PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
SEPTEMBER 30, 1999
FORM 10-QSB
<PAGE>
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 AND EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
|_| 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.
- --------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
(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 1, 1999, the Issuer had 6,355,331 shares of Common Stock, $.01 par
value, issued and 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, 1999 (Unaudited) and June 30, 1999 3
Consolidated Statements of Operations for the
Three Months Ended September 30, 1999
and 1998 (Unaudited) 4
Consolidated Statements of Stockholders' Equity
for the Three Months Ended September 30, 1999 (Unaudited) 5
Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 1999 and 1998 (Unaudited) 6-7
Notes to Consolidated Financial Statements (Unaudited) 8-11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12-14
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, June 30,
1999 1999
------------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 3,676,327 $ 930,642
Accounts receivable 1,667,588 810,922
Prepaid expenses and other current assets 2,244,216 2,496,106
Deferred financing costs 75,459
----------- -----------
Total current assets 7,663,590 4,237,670
PROPERTY AND EQUIPMENT, net 1,125,341 1,125,316
----------- -----------
OTHER ASSETS
Security deposits and other 474,037 307,787
Deferred acquisition costs 363,626 95,000
Note receivable 100,000
----------- -----------
937,663 402,787
----------- -----------
$ 9,726,594 $ 5,765,773
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Deferred revenues $ 62,500 $ --
Accrued payroll and related expenses 664,752 491,001
Accounts payable and accrued expenses 1,189,984 1,230,716
----------- -----------
Total current liabilities 1,917,236 1,721,717
----------- -----------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
authorized 5,000,000 shares, none issued
Common stock, $.01 par value,
authorized 75,000,000 shares,
issued and outstanding 6,355,331and
5,345,717 shares, respectively 63,553 53,457
Capital in excess of par value 15,663,077 11,811,489
Note receivable, stockholder (70,878) (70,878)
Subscription receivable (100,000)
Accumulated deficit (7,846,394) (7,650,012)
----------- -----------
Total stockholders' equity 7,809,358 4,044,056
----------- -----------
$ 9,726,594 $ 5,765,773
=========== ===========
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,
--------------------------
1999 1998
----------- -----------
REVENUES $ 3,638,636 $ 1,844,466
----------- -----------
OPERATING EXPENSES
Cost of sales 2,335,729 655,003
Marketing, selling, general and administrative 1,509,504 1,980,166
----------- -----------
Total operating expenses 3,845,233 2,635,169
----------- -----------
LOSS FROM OPERATIONS (206,597) (790,703)
INTEREST INCOME 10,215 16,583
=========== ===========
NET LOSS $ (196,382) $ (774,120)
=========== ===========
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.03) $ (0.34)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
USED IN COMPUTING BASIC AND DILUTED
LOSS PER COMMON SHARE 5,981,591 2,292,598
=========== ===========
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, 1999
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Capital in Note
--------------------------- Excess of Accumulated Subscription receivable,
Shares Amount Par Value Deficit receivable stockholder
-------------- ------------ -------------- -------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, June 30, 1999 5,345,717 $ 53,457 $ 11,811,489 $ (7,650,012) $ (100,000) $ (70,878)
COMMON STOCK, issued to
outside directors and 38,734 387 183,863
vendor
SALES OF COMMON STOCK 970,880 9,709 3,667,725
PAYMENT OF SUBSCRIPTION 100,000
RECEIVABLE
NET LOSS (196,382)
--------- --------- ------------ ------------ ---------- ---------
BALANCES, September 30, 1999 6,355,331 $ 63,553 $ 15,663,077 $ (7,846,394) $ -- $ (70,878)
========= ========= ============ ============ ========== =========
</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,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (196,382) $ (774,120)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 34,000 52,503
Expenses recorded in connection with warrants granted 4,968
Provision for returns 67,500
Common stock issued to outside directors and vendor 18,000 114,610
Restricted cash (20,568)
Increase (decrease) in cash attributable
to changes in assets and liabilities:
Accounts receivable (856,666) 118,402
Prepaid expenses and other current assets (196,916) (226,418)
Deferred revenues 62,500 476,722
Accrued payroll and related expenses 173,751 28,859
Accounts payable and accrued expenses (190,732) (70,524)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,152,445) (228,066)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (34,025) (14,828)
Payment for note receivable (100,000)
Payments for deferred acquisition costs (118,626)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (252,651) (14,828)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from on subscription receivable 100,000
Proceeds from sale of common stock 4,126,240 187,905
Payments for deferred financing costs (75,459)
Proceeds from notes payable 47,920
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,150,781 235,825
----------- -----------
NET INCREASE (DECREASE) IN CASH 2,745,685 (7,069)
CASH, beginning of period 930,642 863,860
----------- -----------
CASH, end of period $ 3,676,327 $ 856,791
=========== ===========
</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,
--------------------------
1999 1998
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION,
cash paid during the period for income taxes $ -- $ 5,430
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Stock issued in exchange for services $ 18,000 $ 114,610
=========== ===========
Warrants expensed $ -- $ 4,968
=========== ===========
Stock issued to vendor for deposit on equipment $ 166,250 $ --
=========== ===========
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 consolidated 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 (the "SEC") and reflect all adjustments, consisting of normal
recurring adjustments, which are, in the opinion of management, necessary
for a fair presentation of results of operations 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 Report for the year ended June 30, 1999 on Form 10-KSB.
The consolidated results of operations for the three months ended
September 30, 1999 are not necessarily indicative of the results to be
expected for the full fiscal year.
NOTE 2 - BUSINESS AND ORGANIZATION:
Paradise Music & Entertainment, Inc. ("Paradise") was formed in July 1996.
In October 1996, Paradise entered into an exchange agreement (the
"Agreement") whereby Paradise exchanged 873,000 shares of common stock in
exchange for the outstanding stock of its three original subsidiaries in a
transaction accounted for as a pooling of interests. Paradise consists of
the following operating 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, John Loeffler Music, Inc.
(which operates under the name of Rave Music and Entertainment) ("Rave") a
creator of music scores and advertising themes for television and radio,
incorporated in New York, Push Records, Inc. ("Push") a record label which
was incorporated in Delaware and Straw Dogs Acquisition Corporation
("Straw Dogs") incorporated in April 1999 in Delaware.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation - The consolidated financial statements
include the accounts of Paradise and its wholly-owned subsidiaries, All
Access, Picture Vision, Rave, Push and Straw Dogs (collectively the
"Company"). All significant intercompany accounts and transactions 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 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 in
accordance with the provisions of the various distribution agreements.
Certain record costs 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
8
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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."
Deferred acquisition costs - Costs incurred with the potential acquisition
of a business are capitalized and included with the cost of the
acquisition, upon closing. Costs incurred on acquisitions not consummated
are expensed when it is determined that the transaction will not be
consummated.
Deferred financing costs - The Company has deferred certain professional
and other fees incurred in connection with proposed financing. If
financing is successful all costs will be charged against paid-in-capital,
otherwise all costs will be expensed.
Loss Per Common Share - The Company complies with statement of Financial
Accounting Standards ("SFAS") 128, "Earnings Per Share", which 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 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. Diluted loss per common share is the same
as basic loss per common share for the three months ended September 30,
1999 and 1998.
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 4 - COMMITMENTS:
The Company has employment agreements with four of its executives, which
provide for various compensation and bonus arrangements. For the three
months ended September 30, 1999 and 1998 approximately $412,500 and
$403,000, respectively, has been expensed under the bonus plans and
employment agreements. These costs are included in marketing, selling,
general and administrative expenses.
In April 1999, the Company entered into a consulting agreement with a
consultant. The consultant will assist the Company through June 30, 2000
in a range of areas including identifying acquisition targets, structuring
transactions, employment issues and financings to support the Company's
growth and operations. As compensation for these services, the consultant
received 200,000 shares of restricted common stock (which were
subsequently registered with the Securities and Exchange Commission in
July) and three-year warrants to purchase 800,000 shares of common stock
at the following prices: 100,000 at $5.00 per share, 150,000 at $6.00 per
share, 150,000 at $7.00 per share, 150,000 at $8.00 per share, 125,000 at
$9.00 per share and 125,000 at $10.00 per share. The Company valued the
warrants and stock issued at approximately $2,389,000 based upon services
to be provided. At September 30, 1999, approximately $1,527,000 remains
unamortized.
During the Fiscal Year 1999, the Company entered into consulting
agreements with various consultants for professional and financial
services. The consultants will be compensated for their services through
the issuance of an aggregate of 495,000 warrants to purchase the Company's
common stock. The warrants typically vest after one year and have exercise
prices ranging from $4.00 to $10.00 per share. The warrants were valued at
approximately $240,000 based upon services to be provided. As of September
30, 1999, approximately $41,000 was expensed under these agreements.
9
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In April 1999, the Company entered into agreements for financial
consulting services related to proposed acquisitions and other special
projects with its outside Board members. The agreements, which are subject
to shareholder approval, expire in June 2001 and require the Company to
issue an aggregate of 300,000 warrants to purchase the Company's common
stock at exercise prices ranging from $5.00 to $5.25 per share. The
warrants vest after one year and expire in two years. The warrants were
valued at approximately $123,000 and as of September 30, 1999
approximately $14,000 was expensed under these agreements.
NOTE 5 - ECONOMIC DEPENDENCY:
Approximately $1,844,000 and $475,000 of television and film production
revenues for the three months ended September 30, 1999 and 1998,
respectively, were derived from two and four customers respectively.
Approximately $625,000 and $489,000 of recorded music and artist
management revenues for the three months ended September 30, 1999 and
1998, respectively, were derived from one and two customers, respectively.
At September 30, 1999, approximately $859,000 was owed in the aggregate to
the Company from these customers.
NOTE 6 - INFORMATION CONCERNING BUSINESS SEGMENTS
The Company adopted Statement of Financial Accounting Standards No. 131
(SFAS 131), "Disclosures About Segments of an Enterprise and Related
Information", effective July 1, 1998. SFAS 131 requires disclosures of
segment information on the basis that is used internally for evaluating
segment performance and deciding how to allocate resources to segments.
Segment information listed below reflects the two principal business units
of the Company for the three months ended September 30, 1999 and 1998.
Each segment is managed according to the products or services provided to
the respective customers and segment information is reported on the basis
of reporting to the Company's Chief Operating Decision Maker (CODM).
For the three months ended September 30, 1999:
Recorded Television &
Music & Artist Film
Management Production Corporate Consolidated
------------ ----------- ------------ -------------
Revenues $ 725,310 $2,913,326 $ -- $ 3,638,636
Net income (loss) 79,156 505,952 (781,490) (196,382)
For the three months ended September 30, 1998:
Recorded Television &
Music & Artist Film
Management Production Corporate Consolidated
------------ ----------- ------------ -------------
Revenues $ 629,927 $1,214,539 $ -- $ 1,844,466
Net income (loss) (418,261) 72,647 (428,506) (774,120)
10
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - RECENT AND SUBSEQUENT EVENTS:
In July 1999, investors represented by Cassandra, purchased 970,880 shares
of common stock at a price of $4.25 per share or $4,126,240 in the
aggregate. The Company subsequently registered these shares in addition to
266,500 shares previously unregistered of common stock with the Securities
and Exchange Commission.
Effective July 1, 1999 the Company entered into an interim agreement with
Jessie Dylan to function as Chairman and Chief Executive Officer of the
Company at an annual salary of $750,000. The interim agreement also
provided for a one-time signing bonus of $125,000. Upon shareholder
approval of the Consolidated Entertainment, LLC/Spur & Buckle, Inc.
acquisition and a five year employment agreement with Mr. Dylan which will
be effective as of July 1, 1999, Mr. Dylan will receive 750,000 ten-year
non-qualified options to purchase 750,000 shares of the Company's common
stock at $5.00 per share and will serve under the emploment agreement.
These options vest ratably over three-year period following the closing of
the acquisition. All payments made to Mr. Dylan under the interim
agreement, other than the signing bonus, will be applied to the
obligations under the Employment Agreement.
The board of directors has approved, subject to stockholder approval, the
increase of shares of common stock available for issuance under the option
plan to 3,000,000 shares.
In September 1999, the Company entered into an agreement to acquire the
assets of Consolidated Entertainment, LLC d/b/a Straw Dogs and 100% of the
common stock of Spur & Buckle, Inc., Los Angeles based television and
commercial production companies, for an aggregate of 1,441,000 shares of
restricted common stock. The purchase is subject to stockholder approval
and other closing conditions.
In October 1999, the Company entered into an agreement with Eruptor
Entertainment ("Eruptor"), a branded internet portal that features a blend
of original content and e-commerce. The agreement provides for the Company
to purchase one million shares of series A convertible preferred stock in
Eruptor by converting Eruptor's $100,000 note receivable and payment of an
additional $900,000. The preferred stock is convertible on a one to one
basis into shares of Eruptor's common stock. Eruptor's management plans
original episodic shows which will be interactive and range from
two-dimensional to three-dimensional animation to live action.
Additionally, under the agreement Paradise has the opportunity to produce
Eruptor projects in traditional media forms and Eruptor will exploit
certain Paradise projects in digital media form via its internet site.
11
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
Paradise Music & Entertainment, Inc. ("Paradise" or the "Company") is engaged in
several aspects of the music and entertainment industry. Our strategic goal is
to create an artist-centric company capable of producing quality content for any
entertainment medium. We intend to increase our presence in the music and
entertainment industry by concentrating our efforts on developing our core
businesses, by acquiring other viable companies which enhance our core
businesses and by acquiring companies engaged in collateral lines of business.
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 results of operations of the Company's operating subsidiaries are subject to
seasonal variations. Consequently, 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.
During fiscal 2000, the Company expects to expand significantly through
acquisitions and joint venture arrangements in the music and entertainment
industry. Our acquisition program is designed to identify, qualify and integrate
similar businesses of appropriate scale, which compliment our existing
businesses.It is anticipated that acquisitions may be financed through the
issuance of the Company's stock as well as with funds provided from financing
sources, if available. The Company has executed several letters of intent with
respect to prospective acquisitions.
Forward-Looking Statements
Except for the historical information contained herein, this quarterly report on
Form 10-QSB may contain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Investors are cautioned that forward-looking
statements are inherently uncertain. Actual performance and results of
operations may differ materially from those projected or suggested in the
forward-looking statements due to certain risks and uncertainties, including,
without limitation, risks associated with the Company being a recently
consolidated entity, dependence on senior management, risks inherent in the
recorded music industry such as the possibility of losses by the record label
and popularity of recording artists, the Company's ability to contract with
recording artists, the Company's ability to manage growth and the success of the
Company's music and entertainment acquisition program. The forward-looking
statements contained herein represent the Company's judgment as of the date of
this release hereof, and the Company cautions readers not to place undue
reliance on such statements.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Results of Operations
Three Months Ended September 30, 1999 Compared to
Three Months Ended September 30, 1998
Television and film production revenues increased to $2,913,326 for the three
months ended September 30, 1999 from $1,214,539 for the three months ended
September 30, 1998 an increase of $1,698,787 or 139.9%. Revenue from the pending
acquisition of Straw Dogs is not included. The increase in revenues is primarily
due to an increase in the number of television music specials produced during
the three months ended September 30, 1999, in addition to an increase in royalty
and residual revenues from original music scores made for television programs
such as Pokemon.
Television and film production cost of sales increased to $1,930,551 for three
months ended September 30, 1999 from $540,622 for three months ended September
30, 1998, an increase of $1,389,929 or 257.1%. Gross profit increased to
$982,775 from $673,917, an increase of $308,858 or 45.8%. Gross Profit as a
percentage of television and film production revenues decreased to 33.7% for the
three months ended September 30, 1999 from 55.5% for the three months ended
September 30, 1998. The decrease in margin percentage was primarily attributable
to the changing mix of revenues. In 1998 a greater percentage of revenues
derived from royalty and residual income from television programs and these
revenues have no cost of sales. As revenues from other sources in this business
segment have increased, the proportional impact of royalty and residual income
has decreased.
Recorded music and artist management revenues increased to $725,310 for the
three months ended September 30, 1999 from $629,927 for the three months ended
September 30, 1998 an increase of $95,383 or 15.1%. The increase in revenues is
primarily due to the increased sales generated from the release of the Blessid
Union CD in July 1999 combined with sales of the Paul Hardcastle and JazzMasters
III releases through the company's joint venture with the adult contemporary
jazz label, Trippin' `N Rhythm Records. These increases in revenue are partially
offset by the reduction of concerts performed by artists under management. The
recorded music operation has been restructured to decrease operating overhead by
having fewer releases of new records and by forming joint ventures with other
companies willing to absorb the costs associated with the production, marketing
and promotion of records.
Recorded music and artist management cost of sales increased to $405,178 for
three months ended September 30, 1999 from $112,688 for three months ended
September 30, 1998, an increase of $292,490 or 259.6 %. The increase is due to
greater overall album sales when compared to the three months ended September
30, 1998. Gross profit as a percentage of recorded music and artist management
revenues decreased to 44.1% for the three months ended September 30, 1999 from
82.1 % for the three months ended September 30, 1998. The decrease was
attributable to lower overall artist management revenues which have no costs of
sales associated with them and a new distribution agreement the Company executed
with V2 Records which decreased the Company's costs to produce and market the
recordings and provides for a portion of the profits from such recordings to be
shared with V2.
The Company's marketing, selling, general and administrative expenses decreased
to $1,509,504 for three months ended September 30, 1999 from $1,980,166 for the
three months ended September 30, 1998, a decrease of $470,662 or 23.8%. The
decrease is primarily attributable to the changes in the recorded music business
segment. The company's strategy has been to form joint venture agreements to
lower the cash investments required prior to the generation of revenues from
product sales. This is typified by the strategic alliance with V2 Records
whereby Push Records finds talent and produces masters and V2 markets and
promotes the talent and remains responsible for distribution of the recordings.
Prior to the V2 arrangement, Push Records needed substantial cash resources for
the development of its business and experienced substantial operating losses in
prior periods.
Interest income decreased to $10,215 for the three months ended September 30,
1999 from $16,583 for the three months ended September 30, 1998, a decrease of
$6,368 or 38.4%. The decrease resulted from the use of proceeds from the
Company's initial public offering during fiscal 1998, which were invested, in
interest bearing accounts.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The company's net loss decreased to $196,382 for the three months ended
September 30, 1999 from $774,120 for the three months ended September 30, 1998,
a decrease of $577,738 or 74.6%. The decrease in loss was primarily due to the
increase in gross profit and the decrease in marketing, selling, general and
administrative expenses, which reflects the efforts to recapitalize and
restructure the Company's core businesses.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the three months ended September 30,
1999 was $1,152,445. This was principally due to the operating loss for the year
and the increase in accounts receivables.
Net cash used in investing activities for the three months ended September 30,
1999 was $252,651. This was principally due to the payments for deferred
acquisition costs in addition to amounts used to acquire property and equipment.
Net cash provided by financing activities for the three months ended September
30, 1999 was $4,150,781 which is represented substantially by the net proceeds
from the sales of the Company's common stock, net of expenses.
The Company has working capital of $5,746,354 and stockholders' equity of
$7,809,358 at September 30, 1999. The Company raised an additional $4.1 million
in July 1999. The Company believes that its cash, operating cash flows and its
access to capital markets, taken together, provide adequate resources to fund
ongoing operating requirements and future capital expenditures related to the
expansion of existing businesses, future acquisitions and development of new
projects for the next twelve month period.
In September 1999, the Company entered into an agreement to acquire the assets
of Consolidated Entertainment, LLC d/b/a Straw Dogs and 100% of the common stock
of Spur & Buckle, Inc., Los Angeles based television and commercial production
companies, for an aggregate of 1,441,000 shares of restricted common stock. The
purchase is subject to stockholder approval and other closing conditions.
Year 2000 Compliance:
The Company has conducted a review of its computer systems and believes that the
majority of its systems are properly adapted to avoid a Year 2000 problem. The
Company believes that all its computer systems will be Year 2000 compliant by
the end of the third quarter of 1999. The expense incurred by the Company to
achieve compliance has not been material. The Company is currently working with
outside vendors to obtain assurances that they are Year 2000 compliant. However,
there can be no assurance that all of the Company's vendors, will achieve
compliance on a timely basis. In the event of any such noncompliance by vendors,
a material adverse effect to the Company's operations and financial results
could occur. The Company has not developed any contingency plan to address the
possibility of vendor-related Year 2000 problems
14
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PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In July 1999, investors represented by Cassandra, purchased 970,880
shares of common stock at a price of $4.25 per share or $4,126,240
in the aggregate. The Company subsequently registered these shares
in addition to 266,500 shares previously unregistered of common
stock with the Securities and Exchange Commission.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.53 Interim Agreement between Paradise Music & Entertainment,
Inc. and Jesse Dylan.
10.54 Employment Agreement between Paradise Music & Entertainment,
Inc. and Jesse Dylan (incorporated by reference to Appendix
C to the Company's proxy statement filed on November 10,
1999).
10.55 Asset Purchase Agreement dated September 23, 1999 by and
among Paradise Music & Entertainment, Inc., Straw Dogs
Acquisition Corp., Consolidated Entertainment, LLC, Jesse
Dylan and Craig Rodgers (incorporated by reference to
Appendix A to the Company's proxy statement filed on
November 10, 1999).
10.56 Stock Purchase Agreement dated September 23, 1999 by and
among Paradise Music & Entertainment, Inc., Straw Dogs
Acquisition Corp. and Jesse Dylan (incorporated by reference
to Appendix B to the Company's proxy statement filed on
November 10, 1999).
10.57 Purchase Agreement between Eruptor Entertainment, Inc.,
Cassandra/Chase Entertainment Partners, LLC, and Paradise
Music & Entertainment, Inc.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended September 30, 1999.
15
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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.
/S/ Richard Flynn
---------------------------------------
Richard Flynn, CHIEF FINANCIAL OFFICER
November 12, 1999
Paradise Music & Entertainment, Inc.
53 West 23rd Street, 11th Floor
New York, New York 10010
October 1, 1999
Mr. Jesse Dylan
President
Consolidated Entertainment, L.L.C.
1520 Second Street, Suite 2
Santa Monica, California 90401
Re: Terms of Interim Employment
Dear Jesse:
You have been acting as the Chairman/Chief Executive Officer of
Paradise Music & Entertainment, Inc. ("Paradise"). In that capacity you have
been providing full time services for the benefit of Paradise.
Since the commencement of your services Paradise has been
negotiating for the acquisition of Consolidated Entertainment, L.L.C. ("Straw
Dogs"). Among the terms of the Straw Dogs' acquisition are the execution of a
formal employment agreement with you ("Formal Agreement"). The purpose of this
letter is to set forth the terms for the payment to you of compensation for the
period from July 1, 1999 through the closing of the Straw Dogs' acquisition.
During the interim period you will be paid on the basis of an annual
salary of $750,000.00 per year. Payment of the amounts due to you for the period
from July 1, 1999 through the date hereof shall be made promptly. Thereafter you
shall receive payment based upon the normal payroll periods until the closing of
the Straw Dogs' acquisition. All payments to be made to you will be subject to
all standard deductions for withholding taxes and the like. In order to induce
you to enter into this formal interim agreement you will be paid a one-time
signing bonus of $125,000.00, such amount to be paid subject to applicable
withholding taxes and the like within ten business days from the date hereof.
Upon the closing of the Straw Dogs' acquisition any compensation (other than the
signing bonus) made to you hereunder with respect to the period commencing July
1, 1999 will offset amounts otherwise payable to you under the Formal Agreement.
<PAGE>
Will you please indicate your acceptance of these terms by signing a
copy of this letter in the space indicated below and returning it to me.
Sincerely,
Paradise Music & Entertainment, Inc.
By:
------------------------------------
Richard Flynn
Chief Financial Officer
Accepted and Agreed:
- --------------------------
Jesse Dylan
2
PURCHASE AGREEMENT
DATED AS OF SEPTEMBER __, 1999
BETWEEN ERUPTOR ENTERTAINMENT, INC.
AND THE PURCHASERS SET FORTH
ON THE SIGNATURE PAGES HERETO
<PAGE>
TABLE OF CONTENTS
Page
Section 1 Authorization and Closing .........................................1
1A. Authorization of the Preferred Stock...................................1
1B. Purchase and Sale of the Preferred Stock...............................1
1C. The Closing............................................................1
Section 2 Conditions of Each Purchaser's Obligation at the Closing ..........2
2A. Representations and Warranties; Covenants..............................2
2B. Articles of Incorporation..............................................2
2C. Registration Agreement.................................................2
2D. Sale of Preferred Stock to Each Purchaser..............................2
2E. Securities Law Compliance..............................................3
2F. Closing Documents......................................................3
2G. Proceedings............................................................3
2H. Waiver.................................................................4
Section 3 Covenants .........................................................4
3A. Financial Statements and Other Information.............................4
3B. Designation of Directors...............................................6
3C. Affirmative Covenants..................................................6
3D. Compliance with Agreements.............................................7
3E. Reservation of Common Stock............................................7
3F. Intellectual Property Rights...........................................7
3G. Rights of First Refusal and Preemptive Rights..........................8
3H. Redemptions; Dividends................................................11
Section 4 Representations and Warranties of the Company ....................11
4A. Organization, Corporate Power and Licenses............................11
4B. Capital Stock and Related Matters.....................................12
4C. Subsidiaries; Investments.............................................12
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4D. Authorization; No Breach..............................................13
4E. Contracts and Commitments.............................................13
4F. Intellectual Property Rights..........................................15
4G. Litigation, etc.......................................................16
4H. Brokerage.............................................................16
4I. Governmental Consent, etc.............................................17
4J. Insurance.............................................................17
4K. Compliance with Laws..................................................17
4L. Taxes.................................................................17
4M. Employees.............................................................18
4N. Year 2000.............................................................18
4O. Closing Date..........................................................19
Section 5 Definitions ......................................................19
5A. Definitions...........................................................20
Section 6 Miscellaneous ....................................................21
6A. Expenses..............................................................21
6B. Purchaser's Representations...........................................22
6C. Consent to Amendments.................................................23
6D. Survival of Representations and Warranties............................24
6E. Successors and Assigns................................................24
6F. Severability..........................................................24
6G.Counterparts...........................................................24
6H. Descriptive Headings; Interpretation..................................24
6I. Governing Law.........................................................24
6J. Notices...............................................................24
6K. No Strict Construction................................................25
Attachments
Schedule of Wire Transfer Instructions
Schedule of Purchasers
List of Exhibits
List of Disclosure Schedules
ii
<PAGE>
<PAGE>
ERUPTOR ENTERTAINMENT, INC.
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
THIS AGREEMENT is made as of September __, 1999, between Eruptor
Entertainment, Inc., a California corporation (the "Company"), and the Persons
listed on the Schedule of Purchasers attached hereto (collectively referred to
herein as the "Purchasers" and individually as a "Purchaser"). Except as
otherwise indicated herein, capitalized terms used herein are defined in Section
5 hereof.
The parties hereto agree as follows:
Section 1 Authorization and Closing.
1A. Authorization of the Preferred Stock.
The Company shall authorize the issuance and sale to the Purchasers
of 2,000,000 shares of its Series A Convertible Preferred Stock (the "Preferred
Stock"), having the rights and preferences set forth in Exhibit A attached
hereto. The Preferred Stock is convertible into shares of the Company's Common
Stock (the "Common Stock").
1B. Purchase and Sale of the Preferred Stock.
Subject to the terms and conditions set forth herein, at the
Closing, the Company shall sell to each Purchaser and, each Purchaser shall
purchase from the Company, the number of shares of Preferred Stock set forth
opposite such Purchaser's name on the Schedule of Purchasers attached hereto at
a price of $1.00 per share.
1C. The Closing.
The closing of the purchase and sale of the Preferred Stock (the
"Closing") shall take place via facsimile at 10:00 a.m. on September __, 1999,
or at such other place or on such other date as may be mutually agreeable to the
Company and each Purchaser. At the Closing, the Company shall deliver to each
Purchaser stock certificates evidencing the Preferred Stock to be purchased by
such Purchaser, registered in such Purchaser's or its nominee's name, upon
payment of the purchase price thereof by wire transfer of immediately available
funds to the Company's account at [insert
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name of bank and its address], as set forth on the attached Schedule of Wire
Transfer Instructions, in the aggregate amount set forth opposite such
Purchaser's name on the Schedule of Purchasers.
Section 2 Conditions of Each Purchaser's Obligation at the Closing.
The obligation of each Purchaser to purchase and pay for the
Preferred Stock at the Closing is subject to the satisfaction or waiver as of
the Closing of the following conditions:
2A. Representations and Warranties; Covenants.
The representations and warranties contained in Section 4 hereof
shall be true and correct in all respects at and as of the Closing as though
then made, except to the extent of changes caused by the transactions
contemplated herein, and the Company shall have performed in all respects all of
the covenants required to be performed by it hereunder prior to the Closing.
2B. Articles of Incorporation.
The Company shall have duly adopted, executed and filed with the
Secretary of State of California the Articles of Incorporation establishing the
terms and the relative rights and preferences of the Preferred Stock in the form
set forth in Exhibit A hereto (the "Articles of Incorporation"), and the Company
shall not have adopted or filed any other document designating terms, relative
rights or preferences of its preferred stock or otherwise amended its Articles
of Incorporation. The Articles of Incorporation shall be in full force and
effect as of the Closing under the laws of California and shall not have been
amended or modified.
2C. Registration Agreement.
The Company and the Purchasers shall have entered into a
registration rights agreement in form and substance as set forth in Exhibit B
attached hereto (the "Registration Agreement"), and the Registration Agreement
shall be in full force and effect as of the Closing.
2D. Sale of Preferred Stock to Each Purchaser.
The Company shall have simultaneously sold to each Purchaser the
Preferred Stock to be purchased by such Purchaser hereunder at the Closing and
shall have received payment therefor in full.
2
<PAGE>
2E. Securities Law Compliance.
The Company shall have made all filings under all applicable federal
and state securities laws necessary to consummate the issuance of the Preferred
Stock pursuant to this Agreement in compliance with such laws.
2F. Closing Documents.
The Company shall have delivered to each Purchaser all of the
following documents:
(i) an Officer's Certificate, dated the date of the Closing,
stating that the conditions specified Paragraphs 2A through 2E, inclusive,
have been fully satisfied in all material respects;
(ii) certified copies of the resolutions duly adopted by the
Company's board of directors authorizing the execution, delivery and
performance of this Agreement, the Registration Agreement and each of the
other agreements contemplated hereby, the filing of the Articles of
Incorporation, the issuance and sale of the Preferred Stock, the
reservation for issuance upon conversion of the Preferred Stock of an
aggregate of 2,000,000 shares of Common Stock and the consummation of all
other transactions contemplated by this Agreement;
(iii) certified copies of the Articles of Incorporation and
the Company's Bylaws (the "Bylaws"), each as in effect at the Closing;
(iv) copies of all third party and governmental consents,
approvals and filings required in connection with the consummation of the
transactions hereunder (including, without limitation, all blue sky law
filings and waivers of all preemptive rights and rights of first refusal
(if any));
(v) an opinion of Jones & Keller, counsel to the Company, with
respect to the matters set forth in the attached Exhibit C; and
(vi) such other documents relating to the transactions
contemplated by this Agreement as any Purchaser or its special counsel may
reasonably request.
2G. Proceedings.
All corporate and other proceedings taken or required to be taken by
the Company in connection with the transactions contemplated hereby to be
consummated at or prior to the Closing
3
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and all documents incident thereto shall be reasonably satisfactory in form and
substance to each Purchaser and its special counsel.
2H. Waiver.
Any condition specified in this Section 2 may be waived if consented
to by each Purchaser; provided that no such waiver shall be effective against
any Purchaser unless it is set forth in a writing executed by such Purchaser.
Section 3 Covenants.
3A. Financial Statements and Other Information.
The Company shall deliver to each Purchaser:
(i) as soon as available but in any event within 30 days after
the end of each monthly accounting period in each fiscal year, unaudited
consolidating and consolidated statements of income and cash flows of the
Company and its Subsidiaries for such monthly period and for the period
from the beginning of the fiscal year to the end of such month, and
unaudited consolidating and consolidated balance sheets of the Company and
its Subsidiaries as of the end of such monthly period, and commencing with
the statements for October 1999, setting forth in each case comparisons to
the corresponding period in the preceding fiscal year, and all such
statements, except as disclosed therein, shall be prepared in accordance
with generally accepted accounting principles, consistently applied,
subject to the absence of footnote disclosures and to normal year-end
adjustments and the Company's chief financial officer shall deliver a
certificate to such effect;
(ii) within 90 days after the end of each fiscal year,
consolidating and consolidated statements of income and cash flows of the
Company and its Subsidiaries for such fiscal year, and consolidating and
consolidated balance sheets of the Company and its Subsidiaries as of the
end of such fiscal year, setting forth in each case comparisons to the
Company's annual budget and to the preceding fiscal year, all prepared in
accordance with generally accepted accounting principles, consistently
applied (except as otherwise disclosed in such financial statements), and
accompanied by, (a) with respect to the consolidated portions of such
statements, an opinion of an independent accounting firm of recognized
national standing, (b) a certificate from such accounting firm, addressed
to the Company's board of directors, stating that in the course of its
examination nothing came to its attention that caused it to believe that
there was an Event of Noncompliance in existence or that there was any
material default by the Company or any Subsidiary in the fulfillment of or
compliance with any of the terms, covenants, provisions or conditions of
any other material
4
<PAGE>
agreement to which the Company or any Subsidiary is a party or, if such
accountants have reason to believe any Event of Noncompliance or other
such a default by the Company or any Subsidiary exists, a certificate
specifying the nature and period of existence thereof, and (c) a copy of
such firm's annual management letter to the board of directors;
(iii) promptly upon receipt thereof, any additional reports,
management letters or other detailed information concerning significant
aspects of the Company's operations or financial affairs given to the
Company by its independent accountants (and not otherwise contained in
other materials provided hereunder);
(iv) not more than 90 nor less than 30 days prior to the
beginning of each fiscal year commencing as of January 1, 2000, an annual
financial plan for the Company and its Subsidiaries for such fiscal year
on a monthly basis (displaying anticipated statements of income and cash
flows and balance sheets), and promptly upon preparation thereof any
revisions of such annual financial plan; and
(v) with reasonable promptness, such other information and
financial data concerning the Company and its Subsidiaries as a Purchaser
may reasonably request.
Each of the financial statements referred to in subparagraph (i) and (ii) shall
be true and correct in all material respects as of the dates and for the periods
stated therein, subject in the case of the unaudited financial statements to
changes resulting from normal year-end adjustments.
Notwithstanding the foregoing, the provisions of this paragraph 3A shall cease
to be effective once the Company (i) (a) becomes subject to the periodic
reporting requirements of the Securities Exchange Act and continues to comply
with such requirements, and (b) promptly provides to each Person otherwise
entitled to receive information pursuant to this paragraph 3A all reports and
other materials filed by the Company with the Securities and Exchange Commission
pursuant to the periodic reporting requirements of the Securities Exchange Act
or (ii) or upon a sale, merger or consolidation of the Company with or into
another entity where the surviving entity is not controlled by shareholders of
the Company.
Except as otherwise required by law or judicial order or decree or by any
governmental agency or authority, each Purchaser entitled to receive information
regarding the Company and its Subsidiaries under paragraph 3A shall use its best
efforts to maintain the confidentiality of all nonpublic information obtained by
it hereunder which the Company has reasonably designated as, or that a
reasonable person would believe was, proprietary or confidential in nature;
provided that each such Purchaser may, to the extent required by law, disclose
such information in connection with a bona fide sale or transfer of any
Preferred Stock, if the proposed transferee of such Person's Preferred Stock
agrees in advance in writing in a written instrument in form and substance
satisfactory to the Company to be
5
<PAGE>
bound by the provisions hereof.
3B. Designation of Directors.
So long as 500,000 shares of Preferred Stock are outstanding, the
holders of the Preferred Stock shall each have the right to select two (2)
representatives to be elected to the Company's board of directors, which
representatives shall initially be Robert Egan and Jesse Dylan. The Company
shall use its best efforts to cause such representatives to be elected to the
board of directors and shall not take any action which would diminish the
prospects of such representatives being elected to the board of directors. All
reasonable out-of-pocket and documented expenses of each board member incurred
in connection with attending regular and special board meetings shall be
reimbursed by the Company.
3C. Affirmative Covenants.
So long any of the Preferred Stock remains outstanding the Company
shall, and shall cause each Subsidiary to, unless it has received the prior
written consent of the holders of at least two-thirds of the outstanding
Preferred Stock:
(i) at all times cause to be done all things necessary to
maintain, preserve and renew its corporate existence and all material
licenses, authorizations and permits necessary to the conduct of its
businesses;
(ii) maintain and keep its material properties in good repair,
working order and condition, and from time to time make all necessary
repairs, renewals and replacements;
(iii) pay and discharge when payable all taxes, assessments
and governmental charges imposed upon its properties or upon the income or
profits therefrom (in each case before the same becomes delinquent and
before penalties accrue thereon) and all claims for labor, materials or
supplies, unless and to the extent that, in either case, the same are
being contested in good faith and by appropriate proceedings and adequate
reserves (as determined in accordance with generally accepted accounting
principles, consistently applied) have been established on its books with
respect thereto;
(iv) comply with all other obligations which it incurs
pursuant to any contract or agreement, as such obligations become due, or
such obligations are being contested in good faith and by appropriate
proceedings and adequate reserves (as determined in accordance with
generally accepted accounting principles, consistently applied) have been
established on its books with respect thereto;
6
<PAGE>
(v) comply with all applicable laws, rules and regulations of
all governmental authorities;
(vi) apply for and continue in force adequate insurance
covering risks of such types and in such amounts as are customary for
corporations of similar size engaged in similar lines of business; and
(vii) maintain proper books of record and account which
present fairly in all material respects its financial condition and
results of operations and make provisions on its financial statements for
all such proper reserves as in each case are required in accordance with
generally accepted accounting principles, consistently applied.
3D. Compliance with Agreements.
The Company shall perform and observe (i) all of its obligations to
each holder of the Preferred Stock set forth in the Articles of Incorporation,
and (ii) all of its obligations to each holder of Registrable Securities set
forth in the Registration Agreement.
3E. Reservation of Common Stock.
The Company shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose of
issuance upon the conversion of the Preferred Stock, such number of shares of
Common Stock issuable upon the conversion of all outstanding Preferred Stock.
All shares of Common Stock which are so issuable shall, when issued, be duly and
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges. The Company shall take all such actions as may be necessary to assure
that all such shares of Common Stock may be so issued without violation of any
applicable law or governmental regulation or any requirements of any domestic
securities exchange upon which shares of Common Stock may be listed (except for
official notice of issuance which shall be promptly transmitted by the Company
upon issuance).
3F. Intellectual Property Rights.
The Company shall, and shall cause each Subsidiary to, possess and
maintain all Intellectual Property Rights necessary to the conduct of their
respective businesses and own all right, title and interest in and to, or have a
valid license for, all such Intellectual Property Rights. Neither the Company
nor any Subsidiary shall take any action, or fail to take any action, which
would result in the invalidity, abandonment, misuse or unenforceability of such
Intellectual Property Rights or which would materially infringe upon or
misappropriate any material rights of other Persons.
7
<PAGE>
3G. Rights of First Refusal and Preemptive Rights.
(i) Subject to the provisions of subparagraph (vi) below,
other than (a) securities issued to employees, officers and directors of
the Company, but only in the event that such issuances do not exceed ten
percent of the Company's outstanding Common Stock as of the date hereof,
on a fully-diluted basis ("fully-diluted basis" means all outstanding
Common Stock and assumes the exercise or conversion of all other
securities, outstanding as of the date hereof, exercisable for or
convertible into Common Stock); (b) securities issued pursuant to a merger
or acquisition with an unrelated third party; (c) securities issued in
connection with an equipment leasing or financing which is primarily
comprised of debt; (d) securities issued pursuant to a registration
statement declared effective by the Securities and Exchange Commission, or
(e) securities issued in connection with licensing or other strategic
transactions but only if none of the Company's officers, directors,
employees and affiliates are parties to such transactions, if the Company
authorizes (or otherwise agrees to issue or sell) the issuance or sale in
a financing of any shares of Common Stock or any securities containing
options or rights to acquire any shares of Common Stock (other than as a
dividend on the outstanding Common Stock or Preferred Stock), the Company
shall first offer to sell to each holder of at least 50,000 shares of
Underlying Common Stock a portion of such stock or securities equal to
product of (x) the quotient determined by dividing (1) the number of
shares of Underlying Common Stock held by such holder by (2) the sum of
the total number of shares of Underlying Common Stock (the "First Offer
Right") and (y) the number of shares proposed to be sold by the Company in
such offering. The Company shall make such offer by delivering to each
holder a written notice (the "First Offer Notice") setting forth the
following proposed terms of such financing: (i) the aggregate amount of
such financing, (ii) the proposed type of security to be issued, (iii) the
number of shares or units of such security to be issued, (iv) the proposed
purchase price, (v) the conversion price if such security is convertible
into Common Stock, (vi) the dividend rate and liquidation preference, if
any and (vii) such other material terms.
(ii) In order to exercise its First Offer Right, a holder of
Underlying Common Stock must within 10 business days after receipt of a
First Offer Notice from the Company deliver a written notice to the
Company describing its election with respect to the First Offer Right. If
all of the stock and securities offered to the holders of Underlying
Common Stock is not fully subscribed by such holders, the remaining stock
and securities shall be available for offer by the Company to the Persons
to whom the Company originally proposed to issue such securities.
(iii) Upon the expiration of the 10 day period after the date
of receipt by the Purchasers of the First Offer Notice, and for a period
of 120 days thereafter, the Company shall be entitled to sell such stock
or securities which the holders of Underlying
8
<PAGE>
Common Stock have not elected to purchase on terms and conditions no more
favorable to the purchasers thereof than those offered to such holders.
(iv) Each holder of Underlying Common Stock who has exercised
a First Offer Right shall be entitled to purchase such stock or securities
on the same terms and conditions as such stock or securities are sold to
any other Persons. The purchase price for all stock and securities offered
to the holders of the Underlying Common Stock shall be payable in cash at
the closing of the transaction with the other purchasers.
(v) The rights of the holders of Underlying Common Stock under
this paragraph shall terminate upon (i) the effectiveness of a
registration statement filed by the Company with the Securities and
Exchange Commission under the Securities Act with respect to a Qualified
IPO; provided that if the registration statement is withdrawn or abandoned
before any shares of Common Stock are sold thereunder, the provisions of
this paragraph shall remain in effect or (ii) upon an acquisition, merger,
or sale of the Company with or into another entity which is not controlled
by the shareholders of the Company.
(vi) Notwithstanding the provisions of subparagraph (i) above,
if the Company authorizes the issuance or sale in a financing of any
shares of constituting Preferred Stock, Common Stock, or any securities
containing options or rights to acquire any shares of Preferred Stock or
Common Stock (other than as a dividend on the outstanding Common Stock or
Preferred Stock) in amount which would result in aggregate proceeds to the
Company of at least $500,000, the Company shall first offer to sell to
each Purchaser a portion of such stock or securities up to the amount
which would enable each Purchaser to increase its respective ownership of
outstanding Common Stock fifteen percentage points above that of such
Purchaser's percentage ownership of outstanding Common Stock (on a fully
diluted basis, as defined above) immediately prior to such authorization
by the Company (the "Financing Offer Right"); provided, however, in the
event the total amount of securities the Company plans to sell in such
financing is less than the amount necessary to allow the Purchasers to
increase their respective ownership of outstanding Common Stock by fifteen
percentage points, the Purchasers shall be eligible to purchase all of
such Common Stock proposed to be sold by the Company in such financing on
a pro rata basis, with each Purchaser being eligible to purchase a portion
of such stock or securities equal to product of (x) the quotient
determined by dividing (1) the number of shares of Underlying Common Stock
held by such Purchaser by (2) the sum of the total number of shares of
Underlying Common Stock and (y) the number of shares proposed to be sold
by the Company in such offering; and provided further, that in the event
that the Company proposes to sell such securities to Persons designated as
"strategic partners" by the Purchasers in their sole discretion, the
Purchasers shall be entitled to purchase a lesser amount of such
securities, as determined in their sole discretion. The Company shall make
such offer by delivering to
9
<PAGE>
each Purchaser a written notice (the "Financing Offer Notice") setting
forth the following proposed terms of such financing: (i) the aggregate
amount of such financing, (ii) the proposed type of security to be issued,
(iii) the number of shares or units of such security to be issued, (iv)
the proposed purchase price, (v) the conversion price if such security is
convertible into Common Stock, (vi) the dividend rate and liquidation
preference, if any and (vii) such other terms as the Company deems
material.
(A) In order to exercise its Financing Offer Right, a
holder of Underlying Common Stock must within 10
business days after receipt of a Financing Offer
Notice from the Company deliver a written notice
to the Company describing its election with
respect to the Financing Offer Right. If all of
the stock and securities offered to the holders of
Underlying Common Stock is not fully subscribed by
such holders, the remaining stock and securities
shall be available for offer by the Company to the
Persons to whom the Company originally proposed to
issue such securities.
(B) Upon the expiration of the 10 day period after
receipt by a holder of the Financing Offer Notice,
and for a period of 120 days thereafter, the
Company shall be entitled to sell such stock or
securities which the holders of Underlying Common
Stock have not elected to purchase on terms and
conditions no more favorable to the purchasers
thereof than those offered to such holders.
(C) Each holder of Underlying Common Stock who has
exercised a Financing Offer Right shall be
entitled to purchase such stock or securities on
the same terms and conditions as such stock or
securities are sold to any other Persons. The
purchase price for all stock and securities
offered to the holders of the Underlying Common
Stock shall be payable in cash at the closing of
the transaction with the other purchasers.
(D) The rights of the holders of Underlying Common
Stock under this paragraph (vi) shall terminate
upon (i) the
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effectiveness of a registration statement filed by
the Company with the Securities and Exchange
Commission under the Securities Act with respect
to a Qualified IPO; provided that if the
registration statement is withdrawn or abandoned
before any shares of Common Stock are sold
thereunder, the provisions of this paragraph shall
remain in effect or (ii) upon an acquisition,
merger, or sale of the Company with or into
another entity which is not controlled by the
shareholders of the Company.
3H. Redemptions; Dividends.
Without the consent of the holders of two-thirds of the Preferred
Stock, the Company shall not, and shall cause each Subsidiary not to, (i)
directly or indirectly, declare or pay any dividends or make any distributions
upon any of its capital stock or other equity securities, or (ii) directly or
indirectly, redeem, purchase or otherwise acquire, or permit any Subsidiary to
redeem, purchase or acquire, any of the Company's or any Subsidiaries capital
stock or other equity securities (including, without limitation, warrants,
options and other rights to acquire such capital stock or other equity
securities).
Section 4. Representations and Warranties of the Company.
The Company hereby represents and warrants to the Purchasers that,
except as set forth in the disclosure schedules hereto:
4A. Organization, Corporate Power and Licenses.
The Company is a corporation duly organized, validly existing and in
good standing under the laws of California and is qualified to do business in
every jurisdiction in which its lease or ownership of property or conduct of
business requires it to so qualify. The Company possesses all requisite
corporate power and authority and all material licenses, permits and
authorizations necessary to own and operate its properties, to carry on its
businesses as now conducted and to carry out the transactions contemplated by
this Agreement. The copies of the Company's and each Subsidiary's charter
documents and bylaws which have been furnished to the Purchasers' special
counsel reflect all amendments made thereto at any time prior to the date of
this Agreement and are correct and complete.
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4B. Capital Stock and Related Matters.
(i) As of the Closing and immediately thereafter, the
authorized capital stock of the Company shall consist of (a) 20,000,000
shares of preferred stock, of which 2,100,000 shares shall be designated
as Preferred Stock, of which 2,100,000 shares are issued and outstanding,
and (b) 50,000,000 shares of Common Stock, of which 8,000,000 are issued
and outstanding and 2,100,000 shares shall be reserved for issuance upon
conversion of the Preferred Stock and 2,000,000 shall be reserved for
issuance upon exercise of outstanding options to purchase Common Stock. As
of the Closing, neither the Company nor any Subsidiary shall have
outstanding any stock or securities convertible or exchangeable for any
shares of its capital stock or containing any profit participation
features, nor shall it have outstanding any rights or options to subscribe
for or to purchase its capital stock or any stock or securities
convertible into or exchangeable for its capital stock or any stock
appreciation rights or phantom stock plans, except as set forth on the
attached "Capitalization Schedule." As of the Closing, neither the Company
nor any Subsidiary shall be subject to any obligation (contingent or
otherwise) to repurchase or otherwise acquire or retire any shares of its
capital stock or any warrants, options or other rights to acquire its
capital stock, except as contemplated by this Agreement. As of the
Closing, all of the outstanding shares of the Company's capital stock
shall be validly issued, fully paid and nonassessable.
(ii) There are no statutory or contractual stockholders
preemptive rights or rights of refusal with respect to the issuance of the
Preferred Stock hereunder or the issuance of the Common Stock upon
conversion of the Preferred Stock. The Company has not violated any
applicable federal or state securities laws in connection with the offer,
sale or issuance of any of its capital stock, and the offer, sale and
issuance of the Preferred Stock hereunder does not require registration
under the Securities Act or any applicable state securities laws. To the
best of the Company's knowledge, there are no agreements between the
Company's shareholders with respect to the voting or transfer of the
Company's capital stock.
4C. Subsidiaries; Investments.
The attached "Subsidiary Schedule" correctly sets forth the name of
each Subsidiary, the jurisdiction of its incorporation and the Persons owning
the outstanding capital stock of such Subsidiary. Each Subsidiary is duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, possesses all requisite corporate power and
authority and all material licenses, permits and authorizations necessary to own
its properties and to carry on its businesses as now being conducted and as
presently proposed to be conducted, and is qualified to do business in every
jurisdiction in which its lease or ownership of property or conduct of business
require it to so qualify. All of the outstanding shares of capital stock of each
Subsidiary are validly
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issued, full paid and nonassessable, and all such shares are owned by the
Company or another Subsidiary free and clear of any Lien and not subject to any
option or right to purchase any such shares. Except as set forth on the
Subsidiary Schedule, neither the Company nor any Subsidiary owns or holds the
right to acquire any shares of stock or any other security or interest in any
other Person.
4D. Authorization; No Breach.
The execution, delivery and performance of this Agreement and the
Registration Agreement and the filing of the Articles of Incorporation have been
duly authorized by the Company. This Agreement, the Registration Agreement and
the Articles of Incorporation each constitutes a valid and binding obligation of
the Company, enforceable in accordance with its terms. The execution and
delivery by the Company of this Agreement and the Registration Agreement, the
offering, sale and issuance of the Preferred Stock hereunder, the issuance of
the Common Stock upon conversion of the Preferred Stock, the filing of the
Articles of Incorporation and the fulfillment of and compliance with the
respective terms hereof and thereof by the Company, do not and would not (i)
conflict with or result in a breach of the terms, conditions or provisions of,
(ii) constitute a default under, (iii) result in the creation of any lien,
security interest, charge or encumbrance upon the Company's or any Subsidiary's
capital stock or assets pursuant to, (iv) give any third party the right to
modify, terminate or accelerate any obligation under, (v) result in a violation
of, or (vi) other than pursuant to applicable securities laws, rules and
regulations, require any authorization, consent, approval, exemption or other
action by or notice or declaration to, or filing with, any court or
administrative or governmental body or agency pursuant to, the Articles of
Incorporation or the charter or bylaws of the Company or any Subsidiary, or any
law, statute, rule or regulation to which the Company or any Subsidiary is
subject, or any agreement, instrument, order, judgment or decree to which the
Company or any Subsidiary is subject.
4E. Contracts and Commitments.
(i Except as expressly contemplated by this Agreement or as
set forth on the attached "Contracts Schedule" or the attached "Employee
Benefits Schedule," neither the Company nor any Subsidiary is a party to
or bound by any written or oral:
(a pension, profit sharing, stock option, employee stock
purchase or other plan or arrangement providing for deferred or
other compensation to employees or any other employee benefit plan
or arrangement, or any collective bargaining agreement or any other
contract with any labor union, or severance agreements, programs,
policies or arrangements;
(b contract for the employment of any officer,
individual
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employee or other Person on a full-time, part-time, consulting or
other basis providing annual compensation in excess of $100,000 or
contract relating to loans to officers, directors or Affiliates;
(c contract under which the Company or any Subsidiary
has advanced or loaned any other Person amounts in the aggregate
exceeding $50,000;
(d agreement or indenture relating to borrowed money or
other Indebtedness or the mortgaging, pledging or otherwise placing
a Lien on any material asset or material group of assets of the
Company and its Subsidiaries;
(e guarantee of any obligation in excess of $50,000;
(f lease or agreement under which the Company or any
Subsidiary is lessee of or holds or operates any property, real or
personal, owned by any other party, except for any lease of real or
personal property under which the aggregate annual rental payments
do not exceed $50,000;
(g lease or agreement under which the Company or any
Subsidiary is lessor of or permits any third party to hold or
operate any property, real or personal, owned or controlled by the
Company or any Subsidiary;
(h contract or group of related contracts with the same
party or group of affiliated parties the performance of which
involves consideration in excess of $100,000;
(i any agreement under which the Company or any
Subsidiary could have liabilities in the future relating to the
acquisition or disposition of assets or properties having a fair
market value in excess of $100,000 by way of merger, consolidation,
purchase, sale or otherwise, or granting to any Person a right at
such Person's option to purchase or acquire any material asset or
property, of the Company or any Subsidiary or any interest therein
(not including dispositions of inventory in the ordinary course of
business);
(j any agreement for the construction, acquisition or
modification of any land, building, structure, improvement, fixture
or other fixed asset, or for the incurrence of any other capital
expenditure involving amounts in excess of $50,000 in the aggregate;
(k assignment, license, indemnification or agreement
with respect
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to any material intangible property (including without limitation
any Intellectual Property);
(l warranty agreement with respect to its services
rendered or its products sold or leased;
(m agreement under which it has granted any Person any
registration rights (including, without limitation, demand and
piggyback registration rights);
(n sales, distribution or franchise agreement;
(o any contract or agreement pursuant to which the
Company has incurred any debt on behalf of the Company or any of its
Subsidiaries, or any indebtedness which will be fully or partially
satisfied with any portion of the proceeds from the sale of the
Preferred Stock; or
(o contract or agreement prohibiting it from freely
engaging in any business or competing anywhere in the world.
(ii All of the contracts, agreements and instruments set forth
on the Contracts Schedule are, with respect to the Company, valid, binding
and enforceable in accordance with their respective terms. The Company and
each Subsidiary have performed all material obligations required to be
performed by them under the contracts, agreements and instruments listed
on the Contracts Schedule to which they are parties and are not in
material default under or in material breach of nor in receipt of any
written claim of default or breach under any material contract, agreement
or instrument to which the Company or any Subsidiary is a party listed on
the Contracts Schedule; and no event has occurred which with the passage
of time or the giving of notice or both would result in a material
default, breach or event of noncompliance by the Company or any Subsidiary
under any material contract, agreement or instrument to which the Company
or any Subsidiary is a party listed on the Contracts Schedule.
4F. Intellectual Property Rights.
(i The attached "Intellectual Property Schedule" contains a
complete and accurate list, as of September __, 1999, of all (a) patented or
registered Intellectual Property Rights owned or used by the Company or any
Subsidiary, (b) pending patent applications and applications for registrations
of other Intellectual Property Rights filed by the Company or any Subsidiary,
(c) unregistered trade names and corporate names owned or used by the
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<PAGE>
Company or any Subsidiary and (d) unregistered trademarks, service marks,
copyrights and computer software owned or used by the Company or any
Subsidiary, in each case which are material to the financial condition,
operating results, assets, operations or business prospects of the Company
and its Subsidiaries taken as a whole. The Intellectual Property Schedule
also contains a complete and accurate list of all licenses and other
rights granted by the Company or any Subsidiary to any third party with
respect to any material Intellectual Property Rights and all licenses and
other rights granted by any third party to the Company or any Subsidiary
with respect to any material Intellectual Property Rights, in each case
identifying the subject Intellectual Property Rights. Except as set forth
on the Intellectual Property Schedule, the Company or one of its
Subsidiaries owns all right, title and interest to, or has the right to
use pursuant to a valid license, all Intellectual Property Rights
necessary for the operation of the businesses of the Company and its
Subsidiaries as presently conducted. To the Company's knowledge, the
Company and its Subsidiaries have taken all reasonably necessary actions
to maintain and protect the Intellectual Property Rights which they own.
(ii Except as set forth on the Intellectual Property Schedule,
(a) there have been no claims made against the Company or any Subsidiary
asserting the invalidity, misuse or unenforceability of any of such
Intellectual Property Rights, (b) neither the Company nor any Subsidiary
has received any notices of any infringement or misappropriation by, or
conflict with, any third party with respect to such Intellectual Property
Rights, and (c) to the Company's knowledge, the conduct of the Company's
and each Subsidiary's business has not infringed, misappropriated or
conflicted with and does not infringe, misappropriate or conflict with any
Intellectual Property Rights of other Persons.
4G. Litigation, etc.
Except as set forth on the attached "Litigation Schedule," there are
no actions, suits, proceedings, orders, investigations or claims pending or, to
the best of the Company's knowledge, threatened against the Company or any
Subsidiary. Neither the Company nor any Subsidiary is subject to any arbitration
proceedings under collective bargaining agreements or otherwise or, to the
Company's knowledge, any governmental investigations or inquiries. Neither the
Company nor any Subsidiary is subject to any judgment, order or decree of any
court or other governmental agency.
4H. Brokerage.
Except as set forth on the attached "Brokerage Schedule," there are
no claims for brokerage commissions, finders' fees or similar compensation in
connection with the transactions contemplated by this Agreement based on any
arrangement or agreement binding upon the Company or any Subsidiary.
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<PAGE>
4I. Governmental Consent, etc.
Other than with respect to applicable securities laws, rules and
regulations, and filings with the Secretary of State of California, no permit,
consent, approval or authorization of, or declaration to or filing with, any
governmental authority is required in connection with the execution, delivery
and performance by the Company of this Agreement or the Registration Agreement,
or the consummation by the Company of any other transactions contemplated hereby
or thereby, except as set forth on the attached "Consents Schedule" and except
as expressly contemplated herein or in the exhibits hereto.
4J. Insurance.
The attached "Insurance Schedule" contains a true, correct and
complete description of each insurance policy maintained by the Company and its
Subsidiaries with respect to its properties, assets and businesses, and each
such policy is in full force and effect as of the Closing. Neither the Company
nor any Subsidiary is in default with respect to its obligations under any
insurance policy maintained by it, and neither the Company nor any Subsidiary
has been denied insurance coverage. Except as set forth on the Insurance
Schedule, the Company and its Subsidiaries do not have any self-insurance or
co-insurance programs.
4K. Compliance with Laws.
Except as set forth on the attached "Compliance Schedule," to the
Company's knowledge, neither the Company nor any Subsidiary has violated any law
or any governmental regulation or requirement which violation, and neither the
Company nor any Subsidiary has received notice of any such violation.
4L. Taxes.
(i The Company has timely filed (or has had timely filed on
its behalf) or will file or cause to be timely filed, all Tax Returns
required by applicable law to be filed by any of them prior to or as of
the Closing. All such Tax Returns are, or will be at the time of filing,
true, complete and correct in all material respects.
(ii The Company has paid (or has had paid on its behalf), or
where payment is not due, has established (or has had established on its
behalf and for its sole benefit and recourse), or will establish or cause
to be established on or before the Closing, an adequate accrual for the
payment of, all material Taxes due with respect to any period ending prior
to or as of the Closing.
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(iii The Company and its Subsidiaries have withheld and paid
all Taxes required to have been withheld and paid in connection with
amounts paid or owing to any employee, creditor, independent contractor or
other third party.
(iv For purposes of this Agreement, the following terms shall
have the following meanings: (A) "Taxes" shall mean all Federal, state,
local and foreign taxes, and other assessments of a similar nature
(whether imposed directly or through withholding), including any interest,
additions to tax, or penalties applicable thereto, and (B) "Tax Returns"
shall mean all Federal, state, local and foreign tax returns,
declarations, statements, reports, schedules, forms and information
returns and any amended tax return relating to Taxes.
4M. Employees.
Except as set forth on Section 4M of the Disclosure Schedule, to the
Knowledge of the Company, no officer of the Company and no group of employees or
independent contractors of the Company or any Subsidiary has any plans to
terminate his, her or its employment or relationship as an independent
contractor with the Company or any Subsidiary. Except as set forth in Section 4M
of the Disclosure Schedule, no organizational effort is presently being made or,
to the knowledge of the Company, threatened by or on behalf of any labor union
with respect to any employees of the Company or any Subsidiary and none of their
employees are represented by any labor union. Except as set forth in Section 4M
of the Disclosure Schedule, the Company and the Subsidiaries are in compliance
with all applicable laws respecting employment and employment practices, terms
and conditions of employment and wages and hours, and are not engaged in any
unfair labor practice and, to the knowledge of the Company, there is no
reasonable basis for any unfair labor practice complaint or claim to be asserted
against the Company or any Subsidiary, and there is no labor strike, dispute,
slowdown or stoppage actually pending or, to the knowledge of the Company,
threatened, against the Company or any Subsidiary. Except as set forth in
Section 4M of the Disclosure Schedule, the employees of the Company and the
Subsidiaries are not subject to any collective bargaining agreement.
4N. Year 2000.
Except as set forth on Schedule 4N,
(i To the Company's knowledge, none of the computer software,
computer firmware, computer hardware (whether general or special purpose)
or other similar or related items of automated, computerized or software
systems that are used or relied on by
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<PAGE>
Company or by any of its Subsidiaries in the conduct of their respective
businesses will malfunction, will cease to function, will generate
incorrect data or will produce incorrect results when processing,
providing or receiving (a) date-related data from, into and between the
twentieth and twenty-first centuries or (b) date-related data in
connection with any valid date in the twentieth and twenty-first
centuries;
(ii To the Company's knowledge, none of the products and
services sold, licensed, leased, rendered, or otherwise provided by the
Company or by any of its Subsidiaries in the conduct of their respective
businesses will malfunction, will cease to function, will generate
incorrect data or will produce incorrect results when processing,
providing or receiving (a) date-related data from, into and between the
twentieth and twenty-first centuries or (b) date-related data in
connection with any valid date in the twentieth and twenty-first
centuries; and, accordingly, neither the Company nor any of its
Subsidiaries is or will be subject to any claim, demand, action, suit,
liability, damage, material loss, or material expense arising from, or
related to, circumstances where such products and services malfunction,
cease to function, generate incorrect data, or produce incorrect results
when processing, providing or receiving (x) date-related data from, into
and between the twentieth and twenty-first centuries or (y) date-related
data in connection with any valid date in the twentieth and twenty-first
centuries; and
(iii Neither the Company nor any of its Subsidiaries has made
any other representations or warranties regarding the ability of any
product or service sold, licensed, leased, rendered, or otherwise provided
by Company or by any of its Subsidiaries in the conduct of their
respective businesses to operate without malfunction, to operate without
ceasing to function, to generate correct data or to produce correct
results when processing, providing or receiving (a) date-related data
from, into and between the twentieth and twenty-first centuries and (b)
date-related data in connection with any valid date in the twentieth and
twenty-first centuries.
4O. Closing Date.
The representations and warranties of the Company contained in this
Section 4 and elsewhere in this Agreement and all information contained in any
exhibit, schedule or attachment hereto or in any certificate or other writing
delivered by, or on behalf of, the Company to any Purchaser at the Closing shall
be true and correct in all material respects on the date of the Closing as
though then made, except as affected by the transactions expressly contemplated
by this Agreement, and will not contain any untrue statement of a material fact
or omit a material fact necessary to make each statement contained herein or
therein misleading.
Section 5. Definitions.
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5A. Definitions.
For the purposes of this Agreement, the following terms have the
meanings set forth below:
"Affiliate" of any particular Person means any other Person
controlling, controlled by or under common control with such particular Person,
where "control" means the possession, directly or indirectly, of the power to
direct the management and policies of a Person whether through the ownership of
voting securities, contract or otherwise.
"Event of Noncompliance" means any condition, occurrence or event
which, without regard to any giving of notice, lapse of time, or both, would
constitute a material breach of any of the Company's obligations under this
Agreement.
"Intellectual Property Rights" means all (i) patents, patent
applications, patent disclosures and inventions, (ii) trade names, trademarks,
service marks and registrations and applications for registration thereof, and
(iii) copyrights (registered or unregistered) and registrations and applications
for registration thereof.
"Liens" means any mortgage, pledge, security interest, encumbrance,
lien or charge of any kind, any sale of receivables with recourse against the
Company, any Subsidiary or any Affiliate, any filing or agreement to file a
financing statement as debtor under the Uniform Commercial Code or any similar
statute other than to reflect ownership by a third party of property leased to
the Company or any Subsidiaries under a lease which is not in the nature of a
conditional sale or title retention agreement, or any subordination arrangement
in favor of another Person (other than any subordination arising in the ordinary
course of business).
"Officer's Certificate" means a certificate signed on behalf of the
Company by the Company's chief executive officer, its chief financial officer or
chief administrative officer, stating that (i) the officer signing such
certificate has made or has caused to be made such investigations as are
reasonably necessary in order to permit him to verify the accuracy of the
information set forth in such certificate and (ii) to such officer's knowledge,
such certificate does not misstate any material fact and does not omit to state
any material fact necessary to make the certificate not misleading.
"Person" means an individual, a partnership, a corporation, a
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Qualified IPO" has the meaning set forth in Article V, Section 5(b)
of the Articles
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of Incorporation, as in effect on the Closing Date.
"Restricted Securities" means (i) the Preferred Stock issued
hereunder, (ii) the Common Stock issued upon conversion of the Preferred Stock
and (iii) any securities issued with respect to the securities referred to in
clauses (i) or (ii) above by way of a stock dividend or stock split or in
connection with a combination of shares, recapitalization, merger, consolidation
or other reorganization. As to any particular Restricted Securities, such
securities shall cease to be Restricted Securities when they have (a) been
effectively registered under the Securities Act and disposed of in accordance
with the registration statement covering them, (b) been distributed to the
public through a broker, dealer or market maker pursuant to Rule 144 (or any
similar provision then in force) under the Securities Act or become eligible for
sale pursuant to Rule 144(k) (or any similar provision then in force) under the
Securities Act or (c) been otherwise transferred and new certificates for them
not bearing the Securities Act. Whenever any particular securities cease to be
Restricted Securities, the holder thereof shall be entitled to receive from the
Company, without expense, new securities of like tenor not bearing a Securities
Act legend.
"Securities Act" means the Securities Act of 1933, as amended, or
any similar federal law then in force.
"Securities and Exchange Commission" includes any governmental body
or agency succeeding to the functions thereof.
"Securities Exchange Act" means the Securities Exchange Act of 1934,
as amended, or any similar federal law then in force.
"Subsidiary" means any corporation of which the securities having a
majority of the ordinary voting power in electing the board of directors are, at
the time as of which any determination is being made, owned by the Company
either directly or through one or more Subsidiaries.
"Underlying Common Stock" means (i) the Common Stock issued or
issuable upon conversion of the Preferred Stock and (ii) any Common Stock issued
or issuable with respect to the securities referred to in clause (i) above by
way of stock dividend or stock split or in connection with a combination of
shares, recapitalization, merger, consolidation or other reorganization.
Section 6. Miscellaneous.
6A. Expenses.
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The Company shall reimburse the Purchasers for all reasonable and
documented out-of-pocket expenses (including the reasonable attorneys' fees and
out-of-pocket expenses of one outside counsel) actually incurred by them in
connection with the transactions contemplated by this Agreement up to $50,000 in
the aggregate, so long as the Purchaser provides timely notice and explanation
of any fees in excess of $20,000.
6B. Purchaser's Representations.
Each Purchaser hereby represents and warrants to the Company as
follows:
(i) it is acquiring the Restricted Securities purchased
hereunder or acquired pursuant hereto for its own
account with the intention of holding such securities
for purposes of investment, and that it has no intention
of selling such securities in a public distribution in
violation of the federal securities laws or any
applicable state securities laws. Each certificate or
instrument representing Restricted Securities shall be
imprinted with a legend in substantially the following
form:
"The securities represented by this certificate were originally issued on
September __, 1999, and have not been registered under the Securities Act
of 1933, as amended or the securities laws of any state. The transfer of
the securities represented by this certificate is subject to the
conditions specified in the Purchase Agreement, dated as of September __,
1999 and as amended and modified from time to time, between the issuer
(the "Company") and certain investors, and the Company reserves the right
to refuse the transfer of such securities until such conditions have been
fulfilled with respect to such transfer. A copy of such conditions shall
be furnished by the Company to the holder hereof upon written request and
without charge."
(ii) it is, if an entity, an entity duly organized, validly
existing and in good standing under the laws of the
jurisdiction of its organization and is qualified to do
business in every jurisdiction in which its lease or
ownership of property or conduct of business requires it
to so qualify, except where the failure to so qualify
has not had and would not reasonably be expected to have
a material adverse effect on the financial condition,
operating results, assets, operations or business
prospects of such Purchaser or on such Purchaser's
ability to perform its obligations hereunder (a
"Purchaser Material Adverse Effect"). It possesses all
requisite power and authority (corporate or otherwise)
and all material licenses, permits and authorizations
necessary to own and operate its properties, to carry on
its businesses as now conducted
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<PAGE>
and to carry out the transactions contemplated by this
Agreement, except for such licenses, permits and
authorizations as the failure to possess would not
reasonably be expected to have a Purchaser Material
Adverse Effect.
(iii) The execution, delivery and performance of this
Agreement have been duly authorized by such Purchaser.
This Agreement constitutes a valid and binding
obligation of such Purchaser, enforceable in accordance
with its terms. The execution and delivery by such
Purchaser of this Agreement, the purchase of the
Preferred Stock hereunder and the fulfillment of and
compliance with the terms hereof by such Purchaser, do
not and would not (i) conflict with or result in the
breach of the terms, conditions or provisions of, (ii)
constitute a default under, (iii) result in the creation
of any lien, security interest, charge or encumbrance
upon such Purchaser's securities or assets pursuant to,
(iv) give any third party the right to modify, terminate
or accelerate any obligation under, (v) result in a
violation of, or (vi) other than pursuant to applicable
securities laws, rules and regulations, require any
authorization, consent, approval, exemption or other
action by or notice or declaration to, or filing with,
any court or administrative or governmental body or
agency pursuant to, the organization documents of such
Purchaser, or any law, statute, rule or regulation to
which such Purchaser is subject, or any agreement,
instrument, order, judgment or decree to which such
Purchaser is subject.
(iv) Such Purchaser is an "accredited investor" as defined in
Regulation D promulgated under the Securities Act.
6C. Consent to Amendments.
Except as otherwise expressly provided herein, the provisions of
this Agreement may be amended and the Company may take any action herein
prohibited, or omit to perform any act herein required to be performed by it,
only if the Company has obtained the written consent of the holders of
two-thirds of the outstanding Preferred Stock. No other course of dealing
between the Company and the holder of any Preferred Stock or any delay in
exercising any rights hereunder or under the Articles of Incorporation shall
operate as a waiver of any rights of any such holders. For purposes of this
Agreement, shares of Preferred Stock held by the Company or any Subsidiaries
shall not be deemed to be outstanding.
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6D. Survival of Representations and Warranties.
All representations and warranties contained herein or made in
writing by any party in connection herewith shall survive the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby for a period of one year after the Closing.
6E. Successors and Assigns.
Except as otherwise expressly provided herein, all covenants and
agreements contained in this Agreement by or on behalf of any of the parties
hereto shall bind and inure to the benefit of the respective successors and
assigns of the parties hereto whether so expressed or not.
6F. Severability.
Whenever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be prohibited by or invalid
under applicable law, such provision shall be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of this
Agreement.
6G.Counterparts.
This Agreement may be executed simultaneously in two or more
counterparts, any one of which need not contain the signatures of more than one
party, but all such counterparts taken together shall constitute one and the
same Agreement.
6H. Descriptive Headings; Interpretation.
The descriptive headings of this Agreement are inserted for
convenience only and do not constitute a substantive part of this Agreement. The
use of the word "including" in this Agreement shall be by way of example rather
than by limitation.
6I. Governing Law.
This Agreement and the exhibits and schedules hereto shall be
governed by, and construed in accordance with, the laws of the State of
California, without giving effect to any choice of law or conflict of law rules
or provisions (whether of the State of California or any other jurisdiction)
that would cause the application of the laws of any jurisdiction other than the
State of California.
6J. Notices.
24
<PAGE>
All notices, demands or other communications to be given or
delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when delivered personally to the
recipient, sent to the recipient by reputable overnight courier service (charges
prepaid) or mailed to the recipient by certified or registered mail, return
receipt requested and postage prepaid. Such notices, demands and other
communications shall be sent to each Purchaser at the address indicated on the
Schedule of Purchasers and to the Company at the address indicated below:
Eruptor Entertainment, Inc.
4127 Via Marina, #303
Marina Del Rey, CA 90292
Facsimile: 310-286-1902
Attn: Brad Foxhoven
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
6K. No Strict Construction.
The parties hereto have participated jointly in the negotiation and
drafting of this Agreement. In the event an ambiguity or question of intent or
interpretation arises, this Agreement shall be construed as if drafted jointly
by the parties hereto, and no presumption or burden of proof shall arise
favoring or disfavoring any party by virtue of the authorship of any of the
provisions of this Agreement.
[Signatures Appear on Following Page]
25
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
on the date first written above.
ERUPTOR ENTERTAINMENT, INC.
By:
----------------------------------------
Name:
Title:
PURCHASERS:
CASSANDRA/CHASE ENTERTAINMENT
PARTNERS, L.L.C.
By: Cassandra-Chase Eruptor Entertainment
Partners, L.L.C.
By:
---------------------------------
Robert Egan, Member
PARADISE MUSIC & ENTERTAINMENT, INC.
By:
---------------------------------------
Jesse Dylan, Chief Executive Officer
<PAGE>
SCHEDULE OF WIRE TRANSFER INSTRUCTIONS
Wire transfers should be sent to the Company's account at:
<PAGE>
SCHEDULE OF PURCHASERS
Total
No. of Purchase
Shares Price
of For
Names and Preferred Preferred
Addresses Stock Stock
--------- ----- -----
Cassandra/Chase Eruptor Entertainment 1,000,000 $ 1,000,000
Partners, L.L.C.
561 Broadway, Suite 8C
New York, New York 10012-3918
Attn: Robert Egan
Facsimile: 212-966-5693
Paradise Music & Entertainment, Inc. 1,000,000 $ 1,000,000
53 West 23rd Street
New York, New York 10010
TOTAL 2,000,000 $2,000,000.00
<PAGE>
LIST OF EXHIBITS
Exhibit A - Articles of Incorporation
Exhibit B - Registration Agreement
Exhibit C - Legal Opinion of Jones & Keller
<PAGE>
LIST OF DISCLOSURE SCHEDULES
Capitalization Schedule
Subsidiary Schedule
Contracts Schedule
Intellectual Property Schedule
Litigation Schedule
Brokerage Schedule
Consents Schedule
Insurance Schedule
Compliance Schedule
Employee Schedule
Y2K Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,676,327
<SECURITIES> 0
<RECEIVABLES> 1,667,588
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,663,590
<PP&E> 1,619,082
<DEPRECIATION> 493,741
<TOTAL-ASSETS> 9,726,594
<CURRENT-LIABILITIES> 1,917,236
<BONDS> 0
0
0
<COMMON> 63,553
<OTHER-SE> 7,745,805
<TOTAL-LIABILITY-AND-EQUITY> 9,726,594
<SALES> 3,638,636
<TOTAL-REVENUES> 3,638,636
<CGS> 2,335,729
<TOTAL-COSTS> 2,335,729
<OTHER-EXPENSES> 1,509,504
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (196,382)
<INCOME-TAX> 0
<INCOME-CONTINUING> (196,382)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (196,382)
<EPS-BASIC> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
