UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 1997
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _______________________to_______________________
Commission file number 1-12635
PARADISE MUSIC & ENTERTAINMENT, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as
specified in its charter)
Delaware 13-3906452
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
420 West 45th Street, New York, New York 10036
- ----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(Issuer's telephone number (212) 957-9393
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
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 |_|
At May 5, 1997, the Issuer had 2,226,333 shares of Common Stock, $.01 par
value, outstanding.
Transitional Small Business Disclosure Format Yes |_| No |X|
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
PART I FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 1997 (Unaudited) and June 30, 1996 3
Consolidated Statements of Operations for the
Nine and Three Months Ended March 31, 1997
and 1996 (Unaudited) 4
Consolidated Statements of Stockholders' Equity
for the Nine Months Ended March 31, 1997 (Unaudited) 5
Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 1997 and 1996 (Unaudited) 6-7
Notes to Consolidated Financial Statements (Unaudited) 8-11
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 12-15
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
Signature Page 17
2
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
-------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 5,756,574 $ 82,813
Accounts receivable 37,321 129,715
Prepaid costs 37,170 17,255
Prepaid income taxes 42,532 -
Other 19,196 -
-------------- ------------
Total current assets 5,892,793 229,783
-------------- ------------
PROPERTY AND EQUIPMENT, less accumulated
depreciation and amortization 125,892 81,154
-------------- ------------
OTHER ASSETS:
Deferred registration costs - 5,000
Security deposits 14,072 14,072
Deferred tax asset 319,000 -
-------------- ------------
333,072 19,072
-------------- ------------
$ 6,351,757 $ 330,009
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $ 100,000 $ -
Accrued compensation 97,878 -
Deferred revenues 400,000 49,612
Accounts payable - 81,854
Retirement plan contributions payable - 30,000
Accrued expenses and other current liabilities 351,780 28,563
-------------- ------------
Total current liabilities 949,658 190,029
-------------- ------------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
authorized 5,000,000 shares, none issued
Common stock, $.01 par value,
authorized 20,000,000 shares,
issued and outstanding 2,226,333 and
998,000 shares, respectively 22,263 9,980
Capital in excess of par value 5,774,471 12,090
Retained earnings (deficit) (393,835) 119,160
Common stock subscription receivable (800) (1,250)
-------------- ------------
Total stockholders' equity 5,402,099 139,980
-------------- ------------
$ 6,351,757 $ 330,009
============== ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
March 31, March 31,
-------------------------------- --------------------------------
1997 1996 1997 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUES $ 2,852,568 $ 3,040,822 $ 577,381 $ 991,153
-------------- -------------- -------------- --------------
OPERATING EXPENSES:
Cost of sales 1,595,834 1,682,918 264,847 587,904
Selling, general and administrative 1,920,544 1,117,911 1,072,808 257,925
-------------- -------------- -------------- --------------
Total operating expenses 3,516,378 2,800,829 1,337,655 845,829
-------------- -------------- -------------- --------------
OPERATING INCOME (LOSS) (663,810) 239,993 (760,274) 145,324
INTEREST INCOME, net 29,977 - 29,977 -
-------------- -------------- -------------- --------------
INCOME (LOSS) BEFORE INCOME
TAX (BENEFIT) (633,833) 239,993 (730,297) 145,324
INCOME TAX (BENEFIT) (313,000) 44,000 (330,037) 29,000
-------------- -------------- -------------- --------------
NET INCOME (LOSS) $ (320,833) $ 195,993 $ (400,260) $ 116,324
============== ============== ============== ==============
INCOME (LOSS) PER COMMON SHARE $ (.24) $ .19 $ (.21) $ .11
============== ============== ============== ==============
WEIGHTED AVERAGE SHARES
OUTSTANDING 1,316,100 1,039,167 1,869,966 1,039,167
============== ============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Nine Months Ended March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Common
Common Stock Capital in Retained Stock
------------ Excess of Earnings Subscription
Shares Amount Par Value (Deficit) Receivable
------------ ----------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCES, June 30, 1996 998,000 $ 9,980 $ 12,090 $ 119,160 $ (1,250)
Reclassification of prior
"S" corporation retained
earnings 192,162 (192,162)
Sale of common stock, net
of expenses 1,224,333 12,243 5,558,259
Stock issued in exchange
for services 4,000 40 11,960
Repayment of subscription
receivable 450
Net loss (320,833)
------------ ----------- -------------- ------------- --------------
BALANCES, March 31, 1997 2,226,333 $ 22,263 $ 5,774,471 $ (393,835) $ (800)
============ =========== ============== ============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
------------------------------
1997 1996
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (320,833) $ 195,992
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 35,644 12,700
Deferred tax asset (319,000) -
Increase (decrease) in cash attributable
to changes in assets and liabilities:
Accounts receivable 92,394 83,942
Prepaid costs (19,915) 116,719
Officer advances - (63,897)
Prepaid income taxes (42,532) -
Other (19,196) 1,155
Accrued compensation 97,878 -
Deferred revenues 350,388 (52,134)
Accounts payable (81,854) (122,891)
Retirement contributions payable (30,000) (15,000)
Accrued expenses and other current liabilities 323,217 2,696
-------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 66,191 159,282
-------------- -------------
CASH FLOWS FROM AND NET CASH USED IN
INVESTING ACTIVITIES, payments for purchases
of property and equipment (80,382) (16,582)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable 100,000 -
Proceeds from issuance of common stock, net of expenses 5,587,502 -
Payments for stockholders' loans 450 (57,500)
-------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 5,687,952 (57,500)
-------------- -------------
NET INCREASE IN CASH AND EQUIVALENTS 5,673,761 85,200
CASH AND EQUIVALENTS, beginning of period 82,813 106,270
-------------- -------------
CASH AND EQUIVALENTS, end of period $ 5,756,574 $ 191,470
============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
-----------------------
1997 1996
----------- ---------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 2,790 $ -
=========== ===========
Cash paid during the period for income taxes $ 58,400 $ -
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Stock issued in exchange for services $ 12,000 $ -
=========== ===========
Reclassification of prior "S" corporation retained earnings $ 192,162 $ -
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION:
The financial statements included herein have been prepared by
Paradise Music & Entertainment, Inc. and Subsidiaries (the
"Company") pursuant to the rules and regulations of the
Securities and Exchange Commission and reflect all adjustments,
consisting only of normal recurring adjustments, which are, in
the opinion of management, necessary to present a fair statement
of results for interim periods. Certain information and footnote
disclosures have been omitted pursuant to such rules and
regulations, although the Company believes that the disclosures
are adequate to make the information presented not misleading. It
is suggested that these financial statements be read in
conjunction with the financial statements and the notes thereto
included in the Company's January 22, 1997 Form SB-2.
NOTE 2 - BUSINESS AND ORGANIZATION:
The Company was formed on July 18, 1996 and in July 1996 issued
125,000 shares of common stock at $.01 par value to its two
founding stockholders. In October 1996, the Company issued
873,000 shares of common stock in exchange for the outstanding
stock of its subsidiaries in a transaction accounted for as a
pooling of interest, whereby, the financial statements for all
periods prior to the combination were restated to reflect the
combined operations of its subsidiaries, All Access Entertainment
Management Group, Inc. ("All Access"), a musical artist
management company incorporated in New York, Picture Vision, Inc.
("Picture Vision"), a video production company incorporated in
Tennessee, and John Loeffler Music, Inc. (which operates under
the name of Rave Music and Entertainment) ("Rave") a creator of
music scores and advertising themes for television and radio,
which was incorporated in New York. In February 1997, the Company
incorporated its record label, Velocity Records ("Velocity") to
operate in the recorded music business.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation - The consolidated financial
statements include the accounts of Paradise Music &
Entertainment, Inc. and its wholly-owned subsidiaries, Rave,
Picture Vision, All Access and Velocity. All significant
intercompany transactions and balances have been eliminated in
consolidation.
Cash and Equivalents - For the purpose of preparing the statement
of cash flows, cash and equivalents include cash on hand and
highly liquid investments with maturities of less than three
months.
8
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Revenue Recognition - Commercial music production revenues and
the related production costs are recognized upon acceptance of
the music production by the client. Royalty and residual income
is recognized when received. For projects which are short in
duration, (primarily less than one month) video production
revenues and related production costs are recorded upon
completion of the video. For projects that have a longer term,
video production revenues and related production costs are
recorded using the percentage-of-completion method which
recognizes income as work on the project progresses. Music artist
management revenues are recognized when received and, in
accordance with industry custom, the Company frequently operates
its business based on oral agreements and purchase orders with
its artists and customers. Pursuant to these arrangements the
Company receives up to 20% of the gross revenues received in
connection with artist entertainment related earnings less
certain standard industry costs.
Record Label - Costs incurred in connection with the start-up of
the Company's record label have been expensed. Costs which are
directly related to the production, manufacture and sale of
records will be capitalized and amortized over the expected life
of the record, to the extent there is reasonable assurance that
these costs will be recovered.
Paid-in Capital - The Company has incurred costs relating to its
initial public offering (IPO). These costs have been charged to
capital in excess of par value.
Income (Loss) Per Common Share - Income (loss) per common share
is computed based on net income (loss) applicable to common
shareholders divided by the weighted average number of common
shares outstanding. The weighted average includes shares issued
within one year of the Company's IPO with an issue price less
than the IPO price, using the treasury stock method.
Unaudited Financial Statements - The financial statements as of
March 31, 1997 and for the nine and three months ended March 31,
1997 and 1996 are unaudited. These financial statements reflect
all adjustments which are, in the opinion of management,
necessary for a fair presentation of the results for the interim
period. All such adjustments, if any, are of a normal recurring
nature.
NOTE 4 - COMMITMENTS:
On October 9, 1996, the Company entered into employment
agreements, as amended (the "Agreements"), with four of its
executives (the "Executives"). Each of the Agreements are for a
period of three years and provide for annual base salaries of
$150,000. Pursuant to the Agreements, four bonus plans have been
established primarily for the benefit of the Executives.
The Company has adopted certain bonus plans pursuant to which the
Executives are entitled to receive bonuses based upon attainment
of certain financial results. For the nine and three months ended
March 31, 1997 approximately $819,000 and $493,000, respectively
have been expensed under the bonus plans and employment
agreements and are included in selling, general and
administrative expenses.
9
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 - STOCKHOLDERS' EQUITY:
In January 1997, the Company completed its initial public
offering in which it sold 1,000,000 units consisting of 1,000,000
shares of common stock and 1,000,000 warrants. For each two
warrants owned, the holder is entitled to purchase one share of
common stock through January 21, 2001 at $7.20. In February 1997,
an additional 146,000 units were sold upon the exercise of the
underwriter's over allotment option. The aggregate net proceeds
were approximately $5,360,000, after underwriters' commissions
and offering expenses of approximately $1,516,000.
NOTE 6 - ECONOMIC DEPENDENCY:
Approximately $317,000 and $241,000 of commercial production
revenues for the nine months ended March 31, 1997 and 1996,
respectively, were derived from one advertising agency. For the
three months ended March 31, 1997 and 1996 approximately $181,000
and $63,000 of commercial production revenues were derived from
the same advertising agency. Approximately $239,000 and $635,000
of musical talent management revenues for the nine months ended
March 31, 1997 and 1996, respectively, were derived from two
musical artists. For the three months ended March 31, 1997 and
1996, approximately $116,000 and $152,000 of musical talent
management revenues were derived from two musical artists. For
the nine months ended March 31, 1997 and 1996, approximately
$165,000 and $510,000, respectively, of video production revenues
were derived from one and two artists, respectively. For the
three months ended March 31, 1997 and 1996 approximately $178,000
and $435,000 of video production revenues were derived from three
and four artists, respectively. At March 31, 1997, approximately
$37,000 was owed in the aggregate to the Company from these
artists and customers.
NOTE 7 - FINANCIAL DATA BY SUBSIDIARY:
The following financial data is presented for the Company's
subsidiaries:
<TABLE>
<CAPTION>
Nine Months ended March 31, 1997
----------------------------------------------------------
All Picture Velocity
Rave Access Vision Records
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Total revenues $ 657,451 $ 541,937 $ 1,653,180 $ -
Net income (loss) $ 25,274 $ (140,728) $ (59,943) $ (60,158)
Three Months ended March 31, 1997
----------------------------------------------------------
All Picture Velocity
Rave Access Vision Records
-------------- ------------ -------------- ------------
Total revenues $ 246,888 $ 148,566 $ 181,927 $ -
Net income (loss) $ (45,401) $ (103,012) $ (112,502) $ (60,158)
</TABLE>
10
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 - FINANCIAL DATA BY SUBSIDIARY (CONTINUED):
<TABLE>
<CAPTION>
Nine Months ended March 31, 1996
----------------------------------------------------------
All Picture Velocity
Rave Access Vision Records
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Total revenues $ 640,107 $ 680,341 $ 1,720,374 $ -
Net income (loss) $ (1,359) $ 87,431 $ 109,921 $ -
Three Months ended March 31, 1996
----------------------------------------------------------
All Picture Velocity
Rave Access Vision Records
-------------- ------------ -------------- ------------
Total revenues $ 250,053 $ 166,992 $ 574,108 $ -
Net income (loss) $ 22,919 $ 13,856 $ 79,549 $ -
</TABLE>
11
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
While the Company's subsidiaries have operating histories, the Company was
incorporated in Delaware in July 1996 and has no history as a consolidated
enterprise. Management therefore believes that the period to period comparisons
of the Company's results of operations are not indicative of the results that
may be expected for the fiscal year ending June 30, 1997.
General
The Company currently derives most of its revenues from: the production of
original music scores and advertising themes for television, radio, and film;
the production of music videos used to promote music artists and music specials
and programs for television networks and other video broadcasters; and the
management of music artists.
The Company believes the results of operations of its operating subsidiaries
will be subject to seasonal variations, which variations may initially offset
each other. However, once the Company enters into the recorded music business,
the Company's results of operations from period to period may be materially
affected by the timing of new record releases and, if such releases are delayed
beyond the peak holiday season, the Company's operating results could be
materially adversely affected. Additionally, due to the success of particular
artists, artists' touring schedules and the timing of music television specials,
it is possible that the Company could also experience material fluctuations in
revenue from year to year.
During calendar 1997, the Company expects to expand Rave, Picture Vision, and
All Access, establish Velocity, and implement its acquisition program which will
initially target acquisitions and joint venture arrangements with small
complementary businesses in the music and entertainment industry of up to
$5,000,000. The Company's failure to expand its business in an efficient manner
could have a material adverse effect upon the Company's business, operating
results and financial condition.
Forward Looking Statements
Except for the historical information contained herein, this quarterly report on
Form 10-QSB may contain forward-looking statements with the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Investors are cautioned that forward-looking
statements are inherently uncertain. Actual performance and results of
operations may differ materially from those projected or suggested in the
forward-looking statements due to certain risks and uncertainties, including,
without limitation, risks associated with the Company being a recently
consolidated entity, dependence on senior management, risks inherent in the
recorded music industry such as the possibility of losses by the record label
and popularity of recording artists, the Company's ability to contract with
recording artists, the Company's ability to manage growth and the success of the
Company's music and entertainment acquisition program. Additional information
concerning certain risks and uncertainties that would cause actual results to
differ materially from those projected or suggested in the forward-looking
statements is contained in the Company's filings with the Securities and
Exchange Commission, including those risks and uncertainties discussed in the
Company's final Prospectus, dated January 22, 1997, included as part of the
Registration Statement on Form SB-2 (No. 333-13971), in the Section entitled
"Risk Factors". The forward-looking statements contained herein represent the
Company's judgment as of the date of this release hereof, and the Company
cautions readers not to place undue reliance on such statements.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Nine Months Ended March 31, 1997 Compared to
Nine Months Ended March 31, 1996
Commercial music production revenues increased to $657,451 for the nine months
ended March 31, 1997 from $640,107 for the nine months ended March 31, 1996, an
increase of $17,344 or 2.7% while commercial music production costs of sales
decreased to $257,292 for the nine months ended March 31, 1997 from $303,042 for
the nine months ended March 31, 1996, a decrease of $45,750 or 15.1%. The
increase in revenues was due to an increase of residual and royalty income. The
decrease in costs was primarily due to the fact that royalty and residual income
have no cost of sales associated with it. The level of residual and royalty
income varies from period to period based upon the number of compositions airing
at any one time, the medium on which such compositions are aired and the
frequency of such airings. As a result of the foregoing, gross profit as a
percentage of commercial music production revenues increased to 60.9% for the
nine months ended March 31, 1997 from 52.7% for the nine months ended March 31,
1996.
Video production revenues decreased to $1,653,180 for the nine months ended
March 31, 1997 from $1,720,374 for the nine months ended March 31, 1996, a
decrease of $67,194 or 3.9%, while video production costs of sales decreased to
$1,338,542 for the nine months ended March 31, 1997 from $1,379,876 for the nine
months ended March 31, 1996, a decrease of $41,334 or 3%.
Gross profit as a percentage of video production revenues declined slightly to
19% for the nine months ended March 31, 1997 as compared to 19.8% for the nine
months ended March 31, 1996. The average gross profit earned on the Company's
video productions in each period cannot be predicted and varies from period to
period.
Music artist management revenues decreased to $541,937 for the nine months ended
March 31, 1997 from $680,341 for the nine months ended March 31, 1996, a
decrease of $138,404 or 20.3%. The decrease was primarily attributable to a
decrease in the number of concerts performed by two artists. The Company's music
artist management operations have no cost of sales associated with it since no
products are produced.
The Company's selling, general and administrative expenses increased to
$1,920,544 for the nine months ended March 31, 1997 from $1,117,911 for the nine
months ended March 31, 1996, an increase of $802,633. The increase is
principally attributable to the start-up of Velocity, building an infrastructure
to operate and manage a public company and executive compensation.
The Company's income before income taxes decreased to a loss of $633,833 for the
nine months ended March 31, 1997 from a profit $239,993 for the nine months
ended March 31, 1996, a decrease of $873,826 or 364.1%. The decrease was
primarily due to the increase in selling, general and administrative expenses
and the decrease in video production and music artist management revenues
described above.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Three Months Ended March 31, 1997 Compared to
Three Months Ended March 31, 1996
Commercial music production revenues decreased to $246,888 for the three months
ended March 31, 1997 from $250,053 for the three months ended March 31, 1996, a
decrease of $3,165 or 1.3% while commercial music production costs of sales
decreased to $117,436 for the three months ended March 31, 1997 from $136,327
for the three months ended March 31, 1996, a decrease of $18,891 or 13.9%. The
decrease in revenues was primarily due to the loss of one customer. The decrease
in costs was primarily due to the increase in royalty and residual income which
has no costs of sales associated with it.
Gross profit as a percentage of commercial music production revenues increased
to 52.4% for the three months ended March 31, 1997 from 45.5% for the three
months ended March 31, 1996. The increase was primarily attributable to an
increase of royalty and residual income received during the three months ended
March 31, 1997, which royalty and residual income have no cost of sales
associated with it.
Video production revenues decreased to $181,927 for the three months ended March
31, 1997 from $574,108 for the three months ended March 31, 1996, a decrease of
$392,181 or 68.3%. Video production revenues were greater in 1996 than in 1997
primarily due to a decrease in the number of videos produced and the contract
amounts of the videos.
Cost of sales for video productions decreased to $147,411 for the three months
ended March 31, 1997 from $451,577 for the three months ended March 31, 1996, a
decrease of $304,166 or 67.4%. The decrease was primarily attributable to the
decrease in video production revenues.
Gross profit as a percentage of video production revenues decreased to 19% for
the three months ended March 31, 1997 from 21.3% for the three months ended
March 31, 1996. The decrease is attributable to lower gross margin on two jobs
in 1997 compared with four jobs completed in 1996.
Music artist management revenues decreased to $148,566 for the three months
ended March 31, 1997 from $166,992 for the three months ended March 31, 1996, a
decrease of $18,426 or 11%. The decrease was attributable to a decrease in the
number of concerts performed by two artists and was partially offset by revenues
derived from some of the Company's new artists. The Company's music artist
management operations have no cost of sales associated with it.
The Company's selling, general and administrative expenses increased to
$1,072,808 for the three months ended March 31, 1997 from $257,925 for the three
months ended March 31, 1996, an increase of $814,883 or 315.9%. The increase was
primarily attributable to the start-up of Velocity, building an infrastructure
to operate and manage a public company and executive compensation.
The Company's income before income taxes decreased to a loss of $730,297 for the
three months ended March 31, 1997 from a profit before income taxes of $145,324
for the three months ended March 31, 1996, a decrease of $875,621 or 602.5%. The
decrease was primarily attributable to the increase in selling, general and
administrative expenses and the decrease in video production and music artist
management revenues described above.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources
During the nine months ended March 31, 1997, the Company had cash provided by
operating activities in the amount of $66,191 as compared to $159,282 for the
nine months ended March 31, 1996. This decrease was primarily attributable to
the decrease in net income, retirement contribution payable, accounts payable
and an increase in deferred tax assets partially offset by an increase in
deferred revenues and accrued expenses.
During the nine months ended March 31, 1997, the Company used cash for investing
activities in the amount of $80,382 as compared to cash used for investing
activities of $16,582 for the nine months ended March 31, 1996. The cash was
used for the purchase of property and equipment.
During the nine months ended March 31, 1997, the Company had net cash provided
by financing activities of $5,687,952 compared to net cash used in financing
activities of $57,500 for the nine months ended March 31, 1996. In the 1997
period the Company received net proceeds of approximately $5,588,000 from the
issuance of 1,224,333 shares of common stock, 1,146,000 of which were included
in the Company's underwritten initial public offering and related over allotment
option exercise, 78,333 of which were included in a private placement, and
$100,000 from a bank loan by Republic National Bank to one of the Company's
subsidiaries. The loan is payable on August 1, 1997 and provides for an interest
rate of 1.5% above the bank's prime rate. In 1996, the Company used $57,500 to
repay stockholders' loans.
During the next six to twelve months, the Company will be investing
approximately $600,000 in expanding its core businesses through increased
marketing and promotion efforts. This amount includes increasing the size of the
Company's marketing staff and certain equipment and computer purchases. In
addition, the Company intends to consolidate its New York operations in a new
facility, before the end of the fiscal year. The Company is currently
negotiating a ten year lease for approximately 16,500 square feet at a rental of
approximately $18,000 per month. Such relocation will include the construction
of recording studios. The ultimate costs of this relocation and construction are
not currently known. The Company has begun to expend funds for the establishment
of Velocity. It is contemplated that the expenditures required for the
development of Velocity and its anticipated releases can be met from the funds
allocated for this purpose in the initial public offering.
The Company believes that cash generated from the proceeds of the initial public
offering and cash from operations will be sufficient to meet the Company's
operating capital requirements for at least the next 12 months. There can be no
assurance, however, that the Company will not require additional financing
before the end of such 12 month period or thereafter. A significant factor which
will affect the Company's need for additional financing is the Company's
acquisition program. The establishment of additional record labels or other
business in the future could also require the Company to obtain additional
capital. If the Company were required to obtain additional capital in the
future, there can be no assurance that sources of capital would be available or
terms acceptable or favorable to the Company, or at all.
Inflation
The impact of inflation on the Company's operating results has been
insignificant 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 the Company's business will not be affected by
inflation in the future.
15
<PAGE>
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Employment Agreement Amendment, dated as of May 7, 1997
27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter ended March 31, 1997.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PARADISE MUSIC & ENTERTAINMENT, INC.
By:
----------------------------------
John Loeffler, President and
Principal Financial Officer
Date: May 12, 1997
AMENDMENT TO THE BONUS PLAN
May 7, 1997
PARADISE MUSIC & ENTERTAINMENT, INC.
Reference is made to the agreement dated March 10, 1997, among Brian Doyle,
Richard J. Flynn, John R. Loeffler and Jonathon C. Small relating to the accrual
of bonuses under the existing bonus plan of Paradise Music & Entertainment, Inc.
(the "Amendment").
The undersigned hereby agree that the Amendment be, and hereby is,
terminated ab initio with the effect that the Amendment shall be of no force and
effect from its inception.
This agreement may be executed in one or more counterparts, all of which
taken together shall constitute one and the same instrument.
Agreed and accepted as of the date first written above.
PARADISE MUSIC & ENTERTAINMENT, INC.
By:
---------------------------------------
---------------------------------------
Brian Doyle
---------------------------------------
Richard J. Flynn
---------------------------------------
John R. Loeffler
---------------------------------------
Jonathon C. Small
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Paradise Music + Entertaiment, Inc.
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 5,756,574
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0
<COMMON> 22,263
<OTHER-SE> 5,379,836
<TOTAL-LIABILITY-AND-EQUITY> 6,351,757
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<OTHER-EXPENSES> 1,920,544
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<INCOME-PRETAX> (633,833)
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