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 December 31, 1996
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 |_| No |X| (The Company has
been subject to such filing requirements since its initial public offering on
January 22, 1997, a period of less than 90 days.)
At March 11, 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
December 31, 1996 (Unaudited) and June 30, 1996 3
Consolidated Statements of Operations for the
Six and Three Months Ended December 31, 1996
and 1995 (Unaudited) 4
Consolidated Statements of Stockholders' Equity
for the Six Months Ended December 31, 1996 (Unaudited) 5
Consolidated Statements of Cash Flows for the
Six Months Ended December 31, 1996 and 1995 (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 12-16
PART II OTHER INFORMATION
- ------- -----------------
Item 2. Changes in Securities 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature Page 18
2
<PAGE>
PART I - FINANCIAL INFORMATION
- ------ ---------------------
ITEM 1 - FINANCIAL STATEMENTS
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
1996 1996
------------ ---------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 236,692 $ 82,813
Accounts receivable 170,873 129,715
Prepaid costs 9,000 17,255
Other current assets 1,946
--------- ---------
Total current assets 418,511 229,783
--------- ---------
PROPERTY AND EQUIPMENT, less accumulated
depreciation and amortization 105,326 81,154
--------- ---------
OTHER ASSETS:
Deferred registration costs 182,307 5,000
Security deposits 14,072 14,072
--------- ---------
196,379 19,072
--------- ---------
$ 720,216 $ 330,009
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable, bank $ 100,000 $ --
Accrued compensation 53,481
Deferred revenues 39,960 49,612
Accounts payable 79,916 81,854
Retirement plan contributions payable 30,000
Accrued expenses and other current liabilities 4,865 28,563
--------- ---------
Total current liabilities 278,222 190,029
--------- ---------
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 1,080,333 and
998,000 shares, respectively 10,803 9,980
Capital in excess of par value 426,016 12,090
Retained earnings 6,425 119,160
Common stock subscription receivable (1,250) (1,250)
--------- ---------
Total stockholders' equity 441,994 139,980
--------- ---------
$ 720,216 $ 330,009
========= =========
See accompanying notes to consolidated financial statements
3
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended Three Months Ended
December 31, December 31,
----------------------- ----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
REVENUES $2,275,356 $2,049,669 $1,187,368 $ 900,009
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Cost of sales 1,330,987 1,095,014 771,286 527,726
Selling, general and
administrative 861,242 859,986 406,082 472,703
---------- ---------- ---------- ----------
Total operating expenses 2,192,229 1,955,000 1,177,368 1,000,429
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME
TAXES 83,127 94,669 10,000 (100,420)
INCOME TAXES 3,700 15,000 2,500 6,000
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 79,427 $ 79,669 $ 7,500 $ (106,420)
========== ========== ========== ==========
INCOME (LOSS) PER COMMON SHARE $ .08 $ .08 $ .01 $ (.10)
========== ========== ========== ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING 1,039,167 1,039,167 1,039,167 1,039,167
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
4
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Six Months Ended December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Common
Common Stock Capital in Stock
----------------- Excess of Retained Subscription
Shares Amount Par Value Earnings 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 78,333 783 209,804
Stock issued in exchange
for services 4,000 40 11,960
Net income 79,427
--------- ------- -------- --------- ---------
BALANCES, December 31, 1996 1,080,333 $10,803 $426,016 $ 6,425 $ (1,250)
========= ======= ======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
December 31,
-------------------
1996 1995
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 79,427 $ 79,669
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 12,502 6,500
Increase (decrease) in cash attributable
to changes in assets and liabilities:
Accounts receivable (41,158) 123,578
Prepaid costs 8,255 66,444
Other current assets (1,946) (37,742)
Accrued compensation 53,481
Deferred revenues (9,652) 67,878
Accounts payable (1,938) (178,688)
Retirement contributions payable (30,000) (15,000)
Accrued expenses and other current liabilities (23,698) (26,304)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 45,273 86,335
-------- --------
CASH FLOWS FROM AND NET CASH USED IN
INVESTING ACTIVITIES, payments for property
and equipment (36,674) (16,538)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments for deferred registration costs (165,307)
Proceeds from note payable, bank 100,000
Proceeds from issuance of common stock, net
of expenses 210,587
Payments for stockholders' loans (82,500)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 145,280 (82,500)
-------- --------
NET INCREASE (DECREASE) IN CASH 153,879 (12,703)
CASH, beginning of period 82,813 106,270
-------- --------
CASH, end of period $236,692 $ 93,567
======== ========
See accompanying notes to consolidated financial statements.
6
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
Six Months Ended
December 31,
----------------
1996 1995
------ ------
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 $ --
======== ======
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.
On January 22, 1997, the Company completed its initial public offering
(see Note 7).
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. The Company's initial public offering was
completed in January 1997 (see Note 7).
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 and All Access. All
significant intercompany transactions and balances have been
eliminated in consolidation.
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.
8
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Deferred Registration Costs - The Company has incurred costs relating
to its initial public offering (IPO). These costs have been charged to
capital in excess of par value (see Note 7).
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
December 31, 1996 and for the six and three months ended December 31,
1996 and 1995 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 - INCOME TAXES (CREDITS):
The provision for income taxes for the six and three months ended
December 31, 1996 and 1995 differ from the statutory rates primarily
due to the subchapter "S" corporation status of two of the Company's
subsidiaries. On October 9, 1996, two subsidiaries ceased to be "S"
corporations. The following table reconciles the computed income tax
expense (credit) to the provision for income taxes:
Six Months Ended Three Months Ended
December 31, December 31,
---------------- ------------------
1996 1995 1996 1995
------ ------ ------ ------
Computed tax expense (credit)
at federal statutory rate 34.00 % 34.00 % 34.00 % (34.00)%
State provision less federal
benefit 5.10 5.10 5.10 (5.10)
Surtax and other (20.00) (13.70) (14.10) 19.80
Non-taxable (income) loss
resulting from Subchapter
"S" election (14.60) (9.60) 25.30
------ ------ ------ ------
4.50 % 15.80 % 25.00 % 6.00%
====== ====== ====== ======
9
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 - 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. A limitation has been adopted with respect
to the payment of all bonuses that no bonuses are payable under any of
these plans, even if otherwise earned by their terms, unless, after
accrual, the pre-tax profit of the Company in any fiscal quarter is at
least $10,000. Any reduction in bonuses which arise as a result of
this limitation through the end of the quarterly period ending June
30, 1998 may be taken by the Executives as interest free advances. All
such advances must be repaid in full by the end of the fiscal year
following the receipt of the advance. At December 31, 1996, no
advances have been made to the Executives and $53,481 of bonuses and
compensation have been accrued under the bonus plans and employment
agreements.
NOTE 6 - ECONOMIC DEPENDENCY:
Approximately $135,000 and $177,000 of commercial production revenues
for the six months ended December 31, 1996 and 1995, respectively, are
derived from one advertising agency. For the three months ended
December 31, 1996 and 1995 approximately $36,000 and $36,000 of
commercial production revenues were derived from the same advertising
agency, respectively. Approximately $193,000 and $483,000 of musical
talent management revenues for the six months ended December 31, 1996
and 1995, respectively, are derived from three and two musical
artists. For the three months ended December 31, 1995 approximately
$167,000 of musical talent management revenues are derived from two
musical artists. For the six months ended December 31, 1996 and 1995,
approximately $160,000 and $310,000, respectively, of video production
revenues were derived from one artist. For the three months ended
December 31, 1996 and 1995 approximately $630,000 and $450,000 of
video production revenues were derived from seven and three artists,
respectively. At December 31, 1996, approximately $156,000 was owed in
the aggregate to the Company from these artists and customers.
10
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 - SUBSEQUENT EVENTS:
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 after expenses resulting from these sales were
approximately $5,500,000. After giving effect to these sales, the
Company had 2,226,333 shares outstanding plus an additional 573,000
shares reserved for issuance upon the exercise of the warrants
included in the units.
This transaction significantly improved the Company's liquidity and
capital resources from that presented in the accompanying financial
statements. Pro forma condensed information reflecting this
transaction as though it had occurred at December 31, 1996 is
presented as follows:
December 31, 1996
-----------------
Pro Forma Actual
---------- ----------
Cash $5,737,000 $ 237,000
---------- ----------
Working capital $5,640,000 $ 140,000
---------- ----------
Shareholders equity $5,760,000 $ 442,000
---------- ----------
Total assets $6,038,000 $ 720,000
---------- ----------
NOTE 8 - FINANCIAL DATA BY SUBSIDIARY:
The following financial data is presented for the Company's
subsidiaries:
<TABLE>
<CAPTION>
Six Months Ended December 31, Three Months Ended December 31,
1996 1996
------------------------------- -------------------------------
All Picture All Picture
Rave Access Vision Rave Access Vision
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total revenues $ 410,732 $ 393,371 $1,471,253 $ 231,357 $ 118,451 $ 837,560
Net income (loss) 60,364 (17,528) 45,591 32,976 (57,572) 41,096
Six Months Ended December 31, Three Months Ended December 31,
1995 1995
------------------------------- --------------------------------
All Picture All Picture
Rave Access Vision Rave Access Vision
--------- --------- --------- --------- --------- ---------
Total revenues $ 390,054 $ 513,349 $1,146,266 $ 214,434 $ 193,739 $ 491,836
Net income (loss) (24,278) 73,575 30,372 (33,692) (81,396) 8,668
</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.
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 its three wholly-owned
subsidiaries (Rave, Picture Vision, and All Access), establish its record label,
and implement its acquisition program which will initially target acquisitions
of 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.
12
<PAGE>
Forward Looking Statements
Except for the historical information contained herein, this quarterly Report on
Form 10-QSB may contain forward-looking statements within 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. 333-13941), 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.
Six Months Ended December 31, 1996 Compared to
Six Months Ended December 31, 1995
Commercial music production revenues increased to $410,732 for the six months
ended December 31, 1996 from $390,054 for the six months ended December 31,
1995, an increase of $20,678 or 5.3% while commercial music production costs of
sales decreased to $139,856 for the six months ended December 31, 1996 from
$175,772 for the six months ended December 31, 1995, a decrease of $35,916 or
20.4%. 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 has 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
65.9% for the six months ended December 31, 1996 from 54.9% for the six months
ended December 31, 1995.
Video production revenues increased to $1,471,253 for the six months ended
December 31, 1996 from $1,146,266 for the six months ended December 31, 1995, an
increase of $324,987 or 28.4%, while video production costs of sales increased
to $1,191,131 for the six months ended December 31, 1996 from $928,299 for the
six months ended December 31, 1995, an increase of $262,832 of 28.3% which is in
proportion to the increase in sales.
Gross profit as a percentage of video production revenues remained at 19% for
the six months ended December 1996 and 1995. The average gross profit earned on
the Company's video productions in each period cannot be predicted and varies
from period to period.
13
<PAGE>
Music artist management revenues decreased to $393,371 for the six months ended
December 31, 1996 from $513,349 for the six months ended December 31, 1995, a
decrease of $119,978 or 23.4%. The decrease was 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 $861,242
for the six months ended December 31, 1996 from $859,986 for the six months
ended December 31, 1995, an increase of $1,256.
The Company's income before income taxes decreased to $83,127 for the six months
ended December 31, 1996 from $94,669 for the six months ended December 31, 1995,
a decrease of $11,542 or 12.2%. The decrease was primarily due to a decrease in
the Company's music artist management revenues. Such revenues have no cost of
sales associated with them.
Three Months Ended December 31, 1996 Compared to
Three Months Ended December 31, 1995
Commercial music production revenues increased to $231,357 for the three months
ended December 31, 1996 from $214,434 for the three months ended December 31,
1995, an increase of $16,923 or 7.9% while commercial music production costs of
sales decreased to $75,049 for the three months ended December 31, 1996 from
$103,504 for the three months ended December 31, 1995, a decrease of $28,455 or
27.5%. The increase in revenues was primarily due to an increase of residual and
royalty income. 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 67.6% for the three months ended December 31, 1996 from 51.7% for the three
months ended December 31, 1995. The increase was primarily attributable to an
approximately 22% increase of royalty and residual income received during the
three months ended December 31, 1996, which royalty and residual income has no
cost of sales associated with it.
Video production revenues increased to $837,560 for the three months ended
December 31, 1996 from $491,836 for the three months ended December 31, 1995, an
increase of $345,724 or 70.3%. Video production revenue was greater in 1996 than
in 1995 primarily due to an increase in the number of video's produced.
Cost of sales for video productions increased to $696,237 for the three months
ended December 31, 1996 from $433,279 for the three months ended December 31,
1995, an increase of $262,958 or 60.7%. The increase was primarily attributable
to the increase in video production revenues.
Gross profit as a percentage of video production revenues increased 16.9% for
the three months ended December 31, 1996 from 11.9% for the three months ended
December 31, 1995.
14
<PAGE>
Music artist management revenues decreased to $118,451 for the three months
ended December 31, 1996 from $193,739 for the three months ended December 31,
1995, a decrease of $75,288 or 38.9%. The decrease was attributable to a
decrease in the number of concerts performed by two artists. The Company's music
artist management operations has no cost of sales associated with it.
The Company's selling, general and administrative expenses decreased to $406,082
for the three months ended December 31, 1996 from $472,703 for the three months
ended December 31, 1995, a decrease of $66,621 or 14.1%. The decrease was
primarily attributable to a decrease in the Company's music artist management
revenues. Such revenues typically have high selling, general and administrative
expenses.
The Company's income before income taxes increased to $10,000 for the three
months ended December 31, 1996 from a loss before income taxes of $100,420 for
the three months ended December 31, 1995. The increase was primarily
attributable to better operating results from two of the Company's subsidiaries.
Liquidity and Capital Resources
During the six months ended December 31, 1996, the Company had cash provided by
operating activities in the amount of $45,273 as compared to $86,335 for the six
months ended December 31, 1995. This decrease was primarily attributable to the
decrease in net income, retirement contribution payable and accrued expenses and
other current liabilities and an increase in accounts receivable and deferred
tax assets partially offset by an increase in accrued bonus and payroll payable.
During the six months ended December 31, 1996, the Company used cash for
investing activities in the amount of $36,674 as compared to cash used for
investing activities of $16,538 for the six months ended December 31, 1995. The
cash was used for the purchase of property and equipment.
During the six months ended December 31, 1996, the Company had net cash provided
by financing activities of $145,280 compared to net cash used in financing
activities of $82,500 for the six months ended December 31, 1995. In the 1996
period the Company received net proceeds of approximately $210,000 from the sale
of 78,333 shares of common stock and $100,000 from a bank loan by Republic
National Bank to one of its subsidiaries, guaranteed by the Company. The loan is
payable on August 1, 1997 and provides for an interest rate of 1.5% above the
bank's prime rate. The Company used approximately $165,000 for deferred
registration costs. In 1995, the Company used approximately $82,000 for
stockholder loans.
In January and February 1997, the Company received in the aggregate
approximately $5,500,000 in net proceeds from the sale of 1,146,000 units in the
Company's underwritten initial public offering and related over allotment option
exercise. Each unit consisted of one share of common stock and one redeemable
common stock purchase warrant with two warrants entitling the holder to purchase
one share of common stock at $7.20 per share.
15
<PAGE>
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 which has yet to be located. 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 its record label. It is contemplated that the expenditures
required for the development of the record label 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, cash from operations and current cash balances 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 will 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.
16
<PAGE>
PART II OTHER INFORMATION
- ------- -----------------
ITEM 2. CHANGES IN SECURITIES
On October 9, 1996, the Company entered into an Exchange Agreement, pursuant to
which it issued an aggregate of 873,000 shares of common stock to John Loeffler,
Jon Small, Brian Doyle and Richard Flynn in exchange for all of the outstanding
common stock of each of John Loeffler Music, Inc. d/b/a/ Rave Music and
Entertainment, Picture Vision, Inc. and All Access Entertainment Management
Group, Inc., each of which is now a wholly-owned operating subsidiary of the
Company. The Company claimed an exemption from the registration requirements of
the Securities Act of 1933, as amended (the "Securities Act") by relying on
Section 4(2) of the Securities Act, which allows for an exemption for
transactions by an issuer not involving any public offering, and the rules and
regulations promulgated thereunder. The Company's basis for this exemption was
the fact that the individuals receiving shares of common stock were the
principals of each of the Company's constituent corporations and thus had full
access to all information regarding the Company.
On October 9, 1996, the Company issued 78,333 shares of its common stock to 11
individuals in a private placement (the "Private Placement") for $3.00 per
share. There were no underwriters involved in the Private Placement. The common
stock in the Private Placement was issued only to accredited investors, as
defined in the Securities Act. The aggregate offering price of the Private
Placement was $210,000. The Company claimed an exemption from the registration
requirements of the Securities Act by relying on Section 4(2) of the Securities
Act, which allows for an exemption for transactions by an issuer not involving
any public offering, and Rule 506 of Regulation D promulgated thereunder.
On October 9, 1996, the Company issued 4,000 shares of common stock to one
individual for professional service rendered. The Company claimed an exemption
from the registration requirements of the Securities Act by relying on Section
4(2) of the Securities Act, which allows for an exemption for transactions by an
issuer not involving any public offering, and the rules and regulations
promulgated thereunder. The Company's basis for this exemption was the fact that
this individual is an attorney who represented one of the Company's operating
subsidiaries and who had access to all information regarding the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amendment to bonus plan, dated as of March 10, 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 December 31, 1996.
17
<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: /s/ John Loeffler
--------------------------------
John Loeffler, President
Date: March 14, 1997
18
March 10, 1997
PARADISE MUSIC & ENTERTAINMENT, INC.
Amendment to the Bonus Plan
Notwithstanding anything to the contrary contained in the Company's
existing bonus plan, bonuses will be accrued and become payable to Messrs.
Loeffler, Small, Flynn and Doyle (the "Principal Officers") only to the extent
that in any interim period the Company's financial statements prepared in
accordance with GAAP reflect a minimum pre-tax profit of $10,000 per quarter
(the "Minimum Profit"). To the extent this restriction limits the amount of the
bonuses which would have been accrued or paid to the Principal Officers, their
bonuses will be calculated as provided in the existing bonus plan and then
prorated by whatever percentage is necessary to maintain the Company's Minimum
Profit. At the end of any fiscal year the calculation of Minimum Profit will be
cumulative such that the Principal Officers will be entitled following the end
of the year to the maximum amount of bonuses that they would have otherwise been
entitled to for the year such that the Minimum Profit was attained by the
Company in each quarter.
Any reduction in bonuses which comes as a result of this amendment through
the end of the quarterly period ending on June 30, 1998 may be taken by the
Principal Officers as non-interest bearing advances. However, all such advances
must be repaid in full by the end of the fiscal year following the receipt by a
Principal Officer of any such advances.
Agreed and accepted as of the date first written above:
/s/ Brian Doyle
-------------------------
Brian Doyle
/s/ Richard J. Flynn
-------------------------
Richard J. Flynn
_________________________
John R. Loeffler
_________________________
Jonathan C. Small
<PAGE>
March 10, 1997
PARADISE MUSIC & ENTERTAINMENT, INC.
Amendment to the Bonus Plan
Notwithstanding anything to the contrary contained in the Company's
existing bonus plan, bonuses will be accrued and become payable to Messrs.
Loeffler, Small, Flynn and Doyle (the "Principal Officers") only to the extent
that in any interim period the Company's financial statements prepared in
accordance with GAAP reflect a minimum pre-tax profit of $10,000 per quarter
(the "Minimum Profit"). To the extent this restriction limits the amount of the
bonuses which would have been accrued or paid to the Principal Officers, their
bonuses will be calculated as provided in the existing bonus plan and then
prorated by whatever percentage is necessary to maintain the Company's Minimum
Profit. At the end of any fiscal year the calculation of Minimum Profit will be
cumulative such that the Principal Officers will be entitled following the end
of the year to the maximum amount of bonuses that they would have otherwise been
entitled to for the year such that the Minimum Profit was attained by the
Company in each quarter.
Any reduction in bonuses which comes as a result of this amendment through
the end of the quarterly period ending on June 30, 1998 may be taken by the
Principal Officers as non-interest bearing advances. However, all such advances
must be repaid in full by the end of the fiscal year following the receipt by a
Principal Officer of any such advances.
Agreed and accepted as of the date first written above:
_________________________
Brian Doyle
_________________________
Richard J. Flynn
/s/ John R. Loeffler
-------------------------
John R. Loeffler
/s/ Jonathan C. Small
-------------------------
Jonathan C. Small
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 236,692
<SECURITIES> 0
<RECEIVABLES> 170,873
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 418,511
<PP&E> 262,243
<DEPRECIATION> 156,917
<TOTAL-ASSETS> 720,216
<CURRENT-LIABILITIES> 278,222
<BONDS> 100,000
0
0
<COMMON> 10,803
<OTHER-SE> 431,191
<TOTAL-LIABILITY-AND-EQUITY> 720,216
<SALES> 2,275,356
<TOTAL-REVENUES> 2,275,356
<CGS> 1,330,987
<TOTAL-COSTS> 1,330,987
<OTHER-EXPENSES> 861,242
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 83,127
<INCOME-TAX> 3,700
<INCOME-CONTINUING> 79,427
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 79,429
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
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