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, 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
------------------------------------------------------
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, 1998, the Issuer had 2,231,893 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 (Unaudited)
Consolidated Balance Sheets as of
March 31, 1998 and June 30, 1997 3
Consolidated Statements of Operations for the
Nine and Three Months Ended March 31, 1998
and 1997 4
Consolidated Statements of Stockholders' Equity
for the Nine Months Ended March 31, 1998 5
Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 1998 and 1997 6-7
Notes to Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis or
Plan of Operation 11-14
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature Page 16
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, June 30,
1998 1997
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 1,984,679 $ 5,086,118
Accounts receivable, less reserve for
returns of $404,000 at March 31, 1998 847,680 75,402
Prepaid video production costs 400,676 235,645
Prepaid record master costs 144,904 350,160
Other current assets 154,841 46,216
----------- -----------
Total current assets 3,532,780 5,793,541
----------- -----------
PROPERTY AND EQUIPMENT, less accumulated
depreciation and amortization 1,155,829 146,754
----------- -----------
OTHER ASSETS:
Restricted cash 350,000 --
Other 32,247 14,072
----------- -----------
$ 5,070,856 $ 5,954,367
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued payroll and related expenses $ 56,327 $ 374,590
Deferred revenues 1,263,777 501,073
Accrued expenses and other current liabilities 1,236,576 371,058
----------- -----------
Total current liabilities 2,556,680 1,246,721
----------- -----------
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 2,231,893 and
2,228,333 shares, respectively 22,318 22,283
Capital in excess of par value 5,824,571 5,752,317
Accumulated deficit (3,332,713) (1,066,954)
----------- -----------
Total stockholders' equity 2,514,176 4,707,646
----------- -----------
$ 5,070,856 $ 5,954,367
=========== ===========
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,
------------------------ ---------------------------
<S> <C> <C> <C> <C>
1998 1997 1998 1997
------------ ----------- ----------- -----------
REVENUES $ 8,459,367 $ 2,852,568 $ 1,968,335 $ 577,381
------------ ----------- ----------- -----------
OPERATING EXPENSES:
Cost of sales 5,917,935 1,595,834 1,491,354 264,847
Selling, general and
administrative 4,921,645 1,920,544 1,981,039 1,072,808
------------ ----------- ----------- -----------
Total operating expenses 10,839,580 3,516,378 3,472,393 1,337,655
------------ ----------- ----------- -----------
OPERATING LOSS (2,380,213) (663,810) (1,504,058) (760,274)
INTEREST INCOME 121,454 29,977 28,124 29,977
------------ ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (2,258,759) (633,833) (1,475,934) (730,297)
INCOME TAX PROVISION (BENEFIT) 7,000 (313,000) (2,000) (330,037)
------------ ----------- ----------- -----------
NET LOSS APPLICABLE TO COMMON
SHAREHOLDERS $ (2,265,759) $ (320,833) $(1,473,934) $ (400,260)
============ =========== =========== ===========
BASIC AND DILUTED LOSS
PER COMMON SHARE $ (1.02) $ (.24) $ (.66) $ (.21)
============ =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES USED IN
COMPUTING BASIC AND DILUTED
LOSS PER COMMON SHARE 2,229,378 1,316,100 2,230,574 1,869,966
============ =========== =========== ===========
</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, 1998
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Capital in
------------------- Excess of Accumulated
Shares Amount Par Value Deficit
--------- ------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCES, June 30, 1997 2,228,333 $22,283 $ 5,752,317 $(1,066,954)
COMMON STOCK, issued to outside
directors 3,560 35 13,465 --
WARRANTS GRANTED FOR SERVICES -- -- 60,456 --
INITIAL PUBLIC OFFERING EXPENSES -- -- (1,667) --
NET LOSS -- -- -- (2,265,759)
--------- ------- ----------- -----------
BALANCES, March 31, 1998 2,231,893 $22,318 $ 5,824,571 $(3,332,713)
========= ======= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31,
-------------------------
1998 1997
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,265,759) $ (320,833)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 458,062 35,644
Expenses recorded in connection
with warrants granted 60,456 --
Provision for returns 500,000 --
Common stock issued to outside directors 13,500 --
Deferred tax asset -- (319,000)
Increase (decrease) in cash attributable
to changes in assets and liabilities:
Accounts receivable (1,272,278) 92,394
Prepaid video production costs (165,031) (19,915)
Prepaid record master costs (109,546) --
Other (195,798) (61,728)
Accrued compensation (318,263) 97,878
Deferred revenues 762,704 350,388
Retirement contributions payable -- (30,000)
Accrued expenses and other current liabilities 865,518 241,363
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (1,666,435) 66,191
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property & equipment (1,083,337) (80,382)
Restricted cash (350,000) --
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (1,433,337) (80,382)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable, bank -- 100,000
Proceeds from issuance of common stock,
net of expenses (1,667) 5,587,502
Payments for stockholders' loans -- 450
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,667) 5,687,952
----------- -----------
NET INCREASE (DECREASE) IN CASH (3,101,439) 5,673,761
CASH, beginning of period 5,086,118 82,813
----------- -----------
CASH, end of period $ 1,984,679 $ 5,756,574
=========== ===========
See accompanying notes to consolidated financial statements.
6
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
Nine Months Ended
March 31,
-------------------
1998 1997
-------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ -- $ 2,790
======== ========
Cash paid during the period for income taxes $ 14,610 $ 58,400
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Stock issued in exchange for services $ 13,500 $ 12,000
======== ========
Warrants granted $ 60,456 $ --
======== ========
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 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, 1997 Form 10-KSB.
NOTE 2 - BUSINESS AND ORGANIZATION:
The Company was formed on July 18, 1996 and in July 1996 issued 125,000
shares of common stock. 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 interests, 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 Leffler 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 a new subsidiary, Push Records
Inc. ("Push") 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 Push. All
significant intercompany transactions and balances have been eliminated in
consolidation.
Cash and Equivalents - Cash and equivalents include cash on hand and
highly liquid investments with maturities of three months or less, from
the purchase date, which at times exceeds the Federal Deposit Insurance
Corporation coverage of $100,000. Management regularly monitors the
financial condition of the financial institutions in order to keep the
potential risk to a minimum.
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 revenues are recognized when records are shipped and a
reserve for returns is established against gross revenues. 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 of the
records are capitalized and amortized over the expected life of the
record, 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".
Loss Per Common Share - Effective December 31, 1997, the Company adopted
Statement of Financial Accounting Standards No. 128, " Earnings Per Share"
(SFAS No. 128). 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.
NOTE 4 - COMMITMENTS:
In October 1996, the Company entered into employment agreements, as
amended (the "Agreements"), with four of its executives (the
"Executives"). Each of the Agreements was for a period of three years and
provided for annual base salaries of $150,000 plus bonuses.
Effective July 1, 1997, these agreements were replaced by 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 an Executive's
subsidiary reports a pretax loss, such related Executive's salary will be
reduced, but not below $150,000 per annum, to reflect a pretax breakeven
and such reduction will be recorded as an advance with interest payable at
prime plus 1% and will be payable over three years. In addition, such
Executive's salary will be reduced for the subsequent year by the amount
of such reduction but not below $150,000. Pursuant to these agreements,
two bonus plans have been
9
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - COMMITMENTS: (Continued)
established for the benefit of the Executives based upon attainment of
certain financial results.
On October 1, 1997, the Company entered into an employment agreement (the
"Agreement") with an individual who will manage the Company's Los Angeles
commercial music division. The 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 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 Agreement.
For the nine and three months ended March 31, 1998 approximately $973,000
and $300,000 has been expensed under the bonus plans and employment
agreements and are included in marketing, selling, general and
administrative expenses.
NOTE 5 - ECONOMIC DEPENDENCY:
Approximately $337,000 and $317,000 of commercial production revenues for
the nine months ended March 31, 1998 and 1997 were derived from three
advertising agencies and one agency, respectively. For the three months
ended March 31, 1998 and 1997 approximately $78,000 and $181,000 of
commercial production revenues were derived from one advertising agency.
Approximately $370,000 and $239,000 of musical talent management revenues
for the nine months ended March 31, 1998 and 1997, respectively, were
derived from one and two musical artists. For the three months ended March
31, 1998 and 1997, approximately $7,000 and $116,000 of musical talent
management revenues were derived from one and two musical artists. For the
nine months ended March 31, 1998 and 1997, approximately $3,542,000 and
$165,000, respectively, of video production revenues were derived from one
and two artists, respectively. For the three months ended March 31, 1998
and 1997 approximately $825,000 and $178,000 of video production revenues
were derived from one and four artists, respectively. For the nine months
ended March 31, 1998, approximately $1,852,000 of record label revenues
were derived from one customer. For the three months ended March 31, 1998
approximately $342,000 of record label revenues were derived from one
customer. At March 31, 1998, approximately $239,000 was owed in the
aggregate to the Company from these artists and customers.
10
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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, which variations may initially offset each
other. 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.
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, 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, 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 music and entertainment acquisition program. The
forward-looking statements contained herein represent the Company's judgment as
of the date of this report hereof, and the Company cautions readers not to place
undue reliance on such statements.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
Nine Months Ended March 31, 1998 Compared to
Nine Months Ended March 31, 1997
Commercial music production revenues increased to $985,462 for the nine months
ended March 31, 1998 from $657,451 for the nine months ended March 31, 1997, an
increase of $328,011 or 49.9% while commercial music production costs of sales
increased to $409,386 for the nine months ended March 31, 1998 from $257,292 for
the nine months ended March 31, 1997, an increase of $152,094 or 59.1%. The
increase in revenues was due to an increase of residual and royalty income and
the addition of revenue from Rave's new Los Angeles operation. The increase in
costs was primarily due to the addition of costs from Rave's Los Angeles
operation. 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 decreased to 58.5% for the nine months ended March 31, 1998 from 60.9%
for the nine months ended March 31, 1997.
Video production revenues increased to $5,033,430 for the nine months ended
March 31, 1998 from $1,653,180 for the nine months ended March 31, 1997, an
increase of $3,380,250 or 204.5%, while video production costs of sales
increased to $4,369,540 for the nine months ended March 31, 1998 from $1,338,542
for the nine months ended March 31, 1997, an increase of $3,030,998 or 226.4%.
Gross profit from production revenues increased to $663,980 for the nine months
ended March 31, 1998 from $314,638 for the nine months ended March 31, 1997, an
increase of $349,342 or 111.0%. Gross profit as a percentage of video production
revenues decreased to 13.2% for the nine months ended March 31, 1998 as compared
to 19% for the nine months ended March 31, 1997. The current periods gross
profit includes the Garth Brooks HBO Special which was a very significant and
profitable project that was completed in August; however, the gross profit
percentage on this project was lower than the Company's gross profit percentage
on its smaller projects.
Music artist management revenues decreased to $472,247 for the nine months ended
March 31, 1998 from $541,937 for the nine months ended March 31, 1997, a
decrease of $69,690 or 12.9%. The decrease was primarily attributable to a
reduction in the number of artists managed. The Company's music artist
management operations have no cost of sales associated with them.
Record label revenues for the nine months ended March 31, 1998 were $1,981,086
and resulted from shipments of the Daryl Hall and John Oates album "Marigold
Sky". Gross margin amounted to $836,237. There were no record label sales for
the nine months ended March 31, 1997.
The Company's selling, general and administrative expenses increased to
$4,921,645 for the nine months ended March 31, 1998 from $1,920,544 for the nine
months ended March 31, 1997, an increase of $3,001,101. The increase was
principally attributable to the operations of Push Records, building an
infrastructure to operate and manage a public company and executive
compensation.
The Company's loss before income taxes increased to $2,258,759 for the nine
months ended March 31, 1998 from $663,833 for the nine months ended March 31,
1997, an increase of $1,624,926. The increase was primarily due to the increase
in selling, general and administrative expenses described above.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
Three Months Ended March 31, 1998 Compared to
Three Months Ended March 31, 1997
Commercial music production revenues increased to $376,474 for the three months
ended March 31, 1998 from $246,888 for the three months ended March 31, 1997, an
increase of $129,586 or 52.5% while commercial music production costs of sales
increased to $169,775 for the three months ended March 31, 1998 from $117,436
for the three months ended March 31, 1997, an increase of $52,339 or 44.6%. The
increase in revenues was primarily due to an increase in royalty income and the
addition of revenue from Rave's Los Angeles operation. The increase in costs was
also attributable to the addition of Rave's Los Angeles office.
Gross profit as a percentage of commercial music production revenues increased
to 54.9% for the three months ended March 31, 1998 from 52.4% for the three
months ended March 31, 1997. The increase was primarily attributable to an
increase of royalties realized during the three months ended March 31, 1998,
which had no cost of sales associated with it.
Video production revenues increased to $1,126,599 for the three months ended
March 31, 1998 from $181,927 for the three months ended March 31, 1997, an
increase of $944,672 or 519.3%. Video production revenues were greater in 1998
than in 1997 primarily due to a Garth Brooks television special which was
completed in the current quarter.
Cost of sales for video productions increased to $1,010,645 for the three months
ended March 31, 1998 from $147,411 for the three months ended March 31, 1997, an
increase of $863,234 or 585.6%. The increase was primarily attributable to the
aforementioned television special.
Gross profit as a percentage of video production revenues decreased to 10.3% for
the three months ended March 31, 1998 from 19% for the three months ended March
31, 1997. The decrease was attributable to lower gross margin on the
aforementioned television special.
Music artist management revenues decreased to $7,885 for the three months ended
March 31, 1998 from $148,566 for the three months ended March 31, 1997, a
decrease of $140,681 or 94.7%. The decrease was attributable to a reduction in
the number of artists managed and the number of concerts performed by existing
artists. The Company's music artist management operations have no cost of sales
associated with them.
Record label revenues for the three months ended March 31, 1998 were $470,235
and resulted from shipments of Daryl Hall and John Oates album "Marigold Sky".
Gross margin amounted to $153,551. There were no record label sales for the
three months ended March 31, 1997.
The Company's selling, general and administrative expenses increased to
$1,981,039 for the three months ended March 31, 1998 from $1,072,808 for the
three months ended March 31, 1997, an increase of $908,231 or 84.7%. The
increase was primarily attributable to the operations of Push Records.
The Company's loss before income taxes increased to $1,475,934 for the three
months ended March 31, 1998 from a loss before income taxes of $730,297 for the
three months ended March 31, 1997, an increase of $745,637 or 102.1%. The
increase was primarily attributable to the increase in selling, general and
administrative expenses described above, a decrease in music artist management
revenues and a reduction in gross profit of the video production business.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
Liquidity and Capital Resources
During the nine months ended March 31, 1998, the Company had cash used by
operating activities in the amount of $1,666,435 as compared to $66,191 of cash
provided for the nine months ended March 31, 1997. The operating cash usage was
primarily attributable to the net loss, increases in accounts receivable and
prepaid costs, and a decrease in accrued compensation offset by depreciation,
amortization and provision for returns and increases in deferred revenue and
accrued expenses.
During the nine months ended March 31, 1998, the Company used cash for investing
activities in the amount of $1,433,337 as compared to cash used for investing
activities of $80,382 for the nine months ended March 31, 1997. The cash was
used for the construction of the Company's newly leased facility, the purchase
of property and equipment and cash which collateralizes a letter of credit in
connection with the leased facility.
During the nine months ended March 31, 1998, the Company had net cash used in
financing activities of $1,667 compared to net cash provided by financing
activities of $5,687,952 for the nine months ended March 31, 1997. 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 Company has completed construction of its newly leased facility at a cost of
approximately $1.1 million.
The Company has incurred losses of approximately $2.3 million during the nine
months ended March 31, 1998. These losses have had a negative impact on the
liquidity of the Company. The Company will require additional working capital to
continue funding the operations of its businesses and is 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.
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.
Year 2000
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.
14
<PAGE>
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Each of the Company's outside directors are paid annual fees of
$18,000 each fiscal year. One half of the compensation is payable in
cash on a quarterly basis and one half is payable in shares of the
Company's common stock on a quarterly basis valued at the closing
price on the last trading day of each quarter. Accordingly, pursuant
to this arrangement during the three month period ended March 31,
1998, Thomas Edelman and Paul Thomas Cohen, the Company's outside
directors, each received 667 shares of Common Stock. The shares were
not registered under the Securities Act of 1933, as amended (the
"Act"), and were issued in reliance on Section 4(2) of the Act.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the shareholders of the Company was held on February
10, 1998, pursuant to notice. At the meeting the following persons were
elected directors to hold office until the next annual meeting of
shareholders and until their respective successors are duly elected and
qualified and such persons received the number of votes indicated below
opposite their respective names:
Name Number of Votes For Number of Votes Withheld
---- ------------------- ------------------------
Paul Thomas Cohen 2,072,446 4,600
Brian Doyle 2,072,446 4,600
Thomas J. Edelman 2,072,446 4,600
Richard Flynn 2,072,446 4,600
John Loeffler 2,072,446 4,600
Jon Small 2,072,446 4,600
In addition, at the meeting Rothstein, Kass & Company, P.C. was ratified
as the independent public accountants for the 1998 fiscal year. The voting
was as follows:
Number of Votes For Number of Votes Against Number of Votes Withheld
------------------- ----------------------- ------------------------
2,076,746 300 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.40 - Promissory note and stock pledge agreement dated December
31, 1997 between Registrant and John Loeffler.
11 - Statement regarding computation of per share earnings is not
required because the relevant computation can be determined
from the material contained in the financial statements
included herein.
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, 1998.
15
<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: May 15, 1998
16
PROMISSORY NOTE
$150,000 New York, New York
December 31, 1997
FOR VALUE RECEIVED, the undersigned, ("Borrower"), hereby promises to pay
to the order of Paradise Music & Entertainment, Inc. ("Holder"), on December 31,
2000, (the "Maturity Date"), sum of One Hundred Fifty Thousand ($150,000)
Dollars, as borrowed by Borrower on or before June 30, 1998, and set forth on
Schedule A less any principal payments made prior to the Maturity Date.
Borrower further promises to pay Holder interest on the unpaid principal
amount of this Note from the date hereof until maturity at the rate of 8 1/2%
per annum. Accrued and unpaid interest on the outstanding principal amount of
this Note shall be payable in arrears monthly on the first day of each month
commencing February 1, 1998. The remainder of accrued and unpaid interest on the
outstanding principal of this Note shall be payable on maturity of this Note,
whether at stated maturity, by acceleration or otherwise.
The outstanding balance of this Note may be prepaid at any time, in whole
or in part, without premium or penalty. Mandatory pre-payments of outstanding
principal shall be made by Borrower as follows (but only to the extent of the
remaining amount outstanding under the Note):
(a) $2,000 per month on the first day of each of the eleven months
commencing February 1, in the year 2000;
(b) Payments equal to 50% of any cash bonus, net of federal and state
income taxes withheld, received by Borrower from Holder, including any
subsidiary thereof; while this Note is outstanding; and
(c) An amount requested by Holder on 30 days prior written notice to
Borrower equal to the amount by which the net cash and cash equivalent balance
of Holder is less than $500,000.
All indebtedness outstanding under this Note, including, to the extent
permitted by applicable law, interest, shall bear interest (computed in the same
manner as interest on this Note prior to maturity) after maturity, whether at
stated maturity, by acceleration or otherwise, at a rate equal to the rate set
forth above plus 2%, and all of such interest shall be payable on demand of
Holder.
Anything herein to the contrary notwithstanding, the obligation of
Borrower to make payments of interest shall be subject to the limitation that
payments of interest shall not be required to be made to Holder to the extent
that Holder's receipt thereof would not be permissible under the law or laws
applicable to Holder limiting rates of interest which may be charged or
collected by Holder. Any such payments of interest which are not made as a
result of the limitation referred to in the preceding sentence shall be made by
Borrower to Holder on the earliest interest payment date or dates on which the
receipt thereof would be permissible under such laws applicable to the Holder
limiting rates of interest which may be charged or collected by the Holder. Such
deferred interest shall not bear interest.
<PAGE>
Payments of both principal and interest on this Note are to be made at the
offices of Holder, 53 West 23rd Street, New York, N.Y. 10010, or such other
locations as Holder shall designate from time to time by written notice to
Borrower, in lawful money of the United States of America in immediately
available finds.
As used herein, the term "Event of Default" means any of the following:
(a) Borrower's failure to make any payment hereunder when due if such
failure is not remedied within five days after notice thereof from Holder;
(b) Borrower's making a general assignment for the benefit of creditors or
a written admission of its inability to pay his debts as they come due;
(c) Borrower's voluntary commencement of a proceeding under Title 11 of
the United States Code or any similar State bankruptcy statute; or
(d) The commencement against Borrower of an involuntary proceeding under
Title 11 of the United States Code or any similar State bankruptcy statute if
such proceeding is not dismissed within 60 days of the commencement thereof.
Upon the occurrence of any Event of Default, the principal amount of and accrued
interest on this Note may be declared immediately due and payable. Borrower
hereby agrees to pay the costs of collection and reasonable attorneys' fees and
expenses in case default occurs in the payment of this Note.
Borrower agrees hereby to be bound, and waives any exemption right as well
as the benefit of all valuation and appraisement laws (to the extent such waiver
is legal) as to the indebtedness evidenced hereby, waive any and all lack of
diligence or delays in collection or enforcement hereof, and expressly consent
to any extension of time, release of any party liable for this obligation,
release of any of the security for this Note or any other indulgence or
forbearance whatsoever. Any such extension, release, indulgence or forbearance
may be made after notice to said party and without in any way affecting the
liability of such party.
Borrower hereby waives presentment and demand for payment, notice of
dishonor, protest and notice of protest of this Note.
This Note is secured in the manner provided for in that certain Stock
Pledge Agreement of even date herewith annexed hereto as Exhibit 1, between
Borrower and Holder.
THIS NOTE IS BEING DELIVERED IN AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES
OF CONFLICT OF LAWS.
/s/ John R. Loeffler
-----------------------------
John R. Loeffler
-2-
<PAGE>
SCHEDULE A
Set forth below are the amounts borrowed by John R. Loeffler
- --------------------------------------------------------------------------------
Dates of Borrowings: Amounts of Borrowings:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT I
STOCK PLEDGE AGREEMENT
PLEDGE AGREEMENT, dated as of December 31, 1997, by and between John R.
Loeffler (the "Pledgor"), and Paradise Music & Entertainment, Inc., as Secured
Party (the "Secured Party").
W I T N E S S E T H:
In consideration of the covenants and agreements set forth herein, the
parties hereto hereby agree as follows:
1. Pledge, Transfer, Voting Power, Distributions, Etc.
(a) As security for the prompt payment and performance when due (whether
at stated maturity, by acceleration or otherwise) of all indebtedness and all
other liabilities and obligations (collectively, the "Obligations"), whether now
existing or hereafter arising, of the Pledgor to the Secured Party under,
arising out of, or in any way connected with, the Pledgor's Promissory Note, of
even date herewith (the "Note"), issued by the Pledgor to the Secured Party, the
Pledgor hereby grants to the Secured Party a security interest in 200,000 shares
of the capital stock of the Secured Party (the "Secured Party") which is owned
by the Pledgor (such capital stock described above being collectively referred
to herein as the "Pledged Stock," and any other property or assets from time to
time pledged to the Secured Party as collateral security hereunder, and any
property, hereafter paid to or retained by the Secured Party under Section 2
hereof being collectively referred to herein as the "Collateral").
(b) Unless and until any Event of Default shall occur and be continuing
under the Note (the period during which any Event of Default shall continue
being herein called a "Default Period"), the Pledgor shall be entitled to
exercise all powers of voting or consent arising out of its ownership of the
Collateral for all purposes not inconsistent with the terms of this Pledge
Agreement or the Note. As promptly as practicable after exercising any such
power, the Pledgor shall inform the Secured Party in writing of any material
action or omission to act in favor of which it exercised such power.
2. In the Event of the Occurrence of any Event of Default.
(a) During any Default Period:
(1) After giving the Pledgor ten days' prior written notice of its
intention to do so, the Secured Party or its nominee shall have the sole
and exclusive right to exercise all powers of voting or consent and all
other rights pertaining to the Collateral or any part thereof and to
exercise any and all rights of conversion, exchange, subscription or any
other rights, privileges or options pertaining to the Collateral or any
part thereof as if it were the absolute owner thereof, including, without
limitation, the right to exchange, at its discretion, any and all of the
Collateral upon the merger, consolidation, reorganization,
recapitalization or other readjustment of any partnership, corporation or
other entity issuing any part of the Collateral or upon the exercise by
any such issuer of any right, privilege or option pertaining to any part
of the Collateral, and in connection therewith, to
<PAGE>
deposit and deliver any and all of the Collateral with any committee,
depositary, transfer agent, registrar or other designated agency upon such
terms and conditions as it may determine, all without liability (other
than for gross negligence or willful misconduct) except to account for
property actually received by it, but the Secured Party shall have no duty
to exercise any of the aforesaid rights, privileges or options and shall
not be responsible for any failure to do so or delay in so doing.
(2) All payments, distributions or dividends, in securities,
property or cash, including, without limitation, any distribution or
return of capital upon or in respect of the Collateral or any part thereof
or received in exchange for the Collateral or any part thereof as a result
of a merger, consolidation or otherwise, shall be paid, delivered or
transferred directly to the Secured Party immediately upon receipt thereof
by the Pledgor (accompanied by appropriate stock powers duly executed in
blank) or shall be retained by the Secured Party as part of the
Collateral.
(3) In case any money shall be paid by the Pledgor to the Secured
Party pursuant to subsection 1(a) above, the Secured Party shall, if
requested by the Pledgor, apply such money (prior to any sale of the
Collateral hereunder) to the payment of the Obligations in accordance with
Section 3 hereof.
(4) In order to permit the Secured Party to receive all payments and
distributions to which the Secured Party may be entitled under subsection
1(a) hereof, the Pledgor shall, if necessary, upon the written request of
the Secured Party, from time to time execute and deliver to the Secured
Party appropriate payment orders in respect of such payments and
distributions.
(b) All cash and other property paid to or retained by the Secured Party
pursuant to this Section 2 shall be held by it, until applied as herein
provided, as additional collateral security pledged under and subject to the
terms of this Section 2.
3. Realizations, etc. Subject to law, upon the occurrence and during the
continuance of any Event of Default under the Note, in addition to any rights
and remedies which may be available to a secured party under the Uniform
Commercial Code as in effect at the time in New York, the following provisions
shall apply:
(a) The Secured Party may, without being required to give any notice
(except as otherwise provided in this Pledge Agreement or the Note), apply the
cash, if any, then held by it as collateral security hereunder to the payment of
the Obligations and, if there shall be no such cash or the cash so applied shall
be insufficient to pay in full all such Obligations, sell, assign, give an
option or options to purchase, contract to sell or otherwise dispose of and
deliver the Collateral, or any part thereof, at public or private sale or at any
broker's board or on any securities exchange, for cash, upon credit or for
future delivery, without assumption of any credit risk, and at such price or
prices as the Secured Party may deem satisfactory, and the Secured Party may be
the purchaser of any or all of the Collateral so sold and thereafter hold the
same, absolutely and free from any right or claim of whatsoever kind.
(b) The Secured Party is authorized, at any such sale, if it deems it
advisable to do so, to restrict the prospective bidders or purchasers to persons
who will represent and agree that they
- 2 -
<PAGE>
are purchasing for their own account, for investment, and not with a view to the
distribution or sale of any of the Collateral.
(c) Upon any such sale, the Secured Party shall have the right to deliver,
assign and transfer to the purchaser thereof the Collateral so sold. Each
purchaser at any such sale shall hold the property sold absolutely, free from
any claim or right of whatsoever kind, including any equity or rights of
redemption, of the Pledgor. To the extent permitted by applicable law, the
Pledgor specifically waives as against any such purchaser all rights of
redemption, stay or appraisal which it may have under any rule of law or statute
now existing or hereafter adopted.
(d) The Secured Party need not give the Pledgor more than ten days'
written notice of its intention to make any such public or private sale or sale
at broker's board or on a securities exchange, such notice to state the board or
exchange at which such sale is to be made and the day on which the Collateral,
or that portion thereof so being sold, will first be offered for sale at such
board or exchange. Such notice shall be deemed to be reasonable notification of
the matters contained therein.
(e) So long as the Secured Party shall have acted in good faith: (i) the
Secured Party shall not incur any liability as a result of the sale of the
Collateral or any part thereof, at any private sale; and (ii) the Pledgor hereby
waives any claims against the Secured Party arising by reason of the fact that
the price at which any Collateral may have been sold at such a private sale was
less than the price which might have been obtained at a public sale or was less
than the aggregate amount of the Obligations.
(f) Any such public sale shall be held at such time or times within the
ordinary business hours and at such place or places in the Borough of Manhattan,
City of New York, or elsewhere, as the Secured Party may fix in the notice of
such sale. At any such sale the Collateral may be sold in one lot as an entirety
or in separate parcels, as the Secured Party may determine.
(g) The Secured Party shall not be obligated to make any sale pursuant to
any such notice. The Secured Party may, without notice or publication, adjourn
any public or private sale or cause the same to be adjourned from time to time
by announcement at the time and place fixed for the sale, and such sale may be
made at any time or place to which the same may be so adjourned.
(h) In case of any sale of all or any part of the Collateral on credit or
for future delivery, the Collateral so sold will be retained by the Secured
Party until the selling price is paid by the purchaser thereof, but the Secured
Party shall not incur any liability in cash for the failure of such purchaser to
take up and pay for the Collateral so sold and, in case of any such failure,
such Collateral may again be sold upon like notice.
(i) The Secured Party, however, instead of exercising the power of sale
herein conferred upon it, may proceed by a suit or suits at law or in equity to
foreclose the pledge and sell the Collateral, or any portion thereof, under a
judgment or decree of a court or courts of competent jurisdiction.
(j) The Pledgor agrees, to the extent permitted by applicable law, to
waive and agrees not to assert any rights or privileges which it may acquire
under clauses (a), (b), (c), (d) and (e) of Section 9-112 of the Uniform
Commercial Code.
- 3 -
<PAGE>
4. Application of Proceeds. The proceeds of any collection, recovery,
receipt, appropriation, realization or sale as aforesaid, shall be applied by
the Secured Party as follows:
FIRST, to the payment of the reasonable costs and expenses, if any
(including, without limitation, reasonable attorneys' fees and expenses),
incurred by the Secured Party in preserving its interests in the Collateral or
in enforcing any of the rights or remedies granted to it hereunder;
SECOND, to the payment to the Secured Party of accrued and unpaid interest
due and payable on the Note (whether at stated maturity, by acceleration or
otherwise);
THIRD, to the payment to the Secured Party of the outstanding principal
amount due and payable on the Note (whether at stated maturity, by acceleration
or otherwise);
FOURTH, to the payment to the Secured Party of any and all other
Obligations due and payable on the date of such application;
FIFTH, to the payment of any other amounts required by applicable law
(including, without limitation, Section 9-504(1)(c) of the Uniform Commercial
Code); and
SIXTH, after payment in full of any and all Obligations, to the payment to
the Pledgor or to its successors or assigns, or to whomsoever may be lawfully
entitled to receive the same or as a court of competent jurisdiction may direct,
of any surplus then remaining from such proceeds. (As used in this Pledge
Agreement, "proceeds" of the Collateral shall mean cash, securities and other
property realized in respect of, and distributions in kind of, the Collateral,
including any thereof received under any reorganization, liquidation or
adjustment of debt of the Pledgor or any issuer of securities included in the
Collateral.)
5. Representations. The Pledgor represents and warrants to the Secured
Party that:
(a) The Pledgor is the record and beneficial owner of all of the Pledged
Stock as of the date hereof;
(b) All of the Pledged Stock is owned by the Pledgor, free and clear of
any pledge, mortgage, hypothecation, lien, charge, encumbrance or any security
interest in such Pledged Stock or the proceeds thereof except for the security
interest granted to the Secured Party hereunder;
(c) No consent or approval of any Person, and no consent, license,
approval, authorization or declaration of any governmental authority, bureau or
agency, is or will be required in connec tion with the execution, delivery,
performance, validity or enforcement of this Pledge Agreement as to the Pledgor;
(d) The execution and delivery of this Pledge Agreement by the Pledgor and
its performance hereunder will not violate any provision of law and will not
conflict with or result in a breach of any material order, writ, injunction,
ordinance, resolution, decree, or other similar document or instrument of any
court or governmental authority, bureau or agency, or create (with or without
the giving of notice or lapse of time, or both) a default under or breach of any
material agreement, bond, note or indenture to which the Pledgor is a party or
by which the Pledgor is bound or any of the Pledgor's properties or assets is
affected, or result in the imposition of any lien, charge or
- 4 -
<PAGE>
encumbrance of any nature whatsoever upon any of the properties or assets owned
by or used in connection with the business of the Pledgor except as created by
this Pledge Agreement;
(e) This Pledge Agreement creates and grants a valid first priority lien on
and perfected security interest in the Pledged Stock and the proceeds thereof,
subject to no prior security interest, lien, charge or encumbrance, or to any
agreement purporting to grant to any third party a security interest in the
property or assets of the Pledgor which would include any of the Pledged Stock;
and
(f) The Pledged Stock is subject to certain sale restrictions pursuant to
a lock up agreement entered into between Pledgor and Donald & Co. Securities
Inc.
6. Covenants.
(a) The Pledgor hereby covenants and agrees that, so long as the
Obligations shall be outstanding and unpaid, in whole or in part, the Pledgor
will not sell, convey or otherwise dispose of any of the Pledged Stock or any
interest therein to any other party unless such party expressly agrees in
writing to be bound by all of the terms of this Pledge Agreement and executes
and delivers to the Secured Party appropriate financing statements and such
other instruments and documents (all in form and substance satisfactory to
counsel to the Secured Party) as the Secured Party may reasonably request, nor
will the Pledgor create, incur or permit to exist any pledge, mortgage, lien,
charge, encumbrance or any security interest whatsoever with respect to any of
the Pledged Stock or the proceeds thereof.
(b) The Pledgor warrants and will defend the right, title, special
property and security interest in and to the Pledged Stock of the Secured Party
against the claims of any person, firm, partnership, corporation or other
entity.
7. Indemnification, Etc.
(a) The Pledgor shall indemnify and hold harmless the Secured Party, and
any party acting for the Secured Party hereunder for all losses, costs, damages,
fees and expenses whatsoever associated with the exercise of the powers of
attorney granted in Section 9 hereof and shall release the Secured Party, each
Lender and any other party acting hereunder from all liability whatsoever for
the exercise of such powers of attorney and all actions taken pursuant thereto,
except in the case of gross negligence or willful misconduct by the Secured
Party or such other party acting hereunder.
(b) The Pledgor acknowledges that a breach of any of the covenants
contained in Section 6 hereof will cause irreparable injury to the Secured
Party, that the Secured Party shall have no adequate remedy at law in respect of
such breach and, as a consequence, the covenants of the Pledgor contained in
Section 6 hereof shall be specifically enforceable against the Pledgor, and the
Pledgor hereby waives, and shall not assert, any defenses against an action for
specific performance of such covenants, except for a defense that no such breach
has in fact occurred or that no Event of Default has occurred or is continuing.
8. No Impairment. The terms of this Pledge Agreement and the obligations
of the Pledgor arising hereunder shall not be affected, modified or impaired in
any manner or to any extent by: (a) any amendment or modification of or
supplement to the Note or any instrument or document
- 5 -
<PAGE>
executed or delivered pursuant thereto or in connection therewith; (b) the
invalidity or unenforceability of any of such instruments or documents; (c) any
exercise or non-exercise of any right, power or remedy of the Secured Party
under any of such instruments or documents referred to in clause (a) above or
arising at law; (d) any waiver, consent, release, indulgence, extension,
renewal, modification, delay or other action, inaction or omission in respect of
the Note or any of the instruments or documents referred to in clause (a) above
or in respect of any of the properties or assets now or hereafter covered by any
of the Security Documents; or (e) any waiver by the Secured Party of any rights
under this Pledge Agreement, whether or not the Pledgor shall have had notice or
knowledge of any of the foregoing and whether or not the Pledgor shall have
consented thereto.
9. Attorney-in-Fact. The Secured Party is hereby appointed the
attorney-in-fact of the Pledgor (a) for any period not a Default Period, for the
purpose of signing documents and taking other action to perfect the security
interest in the Collateral and (b) during a Default Period, for the purpose of
carrying out the provisions of this Pledge Agreement and taking any action and
executing any instruments which the Secured Party may deem necessary or
advisable to accomplish the purposes hereof, which appointment as
attorney-in-fact is irrevocable and coupled with an interest. Without limiting
the generality of the foregoing, during a Default Period, upon at least ten days
prior written notice, the Secured Party shall have the right and power to
receive, endorse and collect all checks made payable to the order of the Pledgor
representing any payment in respect of the Collateral or any part thereof and to
give full discharge for the same.
10. No Representation, Etc. Anything herein contained to the contrary
notwithstanding, neither the Secured Party nor any of its nominees or assignees
shall have any obligation or liability by reason of or arising out of this
Pledge Agreement to make any inquiry as to the nature or sufficiency of, to
present or file any claim with respect to, or to take any action to collect or
enforce the payment of, any amounts to which it may be entitled at any time or
times by virtue of this Pledge Agreement. The Secured Party makes no
representations or warranties with respect to the Pledged Stock or the
Collateral or any part thereof, and the Secured Party shall not be chargeable
with any obligations or liabilities of the Pledgor or any other party with
respect thereto.
11. Remedies Cumulative. Each right, power and remedy herein specifically
granted to the Secured Party or otherwise available to it shall be cumulative,
and shall be in addition to every other right, power and remedy herein
specifically given or now or hereafter existing at law, in equity or otherwise;
and each right, power and remedy, whether specifically granted herein or
otherwise existing, may be exercised, at any time and from time to time as often
and in such order as may be deemed expedient by the Secured Party in its sole
and complete discretion; and the exercise or commencement of exercise of any
right, power or remedy shall not be construed as a waiver of the right to
exercise, at the same time or thereafter, the same or any other right, power or
remedy. No delay or omission by the Secured Party in exercising any such right
or power, or in pursuing any such remedy, shall impair any such right, power or
remedy or be construed to be a waiver of any default on the part of the Lenders
or an acquiescence therein. No waiver by the Secured Party of any breach or
default of or by the Pledgor hereunder shall be deemed to be a waiver of any
other or similar, previous or subsequent, breach or default.
- 6 -
<PAGE>
12. Amendment, Etc. This Pledge Agreement may not be amended orally, but
may be amended or modified only in writing, signed by the Pledgor and the
Secured Party. No waiver of any term or provision of this Pledge Agreement shall
be effective unless it is in writing, making specific reference to this Pledge
Agreement and signed by the party against whom such waiver is sought to be
enforced. This Pledge Agreement constitutes the entire agreement among the
parties hereto with respect to the subject matter hereof.
13. CONSENT TO JURISDICTION. THE PLEDGOR IRREVOCABLY CON SENTS THAT ANY
LEGAL ACTION OR PROCEEDING AGAINST THE PLEDGOR UNDER, ARISING OUT OF OR IN ANY
MANNER RELATING TO THIS PLEDGE AGREEMENT, MAY BE BROUGHT IN THE SUPREME COURT OF
THE STATE OF NEW YORK, COUNTY OF NEW YORK OR IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK. THE PLEDGOR BY ITS EXECUTION AND DELIVERY
OF THIS PLEDGE AGREEMENT EXPRESSLY AND IRREVOCABLY ASSENTS AND SUBMITS TO THE
PERSONAL JURISDICTION OF ANY OF SUCH COURTS IN ANY SUCH ACTION OR PROCEEDING.
THE PLEDGOR FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF ANY COMPLAINT,
SUMMONS, NOTICE OR OTHER PROCESS RELATING TO ANY SUCH ACTION OR PROCEEDING BY
DELIVERY THEREOF TO THE PLEDGOR BY HAND OR BY MAIL IN THE MANNER PROVIDED FOR IN
THIS PLEDGE AGREE MENT. THE PLEDGOR HEREBY EXPRESSLY AND IRREVOCABLY WAIVES ANY
CLAIM OR DEFENSE IN ANY SUCH ACTION OR PROCEEDING IN EITHER SUCH COURT BASED ON
ANY ALLEGED LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON
CONVENIENS OR ANY SIMILAR BASIS. NOTHING IN THIS SECTION 13 SHALL AFFECT OR
IMPAIR IN ANY MANNER OR TO ANY EXTENT THE RIGHT OF THE SECURED PARTY TO COMMENCE
LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE PLEDGOR IN ANY JURISDICTION
OR TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW.
14. Further Assurances. The Pledgor shall at any time and from time to
time upon the written request of the Secured Party execute and deliver such
further documents and do such further acts and things as the Secured Party may
reasonably request in order to effect the purposes of this Pledge Agreement.
15. Course of Dealing. No course of dealing between the Pledgor and the
Secured Party, nor any failure to exercise, nor any delay in exercising, on the
part of the Secured Party of any right, power or privilege hereunder or under
the Note shall operate as a waiver thereof; nor shall any single or partial
exercise by the Secured Party of any right, power or privilege hereunder or
thereunder preclude any other or further exercise thereof or the exercise of any
other right, power or privilege.
16. Severability. The provisions of this Pledge Agreement are severable,
and if any clause or provision shall be held invalid or unenforceable in whole
or in part in any jurisdiction, then such invalidity or unenforceability shall
affect only such clause or provision, or part thereof, in such jurisdiction and
shall not in any manner affect such clause or provision in any other
jurisdiction, or any other clause or provision in this Pledge Agreement in any
jurisdiction.
- 7 -
<PAGE>
17. Successors and Assigns. This Pledge Agreement, and the terms and
conditions hereof, shall be binding upon and shall inure to the benefit of the
Pledgor and its successors and assigns, and the Secured Party and its successors
and assigns; provided that the Pledgor may not assign its rights or delegate its
obligations hereunder without the prior written consent of the Secured Party and
any purported assignment or delegation by the Pledgor in the absence of such
written consent shall be void.
18. GOVERNING LAW. THIS PLEDGE AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, PROVIDED THAT AS TO
COLLATERAL LOCATED IN ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK, THE
SECURED PARTY SHALL HAVE ALL THE RIGHTS TO WHICH A SECURED PARTY UNDER THE LAWS
OF SUCH JURISDICTION IS ENTITLED.
19. Term. This Pledge Agreement shall continue in full force and effect
until all the Obligations have been fully and indefeasibly paid in full,
whereupon this Pledge Agreement shall terminate.
20. Notices. All notices and other communications provided for herein
shall be by telephone (except where written notice is expressly required
hereby), or in writing and telephoned, telecopied, mailed or delivered by
overnight courier or by hand to the intended re cipient at the telephone number
or "Address for Notices" specified below its name on the signature pages hereof;
or, as to either party, at such other telephone number or address as shall be
designated by such party in a notice to the other party. Except as otherwise
provided in this Pledge Agreement, all notices and other communications
hereunder shall be deemed to have been duly given when transmitted by telecopier
or delivered to an overnight courier service, in each case addressed as
aforesaid or personally delivered or, in the case of a mailed notice, when
actually received by the intended recipient. Telephoned notices shall be
confirmed within three days by the sender by telecopy, overnight courier or hand
delivery, provided that failure to con firm any such telephoned notice shall not
affect its validity.
21. Counterparts. This Pledge Agreement may be executed in any number of
counterpart copies, each of which shall be deemed an original, but which
together shall constitute a single instrument.
22. Headings. Descriptive headings appearing herein are included solely
for convenience of reference and are not intended to affect the meaning or
construction of any of the provisions of this Pledge Agreement.
- 8 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
/s/ John R. Loeffler
-----------------------------------------
John R. Loeffler (Pledgor)
Address for notices to
Pledgor:
c/o Paradise Music & Entertainment, Inc.
53 West 23rd Street
New York, N.Y. 10010
Telecopier No: 212-242-5225
Paradise Music & Entertainment, Inc.
(Secured Party)
by: /s/ Joseph A. Gallo
--------------------------------------
Joseph A. Gallo, Senior Vice President
and Chief Financial Officer
Address for notices to Secured Party
Paradise Music & Entertainment, Inc.
53 West 23rd Street
New York, New York 10010
Telecopier No. 212-242-5225
Attention: Chief Financial Officer
- 9 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 1,984,679
<SECURITIES> 0
<RECEIVABLES> 1,251,680
<ALLOWANCES> 404,000
<INVENTORY> 0
<CURRENT-ASSETS> 3,532,780
<PP&E> 1,425,301
<DEPRECIATION> 269,472
<TOTAL-ASSETS> 5,070,856
<CURRENT-LIABILITIES> 2,556,680
<BONDS> 0
0
0
<COMMON> 22,318
<OTHER-SE> 2,491,858
<TOTAL-LIABILITY-AND-EQUITY> 5,070,856
<SALES> 8,459,367
<TOTAL-REVENUES> 8,459,367
<CGS> 5,917,935
<TOTAL-COSTS> 5,917,935
<OTHER-EXPENSES> 4,921,645
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,258,759)
<INCOME-TAX> 7,000
<INCOME-CONTINUING> (2,380,213)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,265,759)
<EPS-PRIMARY> (1.02)
<EPS-DILUTED> (1.02)
</TABLE>
