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 September 30, 1998
-------------------------------------------------
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.)
53 West 23rd Street, New York, New York 10010
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(Issuer's telephone number (212) 590-2100
-----------------------------------------------------
420 West 45th Street, New York, New York 10036
- --------------------------------------------------------------------------------
(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 November 12, 1998, the Issuer had 2,430,867 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
September 30, 1998 (Unaudited) and June 30, 1998 3
Consolidated Statements of Operations for the
Three Months Ended September 30, 1998
and 1997 (Unaudited) 4
Consolidated Statements of Stockholders' Equity
for the Three Months Ended September 30, 1998 (Unaudited) 5
Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 1998 and 1997 (Unaudited) 6-7
Notes to Consolidated Financial Statements (Unaudited) 8-13
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 14-16
PART II OTHER INFORMATION
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
September 30, June 30,
1998 1998
------------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 856,791 $ 863,860
Restricted cash 485,171 464,603
Accounts receivable, less reserve for returns
of $221,957 at September 30, 1998 and $271,188
at June 30, 1998 620,684 806,586
Prepaid production costs 221,541 52,882
Prepaid record master costs 187,500 93,750
Other current assets 93,994 129,985
----------- -----------
Total current assets 2,465,681 2,411,666
PROPERTY AND EQUIPMENT, net 1,225,789 1,262,465
----------- -----------
OTHER ASSETS
Note receivable 70,878 70,878
Restricted cash 350,000 350,000
Other 25,827 26,826
----------- -----------
446,705 447,704
----------- -----------
$ 4,138,175 $ 4,121,835
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 137,920 $ --
Deferred revenues 743,358 266,636
Accrued payroll and related expenses 181,458 152,599
Accrued expenses and other current liabilities 1,594,209 1,754,733
----------- -----------
Total current liabilities 2,656,945 2,173,968
----------- -----------
COMMITMENTS AND CONTINGENCIES
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 2,407,200 and
2,245,143 shares, respectively 24,072 22,451
Capital in excess of par value 6,167,361 5,861,499
Accumulated deficit (4,710,203) (3,936,083)
----------- -----------
Total stockholders' equity 1,481,230 1,947,867
----------- -----------
$ 4,138,175 $ 4,121,835
=========== ===========
See accompanying notes to consolidated financial statements.
3
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
September 30,
--------------------------
1998 1997
----------- -----------
REVENUES $ 1,844,466 $ 4,187,985
----------- -----------
OPERATING EXPENSES:
Cost of sales 655,003 3,179,684
Marketing, selling, general and administrative 1,970,166 1,282,883
----------- -----------
Total operating expenses 2,625,169 4,462,487
----------- -----------
OPERATING LOSS (780,703) (274,502)
INTEREST INCOME 16,583 58,614
----------- -----------
LOSS BEFORE INCOME TAX PROVISION (764,120) (215,888)
INCOME TAX PROVISION 10,000 13,000
----------- -----------
NET LOSS $ (774,120) $ (228,888)
=========== ===========
BASIC AND DILUTED LOSS PER COMMON SHARE $ (.34) $ (.10)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
USED IN COMPUTING BASIC AND DILUTED
LOSS PER COMMON SHARE 2,292,598 2,228,333
=========== ===========
See accompanying notes to consolidated financial statements.
4
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three Months Ended September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Capital in
------------------------ Excess of Accumulated
Shares Amount Par Value Deficit
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCES, June 30, 1998 2,245,143 $ 22,451 $ 5,861,499 $(3,936,083)
SALES OF COMMON STOCK 66,249 663 187,242
COMMON STOCK, issued to outside
directors and consultants 95,808 958 113,652
WARRANTS GRANTED FOR SERVICES 4,968
NET LOSS (774,120)
--------- ----------- ----------- -----------
BALANCES, September 30, 1998 2,407,200 $ 24,072 $ 6,167,361 $(4,710,203)
========= =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (774,120) $ (228,888)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 52,503 56,496
Expenses recorded in connection with warrants granted 4,968 8,012
Provision for returns 67,500 902,000
Common stock issued to outside directors and consultants
(for services) 114,610 4,500
Restricted cash (20,568)
Increase (decrease) in cash attributable
to changes in assets and liabilities:
Accounts receivable 118,402 (1,561,562)
Accrued interest receivable 6,629
Prepaid production costs (168,659) 116,357
Prepaid record master costs (93,750) (80,307)
Other current assets 35,991 13,925
Other (19,000)
Deferred revenues 476,722 (318,555)
Accrued payroll and related expenses 28,859 (204,941)
Accrued expenses and other current liabilities (70,524) 410,822
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (228,066) (894,512)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (14,828) (113,839)
Construction in progress (252,788)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (14,828) (366,627)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock 187,905 (1,667)
Proceeds from notes payable 47,920
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 235,825 (1,667)
----------- -----------
NET DECREASE IN CASH AND EQUIVALENTS (7,069) (1,262,806)
CASH AND EQUIVALENTS, beginning of period 863,860 5,086,118
----------- -----------
CASH AND EQUIVALENTS, end of period $ 856,791 $ 3,823,312
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
Three Months Ended
September 30,
--------------------
1998 1997
--------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION,
cash paid during the period for income taxes $ 5,430 $ 10,010
========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Stock issued in exchange for services $ 114,610 $ 4,500
========= =========
Warrants expensed $ 4,968 $ 8,012
========= =========
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 for a fair presentation of results of operations, financial
condition, and cash flows 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 consolidated financial statements and the notes thereto included
in the Company's June 30, 1998 Form 10-KSB.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation - The consolidated financial statements
include the accounts of Paradise and its wholly-owned subsidiaries,
Rave, Picture Vision, All Access and Push. 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 which relates to
musical compositions used in television series are recognized when
earned and the amount can be reasonably estimated. All other royalty
and residual income is recognized when received as it cannot be
reasonably estimated. 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. In accordance with industry custom, the Company currently
operates its music artist management business based on oral agreements
and purchase orders with certain 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 revenues
are recognized when records are shipped and costs which are directly
related to production, manufacture and sale of records are capitalized
as recoverable from future revenues and amortized over the expected
life of the records, to the extent there is reasonable assurance that
these costs will be recoverable from future sales. The Company is
accounting for these costs in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 50 "Financial Reporting in the
Record and Music Industry."
8
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Cash and Cash Equivalents - Cash and cash equivalents consist of cash
on hand and a highly liquid investment account with maturity of less
than three months from the purchase date, and at times exceeds the
Federal Deposit Insurance Corporation Coverage of $100,000 per
institution. Management regularly monitors the financial condition of
the financial institutions in order to keep the potential risk to a
minimum.
Loss Per Common Share - Effective December 31, 1997, the Company
adopted SFAS No. 128, "Earnings Per Share". SFAS No. 128 requires dual
presentation of basic and diluted earnings per share for all periods
presented. Basic earnings per share excludes dilution and is computed
by dividing income (loss) available to common shareholders by the
weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the entity. Prior
period loss information has been restated as required by SFAS No. 128.
The restatement had no effect on previously reported loss per share.
Use of Estimates - The preparation of consolidated financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
NOTE 3 - LIQUIDITY:
The Company's consolidated financial statements have been prepared on
the basis that it is a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the
normal course of business. The Company has incurred net losses of
approximately $774,120 and $228,888 for the three months ended
September 30, 1998 and 1997, respectively, and believes it will
require working capital to continue to fund its operations. The
Company is in the process of seeking additional equity or debt
financing. Continuation of the Company as a going concern is dependent
on its ability to resolve its liquidity problem and attain future
profitable operations. The financial statements do not include any
adjustments that might result from this uncertainty (see Note 7).
9
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - COMMITMENTS AND CONTINGENCIES:
In October 1996, the Company entered into employment agreements, as
amended (the "Executive Agreements"), with Messrs. Loeffler, Small,
Doyle and Flynn (the "Executives"). Each of the Executive Agreements
was for a period of three years, and provided for annual base salaries
of $150,000 plus bonuses.
Effective July 1, 1997, these Executive Agreements were replaced by
New Agreements (the "New Agreements"). Each of the New Agreements is
for a period of two years and provides for annual salaries between
$300,000 and $325,000. If the subsidiary, which an Executive manages,
reports a pretax loss, such Executive's salary was to be reduced, but
not below $150,000 per annum, to the extent necessary to reflect a
pretax breakeven and such reduction was to be recorded as an advance
with interest payable at prime plus 1% and was to be payable over
three years. In addition, such Executive's salary was to be reduced
for the subsequent year by the amount of such reduction but not below
$150,000. In fiscal 1998, based on the performance of one of the
Company's subsidiaries approximately $150,000 of compensation should
have been recorded as advances pursuant to the Executive Agreements
but remained as compensation following approval by the Compensation
Committee. Pursuant to these New Agreements, two bonus plans have been
established for the benefit of the Executives based upon attainment of
certain financial results.
In September 1998, each of the Executives entered into a letter
agreement (the "Employment Modification Agreement") with the Company
which amended certain provisions of the New Agreements. In the case of
Messrs. Doyle and Flynn, the Employment Modification Agreement is
subject to approval by the Compensation Committee of the Board of
Directors of a definitive budget for fiscal year 1999 for Push. In
consideration of reduced base salaries (which were reduced in the
aggregate of $300,000), other compensation concessions and more
stringent non-compete terms reflected in the Employment Modification
Agreement (and, in the case of Mr. Doyle, conditioned upon approval of
the Push budget for year 1999), the Compensation Committee of the
Board of Directors treated all monies paid to the executives in fiscal
year 1998 and the three months ended September 30, 1998 as
compensation, as opposed to treating any portion thereof as "advances"
subject to recoupment. In recognition of Picture Vision's
profitability for fiscal year 1998 and the other achievements of Mr.
Small, the Compensation Committee also awarded Mr. Small a bonus of
$150,000 for fiscal year 1998, which bonus was paid in July of 1998.
According to its terms, the Employment Modification Agreement expired
on October 30, 1998 since initial funding under the Pines Investment
Agreement (as described in Note 7) has not occurred. Messrs. Loeffler,
Doyle and Flynn have agreed to abide by the reduced salary level under
the Employment Modification Agreement through December 15, 1998 or
until new employment agreements can be executed.
10
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - COMMITMENTS AND CONTINGENCIES (CONTINUED):
On October 1, 1997, the Company entered into an employment agreement
(the "Employment Agreement") with an individual who manages the
Company's Los Angeles commercial music division. The Employment
Agreement provides for the individual to receive as compensation an
amount equal to 75% of the first $350,000 of the division's gross
margin and 15% of the division's gross margin above $350,000. In
addition, this individual has been granted options (outside the option
plan) to purchase 100,000 shares of the Company's common stock at
$4.75 per share which vest at various times during the term of the
Employment Agreement. For the three months ended September 30, 1998,
approximately $34,000 has been expensed under this agreement. In
addition, no options have vested as of September 30, 1998. The Company
is in the process of renegotiating the terms of the Employment
Agreement. The Company will not be required to provide any funding for
this operation under the proposed terms. In addition, this operation
has changed its name to Blue Music and Sound Design and operates
independently from the Company's New York commercial music production
operation as a wholly owned subsidiary of the Company. Pending
completion of a formal agreement, the parties are operating as if the
agreement had been adopted except that compensation has been accrued
under the prior existing arrangement.
For the three months ended September 30, 1998 and 1997, approximately
$403,000 and $306,000 has been expensed under the bonus plans and
Employment, Executive and New Agreements and are included in
marketing, selling, general and administrative expenses.
NOTE 5 - STOCKHOLDERS' EQUITY:
In late July of 1998, at the Company's request, all six members of the
Company's Board of Directors sold in the aggregate approximately
105,000 shares of the Company's Common Stock in one or more open
market transactions at a price per share of $2.875 to provide
financing for the Company. The Company's two outside directors lent
the proceeds of such open market sales (an aggregate of approximately
$48,000) to the Company pursuant to convertible promissory notes that
would allow the holders of such notes to convert the outstanding
principal and interest accrued thereunder into shares of the Company's
Common Stock at a price per share equal to $2.875. Three of the
Company's Board members took the proceeds of their open market sales
(approximately $188,000) and reinvested them into the Company in
exchange for restricted shares of Common Stock at a purchase price per
share of $2.875. One of the Company's Board members, Mr. Loeffler,
used the proceeds of his open market sales to repay approximately
$58,000 of a loan that had been advanced to him by the Company. In
all, the Company received approximately $302,000 in gross proceeds
from such transactions.
11
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 - ECONOMIC DEPENDENCY:
Approximately $73,000 and $67,000 of commercial production revenues
for the three months ended September 30, 1998 and 1997, respectively,
were derived from one advertising agency. Approximately $232,000 and
$297,000 of musical talent management revenues for the three months
ended September 30, 1998 and 1997, respectively, were derived from one
and two musical artists, respectively. For the three months ended
September 30, 1998 and 1997 approximately $402,000 and $2,575,000 of
video production revenues were derived from three artists and one
artist, respectively. Approximately $257,000 and $386,000 of record
label revenues were derived from one customer for the three months
ended September 30, 1998 and September 30, 1997, respectively. At
September 30, 1998, approximately $27,000 was owed in the aggregate to
the Company from these artists and customers.
NOTE 7 - SUBSEQUENT EVENTS:
In September 1998, the Company entered into a non-exclusive financial
advisory relationship with CCF Capital Group, Inc. ("CCF Capital")
pursuant to which, among other things, CCF Capital would receive a
monthly retainer of $6,500 per month and certain success fees and
bonuses for assisting the Company in raising monies through the sale
of debt, equity or a combination of the two. Upon closing of the Pines
Investment Agreement, CCF Capital would have received 100,000 shares
of the Company's common stock in connection with the rendering of its
financial advisory services and would have earned a success fee of
$75,000. As of November 17, 1998, the Pines Investment Agreement had
not closed and the Company declared the Pines Investment Agreement and
the CCF agreement to have been breached. The Company has retained the
sum of $50,000 received from Pines as partial damages and has reserved
its rights to assert additional damages. The aforementioned monthly
retainer and related shares have not been remitted to CCF Capital. The
Company is in advanced discussions for certain possible financings.
There can be no assurance that any financing will be completed and
unless adequate financing can be obtained the Company will be forced
to substantially curtail its operating activities, downsize and
possibly eliminate its most costly operations, especially its newly
established record label.
The Company entered into an investment agreement (the "Pines
Investment Agreement") with Pines International Resorts, Inc.
("Pines") on October 6, 1998 which was amended on October 14, 1998
subject to approval by the Company based on the receipt of funds under
which Pines agreed to purchase 668,000 shares of the Company's common
stock in consideration for payment to the Company of $775,000. Pines
failed to meet its obligations and the Company has retained $50,000
received from Pines as partial damages.
12
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 - SUBSEQUENT EVENTS (CONTINUED):
The Company is also pursuing other sources of equity investments to
meet its immediate needs as well as debt and/or equity financing to
provide for its intermediate and long-term cash requirements. In the
event that the Company cannot procure adequate financing, the Company
may be required to, among other things, reduce its operating costs,
reduce its payroll, curtail its on-going investment activities,
especially in Push Records, and curtail, restrict or even eliminate
certain of the Company's businesses or operating subsidiaries.
Potential financing could also involve special joint or project
financing with respect to Push Records. Even if the Company is
successful in obtaining financing for its immediate cash needs, there
can be no assurance that the actions outlined above will ensure the
Company's survival as a going concern and if the Company does
continue, implementation of the cash containment measures outlined
above could materially adversely affect the long-term profitability or
potential future value of the Company's business and operating
subsidiaries.
The Company's tangible net asset value as of September 30, 1998 was
below the threshold required by NASDAQ for continued listing of the
Company's securities. The Company believes that it has developed an
overall strategy for meeting this requirement in a reasonable period
of time. NASDAQ initially determined that such strategy was not
adequate and called for termination of listing as of November 10,
1998. This determination is being appealed and, pending such appeal,
NASDAQ will refrain from taking any action with respect to suspension.
There can be no assurance that this appeal will be successful. If the
Company's securities are delisted, the value of the Company's
securities would be materially adversely affected and the Company
would, in all likelihood, find it more difficult to consummate any
financing transactions.
13
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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, the ability of the Company to obtain adequate
financing to continue its current operations, risks associated with the ability
to produce additional albums which are commercially successful, the Company's
history of operating losses, dependence on senior management, risks inherent in
the recorded music industry, the Company's ability to contract with recording
artists, the Company's ability to manage growth and the success of the Company's
acquisition program. 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.
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; the
management of music artists and the record business.
The Company believes the results of operations of its operating subsidiaries are
subject to seasonal variations. As such, the Company's results of operations
from period to period may be materially affected. The timing of new record
releases, for example, could materially impact the Company's operating results.
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.
As discussed in "Liquidity and Capital Resources" and elsewhere in this
quarterly report, the Company is experiencing severe liquidity problems which
have had and will continue to have a material adverse effect on the operations
of the Company.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Results of Operations
Three Months Ended September 30, 1998 Compared to
Three Months Ended September 30, 1997
Commercial music production revenues increased to $454,646 for the three months
ended September 30, 1998 from $173,858 for the three months ended September 30,
1997, an increase of $280,788 or 161.5% while commercial music production costs
of sales increased to $125,523 for the three months ended September 30, 1998
from $91,461 for the three months ended September 30, 1997, an increase of
$34,062 or 37.2%. The increase in revenues was due to an increase of residual
and royalty income and the addition of an operation in Los Angeles. The increase
in costs was primarily due to higher revenues, a greater amount of royalty
income which has no related costs and the Los Angeles operations experiencing
higher margins than historical levels. 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 72.4% for the three months
ended September 30, 1998 from 47.4% for the three months ended September 30,
1997.
Video production revenues decreased to $759,893 for the three months ended
September 30, 1998 from $3,287,376 for the three months ended September 30,
1997, a decrease of $2,527,483 or 76.9%, while video production costs of sales
decreased to $415,099 for the three months ended September 30, 1998 from
$2,897,050 for the three months ended September 30, 1997, a decrease of
$2,481,951 or 85.7%. The decrease in both revenues and costs are primarily due
to the Garth Brooks HBO Special which was completed in the first quarter of
1997.
Gross profit from video production revenues decreased to $344,794 for the three
months ended September 30, 1998 from $390,326 for the three months ended
September 30, 1997, a decrease of $45,532 or 11.7%. Gross profit as a percentage
of video production revenues increased to 45.4% for the three months ended
September 30, 1998 as compared to 11.9% for the three months ended September 30,
1997. The prior period's gross profit included the Garth Brooks HBO Special
which was a very significant and profitable project, however, the gross profit
percentage on this project was lower than the Company's historical gross profit
percentage on its smaller projects.
Music artist management revenues decreased to $247,463 for the three months
ended September 30, 1998 from $340,368 for the three months ended September 30,
1997, a decrease of $92,905 or 27.3%. The decrease was primarily attributable to
a decrease in the number of concerts performed by an artist. The Company's music
artist management operations have no cost of sales associated with it since no
products are produced.
Record label revenues for the three months ended September 30, 1998 decreased to
$382,464 from $386,383 for the three months ended September 30, 1997, a decrease
of $3,919 or 1.0%. The decrease reflects lower record sales in fiscal 1999
compared to the prior period when Daryl Hall & John Oates' album "Marigold Sky"
was released in September of 1997. This decrease was offset in part by the
recognition of foreign licensing income of approximately $203,000 in fiscal 1998
received relating to "Marigold Sky". Gross profit as a percentage of revenues
amounted to 70% for the three months ended September 30, 1998 compared with 50%
for the comparable period last year. The increase in the margin percentage
results from recognition of the aforementioned licensing income; if this income
had not been recognized the resulting margin would have been approximately 36%
or lower than last year as margins on the "Marigold Sky" album were greater than
margin recognized on the mix of albums during the current quarter.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company's marketing, selling, general and administrative expenses increased
to $1,970,166 for the three months ended September 30, 1998 from $1,282,803 for
the three months ended September 30, 1997, an increase of $687,363. The increase
is principally attributable to an increase in infrastructure costs at Push, an
increase in costs at corporate resulting from retaining an interim Chief
Operating Officer and efforts to obtain short-term financing and increased costs
related to the commercial music production operation in Los Angeles which was
not operational in the first quarter of fiscal 1998.
The Company's loss before income taxes increased to $764,120 for the three
months ended September 30, 1998 from $215,888 for the three months ended
September 30, 1997, an increase of $548,232 or 253.9%. The increase was
primarily due to the increase in marketing, selling, general and administrative
expenses described above for Push and corporate.
Liquidity and Capital Resources
The Company has a history of operating losses having incurred losses of
approximately $2.9 million and $1.0 million for the years ended June 30, 1998
and 1997, respectively and $.8 million for the three months ended September 30,
1998. These losses have had a negative impact on the liquidity of the Company.
The Company currently requires additional working capital to continue funding
the operations of its businesses and is currently exploring various alternatives
to obtain such financing. There can be no assurance that such financing will be
available or, if available, on terms that are acceptable or favorable to the
Company. Failure to obtain such financing will have a material adverse effect on
the Company and its continuing operations. Continuation of the Company as a
going concern is dependent on its ability to resolve its liquidity problem and
attain future profitable operations. In response to such liquidity concerns, the
Company has reduced overhead at its record label and is attempting to reduce
additional overhead at its New York operations.
The Company entered into the Pines Investment Agreement with Pines on October 6,
1998 which was amended on October 14, 1998 subject to approval by the Company
based on the receipt of funds under which Pines agreed to purchase 668,000
shares of the Company's common stock in consideration for payment to the Company
of $775,000. Pines failed to meet its obligations and the Company has retained
$50,000 received from Pines as partial damages.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company is pursuing sources of equity investments to meet its immediate
needs as well as debt and/or equity financing to provide for its intermediate
and long-term cash requirements. The Company is in advanced discussions for
certain possible financings. There can be no assurance that any financing will
be completed and in the event that the Company cannot procure adequate
financing, the Company may be required to, among other things, reduce its
operating costs, reduce its payroll, curtail its on-going investment activities,
especially in Push Records, and curtail, restrict or even eliminate certain of
the Company's businesses or operating subsidiaries. Even if the Company is
successful in obtaining financing for its immediate cash needs, there can be no
assurance that the actions outlined above will ensure the Company's survival as
a going concern and if the Company does continue, implementation of the cash
containment measures outlined above could materially adversely affect the
long-term profitability or potential future value of the Company's business and
operating subsidiaries.
The Company's tangible net asset value as of September 30, 1998 was below the
threshold required by NASDAQ for continued listing of the Company's securities.
The Company believes that it has developed an overall strategy for meeting this
requirement in a reasonable period of time. NASDAQ initially determined that
such strategy was not adequate and called for termination of listing as of
November 10, 1998. This determination is being appealed and, pending such
appeal, the determination has been suspended. There can be no assurance that
this appeal will be successful. If the Company's securities are delisted, the
value of the Company's securities would be materially adversely affected and the
Company would, in all likelihood, find it more difficult to consummate any
financing transactions.
During the three months ended September 30, 1998, the Company used cash for
operating activities of $228,066 compared to a cash usage of $894,512 for the
three months ended September 30, 1997. The cash usage for the current quarter
was primarily attributable to the net loss, an increase in prepaid production
and record master costs and a decrease in accrued expenses and other current
liabilities offset by an increase in deferred revenues and common stock issued
for services and a decrease in accounts receivable.
During the three months September 30, 1998, the Company used cash for investing
activities of $14,828 for the purchase of property and equipment. During the
three months ended September 30, 1997, the Company used cash for investing
activities of $366,627 for construction of the Company's leased facility in New
York City and the purchase of property and equipment.
During the three months ended September 30, 1998, the Company generated cash
from financing activities of $235,825 from the sale of common stock and proceeds
from notes payable.
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.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Year 2000
The Company has conducted a review of its computer systems to identify any
systems that could be affected by the "Year 2000" issue. The year 2000 problem
is the result of computer programs being written using two digits rather than
four to define the applicable year. Any programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a major systems failure or miscalculations. The
Company believes that its computer systems and software products are fully year
2000 compatible. However, it is possible that certain computer systems or
software products of the Company's suppliers or customers may not accept input
of, store, manipulate and output dates in the year 2000 or thereafter without
error or interruption. The Company has retained a consultant to evaluate the
implications of year 2000 issues on the Company and its suppliers and customers.
There can be no assurance that the Company will not be required to make
significant expenditures to identify, address or remedy any potential year 2000
problems, or to satisfy liabilities to which the Company may become subject as a
result of such problem.
18
<PAGE>
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.49 Extension Letter Agreement dated as of November 19, 1998 of
the September 28, 1998 Employment Modification Letter
Agreement among Registrant and Messrs. Doyle, Flynn and
Loeffler.
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 September 30, 1998.
19
<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, Chairman of the Board, Chief
Executive Officer and President
By: /s/ Joseph A. Gallo
------------------------------------------
Joseph A. Gallo, Senior Vice President
and Chief Financial Officer
Date: November 20, 1998
20
[Letterhead of Paradise Music & Entertainment, Inc.]
November 19, 1998
Messrs. John Loeffler, Jon Small,
Brian Doyle and Richard Flynn
C/o Paradise Music & Entertainment, Inc.
53 West 23rd Street - 11th Floor
New York, NY 10010
Gentlemen:
This letter will memorialize that, as to each party who signs below, the terms
and provisions of Sections 4 and 5 of the letter agreement dated September 28,
1998 will be deemed extended through December 15, 1998. The agreement reflected
by this letter may be extended by the mutual consent of the signatories hereto.
If the above is satisfactory to you and adequately reflects our understanding,
please acknowledge by executing in the space below provided.
PARADISE MUSIC & ENTERTAINMENT, INC.
By: /s/ John Loeffler
---------------------------------
John Loeffler, Chairman
By: /s/ John Loeffler
--------------------------------- -----------------------------------
John Loeffler, an Executive Jon Small, an Executive
By: /s/ Brian Doyle By: /s/ Richard Flynn
--------------------------------- -------------------------------
Brian Doyle, an Executive Richard Flynn, an Executive
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 856,791
<SECURITIES> 0
<RECEIVABLES> 842,641
<ALLOWANCES> 221,957
<INVENTORY> 0
<CURRENT-ASSETS> 2,465,681
<PP&E> 1,496,507
<DEPRECIATION> 270,718
<TOTAL-ASSETS> 4,138,175
<CURRENT-LIABILITIES> 2,656,945
<BONDS> 0
0
0
<COMMON> 24,072
<OTHER-SE> 1,457,158
<TOTAL-LIABILITY-AND-EQUITY> 4,138,175
<SALES> 1,844,466
<TOTAL-REVENUES> 1,844,466
<CGS> 655,003
<TOTAL-COSTS> 655,003
<OTHER-EXPENSES> 1,970,166
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (764,120)
<INCOME-TAX> 10,000
<INCOME-CONTINUING> (774,120)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (774,120)
<EPS-PRIMARY> (.34)
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