000 date change successfully, we may suffer the following consequences: * We may experience a significant number of operational inconveniences and inefficiencies for us and our customers that may divert our time and attention and financial and human resources from our ordinary business activities. * We may suffer serious systems failures that may require significant efforts by us or our customers to prevent or alleviate material business disruptions. * We may be in default of a number of agreements, including our credit agreement, if we fail to respond to our Year 2000 issues in a timely manner. * We may experience significant loss of revenues or incur a significant amount of unanticipated expenses.may incur liability for the losses incurred by our customers or others where business is disrupted by our system failures or incur significant costs of defending claims made against us for the recovery of such losses. Safe Harbor Provision Some of the information in this filing contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as "anticipate," "believe," "estimate" and "expect" or similar words. You should read statements that contain these words because they (1) discuss our future expectations, (2) contain projections of our future results of operations or of our financial condition or (3) state other "forward- looking" information. We believe it is important to communicate our expectations to our investors. There may be events in the future, however, that we are not accurately able to predict or over which we have no control. A number of important factors could cause our actual results, performance and achievements for fiscal 1999, and beyond to differ materially from those expressed in such forward-looking statements. Reference is made to our prior filings with the Securities and Exchange Commission, in particular the "Risk Factors" section of our Prospectus effective August 9, 1999, for a discussion of some of these factors. These risk factors include, without limitation, commercial success of our repertoire, risks of inadequate financing, charges and costs related to acquisitions, management of growth, relationships with artists, producers and licensees, attraction and retention of key personnel, general economic and business conditions and competition in the recorded music industry. ITEM 3. Quantitative and Qualitative Disclosures about Market Risk. The principal market risk (i.e., the risk of loss arising from adverse changes in market rates and prices) to which we are exposed is interest rates on debt. On September 30, 1999, we had $34,247,000 of debt outstanding under a $34,425,000 revolving bank line of credit. The line of credit expires on March 31, 2000. The line of credit bears interest at the bank's base rate plus 1.5% per annum (9.75% at September 30, 1999). We do not hold and have not issued derivative financial instruments for speculation or trading purposes. PART II - OTHER INFORMATION ITEM 1. Legal Proceedings. On March 31, 1999, we settled our pending litigation with JCSHO, Inc. entitled JCSHO, Inc. f/k/a Intersound, Inc. v. Platinum Entertainment, Inc., No. 97-2479 MJD/AJB (D. Minn.). The parties determined that JSCHO would retain 306,122 shares (60%) of the 510,203 shares of our Common Stock issued to JCSHO in connection with our acquisition of Intersound in 1997 which were held in escrow pending resolution of this litigation and that JSCHO would return 204,081 shares (40%) to us. We also agreed to issue Donald R. Johnson, a shareholder and former employee of Intersound, Inc., 20,000 shares of our Common Stock. The settlement resulted in an offset of charges previously expensed by us in connection with the acquired assets and assumed liabilities of Intersound, Inc. through the recognition of a gain of $1,185,000 during the first quarter of 1999. This settlement results in the mutual release of all claims and actions the parties have or ever had against each other arising from conduct occurring before March 31, 1999, including all claims that were asserted or that could have been asserted by Donald R. Johnson, a shareholder and former employee of Intersound, Inc., in the action entitled Donald R. Johnson v. Intersound, Inc. (Del), f/k/a River North Studios, Inc., No. E-64885, Superior Court in Fulton County Georgia. The lawsuit has been dismissed with prejudice. On April 7, 1999, Ichiban Records, Inc. filed a lawsuit in the Superior Court of Fulton County, State of Georgia, captioned Ichiban Records, Inc. v. Platinum Entertainment, Inc., Civil Action No. 1999 CV 07215 ("Ichiban Claim"), seeking termination of its distribution agreement with us and damages in excess of $10,000,000 for alleged breaches of its distribution agreement by us. Ichiban Records, Inc. also filed a complaint for injunction and temporary restraining order and appointment of a receiver under the same caption. On April 21, 1999, Ichiban Records, Inc. also filed a voluntary petition to commence a case under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Georgia, Atlanta Division, Case No. 99-66017. Further, we removed the Ichiban Claim from the State of Georgia court to the United States District Court for the Northern District of Georgia, Atlanta Division, Case No. 1:99 CV-1113. The Ichiban Claim will now be asserted through the bankruptcy action. We have restructured the distribution agreement with Ichiban Records, Inc. in order to recover advances and other monies owed by Ichiban Records, Inc. to us, and the restructure agreement has been approved by the Bankruptcy Court. A settlement agreement to dismiss the Ichiban Claim also has been reached with the trustee for the bankruptcy estate and has been presented to the Bankruptcy Court for approval. We believe the claims of Ichiban Records, Inc. are without merit and that the matter will be successfully resolved without a material impact on our financial position or results of operations. However, because the bankruptcy is at an early stage, there can be no assurances that the matter can be resolved in our favor. A decision adverse to us in this matter could have a material adverse impact on our financial position and results of operations. On May 28, 1999, PolyGram Group Distribution, Inc. filed an action against us in the Superior Court of the State of California for the County of Los Angeles captioned PolyGram Group Distribution, Inc. - v- Platinum Entertainment, Inc., Case No. B C211091, seeking injunctive relief, restitution, and disgourgement of profits arising out of PolyGram's claim that the distribution agreement between us and PolyGram Group Distribution bars the distribution of recordings by us through our own distribution facilities and requires that they be distributed by PolyGram. On June 25, 1999, PolyGram filed an amended complaint that additionally seeks the recovery of damages. We have rejected earlier demands to cease and desist selling our recordings through our own distribution facilities on the grounds that an amendment to the distribution agreement with PolyGram Group Distribution specifically allows us to distribute records through our own distribution company. We have filed our answer to the complaint and have filed cross- complaints against PolyGram seeking damages incurred in connection with the production of a compilation album by PolyGram entitled "Essential Southern Rock", for the failure of PolyGram's successor, Universal Music, to properly pay royalties to us pursuant to the terms of a foreign licensing agreement between Universal and us, and for breach of the distribution agreement by PolyGram. We have also sent a notice of termination of the distribution agreement to PolyGram, terminating the distribution agreement effective as of July 21, 1999 for PolyGram's breach of the distribution agreement. On November 10, 1999, the action in California was stayed on the grounds that the forum for the lawsuit should be in New York rather than California. We had earlier filed an action in New York asserting as plaintiff the claims made as cross-complaints in the action in California, so to the extent PolyGram elects to continue pursuing its claims against us, those claims will be litigated in New York. We are a party in various other lawsuits which have arisen in the normal course of business. In the opinion of management, after consultation with legal counsel, the ultimate outcome of these lawsuits will not have a material impact on our financial position or results of operations. ITEM 2. Changes in Securities and Use of Proceeds. During July 1999, we issued 3,333 shares of our Common Stock, valued at $25,000 or $7.50 per share, to William Benedict, in connection with professional services rendered. This transaction was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 as a transaction not involving a public offering. ITEM 6. Exhibits and Reports on Form 8-K. A. Exhibits. 10.1 Fouth Amendment to Credit Agreement, dated August 11, 1998, between the Registrant and First Source Financial LLP (First Source). 10.2 Fifth Amendment to Credit Agreement, dated October 13, 1999, between the Registrant and First Source. 27. Financial Data Schedule Platinum Entertainment, Inc. agrees to furnish supplementally to the Securities Exchange Commission, upon request, a copy of any omitted exhibit or schedule to any agreement. B. Reports on Form 8-K. On July 1, 1999, we filed a Current Report on Form 8-K: (i) confirming our equity investment in musicmaker.com, Inc.; (ii) announcing the purchase by Steven Devick, our Chairman, President and Chief Executive Officer, of 2,500 shares of our Series C Preferred Stock plus accrued dividends and warrants to purchase 84, 375 shares of Common Stock held in the name of Platinum Venture Partners, II L.P. for consideration of $3,014,000; (iii) announcing the sale of 423,280 shares of our Common Stock to Special Situations Fund III, L.P., Special Situations Private Fund, L.P., Special Situations Cayman Fund, L.P. and Special Situations Technology Fund, L.P., at a per share price of $7.088, for total consideration of $3,000,000 and (iv) announcing the total shares of outstanding Common Stock. On July 19, 1999, we filed a Current Report on Form 8-K to provide the pro forma effect of the musicmaker.com, Inc. initial public offering on our investment in musicmaker.com, Inc SIGNATURES Pursuant to the requirements of the Securities Act of 1933, we have duly caused this Report to be signed on our behalf by the undersigned, thereunto duly authorized, in the City of Downers Grove, State of Illinois, on November 15, 1999. Platinum Entertainment, Inc. BY:/s/STEVEN DEVICK Steven Devick Chairman, President and Chief Executive Officer /s/DOUGLAS C. LAUX Douglas C. Laux Chief Operating Officer, Chief Financial Officer and Director EX-10 2 Exhibit 10.1 FOURTH AMENDMENT TO SECURED CREDIT AGREEMENT This Fourth Amendment to Secured Credit Agreement (this "Agreement") is dated as of August 11, 1999, and is between Platinum Entertainment, Inc., a Delaware corporation (the "Borrower"), and First Source Financial LLP, an Illinois limited liability partnership, as Agent for Lenders party to the Secured Credit Agreement (as defined below) (the "Agent"). RECITALS WHEREAS, the parties hereto are parties to that certain Secured Credit Agreement, dated as of July 31, 1998 (as amended by that certain First Amendment to Secured Credit Agreement, dated as of November 1, 1998, that certain Second Amendment to Secured Credit Agreement, dated as of January ___, 1999, and that certain Third Amendment to Secured Credit Agreement, dated as of April 14, 1999, and as from time to time further amended, restated, supplemented or otherwise modified and in effect, the "Secured Credit Agreement"); and WHEREAS, Borrower and Lenders desire to amend the Secured Credit Agreement to make certain changes thereto and to correct certain matters, all as set forth below. NOW THEREFORE, in consideration of the mutual agreements contained herein, the parties hereto agree as follows: AGREEMENT 1. Definitions. Capitalized terms used but not otherwise defined herein shall have the meanings as set forth in the Secured Credit Agreement. 2. Amendments to Secured Credit Agreement. The Secured Credit Agreement is hereby amended as follows: (a) The definition of "Borrowing Base" set forth in Section 1.1 of the Secured Credit Agreement is hereby amended by deleting it in its entirety and replacing it with the following: "Borrowing Base" shall mean an amount equal to: (i) eighty percent (80%) of the face amount (less maximum discounts, credits and allowances which may have been taken by or granted to Account Debtors in connection therewith) then outstanding of existing Eligible Accounts minus (ii) the then current Return Credit Reserve, plus (iii) the lesser of (x) fifty percent (50%) of the book value of Borrower's then existing finished goods portion of Eligible Inventory and (y) the Inventory Sublimit (the book value of Eligible Inventory to be determined at the lower of cost (determined on a first-in-first-out ("FIFO") basis) or market), plus (iii) the lesser of (x) fifty percent (50%) of the Music Catalog Appraised Value and (y) $25,000,000. (b) Section 2.7 of the Secured Credit Agreement is hereby amended by inserting the following new Section 2.7(c) immediately following Section 2.7(b): (c) Upon receipt by Borrower of the Assets Sale Proceeds from the Country Publishing Sale, Borrower shall make a mandatory prepayment of Revolving Loans outstanding in an amount equal to 50% of such Asset Sale Proceeds. Each such payment shall be accompanied by accrued interest on such principal amount and amounts payable under Section 4.4(f), if any. Concurrently with the payment set forth in this Section 2.7(c), the Revolving Commitment shall be reduced by an amount equal to such payment. As used in this Section 2.7(c), "Asset Sale Proceeds" shall mean the aggregate cash proceeds payable to Borrower in connection with the Country Publishing Sale after deduction of all reasonable, customary and documented costs and expenses (including, without limitation, taxes) of such Country Publishing Sale. (c) Section 11.12 of the Secured Credit Agreement is hereby amended by deleting it in its entirety and replacing it with the following: SECTION 11.12 Mergers, Consolidations, Sales. Not, nor shall it permit any Subsidiary to, (a) be a party to any merger or consolidation or purchase or otherwise acquire all or substantially all of the assets or stock of any class of, or any partnership or joint venture interest or other interest in, any other Person other than (i) the House of Blues Venture and (ii) other joint ventures entered into in Borrower's ordinary course of business with respect to the music or related entertainment business; provided, that Borrower continues to won, free and clear of any interest of the joint venture (other than allocation of profits therefrom), all music rights and recording product used in such joint venture; or (b) sell, transfer, convey or lease all or any substantial part of its assets or sell or assign with or without recourse any Account, other than (i) any sale of inventory in the ordinary course of business; provided, that the sale, transfer, conveyance or lease of assets shall be in addition subject to the limitations set forth in the Collateral Documents and (ii) a sale of all or substantially all of the assets of the Double J Music, Victoria Kay Music (ASCAP) and John Juan Music (BMI) divisions of Borrower (the "Country Publishing Sale") for cash at a price determined to be fair and reasonable by Borrower's board of directors; provided, that no Event of Default or Unmatured Event of Default exists after giving effect to such sale. (d) Exhibit 1.2 of the Secured Credit Agreement is hereby amended by deleting it in its entirety and replacing it with Exhibit 1.2 attached hereto and made a part hereof. 3. Representations and Warranties. To induce Agent to enter into this Agreement and to make all future Loans under the Secured Credit Agreement, Borrower represents and warrants to Agent that: (a) Due Authorization, etc. The execution, delivery and performance by Borrower of this Agreement are within its corporate powers, have been duly authorized by all necessary corporate action, have received all necessary governmental approval (if any shall be required), and do not and will not contravene or conflict with any Requirement of Law or Contractual Obligation binding upon such entity. This Agreement is the legal, valid, and binding obligation of Borrower enforceable against Borrower in accordance with its respective terms. (b) Certain Agreements. To the best of Borrower's knowledge, on the date hereof all warranties of the Borrower thereto set forth in the Secured Credit Agreement are true and correct in all material respects, without any waiver or modification thereof and no default of any party exists under the Secured Credit Agreement or any Related Document. (c) Financial Information. All balance sheets, all statement of operations, of shareholders' equity and of changes in financial position, and other financial data which have been or shall hereafter be furnished to Agent for the purposes of or in connection with this Agreement have been and will be prepared in accordance with GAAP consistently applied throughout the periods involved and do and will, present fairly the financial condition of the entities involved as of the dates thereof and the results of their operations for the periods covered thereby. (d) Litigation. No material litigation (including, without limitation, derivative actions), arbitrations, governmental investigation or proceeding or inquiry shall, on the date hereof, be pending which was not previously disclosed in writing to Agent and no material adverse development shall have occurred in any litigation (including, without limitation, derivative actions), arbitration, government investigations, or proceeding or inquiry previously disclosed to Agent in writing. 4. Conditions to Effectiveness. This Agreement shall be effective as of the date hereof upon the satisfaction of the conditions set forth in this Section 4 and delivery of the following documents to Agent on or prior to the date hereof (unless another date is specified), in form and substance satisfactory to Agent: (a) Amendment. Borrower shall have delivered to Agent executed originals of this Agreement. (b) Consents and Acknowledgments. Borrower shall have obtained all consents, approvals and acknowledgments which may be required with respect to the execution, delivery and performance of this Agreement. (c) No Default. As of the date hereof after giving effect to this Agreement no Unmatured Event of Default or Event of Default under any Related Document shall have occurred and be continuing. 5. Affirmation of Guaranties. Each Guarantor (i) consents to and approves the execution and delivery of this Agreement by Borrower and Agent, (ii) agrees that this Agreement does not nor shall it limit or diminish in any manner its obligations under its Guaranty or under any of the other Related Documents to which it is a party, (iii) agrees that this Agreement shall not be construed as requiring the consent of any Guarantor in any other circumstance, (iv) reaffirms its obligations under its Guaranty and all of the other Related Documents to which it is a party, and (v) agrees that its Guaranty and such other Related Documents remain in full force and effect and are each hereby ratified and confirmed. 6. Miscellaneous. (a) Captions. Section captions used in this Agreement are for convenience only, and shall not affect the construction of this Agreement. (b) Governing Law. This Agreement shall be a contract made under and governed by the laws of the State of Illinois, without regard to conflict of laws principles. Wherever possible each provision of this Agreement shall be interpreted in such manner to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provision of this Agreement. (c) Counterparts. This Agreement may be executed in any number of counterparts and by the different parties on separate counterparts, and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute one and the same Agreement. Delivery of an executed counterpart of a signature page to this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement. (d) Successors and Assignees. This Agreement shall be binding upon Borrower, the Lenders and Agent and their respective successors and assignees, and shall inure to the sole benefit of Borrower, Agent and each Lender and their successors and assignees. (e) References. Any reference to the Secured Credit Agreement contained in any notice, request, certificate, or other document executed concurrently with or after the execution and delivery of this Agreement shall be deemed to include this Agreement unless the context shall otherwise require. (f) Continued Effectiveness. Notwithstanding anything contained herein, the terms of this Agreement are not intended to and do not serve to effect a novation as to the Secured Credit Agreement, any Note or any of the Collateral Documents provided to furnish security therefor. The parties hereto expressly do not intend to extinguish the Secured Credit Agreement, any Note or the Collateral Documents. Instead, it is the express intention of the parties hereto to reaffirm the existence of the indebtedness created under the Secured Credit Agreement which is evidenced by Notes and secured by the various Collateral Documents. The Secured Credit Agreement and each of the Related Documents as amended hereby remain in full force and effect. The execution, delivery and effectiveness of this Agreement shall not operate as a waiver of any right, power or remedy of the Lenders or Agent under the Secured Credit Agreement or any Related Document to which the Lenders and Agent are a party nor constitute a waiver of any provision in or Event of Default or Unmatured Event of Default (now or hereafter existing) under the terms of the Secured Credit Agreement or any Related Document. (g) Fees and Expenses. In accordance with Section 14.4 of the Secured Credit Agreement, Borrower agrees to pay on demand all fees, costs and expenses incurred by Agent and the Lenders in connection with the preparation, execution and delivery of this Agreement. [signature pages follow] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their duly authorized officers on the date first above written. PLATINUM ENTERTAINMENT, INC., as Borrower: By: /s/ DOUGLAS C. LAUX Name Printed: DOUGLAS C. LAUX Title: CHIEF FINANCIAL OFFICER FIRST SOURCE FINANCIAL LLP, as a Lender and as Agent By: First Source Financial, Inc., Its: Manager By: /s/ JOHN P. THACKER Name Printed: JOHN P. THACKER Title: SENIOR VICE PRESIDENT LEXICON MUSIC, INC., as Guarantor By: /s/ DOUGLAS C. LAUX Name Printed: DOUGLAS C. LAUX Title: CHIEF FINANCIAL OFFICER PEG PUBLISHING, INC., as Guarantor By: /s/ DOUGLAS C. LAUX Name Printed: DOUGLAS C. LAUX Title: CHIEF FINANCIAL OFFICER ROYCE PUBLISHING, INC., as Guarantor By: /s/ DOUGLAS C. LAUX Name Printed: DOUGLAS C. LAUX Title: CHIEF FINANCIAL OFFICER JUSTMIKE MUSIC, INC., as Guarantor By: /s/ DOUGLAS C. LAUX Name Printed: DOUGLAS C. LAUX Title: CHIEF FINANCIAL OFFICER EX-10 3 Exhibit 10.2 FIFTH AMENDMENT, CONSENT AND WAIVER TO SECURED CREDIT AGREEMENT This Fifth Amendment, Consent and Waiver to Secured Credit Agreement (this "Agreement") is dated as of October 13, 1999, and is between Platinum Entertainment, Inc., a Delaware corporation (the "Borrower"), and First Source Financial LLP, an Illinois limited liability partnership, as Agent for Lenders party to the Secured Credit Agreement (as defined below) (the "Agent"). RECITALS WHEREAS, the parties hereto are parties to that certain Secured Credit Agreement, dated as of July 31, 1998 (as amended, restated, supplemented or otherwise modified from time to time, the "Secured Credit Agreement"); and WHEREAS, Borrower and Lenders desire to amend the Secured Credit Agreement to make certain changes thereto and to correct certain matters, all as set forth below. NOW THEREFORE, in consideration of the mutual agreements contained herein, the parties hereto agree as follows: AGREEMENT 1. Definitions. Capitalized terms used but not otherwise defined herein shall have the meanings as set forth in the Secured Credit Agreement. 2. Amendments to Secured Credit Agreement. The Secured Credit Agreement is hereby amended as follows: (a) Section 1.1 of the Secured Credit Agreement is hereby amended by adding the following definitions in their proper alphabetical order: "* Library" shall mean any and all sound recordings listed on Exhibit A attached hereto and any and all masters, videos and any materials associated with such sound recordings. "* Sale Proceeds" shall mean the aggregate cash proceeds payable to Borrower in connection with the sale of the * Library after deduction of all reasonable, customary and documented costs and expenses (including, without limitation, taxes) of such sale. (b) Section 2.1(a) of the Secured Credit Agreement is hereby amended by deleting the date "July 31, 2003" in the third line thereof and replacing it with the date "March 31, 2000". (c) Section 2.7 of the Secured Credit Agreement is hereby amended by inserting the following new Section 2.7(d) immediately following Section 2.7(c): (d) Upon receipt by Borrower of the * Sale Proceeds, Borrower shall immediately deposit the * Sale Proceeds into the Master Account for application to the outstanding Liabilities in accordance with the terms of this Agreement. Concurrently with the payment set forth in this Section 2.7(d), the Revolving Commitment shall be reduced by an amount equal to 50% of the * Sale Proceeds. (d) Section 2.8 of the Secured Credit Agreement is hereby amended by deleting it in its entirety. (e) Section 5.6 of the Secured Credit Agreement is hereby amended by deleting it in its entirety and replacing it with the following: SECTION 5.6 Appraisal Fees. Borrower shall pay to Agent all appraisal costs and expenses related to the following appraisals of Borrower's music catalog prepared after the Closing Date at the request of Agent: (i) any appraisals conducted during the occurrence and continuance of an Unmatured Event of Default or Event of Default; (ii) an appraisal conducted by Valuation Research Corporation at the request of the Agent made in September 1999; and (iii) an appraisal conducted by Kagan Media Appraisals, Inc. at the request of the Agent made in September 1999; provided that the aggregate fees payable by Borrower to Agent with respect to the appraisals referenced in clauses (ii) and (iii) above shall not exceed $60,000 plus out-of-pocket expenses of the appraisers. [FN] * Confidential portions omitted and filed separately with the commission. (f) Section 11.12 of the Secured Credit Agreement is hereby amended by inserting the following in the eighth line thereof immediately following the word "assets": (unless in connection and concurrently with such sale, Borrower indefeasibly pays in full in cash all outstanding Liabilities hereunder) (g) Section 11.30 of the Secured Credit Agreement is hereby amended by inserting the following in the fifth line thereof immediately following the amount "$50,000": and (iii) sales of Property the proceeds of which are concurrently used by the Borrower to indefeasibly pay in full in cash all outstanding Liabilities hereunder. (h) Section 11.33 of the Secured Credit Agreement is hereby amended by deleting it in its entirety and replacing it with the following: SECTION 11.33 Financial Covenants. (a) EBITDA. Not permit EBITDA measured on the last day of each month set forth below for the month ended on such day to be less than the amount listed below opposite such period: Periods Minimum EBITDA October 1999 $5,400,000 November 1999 $0 December 1999 ($250,000) January 2000 ($450,000) February 2000 $0 (b) Gross Capital Expenditures. Not, nor shall it permit any Subsidiary to, directly or indirectly (by way of the acquisition of the securities of a Person or otherwise), make or commit to make Gross Capital Expenditures, except that Borrower may, so long as no Event of Default or Unmatured Event of Default shall exist or would result therefrom, make Gross Capital Expenditures (excluding any permitted acquisitions) in the ordinary course of business in an aggregate amount not to exceed $1,000,000 during (a) the period from the Closing Date through December 31, 1998 and (ii) any Fiscal Year thereafter. (i) Section 11 of the Secured Credit Agreement is hereby amended by adding the following at the end thereof: SECTION 11.35 Borrowing Availability. Borrower shall maintain at all times Borrowing Availability of at least $300,000. SECTION 11.36 Board Resolution. As soon as possible and in no event later than November 15, 1999, Borrower shall deliver to Agent a certified copy of the unanimous resolution of the full Board of Directors of each of the Borrower and the Guarantors in form and substance satisfactory to Agent ratifying the execution and delivery by Borrower and the Guarantors of the Fifth Amendment, Consent and Waiver to Secured Credit Agreement in its final form and the consummation of the transactions contemplated by such agreement and each other Related Document to be executed and delivered in connection therewith and the performance of their respective obligations thereunder. (j) Section 13.1(f) of the Secured Credit Agreement is hereby amended by deleting it in its entirety and replacing it with the following: (f) Failure by Borrower to comply with or to perform (x) any provision contained in clause (i) of Section 11.1(h), Section 11.4 or Section 11.10 through 11.34 or (y) any provision contained in any Section of this Agreement (other than occurrences referred to or embodied in other clauses of this Section 13.1) for a period of five (5) Business Days after the earlier of (i) Borrower's receipt of notice from Agent or (ii) actual knowledge of such failure by Borrower. (k) The Secured Credit Agreement is hereby amended by deleting in their entirety the headings "Commitments" and "Aggregate Commitments" and all amounts listed thereunder set forth on the signature page of the Secured Credit Agreement. (l) Schedule 1 to the Credit Agreement is hereby amended by deleting it in its entirety and replacing it with Schedule 1 attached to this Agreement. (m) Schedule 10.16 to the Secured Credit Agreement is hereby amended to delete the address "11810 Willis Road, Alpharetta, GA 30004" and adding the address "11415 Old Roswell Rd., Alpharetta, GA 30201". 3. Waivers. (a) Indebtedness. Lenders and Agent hereby waive any Unmatured Event of Default or Event of Default caused by Borrower's breach of Section 11.19 or 11.21 of the Secured Credit Agreement arising from Borrower's incurrence of the Indebtedness set forth on Exhibit A attached to this Agreement. Schedules 11.19 and 11.21 of the Secured Credit Agreement are hereby amended to include the Indebtedness set forth on Exhibit A attached hereto. (b) Financial Covenants. Lenders and Agent hereby waive any Unmatured Event of Default or Event of Default caused by Borrower's failure to comply with Sections 11.33(a) and 11.33(b) of the Secured Credit Agreement, as they existed before the date of this Agreement, through and including September 30, 1999. (c) Polygram. Lenders and Agent hereby waive any Unmatured Event of Default or Event of Default arising under Section 13.1(n) of the Secured Credit Agreement as a result of the termination of the Polygram Distribution Agreement. (d) Commitment Reduction. Lenders and Agent hereby waive the five Business Days' notice under Section 2.6 of the Secured Credit Agreement and any Prepayment Premium that would otherwise be applicable with respect to the $1,400,000 reduction of the Revolving Commitment required by Section 6(d) of this Agreement. (e) Legal Fees. Lenders and Agent hereby waive all fees and out-of-pocket fees otherwise payable under Section 14.4 of the Secured Credit Agreement incurred with respect to the negotiations regarding the sale of the Borrower's 1,320,000 shares of Music Connection Corporation (or, as exchanged, Musicmaker.com) and the preparation, negotiations and execution of this Agreement. (f) Default Interest. Lenders and Agent hereby waive all accrued and unpaid interest on the Loans outstanding on the date hereof in excess of the non-default contract rate per annum applicable to the Loans. (g) Interest Payment. Lenders and Agent hereby waive the Event of Default arising under Section 13.1(a) of the Secured Credit Agreement as a result of Borrower's late payment of the interest due on the Loans on September 15, 1999. (h) Limited Waivers. The foregoing waivers are limited to the specific purpose for which they were granted, and except as set forth in this Section 3, such waivers shall not be construed as a waiver or other modification with respect to any other term, condition or other provisions of any Related Document. 4. Consent. (a) Lenders and Agent hereby consent to the sale of the Borrower's 1,320,000 shares of Music Connection Corporation (or as exchanged, Musicmaker.com) for a purchase price of $9.125 per share provided that the Asset Sale Proceeds of such stock shall be immediately delivered to Agent by wire transfer of immediately available funds to the Master Account for application to the outstanding Liabilities in accordance with the terms of Section 7.3 of the Secured Credit Agreement. (b) Lenders and Agent hereby consent to the sale of the * Library; provided that such sale is made by the Borrower to an unaffiliated party on an arms length basis for cash only; provided further that all cash proceeds of such sale are deposited into the Master Account in accordance with the terms of Section 2.7(d) of the Secured Credit Agreement. 5. Representations and Warranties. To induce Agent and Lenders to enter into this Agreement and to extend Loans and L/C Guaranties under the Secured Credit Agreement, Borrower represents and warrants to Agent that: (a) Due Authorization, etc. The execution, delivery and performance by Borrower of this Agreement are within its corporate powers, have been duly authorized by all necessary corporate action, have received all necessary governmental approval (if any shall be required), and do not and will not contravene or conflict with any Requirement of Law or Contractual Obligation binding upon such entity. This Agreement is the legal, valid, and binding obligation of Borrower enforceable against Borrower in accordance with its respective terms. (b) Certain Agreements. To the best of Borrower's knowledge, on the date hereof all warranties of the Borrower thereto set forth in the Secured Credit Agreement are true and correct in all material respects, without any waiver or modification thereof and, after giving effect to this Agreement, no Unmatured Event of Default or Event of Default exists under the Secured Credit Agreement or any other Related Document. (c) Financial Information. All balance sheets, all statement of operations, of shareholders' equity and of changes in financial position, and other financial data which have been or shall hereafter be furnished to Agent for the purposes of or in connection with this Agreement have been and will be prepared in accordance with GAAP consistently applied throughout the periods involved and do and will, present fairly the financial condition of the entities involved as of the dates thereof and the results of their operations for the periods covered thereby. (d) Litigation. Except as set forth on Exhibit C to this Agreement, no material litigation (including, without limitation, derivative actions), arbitrations, governmental investigation or proceeding or inquiry shall, on the date hereof, be pending which was not previously disclosed in writing to Agent and no material adverse development shall have occurred in any litigation (including, without limitation, derivative actions), arbitration, government investigations, or proceeding or inquiry previously disclosed to Agent in writing. 6. Conditions to Effectiveness. This Agreement shall be effective as of the date hereof upon the satisfaction of the conditions set forth in this Section 6 and delivery of the following documents to Agent on or prior to the date hereof (unless another date is specified), in form and substance satisfactory to Agent: (a) Amendment. Borrower shall have delivered to Agent executed originals of this Agreement. (b) Consents and Acknowledgments. Borrower shall have obtained all consents, approvals and acknowledgments which may be required with respect to the execution, delivery and performance of this Agreement. (c) No Default. As of the date hereof after giving effect to this Agreement no Unmatured Event of Default or Event of Default under any Related Document shall have occurred and be continuing. (d) Commitment Reduction. Agent shall have received $1,400,000 in cash as a permanent reduction of the Revolving Commitment to $33,024,986. (e) Interest and Fees. Agent shall have received payment in full of all interest and fees that would otherwise be due and payable on October 15, 1999. (f) Resolutions. A certified copy of the unanimous resolutions of the full Board of Directors of each of the Borrower and the Guarantors in form and substance satisfactory to Agent authorizing the execution and delivery of, and the consummation of the transactions contemplated by, this Agreement and each other Related Document to be executed and delivered in connection herewith and the performance of their respective obligations hereunder. (g) Incumbency Certificate. A certificate of the Secretary or Assistant Secretary of Borrower certifying the names and true signatures of the officers of Borrower authorized to execute, deliver and perform this Agreement and each other Loan Document to be executed and delivered in connection herewith, upon which certificate Agent and Lenders shall be entitled to rely. (h) Other Documents. All other documents, certificates and agreements as Agent may reasonably request to accomplish the purposes of this Agreement. 7. Affirmation of Guaranties. Each Guarantor (i) consents to and approves the execution and delivery of this Agreement by Borrower and Agent, (ii) agrees that this Agreement does not nor shall it limit or diminish in any manner its obligations under its Guaranty or under any of the other Related Documents to which it is a party, (iii) agrees that this Agreement shall not be construed as requiring the consent of any Guarantor in any other circumstance, (iv) reaffirms its obligations under its Guaranty and all of the other Related Documents to which it is a party, and (v) agrees that its Guaranty and such other Related Documents remain in full force and effect and are each hereby ratified and confirmed. 8. Release. In consideration of Agent's and Lenders' execution of this Agreement, the consent set forth in Section 4 hereof and the waivers set forth in Section 3 hereof, each of Borrower and the Guarantors, individually and on behalf of its successors, assigns, subsidiaries and affiliates, hereby forever releases, acquits and discharges Agent and Lenders and their respective successors, assigns, parents, subsidiaries, affiliates, officers, employees, directors, agents and attorneys (collectively, the "Releasees") from any and all debts, claims, demands, liabilities, responsibilities, disputes, actions and causes of action (whether at law or in equity) and obligations of every nature whatsoever, whether liquidated or unliquidated, known or unknown, matured or unmatured, fixed or contingent (collectively, "Claims") that Borrower may have against the Releasees which arise from or relate to any act of commission or omission of the Releasees existing or occurring on or prior to the date hereof with respect to any attempted sale or disposition and the actual sale or disposition by Borrower of the shares of Music Connection Corporation or, as exchanged, Musicmaker.com including, without limitation, all allegations set forth, referenced or alluded to in that certain letter, dated October 8, 1999, from John R. Weiss of Bell, Boyd & Lloyd, Borrower's legal counsel, to Jim L. Blanco of Winston & Strawn, Agent's and Lenders' legal counsel. 9. Miscellaneous. (a) Captions. Section captions used in this Agreement are for convenience only, and shall not affect the construction of this Agreement. (b) Governing Law. This Agreement shall be a contract made under and governed by the laws of the State of Illinois, without regard to conflict of laws principles. Wherever possible each provision of this Agreement shall be interpreted in such manner to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provision of this Agreement. (c) Counterparts. This Agreement may be executed in any number of counterparts and by the different parties on separate counterparts, and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute one and the same Agreement. Delivery of an executed counterpart of a signature page to this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement. (d) Successors and Assignees. This Agreement shall be binding upon Borrower, the Lenders and Agent and their respective successors and assignees, and shall inure to the sole benefit of Borrower, Agent and each Lender and their successors and assignees. (e) References. Any reference to the Secured Credit Agreement contained in any notice, request, certificate, or other document executed concurrently with or after the execution and delivery of this Agreement shall be deemed to include this Agreement unless the context shall otherwise require. (f) Continued Effectiveness. Notwithstanding anything contained herein, the terms of this Agreement are not intended to and do not serve to effect a novation as to the Secured Credit Agreement, any Note or any of the Collateral Documents provided to furnish security therefor. The parties hereto expressly do not intend to extinguish the Secured Credit Agreement, any Note or the Collateral Documents. Instead, it is the express intention of the parties hereto to reaffirm the existence of the indebtedness created under the Secured Credit Agreement which is evidenced by Notes and secured by the various Collateral Documents. The Secured Credit Agreement and each of the Related Documents as amended hereby remain in full force and effect. The execution, delivery and effectiveness of this Agreement shall not operate as a waiver of any right, power or remedy of the Lenders or Agent under the Secured Credit Agreement or any Related Document to which the Lenders and Agent are a party nor, except as set forth in Section 3 hereof, constitute a waiver of any provision in or Event of Default or Unmatured Event of Default (now or hereafter existing) under the terms of the Secured Credit Agreement or any Related Document. (g) Entire Agreement. This Agreement and all schedules, exhibits and other documents attached hereto or incorporated by reference herein constitute the entire agreement of the parties hereto with respect to the subject matter hereof and supersede all other understandings, oral or written, with respect to the subject matter hereof. (h) Conflict of Terms. Except as provided in this Agreement, if any provision contained in this Agreement is in conflict or is inconsistent with any provision in any of the other Related Documents, the provision contained in this Agreement shall govern and control. (i) Incorporation of Secured Credit Agreement. The provisions contained in Sections 14.7 and 14.11 of the Secured Credit Agreement are incorporated herein by reference to the same extent as if produced herein in their entirety. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their duly authorized officers on the date first above written. PLATINUM ENTERTAINMENT, INC., as Borrower: By: /s/ DOUGLAS C. LAUX Name Printed: DOUGLAS C. LAUX Title: CHIEF FINANCIAL OFFICER FIRST SOURCE FINANCIAL LLP, as a Lender and as Agent By: First Source Financial, Inc., Its: Manager By: /s/ JOHN P. THACKER Name Printed: JOHN P. THACKER Title: SENIOR VICE PRESIDENT LEXICON MUSIC, INC., as Guarantor By: /s/ DOUGLAS C. LAUX Name Printed: DOUGLAS C. LAUX Title: CHIEF FINANCIAL OFFICER PEG PUBLISHING, INC., as Guarantor By: /s/ DOUGLAS C. LAUX Name Printed: DOUGLAS C. LAUX Title: CHIEF FINANCIAL OFFICER ROYCE PUBLISHING, INC., as Guarantor By: /s/ DOUGLAS C. LAUX Name Printed: DOUGLAS C. LAUX Title: CHIEF FINANCIAL OFFICER JUSTMIKE MUSIC, INC., as Guarantor By: /s/ DOUGLAS C. LAUX Name Printed: DOUGLAS C. LAUX Title: CHIEF FINANCIAL OFFICER EX-27 4
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 JUL-01-1999 SEP-30-1999 23 8,239 19,192 (8,024) 8,276 31,921 4,449 (1,794) 66,514 54,837 0 0 0 7 11,670 66,514 15,675 15,903 5,567 5,661 6,896 650 879 (3,999) 0 (3,999) 0 0 0 (3,999) (0.55) (0.55)
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