SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|X| Preliminary Proxy Statement |_| Confidential, for Use of the
|_| Definitive Proxy Statement Commission Only
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
Paradise Music & Entertainment, Inc.
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(Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
|_| No fee required
|X| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, par value $.01 per share,
of Paradise Music & Entertainment, Inc.
("Paradise Common Stock")
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(2) Aggregate number of securities to which transaction applies:
An aggregate of 1,441,000 shares of Paradise Common Stock
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined:
The Registrant has determined that the maximum underlying value of
the transaction is $5,673,938. The average between the high and the
low sale price on October 18, 1999 of $3.9375. One-fiftieth of one
percent of such underlying value, the amount of the filing fee is
$1,135.
(4) Proposed maximum aggregate value of transaction:
$5,673,938
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(5) Total fee paid:
$1,135
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|_| Fee paid previously with preliminary materials.
|_| Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>
PROXY STATEMENT
FOR
SPECIAL MEETING OF STOCKHOLDERS
PROPOSED ACQUISITIONS AND OTHER MATTERS - YOUR VOTE IS IMPORTANT
This proxy statement and the accompanying proxy card are being mailed,
beginning November 1, 1999, to Paradise stockholders in connection with the
solicitation of proxies by the Board of Directors for use at a special meeting
of stockholders. This proxy procedure is necessary to permit stockholders, who
are unable or unwilling to attend the meeting, to vote. We encourage you to read
this document thoroughly and to take this opportunity to vote on the matters to
be decided at the meeting which are listed in the following notice and are
described in this proxy statement.
Proposed Acquisition
We have agreed to:
o acquire the business and assets of Consolidated Entertainment, LLC
(d/b/a "Straw Dogs"), a company owned and operated by Jesse Dylan,
our Chairman and Chief Executive Officer, and Craig Rodgers;
o acquire all the stock of Spur & Buckle, Inc., a company which is
wholly-owned by Mr. Dylan; and
o enter into employment agreements with Jesse Dylan and with Craig
Rodgers.
The acquisitions and the employment agreements must be approved by our
stockholders. We have scheduled this special meeting to vote on the acquisitions
and the other proposals described below.
If the acquisitions are completed and employment agreements are entered
into, Jesse Dylan will receive a total of 1,000,000 shares of common stock and
ten year non-qualified options (outside of our stock option plan) to purchase
750,000 shares at $5 per share, and Craig Rodgers will receive 441,000 shares of
common stock and ten year non-qualified options to purchase 100,000 shares at $5
per share. We estimate that the shares of common stock to be issued, without
counting options, to Messrs. Dylan and Rodgers will represent approximately 19%
of our outstanding common stock after giving effect to the acquisitions.
The Board of Directors believes that the transactions are fair to, and in
the best interests of, the company and its stockholders.
Other Matters
You are also being asked to vote on and approve:
o increasing the total number of shares available for stock options
from 1,500,000 to 3,000,000;
o the consulting agreement with Jeffrey Rosen, a director, under which
he will be paid for his services with a three-year warrant to
purchase 200,000 shares at $5.25 per share; and
o the consulting agreement with Thomas J. Edelman, a director, under
which he will be paid for his services with a three-year warrant to
purchase 100,000 shares of Paradise common stock at $5 per share.
Only stockholders of record at the close of business on October 18, 1999,
the record date, will be entitled to notice of and to vote at the meeting. On
the record date there were 6,355,331 shares of common stock issued and
outstanding and entitled to vote at the meeting. There is no other class of
voting securities outstanding. Each share of common stock is entitled to one
vote which may be cast in person or by proxy.
The Board of Directors unanimously recommends that you vote in favor of
all of the matters being voted on.
Dissenting stockholders do not have appraisal rights in connection with
the proposals.
Whether or not you plan to attend a meeting, please take the time to vote
by completing and mailing the enclosed proxy card to us. If you sign, date and
mail your proxy card without indicating how you want to vote, your proxy will be
counted as a vote FOR the proposal(s) submitted at the meeting. If you are a
stockholder and fail to return your proxy card or vote in person at the meeting,
you will not be counted as present or voting at the meeting.
<PAGE>
PRELIMINARY COPY
PARADISE MUSIC & ENTERTAINMENT, INC.
53 WEST 23RD STREET
NEW YORK, NEW YORK 10010
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
DATE: November 15, 1999
TIME: 10:00 a.m. New York time
PLACE: Our Executive Offices
53 West 23rd Street, 11th Floor
New York, NY 10010
The purposes of the meeting are:
1. To consider and vote upon a proposal to adopt and approve the following
agreements and transactions described in the summary on page 1 and on pages 8
through 17 of the proxy statement:
o the asset purchase agreement for the purchase of substantially all
of the business and assets of Consolidated Entertainment, LLC (d/b/a
Straw Dogs), a company owned and operated by Jesse Dylan, our
Chairman and Chief Executive Officer, and Craig Rodgers;
o the issuance to Straw Dogs, as payment of the purchase price, of
900,000 shares of Paradise common stock;
o the stock purchase agreement for the purchase of all of the stock of
Spur & Buckle, Inc., a company wholly-owned by Jesse Dylan;
o the issuance to Jesse Dylan, as payment of the purchase price, of
541,000 shares of Paradise common stock;
o the employment agreements with Jesse Dylan and with Craig Rodgers;
o the award to Jesse Dylan of ten year non-qualified options (outside
of our stock option plan) to purchase 750,000 shares contemplated by
his employment agreement;
o the award to Craig Rodgers of ten year non-qualified options to
purchase 100,000 shares contemplated by his employment agreement;
and
o the other transactions contemplated by these transactions and
agreements.
2. To consider and vote upon the amendment to the company's 1996 Stock
Option Plan to increase the total number of shares of common stock available for
options to be granted under the plan from 1,500,000 to 3,000,000.
3. To consider and vote upon the consulting agreement with Jeffrey Rosen,
a director, under which he will be paid for his services with three-year
warrants to purchase 200,000 shares at a purchase price of $5.25 per share.
4. To consider and vote upon the consulting agreement with Thomas J.
Edelman, a director, under which he will be paid for his services with
three-year warrants to purchase 100,000 shares at a purchase price of $5 per
share.
5. To transact any other business that may come before the meeting.
New York, New York By Order of the Board of Directors,
November 1, 1999
RICHARD FLYNN
Secretary
RETURN OF PROXIES
A PROXY AND SELF-ADDRESSED ENVELOPE ARE ENCLOSED FOR YOUR USE IF YOU DO
NOT PLAN TO ATTEND THE MEETING IN PERSON. IF YOU ARE UNABLE TO ATTEND THE
MEETING WE URGE YOU TO VOTE BY PROMPTLY SIGNING AND RETURNING THE PROXY,
REGARDLESS OF THE NUMBER OF SHARES OF STOCK HELD BY YOU. ANY PROXY GIVEN BY YOU
MAY BE REVOKED BY YOU AT ANY TIME PRIOR TO THE VOTING OF THE PROXY.
<PAGE>
TABLE OF CONTENTS
SUMMARY......................................................................1
The Meeting..................................................................1
The Acquisition Transactions.................................................2
Plan Amendment...............................................................5
Proposal No. 3...............................................................5
Consulting Agreement with Jeffrey Rosen......................................5
Proposal No. 4...............................................................5
Consulting Agreement with Thomas J. Edelman..................................5
THE MEETING..................................................................6
Date, Time And Place.........................................................6
Matters To Be Considered At the Meeting......................................6
Record Date; Shares Entitled To Vote; Quorum.................................6
Votes Required...............................................................6
Voting of Proxies............................................................6
Revocability of Proxies......................................................7
Solicitation of Proxies......................................................7
Security Ownership Of Management.............................................7
Interest of Jesse Dylan in Acquisition Transactions..........................7
PROPOSAL NO. 1...............................................................8
THE ACQUISITION TRANSACTIONS.................................................8
Background of and Reasons for the Acquisition Transactions...................8
Recommendation of the Board of Directors.....................................9
Description of Asset Purchase Agreement.....................................10
Description of Stock Purchase Agreement.....................................13
Description of Employment Agreement with Jesse Dylan........................15
Description of Employment Agreement with Craig Rodgers......................16
Federal Income Tax Consequences of the Acquisition Transactions
Contemplated by the Asset Purchase Agreement and Stock Purchase Agreement...17
Accounting Treatment........................................................18
Federal and State Regulatory Approvals......................................18
Percentage of the Company Owned by Messrs. Dylan and Rodgers After the
Acquisition Transactions....................................................18
Dissenter's Rights of Appraisal.............................................18
Listing On Nasdaq and Boston Stock Exchange.................................18
Resales of Common Stock.....................................................18
Conduct of Our Business and Straw Dogs Business if the Acquisition
Transactions Are Not Consummated............................................18
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION............19
INFORMATION CONCERNING PARADISE.............................................23
Recent Developments.........................................................24
Our Current Business........................................................24
Our Acquisition Program.....................................................26
Competition.................................................................26
Organization................................................................27
Employees/Independent Contractors...........................................27
Description of Property.....................................................27
Description of Legal Proceedings............................................28
Management Discussion and Analysis of Financial Condition and Results of
Operations of Paradise......................................................28
INFORMATION CONCERNING STRAW DOGS AND SPUR & BUCKLE.........................29
Description of Business.....................................................29
Description of Property.....................................................30
Description of Legal Proceedings............................................30
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Straw Dogs....................................................30
Results of Operations.......................................................30
Newly Issued Accounting Pronouncements......................................30
Inflation...................................................................31
Year 2000...................................................................31
Market Information and Related Stockholder Matters..........................32
<PAGE>
Security Ownership of Paradise of Certain Beneficial Owners and Management..34
COMPENSATION OF NAMED EXECUTIVE OFFICERS OF PARADISE........................36
Summary Compensation Table..................................................36
Option Grants in Last Fiscal Year...........................................37
Aggregate Option/SAR Exercises; Fiscal 1999 Year End Option/SAR Values......37
Directors' Compensation.....................................................38
Employment Agreements, Termination of Employment and Change in Control
Arrangements................................................................38
PROPOSAL NO. 2..............................................................39
AMENDMENT OF 1996 STOCK OPTION PLAN.........................................39
Reasons for and Principal Effects of the Plan Amendment.....................40
Description of 1996 Stock Option Plan.......................................40
Grants......................................................................43
Federal Income Tax Consequences of Option Plan..............................43
Plan Amendment Benefits Table...............................................45
Proposed Plan Amendment.....................................................43
Vote Required for Approval..................................................45
PROPOSAL NO. 3..............................................................46
APPROVAL OF CONSULTING AGREEMENT WITH JEFFREY ROSEN.........................46
Vote Required for Approval..................................................46
PROPOSAL NO. 4..............................................................46
APPROVAL OF CONSULTING AGREEMENT WITH THOMAS J. EDELMAN.....................46
Vote Required for Approval..................................................46
OTHER BUSINESS..............................................................46
INDEPENDENT ACCOUNTANTS.....................................................46
ADDITIONAL INFORMATION......................................................47
SHAREHOLDER PROPOSALS FOR 2000 ANNUAL MEETING...............................47
INDEX TO FINANCIAL STATEMENTS OF PARADISE..................................F-1
INDEX TO FINANCIAL STATEMENTS OF STRAW DOGS...............................F-17
APPENDICES
ASSET PURCHASE AGREEMENT.....................................................A
STOCK PURCHASE AGREEMENT.....................................................B
DYLAN EMPLOYMENT AGREEMENT...................................................C
RODGERS EMPLOYMENT AGREEMENT.................................................D
PROPOSED AMENDMENT TO 1996 STOCK OPTION PLAN.................................E
FORM OF PROXY FOR THE SPECIAL MEETING........................................F
<PAGE>
SUMMARY
This summary highlights selected information. We are providing this
summary to help you in your review and understanding of the more detailed
information provided in the other sections of this proxy statement and in the
attachments, which you are urged to read in their entirety. We have included
page references parenthetically to direct you to a more detailed description of
the topics of this summary.
The Meeting
Date, Time and Place
The meeting will be held at our offices at 53 West 23rd Street, 11th
Floor, New York, New York 10010, on November 15, 1999 commencing at 10:00 a.m.,
local time.
Purposes
At the meeting, you will vote upon
o as a single proposal, the adoption of
- the asset purchase agreement for the purchase of substantially
all of the business and assets of Straw Dogs;
- the stock purchase agreement for the purchase of all of the
stock of Spur & Buckle;
- the employment agreements with Jesse Dylan and with Craig
Rodgers; and
- the transactions contemplated by these agreements;
o the amendment to the stock option plan;
o the consulting agreement with Jeffrey Rosen, a director;
o the consulting agreement with Thomas J. Edelman, a director;
o any other business that may come before the meeting or any
postponement or adjournment thereof.
Record Date; Shares Entitled to Vote; Quorum (Page 6)
We have established the close of business on October 18, 1999 as the
record date for stockholders entitled to notice and to vote at the meeting. A
majority of the outstanding shares must be represented at the meeting for the
meeting to take place. You will have one vote for each share of common stock
owned.
Votes Required (Page 6)
The affirmative vote of the holders of a majority of the shares present at
the meeting in person or by proxy and entitled to vote will be required to
approve each of the matters scheduled to be voted upon at the meeting.
Security Ownership of Management (Page 7)
On the record date, our directors and executive officers and their
affiliates beneficially owned 1,213,367 shares of common stock (exclusive of
shares that may be acquired through the exercise of options and warrants), which
represented approximately 19% of the outstanding shares of common stock on that
date. Each director and executive officer has indicated his intention to vote
his shares FOR each of the matters being voted on at the meeting. In addition,
Mr. Dana Giacchetto, President of The Cassandra Group, Inc. and Investors for
whom Cassandra acts as Investment Adviser, are the owners of record of an
aggregate of more than 32% of our outstanding shares. Mr. Giacchetto has
indicated that he intends to vote his shares in favor of the matters scheduled
to be voted on at the meeting and to advise Cassandra investors who own shares
to vote their shares in favor of each of the matters being voted on at the
meeting.
1
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Proposal No. 1
The Acquisition Transactions
You are being asked to consider and vote upon and approve, as a single
proposal, the asset purchase agreement, the stock purchase agreement, the
employment agreements with Jesse Dylan and with Craig Rodgers and the related
transactions. There follows a summary description of each of these agreements
and the related transactions.
The Asset Purchase Agreement (Page 10)
We have agreed to purchase, for 900,000 shares of Paradise common stock,
substantially all of the business and assets of Straw Dogs and to assume
substantially all liabilities of Straw Dogs, effective as of June 1, 1999. Straw
Dogs is currently owned and operated by Jesse Dylan and Craig Rodgers. Mr. Dylan
is our Chairman and Chief Executive Officer and a director. The shares being
issued are not being registered under the Securities Act of 1933, as amended.
Messrs. Dylan and Rodgers have been granted "piggyback" registration rights.
A copy of the asset purchase agreement is included as Appendix A to this
proxy statement. For a more detailed description of the asset purchase agreement
and the transactions contemplated thereby, see "THE ACQUISITION TRANSACTIONS -
Description of Asset Purchase Agreement" commencing on page 10.
The Stock Purchase Agreement (Page 13)
We have agreed to purchase, effective as of June 1, 1999, all of the stock
of Spur & Buckle for 541,000 shares of Paradise common stock. Spur & Buckle is
wholly-owned by Mr. Dylan. The shares being issued are not being registered
under the Securities Act. Mr. Dylan has been granted "piggyback" registration
rights.
A copy of the stock purchase agreement is included as Appendix B to this
proxy statement. For a more detailed description of the stock purchase agreement
and the transactions contemplated thereby, see "THE ACQUISITION TRANSACTIONS -
Description of Stock Purchase Agreement" commencing on page 13.
The Employment Agreement with Jesse Dylan (Page 15)
Mr. Dylan will be employed as our Chairman and Chief Executive Officer, a
position he currently holds, for a five year term commencing as of July 1, 1999.
Mr. Dylan will continue his directional efforts and his fees will accrue to
Paradise. Mr. Dylan will receive an annual salary of $750,000. Mr. Dylan's
compensation is to be reviewed annually by our compensation committee with bonus
awards or increases in salary to be considered based on Mr. Dylan's and our
overall performance. In addition to salary and bonus, Mr. Dylan will be entitled
to receive ten year non-qualified options (outside of our stock option plan) to
purchase 750,000 shares of common stock at $5 per share. The options will vest
ratably over a three year period following the closing (provided Mr. Dylan is
employed by us at that time). The employment agreement requires us to register
the issuance of the shares underlying the options and the resale of these shares
under the Securities Act. In addition, Mr. Dylan will be entitled to participate
in benefit plans established by us for our key executives and to receive
$1,500,000 of life insurance. Mr. Dylan has agreed to restrictions on competing
with us and on soliciting our customers and employees.
The execution and delivery of Mr. Dylan's employment agreement is a
condition to closing the asset purchase agreement and the stock purchase
agreement. The employment agreement with Mr. Dylan will be effective only if the
asset purchase and the stock purchase are completed. A copy of the employment
agreement with Mr. Dylan is included as Appendix C to this proxy statement. For
a more detailed description, see "THE ACQUISITION TRANSACTIONS -- Description of
Employment Agreement with Jesse Dylan" commencing on page 15.
2
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The Employment Agreement with Craig Rodgers (Page 16)
Mr. Rodgers will be employed as Chief Executive Officer of Straw Dogs for
a three year term commencing as of July 1, 1999 at an annual salary of $350,000.
Mr. Rodger's compensation is to be reviewed annually by our compensation
committee with bonus awards or increases in salary to be considered based on Mr.
Rodgers and Straw Dogs' overall performance. In addition to his salary, Mr.
Rodgers will be entitled to receive an annual bonus of $100,000 per year if the
pre-tax profits of Straw Dogs at the end of each fiscal year are at least
$850,000. In addition to salary and bonus, Mr. Rodgers will be entitled to
receive ten year non-qualified options to purchase 100,000 shares at an exercise
price of $5 per share. Mr. Rodgers will also be entitled to participate in
benefit plans established by Straw Dogs for its key executives. Mr. Rodgers has
agreed to restrictions on competing and on soliciting customers and employees.
The execution and delivery of Mr. Rodgers' employment agreement is a
condition to closing the asset purchase agreement. The employment agreement with
Mr. Rodgers will be effective only if the asset purchase and the stock purchase
are completed. A copy of the employment agreement with Mr. Rodgers is included
as Appendix D to this proxy statement. For a more detailed description see "THE
ACQUISITION TRANSACTIONS -- Description of Employment Agreement with Craig
Rodgers" commencing on page 16.
Description of Business of Straw Dogs and Spur & Buckle (Page 29)
Straw Dogs is a leading television commercial production company. Spur &
Buckle is a motion picture development company. See "INFORMATION CONCERNING
STRAW DOGS AND SPUR & BUCKLE" on page 29.
Conditions to Asset Purchase Agreement and Stock Purchase Agreement (Pages 13
and 15, respectively)
Completion of the asset purchase and stock purchase is subject to the
satisfaction of a number of conditions, including obtaining stockholder
approval. See "THE ACQUISITION TRANSACTIONS - Description of Asset Purchase
Agreement - Closing Conditions" commencing on page 13. See "THE ACQUISITION
TRANSACTIONS - Description of Stock Purchase Agreement - Closing Conditions"
commencing on page 15.
Termination of Asset Purchase Agreement and Stock Purchase Agreement (Pages 12
and 15, respectively.)
The asset purchase agreement and stock purchase agreement may be
terminated at any time without completing the acquisitions as follows:
o by mutual consent;
o by either party, if the other party has violated the agreement;
o by either party, if the transactions have not been completed by
December 31, 1999; and
o by either party if a court or other governmental authority has
permanently prohibited the transactions.
See "THE ACQUISITION TRANSACTIONS - Description of Asset Purchase Agreement"
"Description of Stock Purchase Agreement commencing on pages 10 and 13,
respectively.
Background and Reasons for the Acquisition/Board Recommendation (Page 8)
For a discussion of the background of the acquisition, see "THE
ACQUISITION TRANSACTIONS - Background and Reasons for the Acquisition
Transactions." We believe that the acquisition of Straw Dogs and Spur & Buckle
is in the best interests of, and is fair to, Paradise and its stockholders. We
believe the transaction offers us an opportunity to benefit from the earnings
and management skills provided by the businesses we will acquire. We believe
that the price we are paying is beneficial to us. See "THE ACQUISITION
TRANSACTIONS - Background and Reasons for the Acquisition Transactions;
Recommendation of the Board" on page 8.
The Board Unanimously Recommends that the Stockholders Vote in Favor of the
Acquisition Transactions.
3
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Interests of Jesse Dylan in the Acquisition Transactions (Page 7)
In considering the Board's recommendation to vote in favor of the asset
purchase and stock purchase agreements and the related transactions, you should
be aware of the following interests in the transactions of Jesse Dylan, our
Chairman and Chief Executive Officer and a director:
o Mr. Dylan is one of the owners and operators of Straw Dogs and owns
all of Spur & Buckle. If the transactions are approved Mr. Dylan
will receive (i) 1,000,000 shares of Paradise common stock, (ii) a
five year employment agreement with (a) an annual salary of
$750,000; (b) ten year non-qualified options (outside of our stock
option plan) to purchase 750,000 shares at $5 per share; and (c) an
annual compensation review with bonus awards or salary increases to
be based on Mr. Dylan's performance and our overall performance. In
addition, effective as of August 8, 1999, if the acquisition closes
we will enter into a ten year lease with an affiliate of Mr. Dylan
and Mr. Rodgers for 10,000 square feet of space at between $2.25 and
$2.40 per square foot based on independent appraisals and subject to
future escalation.
Mr. Dylan excused himself from voting on the acquisition transactions. The
Board recognized the interests of Mr. Dylan and determined that they did not
detract from the fairness to our stockholders of the asset purchase and stock
purchase agreements and the related transactions.
Federal Income Tax Consequences of the Asset Purchase Agreement and the Stock
Purchase Agreement (Page 17)
The asset purchase and stock purchase, respectively, will constitute a
reorganization under Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code") and will therefore constitute a non-taxable transaction for
each of Messrs. Dylan and Rodgers. We will get a carry over basis in the assets
and businesses acquired. See "THE ACQUISITION TRANSACTIONS - Federal Income Tax
Consequences of the Asset Purchase Agreement and the Stock Purchase Agreement"
commencing on page 17.
Accounting Treatment (Page 17)
The asset purchase and stock purchase will each be accounted for as a
purchase in accordance with generally accepted accounting principles. See "THE
ACQUISITION TRANSACTIONS -- Accounting Treatment" commencing on page 17.
Dissenter's Rights of Appraisal
Under Delaware corporate law you are not entitled to appraisal or
dissenter's rights in connection with the acquisitions.
Listing on NASDAQ and Boston Stock Exchange
Application will be made to list the shares being issued and being
reserved for issuance on the Nasdaq SmallCap Market and the Boston Stock
Exchange.
Markets and Market Prices
The common stock is traded on Nasdaq SmallCap Market and the Boston Stock
Exchange, under the symbol "PDSE" and "PMU," respectively.
The last reported sale price of the common stock on April 23, 1999, the
last full trading day prior to the public announcement of the proposed asset
purchase and stock purchase as reported on Nasdaq, was $5.75.
On October 18, 1999, the last reported sale price of the common stock, as
reported on Nasdaq was $3.8125 per share.
Unaudited Pro Forma Condensed Consolidated Financial Information (Page 19)
4
<PAGE>
See "Unaudited Pro Forma Condensed Consolidated Financial Information" on
page 19 for unaudited pro-forma condensed consolidated financial information
with respect to the acquisition transactions.
Proposal No. 2
Plan Amendment
On April 30, 1999, the Board of Directors adopted an amendment to the 1996
Stock Option Plan to increase from 1,500,000 to 3,000,000 the number of shares
available for issuance of stock options under the option plan. As of October 1,
1999, there were options covering 1,062,500 shares of common stock outstanding
under the option plan. Accordingly, only 437,500 shares are available for future
grants under the option plan. As we believe that stock based performance
compensation arrangements are beneficial in attracting and maintaining key
employees and directors by aligning their interests with those of our
stockholders over the long term, we have adopted the amendment to the option
plan, subject to stockholder approval. We believe that the ability to provide
future grants to existing employees and new employees as our businesses
expand, and to employees of acquired companies, will increase our growth.
The Board of Directors recommends a vote FOR the amendment to the stock
option plan.
Proposal No. 3
Consulting Agreement with Jeffrey Rosen
On April 20, 1999, we entered into a consulting agreement with Jeffrey
Rosen, one of our non-executive directors, in which Mr. Rosen has agreed to
assist us in the structuring of proposed business ventures over and above his
services as a director. The term commenced April 20, 1999 and ends June 30,
2000. In consideration for his services Mr. Rosen was awarded, subject to
stockholder approval, three year warrants to purchase 200,000 shares at a
purchase price of $5.25 per share, which warrants vest after one year.
The Board of Directors recommends a vote FOR the consulting agreement with
Jeffrey Rosen.
Proposal No. 4
Consulting Agreement with Thomas J. Edelman
On April 8, 1999, we entered into a consulting agreement with Thomas J.
Edelman, one of our non-executive directors, in which Mr. Edelman has agreed to
assist us in the structuring of proposed business ventures over and above his
services as a director. The term of the agreement commenced April 8, 1999 and
ends June 30, 2000. In consideration for his services Mr. Edelman was awarded,
subject to stockholder approval, three year warrants to purchase 100,000 shares
at a purchase price of $5 per share, which warrants vest after one year.
The Board of Directors recommends a vote FOR the consulting agreement with
Thomas J. Edelman.
5
<PAGE>
THE MEETING
Date, Time And Place
The meeting will be held at our offices located at 53 West 23rd Street,
11th Floor, New York, New York, 10010, on November 15, 1999 commencing at 10:00
a.m., local time.
Matters To Be Considered At the Meeting
At the meeting, stockholders of record on the October 18, 1999 record
date, are being asked to consider, vote upon and approve:
o as a single proposal, the asset purchase agreement, the stock
purchase agreement, the employment agreements with Jesse Dylan and
with Craig Rodgers, and the related transactions;
o the amendment to the stock option plan;
o the consulting agreement with Jeffrey Rosen, a director;
o the consulting agreement with Thomas J. Edelman, a director; and
o any other business that may come before the meeting or any
postponement or adjournment thereof.
Record Date; Shares Entitled To Vote; Quorum
Stockholders of record on the October 18, 1999 record date are entitled to
one vote per share of common stock on each matter to be voted on at the meeting.
As of the record date there were 6,355,331 shares of common stock issued and
outstanding. The presence in person or by properly executed proxy of the holders
of a majority of the issued and outstanding shares of common stock is necessary
to constitute a quorum at the meeting. Abstentions and broker non-votes (i.e.
shares held by brokers or nominees as to which (i) instructions have not been
received from the beneficial owners and (ii) the broker or nominee does not have
discretionary authority to vote on a particular matter) are counted as present
in determining whether the quorum requirement is satisfied.
Votes Required
The affirmative vote of the holders of a majority of the shares present at
the meeting in person or by properly executed proxy and entitled to vote will be
required to approve the acquisition transactions, the amendment to the option
plan, the consulting agreement with Jeffrey Rosen and the consulting agreement
with Thomas Edelman, and any other matters that may come before the meeting. If
you abstain on any proposal, your shares are considered present at the meeting
for that proposal, but since they are not affirmative votes for that proposal,
they will have the same effect as votes against the proposal. With respect to
broker non-votes, the shares are not considered entitled to vote at the meeting
for those proposals and they are, therefore, not counted in respect of those
proposals. These broker non-votes have the practical effect of reducing the
number of affirmative votes required to achieve a majority for those proposals
by reducing the total number of shares from which the majority is calculated.
Voting of Proxies
The persons named as proxies are M. Jay Walkingshaw and Richard Flynn.
Shares represented by all properly executed proxies received in time for the
meeting will be voted at the meeting in the manner specified by the holders
thereof. In the absence of any specification, the shares will be voted in favor
of the matters described being voted on at the meeting. The proxies will vote in
their discretion, on any other business that may come before the meeting. The
persons named as proxies by you may propose and vote for one or more
adjournments or postponements of the meeting, including, without limitation,
adjournments to permit further solicitations of proxies in favor of any
proposal; provided, however, that no proxy that is voted against a proposal will
be voted in favor of any such adjournment or postponement.
The Board of Directors is not aware of any business to come before the
meeting other than as described in this proxy statement. If, however, other
matters come before either the meeting or any adjournment or postponement
thereof, the persons appointed as proxies will have discretionary authority to
vote the shares represented by duly executed proxies in accordance with their
discretion and judgment as to the best interest of the company.
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Revocability of Proxies
By granting your proxy on the accompanying proxy you are not precluded
from revoking it and voting in person. You may revoke a proxy at any time prior
to the time it is voted by (i) delivering to our Secretary at our principal
offices a duly executed revocation of proxy, (ii) submitting a duly executed
proxy bearing a later date, or (iii) appearing at the meeting and voting in
person at the meeting. Attendance by you at a meeting will not, in and of
itself, constitute revocation of a proxy.
Solicitation of Proxies
We will pay the costs of printing and mailing this proxy statement and the
fees associated with the filing of this proxy statement with the Securities and
Exchange Commission ("SEC"). In addition to soliciting by mail, our directors,
officers and employees may solicit proxies from stockholders by telephone or
other means of communication. Arrangements will also be made with brokerage
houses and other custodians, nominees and fiduciaries for the forwarding of
solicitation material to the beneficial owners of stock held of record by those
persons. We may reimburse these custodians, nominees and fiduciaries for their
reasonable out-of-pocket expenses.
YOU ARE ASKED TO COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY CARD AND
RETURN IT PROMPTLY IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE.
Security Ownership Of Management
On the record date, our directors and executive officers and their
affiliates beneficially owned 1,213,367 shares of common stock (exclusive of
shares that may be acquired through the exercise of options and warrants), which
represented approximately 19% of the outstanding shares of common stock on that
date. Each director and executive officer has indicated his intention to vote
his shares in favor of each of the matters scheduled to be voted on at the
meeting. In addition, Mr. Dana Giacchetto, President of Cassandra, and investors
for whom the Cassandra acts as an investment adviser, are the owners of record
of an aggregate of more than 32% of our outstanding shares. Mr. Giacchetto has
indicated that he intends to vote in favor of the matters scheduled to be voted
on at the meeting. Mr. Giacchetto is an advisor to the Cassandra investors and
has indicated his intention to advise them to vote their shares in favor of each
of the matters being voted on at the meeting.
Interests of Jesse Dylan in Acquisition Transactions
In considering the Board's recommendations to you to vote in favor of the
acquisition transactions, you should be aware of the interests of Jesse Dylan,
our Chairman and Chief Executive Officer and a director, in the acquisition
transactions.
Mr. Dylan is one of the principal owners and operators of Straw Dogs and
Spur & Buckle. If the acquisition transactions are approved, Mr. Dylan will
receive:
o 1,000,000 shares of Paradise common stock; and
o a five year employment agreement with
- an annual salary of $750,000 per year;
- an annual compensation review with bonus awards or salary
increases to be based on Mr. Dylan's performance and our
overall performance; and
- ten year non-qualified options, outside of our option plan, to
purchase 750,000 shares of Paradise common stock at an
exercise price of $5, vesting ratably over a three year
period.
In addition, effective as of August 8, 1999, if the acquisition closes we
will enter into a ten year lease with an affiliate of Mr. Dylan and Mr. Rodgers
for 10,000 square feet of space at between $2.25 and $2.40 per square foot,
subject to independent appraisal and future escalation.
Mr. Dylan excused himself from voting on the acquisition transactions. The
Board recognized the interests of Mr. Dylan in the acquisition transactions and
determined that they did not detract from the fairness to our stockholders of
the asset purchase and stock purchase agreements and the related transactions.
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PROPOSAL NO. 1
THE ACQUISITION TRANSACTIONS
Background of and Reasons for the Acquisition Transactions
In December of 1998, investors represented by Cassandra, a registered
investment advisor purchased 2,000,000 shares of common stock. With the
assistance of Cassandra, Paradise' senior management began to develop plans for
developing the company through refocusing its existing operations and developing
strategies for growth.
As provided in the terms of the Cassandra financing, Cassandra recommended
the appointment of Jesse Dylan and Jeffrey Rosen for election to the Paradise
Board of Directors. In addition, Cassandra designated an individual who has
since resigned as its Board representative.
In January the Board adopted a policy to significantly expand the
company's operations by developing its core businesses internally and by
acquiring viable companies to enhance its core businesses.
In January of 1999, Dana Giacchetto, founder and Chief Executive Officer
of Cassandra, requested a meeting with Brian Doyle and Richard Flynn, Chief
Executive Officer and Chief Operating Officer of Paradise, respectively, and
directors of Paradise to discuss the possibility of Paradise acquiring
Consolidated Entertainment LLC, a company owned by Mr. Dylan and Craig Rodgers
and a motion picture development company owned by Mr. Dylan, Spur & Buckle,
Inc., (collectively "Straw Dogs") and the benefits that could be achieved from
such an acquisition. Straw Dogs is a leading production company of television
commercials, music videos and other related media.
In early February of 1999, Messrs. Flynn and Doyle met with Messrs. Dylan
and Rodgers to discuss Paradise's strategic plan and a potential acquisition of
Straw Dogs by Paradise. During the meeting, Messrs. Doyle and Flynn requested
further information regarding Straw Dogs' business and operations. Based on the
expression of interest, Paradise and Straw Dogs executed a confidentiality
agreement. Thereafter, Straw Dogs made available to Paradise certain limited
information regarding its business and operations.
During several telephone conversations in February 1999, senior management
of Paradise continued to discuss the terms of a potential acquisition of Straw
Dogs with Messrs. Dylan and Rodgers. During this period Paradise retained its
auditors, Rothstein, Kass & Company P.C. ("Rothstein"), as its financial
advisors and auditors, and Davis & Gilbert, LLP, its outside counsel, as its
legal advisor, with respect to a potential acquisition of Straw Dogs.
On February 17, 1999, Paradise delivered to Mr. Dylan a preliminary
non-binding indication of interest in acquiring all of the outstanding stock of
Straw Dogs in exchange for approximately 1.5 million shares of Paradise common
stock, at Paradise's then current market price of $3 per share. This non-binding
indication of interest provided for an exclusive negotiation period during which
Paradise and Straw Dogs would continue to negotiate the terms of an acquisition
of Straw Dogs with a view toward executing a binding letter of intent by April
30, 1999.
In February 1999, Mr. Michael Sher of Sher, Sherr, Gelb & Company,
accountants acting on behalf of Straw Dogs, contacted Paradise and suggested
that the parties reach a decision regarding the outline of the proposed
transaction between Straw Dogs and Paradise and agreed to release additional
confidential financial information pertaining to Straw Dogs.
During March of 1999, representatives of Paradise and Straw Dogs and their
representative financial, accounting and legal advisors conducted due diligence
reviews of Straw Dogs and Paradise, respectively. Additionally, during this
period, Paradise delivered to Straw Dogs a formal letter of intent setting forth
the terms of the proposed transaction between Paradise and Straw Dogs. In the
letter of intent, Paradise offered to acquire all of the assets of Straw Dogs
and 100% of the equity of Spur & Buckle, subject to the conditions contained in
such letter.
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The letter of intent stated Paradise's offer to acquire all of the assets
and liabilities of Straw Dogs and all of the outstanding equity of Spur & Buckle
in exchange for an aggregate of 1,300,000 restricted shares of Paradise common
stock. The letter of intent also provided that Paradise and Straw Dogs would
enter into employment agreements with Jesse Dylan and Craig Rodgers for a term
of five years and three years, respectively.
In April 1999, Mr. Flynn, together with Paradise representatives met
several times in New York City and Los Angeles with Mr. Dylan and Straw Dogs
representatives to discuss certain aspects of Paradise's offer, including
Paradise's intentions with respect to retention of its current management.
On April 22, 1999, Paradise's Board of Directors met and approved a
revised letter of intent to Straw Dogs and the appointment of Mr. Dylan as Chief
Executive Officer of Paradise. The letter of intent set forth the parameters of
the acquisition of all of the assets of Straw Dogs for 900,000 shares of
restricted Paradise common stock and 541,000 shares for Spur & Buckle, Inc., and
the terms of future employment of Mr. Dylan and Mr. Rodgers. As a result of the
acquisition Straw Dogs would become a subsidiary of Paradise ("New Straw Dogs").
On April 22, 1999, Paradise and Straw Dogs signed the letter of intent.
On April 23, 1999, Paradise issued a press release announcing the proposed
transaction and that Mr. Dylan was named Chief Executive Officer of Paradise.
The press release also announced that Mr. Rodgers would become the CEO of New
Straw Dogs once the acquisition was completed.
In early May 1999, Rothstein began an audit of the financial statements of
Straw Dogs pursuant to the terms of the letter of intent. In early July 1999 the
financial statements for June 30, 1998 and March 31, 1999 were prepared and
submitted. In early August 1999, Rothstein then began an audit of Straw Dogs for
the 12 month period ended June 30, 1999.
During the period of May through September, the parties negotiated the
definitive asset purchase agreement of Straw Dogs and the definitive stock
purchase agreement of Spur & Buckle, Inc.
In September 1999, the Board of Directors of Straw Dogs and the Board of
Directors of Paradise approved the transaction.
On September 24, 1999, the asset purchase agreement was executed by
Paradise and Straw Dogs and the stock purchase agreement was executed by
Paradise and Spur & Buckle, Inc.
Upon closing of the transactions, the employment agreements with Jesse
Dylan and Craig Rodgers will be executed. The employment agreements will be
effective as of July 1, 1999.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS UNANIMOUSLY DETERMINED THAT THE TERMS OF THE
ACQUISITION TRANSACTIONS ARE FAIR TO AND IN THE BEST INTEREST OF THE COMPANY AND
ITS STOCKHOLDERS. ACCORDINGLY, THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED
THE ACQUISITION TRANSACTIONS AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR
THEREOF.
The terms of the asset purchase agreement, stock purchase agreement and
the employment agreements with Jesse Dylan and with Craig Rodgers were the
result of arm's length negotiations between the company, Straw Dogs, Spur &
Buckle, Jesse Dylan and Craig Rodgers and their respective representatives. Mr.
Dylan did not participate in the Board meeting at which the acquisition
transactions were approved. In reaching its determination to approve the
acquisition transactions, the Board considered, among other things,
o the judgment, advice and analysis of its management;
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o the financial condition, results of operations, business operations
and prospects of the company, Straw Dogs and Spur & Buckle;
o the cost efficiencies and synergies expected to arise as a result of
the acquisition transactions;
o the strategic benefits and opportunities expected to occur as a
result of the acquisition transactions; and
o the terms and conditions of the acquisition transactions and related
agreements.
In reaching its determination, the Board of Directors did not assign any
relative or specific weights to the foregoing factors, and individual directors
may have given differing weights to different factors. After deliberating with
respect to the acquisition transactions, and considering, among other things,
the matters discussed above, the Board of Directors unanimously approved the
acquisition transactions as being fair and in the best interests of the company
and its stockholders.
The following summary of each of the asset purchase agreement, the stock
purchase agreement, the employment agreement with Jesse Dylan and with Craig
Rodgers do not purport to be complete and each is qualified in its entirety by
reference to the complete text of the agreements themselves, copies of which are
attached as Appendix A, B, C and D to this proxy statement, which you are urged
to read in their entirety. Capitalized terms used but not defined herein shall
have the meaning set forth in the respective agreements.
Description of Asset Purchase Agreement
We have agreed to purchase, for 900,000 shares of common stock,
substantially all of the business and assets and to assume substantially all
liabilities of Straw Dogs effective as of June 1, 1999. Straw Dogs is currently
owned and operated by Jesse Dylan and Craig Rodgers. Mr. Dylan is our Chairman
and Chief Executive Officer and a director. The shares being issued are not
being registered under the Securities Act of 1933, as amended, however, Messrs.
Dylan and Craig have been granted "piggyback" registration rights with respect
to these shares.
Assets and Liabilities to be Transferred. We are acquiring substantially
all of Straw Dogs' business and assets as of June 1, 1999 other than tax
refunds, credits or similar tax assets relating to periods prior to June 1, 1999
and any non-transferable or non-transferred license. We are assuming
substantially all of Straw Dogs liabilities, including obligations reflected on
the balance sheet; real and personal property lease obligations; obligations
under contracts and licenses being assumed; and obligations to Affected
Employees (as defined) arising on and after June 1, 1999. We agreed that Straw
Dogs could distribute to Messrs. Dylan and Rodgers from their respective capital
accounts an amount equal to their tax liabilities for the period beginning
January 1, 1999 through May 31, 1999 and will distribute an amount equal to
their tax liability for the period June 1, 1999 to closing without charge to
their capital accounts or any other accounts. In addition, we agreed to the
following with respect to the repayment of the outstanding loan made by Straw
Dogs to an entity controlled by Messrs. Dylan and Rodgers which loan is
projected to be $1,175,000 at the closing:
o the loan will be reduced by the amount of the capital accounts at
closing (projected to be between $614,000 and $774,0000) after the
tax distributions;
o the affiliated entity will endeavor to refinance the leased premises
and will pay Straw Dogs up to $500,000 on completion of the
refinancing contingent on net cash available from the refinancing.
If the refinancing is not completed the parties will negotiate in
good faith as to the repayment of the outstanding balance;
o the loan would be further reduced by $400,000 as a leasehold tenant
improvement contribution relating to the lease being entered into by
Straw Dogs; and
o the remaining amount will be evidenced by a promissory note
amortized over ten years at 1% above prime rate subject to
adjustment.
Representations and Warranties. Jesse Dylan and Craig Rodgers have
severally made various representations and warranties, including those relating
to the following customary matters, which representations and warranties are
subject in certain cases to specified exemptions:
o legal capacity, execution and delivery, enforceability;
o lack of legal and administrative proceedings;
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o non-violation of laws or applicable judgments or decrees;
o non-violation or breach of contracts or licenses;
o liabilities, requisite consents and approvals;
o interests in customers;
o company controls;
o brokers; and
o investment representations.
Straw Dogs, Jesse Dylan and Craig Rodgers have jointly and severally made
various representations and warranties including those relating to the following
customary matters, which representation and warranties are subject in certain
cases to specified exemptions:
o execution and delivery;
o organization and similar matters;
o subsidiaries and ownership interests;
o accuracy of financial statements and absence of material changes;
o accuracy of books and records;
o condition and title to assets and properties;
o real property owned and leased;
o contracts;
o non-contravention of organizational documents;
o approvals and consents;
o non-violation or breach of any contracts;
o litigation;
o taxes;
o insurance;
o intellectual property;
o compliance with applicable laws;
o licenses, consents and permits;
o client relations;
o accounts receivable;
o work in process and accounts payable;
o employee relations;
o employee benefit plans;
o bank accounts;
o compensation of employees;
o absence of changes;
o year 2000 compliance; and
o prepayment for services.
The company and the acquisition subsidiary have made various customary
representations and warranties including, among others, representations and
warranties related to:
o organization and similar corporate matters;
o execution and delivery;
o enforceability;
o absence of restrictions;
o non-contravention of organizational documents;
o compliance with applicable laws;
o non-violation or breach of any contracts;
o requisite consents and approvals;
o licenses;
o common stock to be issued to Jesse Dylan and Craig Rodgers; and
o brokers.
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The representations and warranties generally survive the closing for a
period of one year from the closing date.
Covenants. The asset purchase agreement contains pre-closing covenants of
Straw Dogs, Jesse Dylan and Craig Rodgers including, among others, covenants
relating to:
o obtaining all necessary consents and approvals to complete the
transaction;
o access to books and records;
o non-solicitation of offers concerning the acquisition of Straw Dogs;
o operation of the business of Straw Dogs; and
o fulfillment of closing conditions.
The asset purchase agreement contains pre-closing covenants of the company
and our acquisition subsidiary including, among other things:
o obtaining all necessary consents and approvals to complete the
transaction;
o access to books and records;
o fulfillment of closing conditions; and
o "blue sky" authorizations.
The asset purchase agreement also contains mutual covenants and agreements
relating to:
o the use of reasonable efforts by both parties to complete the
transaction;
o publicity and cooperation;
o the offer by the company of employment to all employees of Straw
Dogs on the same terms as they are currently employed;
o apportionment of tax obligations;
o indemnification with respect to breaches of representations,
warranties, covenants or agreements;
o indemnification by Messrs. Dylan and Rodgers with respect to
liabilities not being assumed by the company; and
o indemnification by the company with respect to liabilities being
assumed.
The indemnification obligations of Dylan and Rodgers for losses, except
for losses relating to liabilities not being assumed by the company and breach
of covenant, are limited as follows: the total indemnification will not exceed
the fair market value of the common stock received by each of Messrs. Dylan and
Rodgers (calculated at the time of payment of any claim); and no indemnification
will be made until the aggregate amount of losses exceeds $50,000 plus the
amount by which net worth (as defined) exceeds $1 (in which case Messrs. Dylan
and Rodgers will be proportionately liable to the extent such losses exceed such
amount).
Closing Conditions. The closing of the asset purchase agreement is
scheduled to occur within six business days after its approval by our
stockholders at the meeting. The obligations of the company and New Straw Dogs,
the acquisition subsidiary, to complete the asset purchase are subject to a
number of closing conditions including the following:
o net worth of Straw Dogs being no less than $1;
o the execution of the employment agreements with Jesse Dylan and with
Craig Rodgers;
o the repayment by Jesse Dylan and Craig Rodgers to Straw Dogs of all
amounts due for repayment at closing;
o the simultaneous closing of the stock purchase agreement;
o the receipt of all requisite consents and approvals, including
stockholder approval;
o the absence of any material adverse change;
o the receipt of opinions of counsel;
o the absence of proceedings to enjoin the transaction;
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o obtaining lines of credit;
o the execution of a lease with an affiliate of Mr. Dylan and Mr.
Rodgers for 10,000 square feet of space; and
o certain customary conditions such as the accuracy of representations
and warranties and the performance of covenants.
The obligations of Straw Dogs, Jesse Dylan and Craig Rodgers to complete
the asset purchase are subject to a number of closing conditions including the
following:
o the execution of the employment agreements with Jesse Dylan and with
Craig Rodgers;
o the simultaneous closing of the stock purchase agreement;
o the receipt of all requisite consents and approvals including,
stockholder approval;
o the absence of any material adverse change;
o the receipt of an opinion of counsel;
o the absence of proceedings to enjoin the transaction;
o obtaining lines of credit;
o the execution of a lease with an affiliate of Mr. Dylan and Mr.
Rodgers for 10,000 square feet of space; and
o certain customary conditions such as the accuracy of representations
and warranties and the performance of the covenants.
Termination. The asset purchase agreement may be terminated at any time
prior to closing
o by mutual consent of the parties;
o by either party (provided, the terminating party is not in breach)
if the other party breaches its representations, warranties or
covenants in any material respect and the breach is not cured within
15 days after notice unless the breach does not materially adversely
affect the business or assets of the breaching party or the ability
of any of the parties to complete the transaction;
o by either party in the event the transaction is permanently
enjoined;
o by either party if the transaction has not been completed prior to
December 31, 1999.
Description of Stock Purchase Agreement
The company has agreed to purchase, for 541,000 shares of common stock,
all of the stock of Spur & Buckle. Spur & Buckle is a California corporation
currently owned and operated by Jesse Dylan as a motion picture development
company. The Paradise shares being issued are not being registered under the
Securities Act, however, Mr. Dylan has been granted "piggyback" registration
rights with respect to such shares.
Representations and Warranties. Mr. Dylan has made various representations
and warranties in the stock purchase agreement, including those relating to the
following customary matters, which representations and warranties are subject in
certain cases to specified exemptions:
o execution and delivery;
o enforceability;
o title to capital stock;
o absence of outstanding options;
o absence of restrictions;
o non-contravention;
o requisite consents and approvals;
o outstanding capital stock;
o organization and similar matters;
o subsidiaries and investments;
o accuracy of financial statements;
o accuracy of books and records;
o condition and title to assets and properties;
o real property owned and leased;
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o contracts;
o non-violation of organizational documents;
o litigation;
o taxes;
o absence of undisclosed liabilities;
o insurance;
o intellectual property;
o compliance with applicable laws;
o consents and permits;
o accounts receivable;
o work in process and accounts payable;
o employee relations;
o employee benefit plans;
o customers and suppliers;
o bank accounts;
o compensation of employees;
o absence of changes;
o company controls;
o brokers;
o year 2000 compliance; and
o prepayment for services.
The company and New Straw Dogs have made various representations and
warranties in the stock purchase agreement, including those relating to the
following customary matters, which representations and warranties are subject in
certain cases to specified exemptions:
o organization and similar corporate matters;
o execution and delivery;
o enforceability;
o absence of restrictions;
o non-contravention of organizational documents;
o non-violation of applicable laws or contracts;
o requisite consents and approvals;
o compliance with applicable laws;
o licenses and permits;
o common stock to be issued to Mr. Dylan; and
o brokers.
The representations and warranties generally survive the closing for a
period of one year from the closing date.
Covenants. The stock purchase agreement contains pre-closing covenants of
Mr. Dylan, including, among others, covenants relating to
o obtaining all necessary consents and approvals to complete the
transaction;
o access to books and records;
o non-solicitation of offers concerning the acquisition of Spur &
Buckle;
o operation of the business; and
o fulfillment of closing conditions.
The stock purchase agreement contains pre-closing covenants of the company
and New Straw Dogs including, among other things:
o obtaining of all necessary consents and approvals to complete the
transaction;
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o access to books and records;
o fulfillment of closing conditions; and
o "blue sky" authorizations.
The stock purchase agreement also contains mutual covenants and agreements
including the following:
o the use of reasonable efforts by both parties to complete the
transaction;
o publicity and cooperation; and
o indemnification with respect to breaches of representations,
warranties, covenants or agreements.
Mr. Dylan's indemnification obligations for losses, except for losses
relating to breach of covenant, are limited as follows: the total
indemnification will not exceed the fair market value of the common stock
received by Mr. Dylan (calculated at the time of payment of any claim); and no
indemnification shall be made until the aggregate amount of losses exceeds
$25,000 plus the amount by which net worth (as defined) exceeds $1 (in which
case Mr. Dylan shall be liable to the extent such losses exceed such amount).
Closing Conditions. The closing of the stock purchase agreement is
scheduled to occur within six business days after receipt of stockholder
approval at the meeting. The obligations of the company and its acquisition
subsidiary to complete the stock purchase are subject to a number of closing
conditions including the following:
o net worth of Spur & Buckle being no less than $1;
o the repayment by Mr. Dylan to Spur & Buckle of all amounts due for
repayment at closing;
o the simultaneous closing of the asset purchase agreement;
o the receipt of all requisite consents and approvals;
o the absence of any material adverse change;
o the receipt of an opinion of counsel;
o the absence of proceedings to enjoin the transaction; and
o certain customary conditions such as the accuracy of representations
and warranties and the performance of covenants.
The obligations of Jesse Dylan to complete the stock purchase are subject
to a number of closing conditions including the following:
o the simultaneous closing of the asset purchase agreement;
o the receipt of all requisite consents and approvals (including
stockholder approval);
o the absence of any material adverse change;
o the receipt of an opinion of counsel;
o the absence of proceedings to enjoin the transaction; and
o certain customary conditions such as the accuracy of representations
and warranties and the performance of covenants.
Termination. The stock purchase agreement may be terminated at any time
prior to the closing:
o by mutual consent of the parties;
o by either party (provided, the terminating party is not in breach)
if the other party breaches its representations, warranties or
covenants in any material respect and the breach is not cured within
15 days after notice unless the breach does not materially adversely
affect the business or assets of the breaching party or the ability
of any of the parties to complete the transaction;
o by either party in the event the transaction is permanently
enjoined; and
o by either party if the transaction has not been completed prior to
December 31, 1999.
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Description of Employment Agreement with Jesse Dylan
Mr. Dylan will be employed as our Chairman and Chief Executive Officer, a
position he currently holds, for a five year term commencing as of July 1, 1999.
Mr. Dylan will continue his directorial efforts and his fees will accrue to
Paradise. Mr. Dylan will receive an annual salary of $750,000. Mr. Dylan's
compensation is to be reviewed annually by our compensation committee with bonus
awards or increases in salary to be considered based on Mr. Dylan's and our
overall performance. In addition to salary and bonus, Mr. Dylan will be entitled
to receive ten year non-qualified options, outside of our stock option plan, to
purchase 750,000 shares at $5 per share. The options vest ratably over the three
year period following the closing (provided Mr. Dylan is employed by us at that
time). If Mr. Dylan dies during the first year of his employment 250,000 options
will vest at the time of his death. Mr. Dylan's employment agreement requires us
to register the shares underlying his options and the resale of the shares under
the Securities Act. In addition, Mr. Dylan will be entitled to (i) participate
in our benefit plans established for key executives, (ii) receive four (4) weeks
paid vacation per year and (iii) receive $1,500,000 life insurance. Mr. Dylan
may be terminated at any time if he (i) is convicted of a felony involving any
financial impropriety or which would materially interfere with his ability to
perform his services, or (ii) commits a willful or intentional act which could
reasonably be expected to materially injure our reputation or business,
including acts of moral turpitude such as continuing alcohol or substance abuse,
or the violation of his confidentiality or non-compete restrictions, which is
not cured within 30 days after he has received written notice from us.
Mr. Dylan has agreed that he will not at any time knowingly use or
disclose any confidential information or trade secrets other than to our
authorized personnel in the course of his employment.
Mr. Dylan has agreed that while he is employed by us (and for three months
thereafter with respect to the television commercial business), he will not,
either directly or indirectly, in any capacity, work for, act as a consultant
to, or own any interest in, any direct competitor which operates in or provides
services essentially the same as we do, in any portion of the geographic
territory where we operate or sell our products or services, except as otherwise
permitted in his employment agreement. Mr. Dylan is not precluded from engaging
in a business activity that is not competitive with us if we thereafter engage
in such business activity. Mr. Dylan has also agreed that during the term, he
will not solicit any of our employees, to alter, terminate or refrain from
extending or renewing any contractual or other relationship with us, or commence
a similar or substantially similar relationship with Mr. Dylan, any entity with
whom he is affiliated or employed by or any direct competitor of ours. If Mr.
Dylan voluntarily terminates his employment prior to the end of the term or we
terminate his employment for cause prior to the end of the term, the non-compete
restrictions with respect to the television commercial business shall apply for
one year following his term (and for three months with respect to directing
television commercials), and the non-solicitation restrictions shall apply for a
period of one year following his termination.
The execution and delivery of the employment agreement with Mr. Dylan is a
condition to the closing of the asset purchase agreement.
Description of Employment Agreement with Craig Rodgers
Mr. Rodgers will be employed as Chief Executive Officer of Straw Dogs for
a three year term commencing as of July 1, 1999 at an annual salary of $350,000.
In addition to his salary, Mr. Rodgers will be entitled to receive an annual
bonus of $100,000 per year if the pre-tax profits of Straw Dogs at the fiscal
year (beginning on July 1, 1999) exceed $850,000. Mr. Rodgers is also entitled
to receive ten year non-qualified options to purchase 100,000 shares at $5 per
share. The options vest ratably over a three year period. Mr. Rodgers will be
entitled to participate in any and all group life, disability income, health or
accident insurance programs applicable to any Straw Dogs' personnel in effect at
any time during the period of his employment, subject only to eligibility
restrictions of those programs. Mr. Rodgers will also have the right to
participate in any employee retirement benefits plans or profit-sharing plans
which Straw Dogs maintains for its personnel in effect at any time during the
period of his employment, subject only to eligibility requirements of those
plans. Mr. Rodgers will also be entitled to four weeks paid vacation.
Mr. Rodgers can be terminated by Straw Dogs in the event (i) he is
convicted of a felony with respect to any criminal act involving Straw Dogs or
(ii) he commits a willful or intentional act which could reasonably be
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expected to materially injure Straw Dogs' reputation or business, including acts
of moral turpitude such as alcohol or substance abuse, or the violation of his
confidentiality or non-compete restrictions which is not cured within 30 days
after he has received written notice.
Mr. Rodgers may terminate his employment agreement upon ten days notice
for "Good Reason." "Good Reason" means Straw Dogs' material violation of its
obligations or the diminution of Mr. Rodgers' duties and responsibilities, which
breach is not cured within 30 days after Straw Dogs has received a written
notice from Mr. Rodgers stating in reasonable detail the nature of the breach.
If Mr. Rodgers terminates his employment prior to the end of the term for Good
Reason, he will be entitled to receive all the compensation due through the end
of the term. If Mr. Rodgers voluntarily terminates his employment prior to the
end of the term other than for Good Reason, he will only be entitled to receive
compensation accrued through the date of termination.
Mr. Rodgers has agreed that he will not at any time knowingly use or
disclose any confidential information or trade secrets other than to authorized
Straw Dogs personnel in the course of his employment.
Mr. Rodgers has agreed while he is employed by Straw Dogs he will not,
either directly or indirectly, in any capacity, work for, act as a consultant
to, or own any interest in, any direct competitor of Straw Dogs which operates
in or provides services essentially the same as Straw Dogs, in any portion of
the geographic territory where Straw Dogs operates or sells its products or
services. Mr. Rodgers has also agreed that during the term, he will not solicit
(i) any employee, artist, client or customer of Straw Dogs, or (ii) any person
or entity that had been engaged in negotiations with Straw Dogs during the six
month period prior to his termination of employment, to become an employee,
artist, client or customer of Straw Dogs, to alter, terminate or refrain from
extending or renewing any contractual or other relationship with Straw Dogs, or
commence a similar or substantially similar relationship with Mr. Rodgers, any
entity with whom he is affiliated or employed by or any direct competitor of
Straw Dogs. If Mr. Rodgers voluntarily terminates his employment prior to the
end of the term or if Straw Dogs terminates his employment for cause prior to
the end of the term (unless Mr. Rodgers voluntarily terminates for Good Reason),
the non-compete restrictions and the non-solicitation restrictions will apply
for a period of one year after the term.
The execution and delivery of the employment agreement with Craig Rodgers
is a condition to the closing of the asset purchase agreement.
Federal Income Tax Consequences of the Acquisition Transactions Contemplated by
the Asset Purchase Agreement and Stock Purchase Agreement
The following is a general summary of the material United States federal
income tax consequences to the existing shareholders of the Company in their
capacity as shareholders (the "Existing Shareholders") of the acquisition
transactions contemplated by the asset purchase agreement and stock purchase
agreement. This summary does not describe the effects to Messrs. Dylan and
Rodgers in their capacity as members of Consolidated Entertainment LLC. This
summary does not purport to be a complete analysis of all the potential tax
effects of the acquisition transactions. The summary is based on the Code, laws,
regulations, rulings and decisions in effect as of the date hereof, all of which
are subject to change possibly with retroactive effect. Tax consequences under
state, local, and other foreign laws are not addressed herein.
No ruling has been (or will be) sought from the Internal Revenue Service
as to the United States federal income tax consequences of the asset purchase
agreement and stock purchase agreement. The following discussion has no binding
effect on the IRS or the courts and assumes that the asset purchase and stock
purchase each qualify as a reorganization within the meaning of Section 368(a)
of the Code.
Based on the above assumptions and qualifications, the company expects the
asset acquisition under the asset purchase agreement and the stock purchase
under the stock purchase agreement to constitute tax-deferred "reorganizations"
under Section 368 of the Code. The principal effect to the Existing Shareholders
will be that the Company's tax basis in the assets acquired pursuant to the
asset purchase agreement and the stock acquired pursuant to the stock purchase
agreement should equal the basis of such assets and/or stock in the hands,
respectively, of Straw Dogs (in its assets) and Dylan (in his stock). Although
such basis would be increased by any
17
<PAGE>
gain recognized in the transactions to the selling parties, it is anticipated
that no such gain will be recognized and, accordingly, that no such increase in
the company's tax basis will occur. The holding period of the assets and/or
stock received by the company pursuant to the acquisitions contemplated under
the asset purchase agreement and stock purchase agreement will include the
holding period, respectively, of Straw Dogs and Dylan in such assets and stock,
respectively.
Accounting Treatment
The stock purchase and asset purchase will each be treated as a purchase
for accounting purposes in accordance with generally accepted accounting
principles. Transaction related expenses will be recorded in the period in which
the transactions are concluded, which are currently estimated to occur in
November 1999. In addition, we are developing a plan to integrate the operations
of Paradise, Straw Dogs and Spur & Buckle after the transaction. In connection
with that plan, we anticipate that certain non-recurring charges will be
incurred in connection with such integration. We cannot now identify the timing,
nature and amount of these charges. However, any charge could affect our results
of operations in the period in which the charge is recorded.
Federal and State Regulatory Approvals
Except for compliance by us with the applicable rules and regulations of
the SEC and applicable blue sky laws in connection with the issuance of shares
in the acquisition, no federal or state regulatory requirements must be complied
with, and no approvals are required, in connection with the transactions related
to the asset purchase agreement and stock purchase agreement.
Percentage of the Company Owned by Messrs. Dylan and Rodgers After the
Acquisition Transactions
1,441,000 shares are being issued to Messrs. Dylan and Rodgers in the
stock purchase and asset purchase transactions, which represent approximately
19% of the outstanding shares of common stock immediately after the closing. In
addition, non-qualified options to purchase (i) 750,000 shares are being issued
to Jesse Dylan and (ii) 100,000 shares are being issued to Craig Rodgers.
Dissenter's Rights of Appraisal
Under the Delaware General Corporate Law, the acquisition transactions,
and the approval of the other matters to be voted upon at the meeting, do not
give rise to any appraisal or dissenter's rights to stockholders.
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<PAGE>
Listing On Nasdaq and Boston Stock Exchange
It is anticipated that the shares to be issued to Messrs. Dylan and
Rodgers, the 850,000 shares reserved for issuance for their options, and the
300,000 shares reserved for issuance for the warrants granted to Messrs. Rosen
and Edelman, will be listed on the Nasdaq Small Cap Market and the Boston Stock
Exchange.
Resales of Common Stock
The shares to be issued to Messrs. Dylan and Rodgers pursuant to the
acquisition transactions have not been registered under the Securities Act.
These shares can be resold only if registered for resale under the Securities
Act or an exemption from registration under the Securities Act is available. We
have granted each of Messrs. Dylan and Rodgers "piggy-back" registration rights
with respect to these shares. In addition, the 850,000 shares underlying the
options awarded to Mr. Dylan and Mr. Rodgers are required to be registered under
the Securities Act of 1933.
Conduct of Our Business and Straw Dogs Business if the Acquisition Transactions
Are Not Consummated
If the acquisition transactions are not consummated, it is expected that
the respective businesses and operations of the company and Straw Dogs will
continue to be conducted substantially as they currently are being conducted.
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<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated financial
statements (the "Pro Forma Financial Statements") are based on the historical
financial statements of Paradise Music & Entertainment, Inc. and Subsidiaries
and Consolidated Entertainment, LLC, (d/b/a Straw Dogs) and Spur & Buckle, Inc.
(collectively "Straw Dogs") included elsewhere in this proxy statement, adjusted
to give effect to the acquisition by the Company of Straw Dogs. The Unaudited
Pro Forma Condensed Consolidated Statements of Operations gives effect to the
acquisition as if it had occurred as of July 1, 1998, and the Unaudited Pro
Forma Condensed Consolidated Balance Sheet gives effect to the acquisition as if
it had occurred as of June 30, 1999. The acquisition and the related adjustments
are described in the accompanying notes. The pro forma adjustments are based
upon available information and certain assumptions that management believes are
reasonable. The Pro Forma Financial Statements do not purport to represent what
Paradise's results of operations or financial condition would actually have been
had the acquisition in fact occurred on such dates or to project Paradise's
results of operations or financial condition for any future period or date. The
Pro Forma Financial Statements should be read in conjunction with the historical
financial statements of Paradise Music & Entertainment, Inc. and Subsidiaries
and Straw Dogs included elsewhere in the proxy statement and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The acquisition will be accounted for using the purchase method of
accounting. After the acquisition, the total purchase cost of the acquisition of
Straw Dogs will be allocated to the tangible and intangible assets and
liabilities of Straw Dogs based upon their respective fair values. The
allocation of the aggregate purchase price included in the Pro Forma Financial
Statements is preliminary.
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<PAGE>
Paradise Music Entertainment, Inc. and Subsidiaries
Pro Forma Condensed Consolidated Balance Sheet
June 30, 1999
(unaudited)
<TABLE>
<CAPTION>
ASSETS Pro Forma Pro
Paradise Straw Dogs Adjustments Forma
-------- ------------ ----------- -----
<S> <C> <C> <C> <C>
Current assets:
Cash $ 930,642 $ 19,318 $ -- $ 949,960
Marketable security -- 140,625 (140,625)(a)(2) --
Accounts receivable, net 810,922 1,525,449 -- 2,336,371
Prepaid expenses and other
current assets 2,496,106 118,513 (828,575)(a) 1,786,044
------------ ------------ ------------ ------------
Total current assets 4,237,670 1,803,905 (969,200) 5,072,375
------------ ------------ ------------ ------------
Property and equipment, net 1,125,316 710,050 -- 1,835,366
------------ ------------ ------------ ------------
Other assets:
Due from affiliate -- 693,958 700,000 (a)(4)
(600,000)(a)(3) 793,958
Due from officer -- 80,000 -- 80,000
Intangible assets -- 135,572 (135,572)(a)(1) --
Goodwill -- -- 9,471,303 (a) 9,471,303
Security deposits and other 307,787 35,110 -- 342,897
Deferred acquisition costs 95,000 -- (95,000)(a) --
------------ ------------ ------------ ------------
402,787 944,640 9,340,731 10,688,158
------------ ------------ ------------ ------------
$ 5,765,773 $ 3,458,595 $ 8,371,531 $ 17,595,899
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' AND
MEMBERS' EQUITY
Current liabilities:
Due to bank $ $ 987,418 $ $ 987,418
Accounts payable and accrued expenses 1,721,717 1,481,053 150,000 (a)
700,000 (a)(4) 4,052,770
Due to stockholder 215,000 (a)(5) 215,000
Capital lease obligation -- 10,905 -- 10,905
------------ ------------ ------------ ------------
Total current liabilities 1,721,717 2,479,376 1,065,000 5,266,093
------------ ------------ ------------ ------------
Stockholders' and members' equity 4,044,056 979,219 7,306,531 12,329,806
------------ ------------ ------------ ------------
$ 5,765,773 $ 3,458,595 $ 8,371,531 $ 17,595,899
============ ============ ============ ============
</TABLE>
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<PAGE>
Paradise Music & Entertainment, Inc. and Subsidiaries
Pro Forma Condensed Consolidated Statement of Operations
for the Year Ended June 30, 1999
(unaudited)
<TABLE>
<CAPTION>
Pro Forma
Paradise Straw Dogs Adjustments Pro Forma
-------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues $ 9,661,036 $19,806,39 $ $ 29,467,429
------------ ------------ ------------ ------------
Operating Expenses
Cost of sales 6,305,511 15,674,362 -- 21,979,873
Selling, general and
administrative 7,101,023 3,365,410 454,565 10,920,998
------------ ------------ ------------ ------------
Total operating expenses 13,406,534 19,039,772 454,565 32,900,871
------------ ------------ ------------ ------------
Operating Income (Loss) (3,745,498) 766,621 (454,565) (3,433,442)
Interest And Other Income 37,569 1,617 -- 39,186
------------ ------------ ------------ ------------
Income (Loss) Before Income
Taxes (3,707,929) 768,238 (454,565) (3,394,256)
Income Tax Provision 6,000 -- -- 6,000
------------ ------------ ------------ ------------
Net Income (Loss) $ (3,713,929) $ 768,238 $ (454,565) $ (3,400,256)
============ ============ ============ ============
Basic And Diluted Loss
Per Common Share $ (0.98) $ (0.65)
============ ============
Weighted Average Number Of
Common Shares Outstanding 3,802,805 5,243,805
============ ============
</TABLE>
Footnotes to Pro-Forma Financial Statements
(a) The unaudited pro forma condensed consolidated balance sheet gives effect
to the proposed acquisition of Straw Dogs by Paradise by combining the
respective balance sheets of the two companies at June 30, 1999. The
acquisition was accounted for using the "purchase" method of accounting.
Therefore, the aggregate consideration paid in connection with the
proposed acquisition will be allocated to Straw Dogs assets and
liabilities based on their fair market values with the excess
consideration treated as goodwill. The purchase price will be paid with
the issuance of 1,441,000 shares of common stock valued at $9,359,325,
including acquisition costs of $1,073,575, of which 150,000 is estimated
and accrued as of June 30, 1999. The seven day average closing market
price of $5.75 of our common stock surrounding April 22, 1999, the date of
the agreement, was used to value the acquisition. The net assets acquired
consisted of certain transactions occurring prior to the acquisition and
the computation of goodwill as follows:
Total assets of Straw Dogs as of
June 30, 1999 $3,458,595
Write off of intangible assets (1) (135,572)
Less marketable security
distributed to members (2) (140,625)
Less reclassification of
member's equity against advances
to affiliate (3) (600,000)
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Plus accrual for additional
advances to affiliate (4) 700,000
---------
Total assets acquired, as
adjusted $3,282,398
Total liabilities of Straw Dogs
as of June 30, 1999 2,479,376
Record dividend to stockholder
prior to acquisition (5) 215,000
Plus accrual for additional
advances to affiliate (4) 700,000
----------
Total liabilities assumed, as
adjusted 3,394,376
----------
Net liabilities assumed (111,978)
Purchase price 9,359,325
----------
Goodwill $9,471,303
==========
- -------------------
(1) To assign zero value to Straw Dogs intangible assets consisting of
organization costs and goodwill.
(2) To reflect marketable securities distributed to the members of Straw
Dogs prior to the consummation of the transaction.
(3) To reflect the reclassification of the members' equity of Straw Dogs
as partial satisfaction of amounts due from affiliates.
(4) To reflect estimated additional advances to the affiliate for the
period July 1, 1999 through the consummation of the transaction.
(5) To reflect the payment of a dividend to the stockholder of Spur &
Buckle prior to the consummation of the transaction.
(b) The acquisition of Straw Dogs resulted in $9,471,303 of goodwill which
will be amortized over 20 years. Intangible assets acquired from Straw
Dogs (consisting of organizational costs and goodwill) were given zero
value and the corresponding amortization of $19,000 was eliminated from
the unaudited pro forma condensed consolidated statements of operations.
The unaudited pro forma condensed consolidated statements of operations
reflect a net adjustment to amortization of $454,565 for the year ended
June 30, 1999.
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<PAGE>
INFORMATION CONCERNING PARADISE
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.
On September 24, 1999, Paradise executed definitive agreements to acquire
substantially all of the assets of Consolidated Entertainment, LLC, d/b/a Straw
Dogs and, all of the outstanding stock of Spur & Buckle, Inc. (collectively know
as "Straw Dogs"). Straw Dogs is a rapidly growing company engaged in the
production of television commercials, music videos and other related media.
Straw Dogs is a leading television commercial production company, with fiscal
1999 revenues of approximately $19 million. Straw Dogs' clients include Nike,
Pepsi, Reebok, Budweiser, Hallmark, 7-Up, General Motors, Coke, AT&T, Sprint,
Chevrolet, McDonalds, Disney, American Express and Mountain Dew, among others.
Spur & Buckle, Inc. provides Jesse Dylan's personal services to Straw Dogs in
connection with the production of television commercials. The acquisition is
subject to stockholder approval and other customary closing conditions. The
description of the business which follows assumes that the Straw Dogs
acquisitions are consummated. There can be no assurance that this will be the
case.
Paradise's operating business can be categorized as:
Television & Film Production
o Production of television commercials and development of film and
television properties through Straw Dogs
o Production of television and cable specials and music videos through
Picture Vision, Inc. ("Picture Vision")
o Production of original scores and advertising themes for television,
radio and film through Rave Music and Entertainment, Inc. ("Rave
Music")
Recorded Music & Artist Management
o Production and commercial release of recorded music through Push
Records, Inc. ("Push Records")
o Artist management through All Access Entertainment Group, Inc. ("All
Access Management")
We believe that we offer a broader range of services than most independent
production and music companies. This combination of services has been structured
to foster synergies between the operating companies, lower costs and provide
greater convenience to our artists and customers.
We have adopted a strategic plan to significantly expand through
acquisitions of related businesses and key personnel. Our acquisition program
concentrates on complementary businesses. If more significant opportunities
become available we believe that through our relationships and management
contacts, we may be able to finance these opportunities directly, through joint
ventures or otherwise. To implement this plan, we have entered into the
transactions and the consulting agreements with the persons described under
"Recent Developments." We believe these relationships will provide us with
acquisition talent and financing opportunities.
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<PAGE>
Recent Developments
Since the beginning of 1999 we have gone through a substantive
restructuring and recapitalization including the addition of several key
managers and an affiliation with The Cassandra Group, Inc. ("Cassandra") as a
resource for obtaining acquisition candidates and additional financing.
Financing Transactions
In July 1999, investors represented by Cassandra purchased an aggregate of
970,880 shares of Paradise common stock at a price of $4.25 per share or
$4,126,240 in the aggregate. We agreed to file a Form S-3 ("S-3") registering
for resale these 970,880 shares. The S-3 was declared effective by the
Securities and Exchange Commission on July 29, 1999.
In April 1999, we entered into a financial consulting agreement with Dana
Giacchetto, Cassandra's President, pursuant to which Mr. Giacchetto will assist
us for a period of time in a range of areas, including identifying acquisition
targets, employee recruitment, structuring transactions and financings to
support our growth and operations. As compensation for his consulting services
he was issued 200,000 shares of common stock and three-year warrants to purchase
800,000 shares of common stock at the following prices: 100,000 at $5 per share,
150,000 at $6 per share, 150,000 at $7 per share, 150,000 at $8 per share,
125,000 at $9 per share and 125,000 at $10 per share. These warrants are
currently exercisable.
Management Developments
In April, 1999 Jesse Dylan was named our Chairman and Chief Executive
Officer. Mr. Dylan succeeded John Loeffler, as our Chairman and Brian Doyle as
our CEO. Mr. Loeffler now devotes more of his time to his role as CEO and
President of Rave Music. Mr. Doyle acts as CEO and President of All Access
Management and Push Records.
On October 13, 1999, we entered into an employment agreement with M. Jay
Walkingshaw, effective as of July 1, 1999, pursuant to which he will act as our
President and Chief Operating Officer for a term of 4 years at a salary of
$450,000. Mr. Walkingshaw's compensation will be reviewed annually by our
compensation committee and any increases or bonuses will be based on Mr.
Walkingshaw's and our overall performance. In addition to salary and bonus, Mr.
Walkingshaw is entitled to options to purchase 600,000 shares at $5 per share.
The options vest ratably over a three year period. Mr. Walkingshaw will be
entitled to four weeks paid vacation and life insurance in the amount of
$1,000,000. Mr. Walkingshaw will be entitled to participate in the benefit plans
established for the benefit of our key employees.
In addition, we have entered into consulting agreements with several other
individuals and companies. In each of these consulting agreements we have issued
warrants to purchase our common stock as compensation for services and have
issued warrants to purchase an aggregate of 495,000 shares at prices ranging
from $4 to $10 per share vested over various periods of time.
We are also considering granting warrants to other consultants as full or
partial compensation for their services.
Our Current Business
The Television & Film Production Business
Through Straw Dogs, upon its acquisition, Picture Vision, and Rave Music,
we produce television series and specials, television commercials, original
scores and advertising themes for television, radio and film, and music videos.
We also intend to expand into the development and production of theatrical
motion pictures. As the demand for content on television continues to increase
dramatically, Paradise expects to be positioned to meet that demand by
inexpensively producing high quality programming with the company's growing base
of video and commercial directors and by utilizing management's key
relationships with writers, and producers. Paradise
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<PAGE>
intends to be one of the few television production companies capable of pitching
an idea, producing the show, supplying the director, creating and producing the
soundtrack and attracting first class talent.
Our intention to branch into the theatrical motion picture production
business does not involve financing the production of projects. Rather, Paradise
intends to seek strategic alliances with major film companies, with the major
company acting as a distributor and Paradise acting as the creator and supplier
of content.
Straw Dogs and its award-winning producers and directors have created
television commercials for national advertisers such as Coca-Cola, Pepsi,
Reebok, Budweiser, Nike, Chevrolet and McDonalds and music videos for artists
such as Tom Petty, Lenny Kravitz, Nick Cave and Tom Waits. Picture Vision, has
produced Emmy-nominated and award-winning television specials for Garth Brooks,
Janet Jackson and John Tesh and music videos for Reba McEntire, Garth Brooks,
Whitney Houston, Billy Joel, Sting, Aerosmith and numerous other artists.
Recently, Picture Vision expanded into the production of television commercials,
completing commercials for national advertisers including MCI and NAPA Auto
Parts.
Rave Music, a wholly owned subsidiary, creates original scores for
television, radio, and film as well as advertising themes for commercials. Rave
Music is currently providing original musical scores for the top-rated
syndicated children's animated television program, Pokemon. Most recently, Rave
Music composed and produced the 2.B.A. Master soundtrack album for the Pokemon
movie. Rave Music also produced all of the music for the WB network television
program Pokemon including the theme song for the series. Presently, Rave Music
is working on the score for Pokemon, the Movie, MEWTWO Strikes Back as well as
the animated short Picachus Vacation soon to be released nationwide by Warner
Brothers. Rave Music also works with advertising agencies to help create the
soundtracks for commercials. Rave is currently providing original compositions
of advertising themes for clients such as Bounty Fabric Softener, Pringles and
Jiff Peanut Butter. Rave Music retains the intellectual property rights to its
musical compositions. Royalty and residual distributions are paid by a
performing rights society, usually BMI, ASCAP or SESAC, to Rave Music, the
composer and the performers for the various uses of the actual compositions.
Such residual fees can exceed the creative fees paid for its composition.
The Recorded Music & Artist Management Business
Paradise engages in the business of discovering and signing musical
artists; manufacturing, packaging, distributing and marketing their recorded
music; and managing musical artists. Unlike most individuals and small companies
which tend to engage in only one of these businesses, Paradise is in the unique
position of providing all of these services. We believe that there is a
significant opportunity for consolidation among the smaller music companies
which are increasingly recognizing the need to adopt new strategies and form
strategic alliances in order to stay competitive.
Push Records, a wholly-owned subsidiary, is a record label launched in
early 1997. Since its launch we have initially focused on alternative and adult
contemporary artists, such as Daryl Hall and John Oates and Blessid Union of
Souls. We are currently contemplating acquiring a number of independent labels
with catalogues and artists to expand our record label activities. Push Records
has a manufacturing and distribution agreement with V2/BMG Music for the
distribution of records and has released 2 new records and 5 catalogue
selections with V2/BMG during the fourth quarter of fiscal year 1999. Push
Records has engaged in a 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. The V2 arrangement
will limit the additional cash investments required prior to the generation of
revenues from product sales. Paradise believes Push Records can provide its
artists with the opportunity to share greater economic benefits than its
competitors because of its lower overhead structural costs.
Our music artist management services are provided by All Access Management
which currently manages Daryl Hall and John Oates and Sozzi, a new up-and-coming
Columbia recording artist. All Access promotes its clients' records, supports
them through touring and secures appropriate recording and publishing contracts,
among other things. The management at All Access Management has worked with
super-star status artists including Mariah Carey, John Cougar-Mellencamp, Daryl
Hall and John Oates, Billy Idol, Billy Joel, Kenny Loggins, Carly
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<PAGE>
Simon, Taylor Dayne.
We believe that our commercial music business has begun to derive creative
benefits from the availability of the resources of our other businesses.
Our Acquisition Program
Our acquisition program is designed to identify, qualify and integrate
similar businesses of appropriate scale, which compliment our existing
businesses.
Areas of contemplated acquisition activity include existing record labels
having a catalogue of niche product offerings and specialized music markets such
as jazz music; commercial and television production companies with established
talent relationships and performance; talent and artist management businesses
which require little initial capital investment and offer good cash flow and
synergistic opportunities with our existing businesses; and catalogue and music
publishing opportunities.
Beginning in early 1999, we initiated a substantial restructuring
including the addition of several key managers and our affiliation with
Cassandra as a source for obtaining new equity investment. We have also entered
into numerous consulting agreements with entities or individuals who we believe
can provide us with acquisition, talent and financing opportunities. If
significant opportunities become available we believe that, through our
consultants and management contacts, we may be able to finance these
opportunities through joint ventures or otherwise.
The commercial and music video production industry is made up of a number
of entities which host varying numbers of resources and commercial and/or video
directors. We believe there are a number of these entities that will benefit
from the economies of scale and efficiencies that the Straw Dogs and Picture
Vision infrastructure provides.
The artist management business is also populated with smaller entities,
which represent specific clients (principally recording artists). By providing a
proactive, efficient and flexible environment with resources to expand these
businesses, we believe we will be able to attract significant talent and expand
this business substantially.
The music industry includes five major companies in the area of recorded
music and thousands of smaller independent music companies in the area of
recorded music and the broader music business. We believe that many owners of
independent music entities do not enjoy many of the benefits which we offer.
These benefits include the ability to provide a broader range of services to
clients and greater liquidity and potential for capital enhancement. Other
benefits that we believe we can provide acquired entities are management
expertise and a broad range of industry contacts. Recently the major companies
have cut back substantially on the number of artists that they are promoting in
order to devote greater resources to a limited number of artists who are
believed to offer major breakthrough opportunities. We believe that our
acquisition program can build on these and other opportunities to generate
growth and profitability.
While we believe that we will find and adequately fund our acquisition
program there can be no assurance of success either with respect to funding and
financing such opportunities or the ultimate profitability of these
acquisitions.
Competition
The television commercial business is highly competitive. Production
companies compete to secure deals to produce television commercials as part of
major national advertising campaigns for products and services with household
name recognition. Those competitors include, among others, MJZ, Propaganda, and
Radke Films. Also, Straw Dogs competes with the other commercial productions
companies for the services of the top commercial directors needed to deliver
commercials of the highest quality. Many directors retain their status as
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<PAGE>
independent contractors even though they are signed to exclusive term contracts,
adding to the competitive nature of the business.
We currently compete with numerous other businesses and individuals who
produce original music scores and advertising themes for television, radio and
film, produce music videos and specials for television and provide management
for music artists. Currently, the production of original scores and advertising
themes for television, radio and film, the production of music videos and video
specials for television, and music artist management are carried out by
individuals or small privately held niche companies. Generally, each such
individual or small company engages in only one of these businesses. These
businesses and individuals include Crushing Enterprises, Elias Associates, Not
Just Jingles, JSM Music, Inc. and Tomandandy, with respect to commercial music;
The End, DNA, Automatic Films, The Collective and High Five, with respect to
video production, and Gold Mountain Entertainment, Deluxe Management, Left Bank
Management and H.K. Management, with respect to artist management.
Push Records faces intense competition for discretionary consumer spending
from numerous other record companies and other forms of entertainment offered by
film companies, video companies and others. Push Records competes directly with
other recorded music companies, including the five major recorded music
companies, which distribute contemporary music, as well as with other record
companies for signing artists and acquiring music catalogs. Many of these
competitors have significantly longer operating histories, greater financial
resources and larger music catalogs than Push Records. Our ability to compete
successfully in the recorded music business will be largely dependent upon
obtaining additional capital, signing and retaining successful artists and
introducing music products which are accepted by consumers.
Organization
Paradise was incorporated in the State of Delaware on July 18, 1996. Our
principal executive offices are located at 53 West 23rd Street, New York, New
York, 10010 and our telephone number is (212) 590-2100.
Employees/Independent Contractors
As of June 30, 1999, we had 22 employees, 14 of whom were located at our
New York office, and 8 of whom were located in Nashville, Tennessee. As of June
30, 1999 Straw Dogs had 12 employees. None of our employees, or those of Straw
Dogs, is represented by a labor union. We have not experienced any work stoppage
and consider relations with our employees to be good.
As is customary in the music business, we also utilize the services of
artists, performers, composers, producers, engineers, roadies, booking agents
and others who are independent contractors. These independent contractors hire
out their services on an as needed basis and receive a set fee for the services.
The services performed by these independent contractors are not needed on a full
time basis. As a result, services of independent contractors are less expensive
than having full time employees perform these services.
Description of Property
We lease office space at three locations. Our headquarters and commercial
music recording studios are located at 53 West 23rd Street in New York City
where we lease approximately 20,000 square feet, pursuant to a lease that
expires in July 2007. Our music video production business leases 2,050 square
feet of office space at 209 10th Avenue South in Nashville, Tennessee which
lease expires in August 2000. Our rent expense for fiscal 1999 was approximately
$247,000. In addition, effective as of August 8, 1999, if the Straw Dogs
acquisition closes, our commercial production company will enter into a 10-year
lease with an affiliate of Jesse Dylan and Craig Rodgers for approximately
10,000 square feet at 8330 West Third Street, Los Angeles, CA at a rate of
between $2.25 and $2.40 per square foot (depending upon independent appraisals)
with such lease being subject to future escalation. See "THE ACQUISITION
TRANSACTIONS -- Description of Asset Purchase Agreement" for a description of
the lease.
28
<PAGE>
Description of Legal Proceedings
Except for proceedings in the normal course of business, neither Paradise
nor any of our subsidiaries is a party to or involved in any material pending
legal proceedings.
Management Discussion and Analysis of Financial Condition and Results of
Operations of Paradise
Results of Operations
Fiscal Year Ended June 30, 1999 Compared to June 30, 1998
Recorded music and artist management revenues decreased to $1,158,701 for
the fiscal year ended June 30, 1999 from $3,099,084 for the fiscal year ended
June 30, 1998, a decrease of $1,940,383 or 62.6%. The decrease in revenues is
primarily due to the restructuring of Push Records and the reduction in sales
volume of Daryl Hall and John Oates album "Marigold Sky". The recorded music
operation has been restructured to decrease operating overhead 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 decreased to $665,875
for fiscal year ended June 30, 1999 from $1,608,090 for fiscal year ended June
30, 1998, a decrease of $942,215 or 58.6 %. The decrease is due to fewer record
releases and lower overall album sales when compared to the prior year. Gross
profit as a percentage of recorded music and artist management revenues
decreased to 42.5% for the fiscal year ended June 30, 1999 from 48.1 % for the
fiscal year ended June 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 Push Records executed with V2 Records which reduced
Push Records' costs to produce and market the recordings and provides for a
portion of the profits from such recordings to be shared with V2.
Television and film production revenues decreased to $8,502,335 for the
fiscal year ended June 30, 1999 from $10,494,342 for the fiscal year ended June
30, 1998, a decrease of $1,992,007 or 19.0% (revenue from the pending
acquisition of Straw Dogs is not included). The decrease in revenues is
primarily due to a reduction in the number of television music specials produced
during the fiscal year ended June 30, 1999, partially offset by an increase in
royalty and residual revenues from original music scores made for television
programs such as Pokemon and Mr. Men.
Television and film production cost of sales decreased to $5,639,636 for
fiscal year ended June 30, 1999 from $8,153,418 for fiscal year ended June 30,
1998, a decrease of $2,513,782 or 30.8%. Gross profit as a percentage of
television and film production revenues increased to 33.7% for the fiscal year
ended June 30, 1999 from 22.3% for the fiscal year ended June 30, 1998. The
increase was primarily attributable to the higher gross profit percentage on the
television music specials, and royalty and residual income from television
programs.
Paradise's marketing, selling, general and administrative expenses
increased to $7,101,023 for fiscal year ended June 30, 1999 from $6,828,087 for
the fiscal year ended June 30, 1998, an increase of $272,936 or 4%. The increase
is primarily attributable to fees associated with services provided to Paradise
pursuant to outside consulting arrangements with regard to liquidity and
acquisitions. These fees were paid predominately through the use of common stock
purchase warrants. The increase in marketing, sales, general and administrative
expenses were partially offset by decreases in other administration costs as a
result of staff reductions and other cost containment measures implemented.
Interest income decreased to $37,569 for the fiscal year ended June 30,
1999 from $139,040 for the fiscal year ended June 30, 1999, a decrease of
$101,471 or 72.9%. The decrease resulted from the use of proceeds from
Paradise's initial public offering during fiscal 1998, which were invested in
interest bearing accounts.
29
<PAGE>
Paradise's loss before income taxes increased to $3,707,929 for the fiscal
year ended June 30, 1999 from $2,857,129 for the fiscal year ended June 30,
1998, an increase of $850,800 or 29.8%. The increase was primarily due to the
decrease in gross profits realized by the two operating segments as mentioned
above, as well as one-time items that impacted fiscal operating results which
include, fees associated with the hiring of key management personnel to drive
Paradise forward in its new growth phase; certain charges relating to the
restructuring of the Push Records subsidiary; and a charge associated with the
termination of Push's record distribution agreement with BMG, precipitated by
its new joint venture with V2; all of which reflected efforts to recapitalize
and restructure Paradise's core businesses.
Liquidity and Capital Resources
Net cash used in operating activities for the fiscal year ended June 30,
1999 was $2,370,079. This was principally due to the operating loss for the year
net of the non-cash charges associated with the issuance of the Company's common
stock and common stock purchase warrants as payment for certain services.
Net cash provided by investing activities for the fiscal year ended June
30, 1999 was $161,498. This was principally due to the release of restricted
cash previously held for rental security deposits, partially offset by amounts
used to acquire property and equipment.
Net cash provided by financing activities for the fiscal year ended June
30, 1999 was $2,275,363, which represented the net proceeds from the sales of
Paradise's common stock, net of expenses.
Paradise has working capital of $2,515,953 and stockholders' equity of
$4,044,056 at June 30, 1999. Paradise raised an additional $4.1 million in July
1999 and 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.
Year 2000 Compliance
Paradise 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.
Paradise believes that all its computer systems will be Year 2000 compliant by
the end of the third quarter of 1999. The expense incurred by Paradise to
achieve compliance has not been material. Paradise is currently working with
outside vendors to obtain assurances that they are Year 2000 compliant. However,
there can be no assurance that all of Paradise's vendors will achieve compliance
on a timely basis. In the event of any such noncompliance by vendors, a material
adverse effect to Paradise's operations and financial results could occur.
Paradise has not developed any contingency plan to address the possibility of
vendor-related Year 2000 problems.
INFORMATION CONCERNING STRAW DOGS AND SPUR & BUCKLE
Description of Business
Straw Dogs is a leading producer of television commercials, music videos
and other related media. Straw Dogs has created and produced television
commercials for national advertisers which include Nike, Coca-Cola, Pepsi,
Reebok, Budweiser, Hallmark, 7-Up, General Motors, Coke, AT&T, Sprint,
Chevrolet, McDonalds, Disney, American Express and Mountain Dew, among others.
Straw Dogs has also produced commercials for leading advertising agencies such
as Grey Advertising and BBDO, and directed music videos for prominent artists
such as Tom Waits, Lenny Kravitz, Tom Petty, and Nick Cave. Straw Dogs was
founded in February, 1998 by Jesse Dylan and Craig Rodgers. Jesse Dylan has
served as our Chairman and Chief Executive Officer since April, 1999 and as a
director since January, 1999. Mr. Dylan has been engaged in the entertainment
business for most of his life. Mr Dylan has prior experience in the area of
music publishing and artist business management, as well as expertise as a
director of music videos and television commercials.
30
<PAGE>
As a viable artistic production company, Straw Dogs often competes to
secure deals to produce television commercials as part of major national
advertising campaigns for household name products and services. In addition,
Straw Dogs also competes with other commercial productions companies for the
services of top commercial directors needed to deliver commercials of the
highest quality. With its proven expertise in the television commercial and
music video production fields -- due in large part to the creative visions and
services of such notable directors as Jesse Dylan, Neil Burger, Charlie Cole,
Jason Farrand, Deb Hagen, Geoff Moore, Mike Rowels and Rob Lieberman -- Straw
Dogs has won the production rights to numerous acclaimed projects, gaining
recognition within the industry, and providing music artists and advertisers
with a quality promotions product.
Straw Dogs must perform several duties throughout the commercial/video
making process. These duties include hiring the crew, casting the talent,
scouting the locations, and designing the commercial/video sets. With its
innovative executive producers, directors, writers, and supporting film crew,
Straw Dogs guarantees the successful development and realization of a production
project, from its inception to the final production. At all times Straw Dogs
maintains open communication with their clients, and ensures that the project is
run on an efficient schedule and according to the allocated budget. Through this
approach, Straw Dogs has been able to maintain successful and profitable
relationships with its clients, and has developed a reputation of artistic
ingenuity, dedication, and fiscal responsibility.
Description of Property
Straw Dogs currently leases approximately 10,000 square feet at 8330 West
Third Street, Los Angeles, CA on a month to month basis. On the closing of the
acquisition transaction, New Straw Dogs will enter into a ten year lease
covering these facilities.
Description of Legal Proceedings
Except for proceedings in the normal course of business neither Straw Dogs
nor Spur & Buckle is a party to or involved in any material pending legal
proceeding.
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Straw Dogs
General
Straw Dogs currently derives most of its revenues from the production of
television commercials. During February 1998, Straw Dogs acquired the name of a
television commercial production company, Straw Dogs.
Forward Looking Statements
Except for the historical information contained herein, this report 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. The forward-looking
statements contained herein represent the Straw Dogs' judgment as of the date of
filing this report hereof, and Straw Dogs cautions readers not to place undue
reliance on such statements.
Results of Operations
Year Ended June 30, 1999 Compared to Year Ended June 30, 1998
The initial fiscal year of Straw Dogs was a short fiscal year since
operations did not commence until
31
<PAGE>
March 1998 and the fiscal year ended June 1998. Revenues increased to
$19,806,393 for the fiscal year ended June 30, 1999 from $7,655,848 for the
fiscal year ended June 30, 1998, an increase of $12,150,545 or 158.7%. The
growth was predominantly attributable to the inclusion of Straw Dog's operations
for a full year.
Gross profit as a percentage of revenues decreased to 20.9% for the fiscal
year ended June 30, 1999 from 28.8% for the fiscal year ended June 30, 1998. The
decrease was principally due to the short-fiscal year.
Straw Dogs' selling, general and administrative expenses increased to
$3,365,410 for the fiscal year ended June 30, 1999 from $1,516,216 for the
fiscal year ended June 30, 1998, an increase of $1,849,194 or 122.0%. The
increase is principally due to reflecting these expenses for a full year.
Other income increased to $1,617 for the fiscal year ended June 30, 1999
from $1,382 for the fiscal year ended June 30, 1998, an increase of $235 or
17.0%.
Straw Dogs' net income increased to $768,238 for the fiscal year ended
June 30, 1999 from $693,845 for the fiscal year ended June 30, 1998, an increase
of $74,393 or 10.7 %.
Liquidity and Capital Resources
Net cash provided by operating activities for fiscal year ended June 30,
1999 was $1,334,355. This was primarily attributable to the net income and an
increase in accrued expenses and other current liabilities.
Net cash used by investing activities for the fiscal year ended June 30,
1999 was $1,435,706. This was principally due to the purchase of property and
equipment, an increase in a loan to an officer, and advances to an affiliate.
Net cash provided by financing activities for the fiscal year ended June
30, 1999 was $110,299. This was principally due to the increase in borrowings
from a bank through its overdraft protection arrangement, which was partially
offset by payment of members' withdrawals.
Straw Dogs has a working capital deficiency of $675,471 and stockholder's
and members' equity of $979,219 at June 30, 1999. On September 24, 1999, Straw
Dogs entered into an agreement to sell the net assets of Straw Dogs and 100% of
the stock of Spur & Buckle, Inc. to Paradise Music and Entertainment, Inc. for
an aggregate of 1,441,000 shares of Paradise's common stock.
Inflation
The impact of inflation on the company's operating results has been
insignificant in recent years, reflecting generally lower rates of inflation in
the economy. While inflation has not had a material impact on operating results,
there is no assurance that the company's business will not be affected by
inflation in the future.
Year 2000
Straw Dogs has conducted a review of its computer systems to identify any
systems that could be affected by the "Year 2000" issue and believes that its
computer systems and software products are fully year 2000 compatible. However,
it is possible that certain computer systems or software products of Straw Dog's
suppliers or customers may not accept input of, store, manipulate and output
dates in the year 2000 or thereafter without error or interruption. All of Straw
Dogs' computer hardware and software have been recently purchased and to the
best of its knowledge are year 2000 compliant. There can be no assurance that
Straw Dogs will not be required to make significant expenditures to identify,
address or remedy any potential year 2000 problems, or to satisfy liabilities to
which Straw Dogs may become subject as a result of such problem.
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<PAGE>
Newly Issued Accounting Pronouncements
In April 1998, the AICPA issued a Statement of Position 98-5 (SOP 98-5),
"Reporting on the Costs of Start-up Activities." SOP 98-5 requires entities
which have previously capitalized start-up costs, such as organizational costs,
to expense the unamortized amount as a cumulative effect of a change in
accounting principle. The SOP is effective for the fiscal years beginning after
December 15, 1998. Based on the requirements of SOP 98-5, Straw Dogs will incur
a cumulative effect charge of approximately $46,000 during the fiscal year ended
June 30, 2000.
Straw Dogs believes that it will have sufficient capital to maintain
operations for the following twelve month period.
Market Information and Related Stockholder Matters
Our common stock began trading on the Nasdaq SmallCap Market and the
Boston Stock Exchange on January 22, 1997 under the symbol "PDSE" and "PMU,"
respectively. The high and low bid prices of our common stock (as reported by
Nasdaq and the Boston Stock Exchange) for each quarter since our initial public
offering were as follows:
Nasdaq SmallCap Market
Period High Low
------ ---- ---
1999 01/01/99 - 03/31/99 $5-3/8 $1-1/4
03/31/99 - 06/30/99 $7-3/4 $3-7/8
06/30/99 - 09/30/99 $9-3/8 $3-7/8
1998 01/01/98 - 03/31/98 $4 $2-13/16
04/01/98 - 06/30/98 $3-3/4 $2
07/01/98 - 09/30/98 $3 $1-1/8
10/01/98 - 12/31/98 $2 $-1/2
1997 01/22/97 - 03/31/97 $7 $5-3/8
04/01/97 - 06/30/97 $5-7/8 $3-1/2
07/01/97 - 09/30/97 $5-1/32 $3-5/8
10/01/97 - 12/31/97 $6-3/8 $3
Boston Stock Exchange
Period High Low
------ ---- ---
1999 01/01/99 - 3/31/99 $5-3/8 1-1/8
03/31/99 - 06/30/99 $7-1/8 $3-5/8
06/30/99 - 09/30/99 $7-1/8 $1
1998 01/01/98 - 03/31/98 $4 $2-13/16
04/01/98 - 06/30/98 $3-5/8 $2
07/01/98 - 09/31/98 $1-7/8 $1
10/01/98 - 12/31/98 1-1/2 $-7/16
1997 01/22/97 - 03/31/97 $7 $5
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<PAGE>
04/01/97 - 06/30/97 $6 $3
07/01/97 - 09/30/97 $5-3/64 $3-5/8
10/01/97 - 12/31/97 $6-3/8 $3
The last reported sale price of our common stock on April 23, 1999, the
last full trading day prior to the public announcement of the stock purchase and
asset purchase, as reported on the Nasdaq was $5.75.
On October 13, 1999, the last reported sale prices of our common stock, as
reported on Nasdaq was $4.485 per share.
The prices set forth above reflect interdealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions. The public market for the common stock is limited and the
foregoing quotations should not be taken as necessarily reflective of prices
which might be obtained in actual market transactions or in transactions
involving substantial numbers of shares.
The approximate number of holders of record of our common stock was 56 as
of September 23, 1999. We believe that there are in excess of 300 round lot
beneficial owners of common stock whose shares are held in street name.
We have never paid a dividend on our common stock. We anticipate that
future earnings, if any, will be retained for use in our business or for other
corporate purposes, and we do not anticipate paying cash dividends in respect of
our common stock.
34
<PAGE>
Security Ownership of Paradise of Certain Beneficial Owners and Management
The following table sets forth certain information as of October 13, 1999
regarding the share ownership of the company by (i) each person who is known to
us to be the record or beneficial owner of more than five percent (5%) of our
common stock; (ii) each director and each Named Executive Officer; and (iii) all
current directors and executive officers as a group.
Information contained in this proxy statement with regard to stock
ownership was obtained from the company's stockholders' list, filings with
governmental authorities, or from the named individual nominees, directors and
officers. The persons identified in the foregoing table disclaim beneficial
ownership of shares owned or held in trust for the benefit of members of their
families or entities with which they may be associated.
35
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Outstanding
Name and Address of Beneficial Owner (1) Ownership (2) Shares Owned (3)
---------------------------------------- ------------- ----------------
<S> <C> <C>
Named Executive Officers and Directors
Jesse Dylan 125,000 (4) 1.6%
Brian Doyle 464,250 (5)(6) 6.1%
Richard Flynn 464,250 (5)(6) 6.1%
John Loeffler 369,601 (6)(7)(8) 4.9%
Jon Small 299,000 (6)(7) 3.9%
Thomas J. Edelman 112,385 (9)(10) 1.5%
Jeffrey Rosen 6,747 (11) *
M. Jay Walkingshaw 620,000 (12) 8.2%
All executive officers and directors as a
group (8 persons) 2,461,233 (4) 32.4%
through (12)
Beneficial Owners of in Excess of 5% (other
than directors and named executive officers)
The Cassandra Group, Inc.
561 Broadway
New York, New York 10012 2,970,880 (13) 39.1%
Dana Giacchetto
561 Broadway
New York, New York 10012 1,000,000 (14) 13.1%
</TABLE>
- -----------------
* less than 1%
(1) The address of each beneficial owner identified is c/o Paradise Music &
Entertainment, Inc., 53 West 23 Street, New York, NY 10010, except for (i)
Thomas J. Edelman, which is c/o Patina Oil & Gas Corporation and Chase
Capital, 380 Madison Avenue, New York, NY 10021, (ii) Jesse Dylan, which
is c/o Straw Dogs, 8330 3rd Street, Los Angeles, CA 90048, and (iii)
Jeffrey Rosen, which is c/o Davasee Enterprises, 67 Irving Place, 11th
Floor, New York, New York 10003.
(2) Unless otherwise indicated, we believe that all persons named in the table
have sole voting and investment power with respect to all shares of common
stock beneficially owned by them. A person is deemed to be the beneficial
owner of securities that can be acquired by such person within 60 days
from October 7, 1999 upon the exercise of options, warrants or convertible
securities.
(3) Each beneficial owner's percentage ownership is determined by assuming (i)
that options, warrants or convertible securities that are held by such
person (but not those held by any other person) and which are exercisable
within 60 days of the record date have been exercised and converted, and
(ii) 6,355,331 shares of common stock were outstanding, before any
consideration is given to such options, warrants or convertible
securities.
(4) Includes 25,000 shares held by Straw Dogs but does not include (i)
1,000,000 shares of common stock to be issued to Mr. Dylan in the proposed
acquisition of Straw Dogs and Spur & Buckle, which transactions are
subject to stockholder approval, (ii) non-qualified options to purchase
750,000 shares at an exercise price of $5 to be granted pursuant to his
employment agreement, subject to stockholder approval.
(5) Includes non-qualified options granted on February 19, 1999 covering
300,000 shares at $5 per share.
(6) Does not include non-qualified options to purchase 50,000 shares of common
stock at $5.25 per share granted on April 21, 1999 which are not
exercisable within 60 days from the record date.
(7) Includes non-qualified options to purchase 5,000 shares granted in
December 1996 at $6 per share.
(8) Includes 18,600 shares owned by Mr. Loeffler's pension plan and 3,800
shares owned by Mr. Loeffler's wife.
(9) Includes (i) non-qualified options granted in December 1996 to purchase
15,000 shares at $6 per share and (ii) non-qualified options granted under
the Directors Option Program of 5,000 shares on January 2, 1997, July 1,
1997, July 1, 1998 and July 1, 1999 at exercise prices of $6, $4, $2.0625
and $5.125, respectively.
(10) Does not include warrants to purchase 100,000 shares granted on April 8,
1999 at $5 per share, subject to stockholder approval.
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<PAGE>
(11) Includes non-qualified options to purchase 5,000 shares at $5.125 per
share granted under the Directors Option Program. Does not include
warrants to purchase 200,000 shares granted on April 23, 1999 at $5.25 per
share subject to stockholder approval.
(12) Includes non-qualified options to purchase 600,000 shares at $5 per share.
(13) Cassandra does not directly own any shares of common stock, the shares
being owned by Cassandra's various clients. Cassandra is a registered
investment adviser which has discretionary power to dispose of the
securities held in its clients accounts. Accordingly, by virtue of such
discretionary power, pursuant to Rule 13d-3 promulgated under the
Securities Exchange Act of 1934, as amended, Cassandra may be deemed to be
the indirect beneficial owner of the shares held by the various account
holders.
(14) Does not include 100,000 which are held of record by Mr. Giacchetto but
are not beneficially owned by him. Does not include the shares deemed to
be beneficially owned by Cassandra, a company which Mr. Giacchetto owns.
Information contained here with regard to stock ownership was obtained
from our stockholders' list, filings with governmental authorities, or from the
named individual nominees, directors and officers. The persons identified in the
foregoing table disclaim beneficial ownership of shares owned or held in trust
for the benefit of members of their families or entities with which they may be
associated.
COMPENSATION OF NAMED EXECUTIVE OFFICERS OF PARADISE
Summary Compensation Table
The following table sets forth all compensation awarded to, earned by or
paid by Paradise or its subsidiaries during each of the last three fiscal years
to Jesse Dylan, our current Chief Executive Officer, and Brian Doyle, who served
as Chief Executive Officer from December 1998 through April 1999 and Executive
Vice President prior to December 1998, and John Loeffler who served as Chief
Executive Officer from July 1996 through December 1998 and Chairman and
President from December 1998 through April 1999, and each of the most highly
compensated executive officers, other than the persons who had served as Chief
Executive Officer during the fiscal year, whose annual base salary and bonus
compensation exceeded $100,000 (the "Named Executive Officers").
<TABLE>
<CAPTION>
Long Term
Annual Compensation (1) Compensation Awards
----------------------------------- ---------------------------
Year Ended Securities
---------- All Other Underlying
Name and Principal Position June 30 Salary ($) Bonus ($) Compensation (2) Options
- --------------------------- ------- ---------- --------- ---------------- -------
<S> <C> <C> <C> <C> <C>
Jesse Dylan 1999 -- -- -- --
Chief Executive Officer 1998 -- -- -- --
(since April 1999) 1997 -- -- -- --
Brian Doyle 1999 $225,000 $ 75,000 $ 25,000 350,000
Former Chief Executive 1998 300,000 -- 28,000 --
Officer (until April 1999) 1997 150,000 162,500 7,000 --
John Loeffler 1999 $225,000 $100,000 $ 25,000 50,000
Former Chief Executive 1998 310,000 -- 34,000 --
Officer (until December 1998) 1997 150,000 191,000 34,000 5,000
Richard Flynn 1999 $225,000 $100,000 $ 18,000 350,000
Chief Financial Officer (since 1998 300,000 -- 15,000 --
February 1998) and Chief
Operating Officer (until
October 1999) 1997 150,000 162,500 -- --
Jon Small 1999 $345,000 $125,000 $ 50,000 50,000
Executive Vice President 1998 310,000 150,000 60,000 --
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
1997 150,000 189,000 36,000 5,000
</TABLE>
(1) We were incorporated in July 1996. Compensation for the fiscal years ended
June 30, 1999, 1998 and 1997 represents amounts paid by Rave Music,
Picture Vision, All Access Management and PUSH Records.
(2) Includes amounts paid by us which we deemed to be for the benefit of such
executive, including amounts paid for lodging, transportation, insurance,
entertainment and other perquisites.
Option Grants in Last Fiscal Year
The following table sets forth, for each of the Named Executive Officers,
information regarding individual grants of options made during the fiscal year
ended June 30, 1999.
Individual Grants
- --------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
% of Total
Options
Granted to Exercise or
Employees in Base Price
Name Granted Fiscal Year ($/Sh) Expiration Date
---- ------- ----------- ------ ---------------
Jesse Dylan -- -- -- --
Brian Doyle 50,000 3% $5.25 4/22/02
300,000 19% $5.00 2/19/02
John Loeffler 50,000 3% $5.25 4/22/02
Richard Flynn 50,000 3% $5.25 4/22/02
300,000 19% $5.00 2/19/02
Jon Small 50,000 3% $5.25 4/22/02
Aggregate Option/SAR Exercises; Fiscal 1999 Year End Option/SAR Values
The following table provides information related to options exercised by
the Named Executive Officers during the fiscal year ended June 30, 1999 and the
number and value of options held by them at June 30, 1999 which were then
exercisable. No options were exercised during the fiscal year ended June 30,
1999.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In the Money Options/
Options/SARs at FY-End SARs at FY-End (1)
---------------------- ------------------
Shares
Acquired on
Exercise Value
Name (#) Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- --- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jesse Dylan -- -- -- -- -- --
John Loeffler 0 0 5,000 50,000 $0 $18,750
Jon Small 0 0 5,000 50,000 $0 $18,750
Richard Flynn 0 0 300,000 50,000 $187,500 $18,750
Brian Doyle 0 0 300,000 50,000 $187,500 $18,750
</TABLE>
- ----------
(1) The last sale price on June 30, 1999 was $5.625
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Directors' Compensation
Pursuant to our Outside Directors Program, directors who are not employees
("Outside Directors") received non-qualified options to purchase 5,000 shares on
January 22, 1997 at $6 per share and are entitled to receive non-qualified
options to purchase 5,000 shares for each year of service, payable in advance on
July 1 of each year. The option exercise price is the closing bid price of the
common stock on the first trading day of each fiscal year. Accordingly, 5,000
options were granted at $4 on July 1, 1997, at $2.0625 on July 1, 1998 and at
$5.125 on July 1, 1999 to each Outside Director.
In addition, Outside Directors are entitled to receive compensation in the
amount of $18,000 per annum, 100% payable in stock. Such amounts are payable
quarterly in arrears. For the year ended June 30, 1999, persons who were Outside
Directors during such fiscal year received compensation of $45,000 and 18,838
shares of common stock.
All directors are reimbursed for certain expenses in connection with
attendance at Board of Directors and Committee meetings. Other than with respect
to reimbursement of expenses, directors who are employees or officers or who are
associated with us do not receive compensation for service as directors.
Employment Agreements, Termination of Employment and Change in Control
Arrangements
Upon the completion of the acquisition of Straw Dogs and Spur & Buckle,
Mr. Dylan will be employed as our Chairman and Chief Executive Officer, a
position he currently holds, for a five year term, commencing July 1, 1999 at an
annual salary of $750,000. In addition to his duties as the Chairman and Chief
Executive Office, Mr. Dylan will also continue to direct commercial and other
television projects. The benefits of these activities will accrue directly to
Paradise. Mr. Dylan's compensation is to be reviewed annually by our
Compensation Committee with bonus awards or increases in salary to be considered
based on Mr. Dylan's and our overall performance. In addition, Mr. Dylan will be
entitled to receive ten year options to purchase 750,000 shares of common stock.
The options vest ratably over three years from the effective date (provided Mr.
Dylan is employed by us at that time), and have an exercise price of $5 per
share.
On October 13, 1999, we entered into an employment agreement with M. Jay
Walkingshaw effective as of July 1, 1999, pursuant to which he will act as our
President and Chief Operating Officer for a term of 4 years at a salary of
$450,000. Mr. Walkingshaw's compensation will be reviewed annually by our
compensation committee and any increases will be based on Mr. Walkingshaw's and
our overall performance. In addition to salary and bonus, Mr. Walkingshaw is
entitled to options to purchase 600,000 shares at $5 per share. The options vest
ratably over a three year period. Mr. Walkingshaw will be entitled to four weeks
paid vacation and life insurance in the amount of $1,000,000. Mr. Walkingshaw
will be entitled to participate in the benefit plans established for the benefit
of our key employees.
Messrs. Doyle, Flynn, Loeffler and Small are each employed under
agreements dated July 1, 1997 as amended from time to time thereafter. At the
current time the employment agreements of Messrs. Doyle, Flynn and Loeffler
expire on June 30, 2001 and the employment agreement of Mr. Small expires June
30, 2000. It is anticipated that new employment agreements will be executed by
each of the these executives for the period ending June 20, 2002. Messrs. Doyle
and Flynn have a base salary for the fiscal year ending June 30, 2000 of
$275,000.00, Mr. Loeffler has a base salary of $325,000.00 and Mr. Small has a
base salary of $375,000.00. Messrs. Doyle, Loeffler and Small are also entitled
to a fixed bonus of $100,000.00 in any fiscal year commencing with the fiscal
year ending June 30, 2000, if the profits before taxes of their operating group
for such fiscal year exceeds $500,000.00. In addition all four may be granted
discretionary bonuses determined by the Compensation Committee.
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For the years ended June 30, 1999 and 1998, approximately $1,391,000 and
$1,480,000 have been expensed under the bonus plans and employment arrangements
with Messrs. Doyle, Flynn, Loeffler and Small and are included in marketing,
selling, general and administrative expenses.
PROPOSAL NO. 2
AMENDMENT OF 1996 STOCK OPTION PLAN
In October 1996, the Board of Directors and the stockholders approved the
1996 Stock Option Plan (the "Option Plan"). In February 1999, the Board approved
an amendment to the Option Plan to increase from 185,000 to 1,500,000 the number
of shares available for options and stock appreciation rights, which amendment
was approved by the stockholders in April, 1999.
In April 1999, the Board of Directors adopted, and recommended that the
stockholders of the company approve, the adoption of an amendment to the Option
Plan to increase from 1,500,000 to 3,000,000 the number of shares of common
stock available for options and SARs to be granted under the Option Plan (the
"Plan Amendment").
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Reasons for and Principal Effects of the Plan Amendment
As of October 1, 1999, there were options outstanding under the Option
Plan options covering 1,062,500 shares of common stock. Accordingly, only
437,500 shares of common stock were available for future grants under the Option
Plan. As the Board of Directors believes that stock-based performance
compensation arrangements are beneficial in attracting and maintaining key
employees and directors by aligning such persons' interests with those of the
stockholders over the long term, the Board has adopted, and recommends that the
stockholders approve the adoption of, the Plan Amendment. The Board believes
that the ability to provide future grants to existing employees and new
employees as our businesses grow, and to employees of acquired companies will
increase our growth.
Description of 1996 Stock Option Plan
The Option Plan is intended to advance the interests of the company by
providing an opportunity for ownership of common stock (or in the case of stock
appreciation rights, the appreciation of the value of the common stock) by
employees, agents and directors of, and consultants to the company and its
subsidiaries. Accordingly, by providing such opportunity, the Option Plan is
intended to attract and retain such qualified personnel, and otherwise to
provide additional incentives for grantees to promote the success of the
company's business.
The Option Plan provides for the grant of incentive stock options ("ISOs")
(within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), non-qualified stock options ("NQSOs") and/or stock
appreciation rights ("SARs") to certain directors, officers, employees of and
consultants to the company.
The total number of shares of common stock for which options and SARs may
be granted pursuant to the Option Plan is currently 1,500,000 which shares may
be authorized but unissued or authorized and issued shares held in the company's
treasury or acquired by the company for purposes of the Option Plan. The number
of shares subject to the Option Plan is subject to adjustment in certain events
as described below.
Types of Options. Options may be designated, at the sole discretion of the
Compensation Committee, as either ISOs or NQSOs.
Eligibility. ISOs may be granted to key employees (including directors) of
the company or its subsidiaries. NQSOs may be granted to officers and key
employees of the company or any of its subsidiaries, or agents, directors of and
consultants to the company or its subsidiaries, whether or not otherwise
employees of the company or its subsidiaries.
Administration: The Option Plan is administered by the Compensation
Committee, which is required to consist of two or more persons who are
"non-employee directors" as defined under Rule 16b-3 under the Exchange Act. No
member of the Compensation Committee can act upon any matter exclusively
affecting any option or SAR granted or to be granted to himself or herself under
the Option Plan. A majority of the members of the Compensation Committee, but at
least two, is required to constitute a quorum, and any action may be taken by a
majority, but at least two, of those present and voting at any meeting. The
decision of the Compensation Committee as to all questions of interpretation and
application of the Option Plan is final and binding on all persons. The
Compensation Committee has authority, subject to the provisions of the Plan, to
construe the respective option and SAR agreements and the Option Plan, to
prescribe and amend rules and regulations relating to the Option Plan.
Option and SAR Agreements. Each option and SAR is evidenced by an
agreement ("Award Agreement"). The Compensation Committee is authorized to
determine the terms and provisions of the respective Award Agreements, which may
but need not be identified, and to make all other determinations in the judgment
of the Compensation Committee as are necessary or desirable for the
administration of the Plan. The Award Agreements may contain such terms,
provisions and conditions which are not inconsistent with the Option Plan as may
be determined by the Compensation Committee; provided that options designated as
ISOs shall meet all of the conditions for ISOs as defined in Section 422 of the
Code. No option or SAR may be granted within the meaning
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of the Option Plan and no purported grant of any option or SAR shall be
effective until the Award Agreement shall have been duly executed on behalf of
the company and the grantee. More than one option and SAR may be granted to an
individual.
Option Price. The option price of shares of common stock for options
designated as NQSO's shall be as determined by the Compensation Committee;
provided that such option price may not be less than the "fair market value" of
the shares determined as of the date of grant of such option. The option price
or prices of shares of the common stock for ISOs shall be at least the fair
market value of such common stock at the time the option is granted as
determined by the Compensation Committee in accordance with the regulations
promulgated under Section 422 of the Code.
Manner of Payment, Manner of Exercise. Options granted under the Option
Plan may provide for the payment of the option price by delivery of (i) cash or
a check in an amount equal to the option price of such options, (ii) shares of
common stock owned by the grantee having a fair market value equal in amount to
the option price of the Options being exercised, or (iii) any combination of (i)
and (ii); provided, however, that payment of the option price by delivery of
shares of common stock owned by such grantee may be made only upon the condition
that such payment does not result in a charge to earnings for financial
accounting purposes as determined by the Compensation Committee, unless such
condition is waived by the Compensation Committee.
To the extent that the right to purchase shares under an option has
accrued and is in effect, options may be exercised in full or in part from time
to time, by giving written notice, to the company, stating the number of shares
with respect to which the option is being exercised, accompanied by payment in
full for such shares. No partial exercise may be made for less than one hundred
(100) full shares of common stock. The exercise of an option shall result in the
cancellation of any related SAR with respect to the same number of shares of
common stock as to which the option was exercised.
Term of Options and SARs, Exercisability. Each option and SAR shall expire
on a date determined by the Compensation Committee which is not more than ten
(10) years from the date of grant, except as otherwise provided in the Option
Plan. Except as otherwise provided in the Option Plan, an option or SAR granted
to any grantee whose employment, by the company or any of its subsidiaries is
terminated, shall terminate on the earlier of (a) ninety (90) days after the
date such grantee's employment for the company or any such subsidiary is
terminated, or (b) the date on which the option or SAR expires by its terms. If
the employment of a grantee is terminated by the company or any of its
subsidiaries for cause or because the grantee is in breach of any employment
agreement or because the grantee voluntarily terminates such employment, such
option or SAR will terminate on the date the grantee's employment is terminated,
unless the Compensation Committee determines to extend such option for a
specified period (but not beyond the period otherwise permitted by the Option
Plan). If the employment of a grantee is terminated by the company or any of its
subsidiaries because the grantee has become permanently disabled, such option or
SAR shall terminate on the earlier of (a) one (1) year after the date such
grantee's employment by the company or any such subsidiary is terminated, or (b)
the date on which the option or SAR expires by its terms. In the event of the
death of any grantee, any option or SAR granted to such grantee shall terminate
one (1) year after the date of death, or on the date on which the option or SAR
expires by its terms, whichever occurs first. An option or SAR granted to a
grantee whose employment, by the company or any of its subsidiaries is
terminated for whatever reason, including, without limitation, death or
disability, shall be exercisable only to the extent that such option or SAR has
accrued and is in effect on the date such grantee's employment is terminated.
Transferability. The right of any grantee to exercise any option or SAR
granted to him or her shall not be assignable or transferable by such grantee
other than by will or the laws of descent and distribution and any such option
or SAR shall be exercisable during the lifetime of such grantee only by the
grantee. Any option or SAR granted under the Option Plan shall be null and void
and without effect upon the bankruptcy of the grantee, or upon any attempted
assignment or transfer, except as otherwise provided in the Option Plan,
including without limitation, any purported assignment, whether voluntary or by
operation of law, pledge, hypothecation or other disposition, attachment, or
similar process, whether legal or equitable, upon such option or SAR.
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SARs. An SAR may be granted separately or in connection with an option
(either at the time of grant or at any time during the term of the option). The
exercise of an SAR results in the cancellation of the option to which it relates
with respect to the same number of shares of common stock as to which the SAR
was exercised. An SAR granted in connection with an option is exercisable or
transferable only to the extent that such related option is exercisable or
transferable. Upon the exercise of an SAR related to an option, the holder is
entitled to receive payment of an amount determined by multiplying: (i) the
difference obtained by subtracting the option price of a share of common stock
specified in the related option from the fair market value of a share of common
stock on the date of exercise of such SAR, by (ii) the number of shares as to
which such SAR is exercised. An SAR granted without relationship to an option
shall be exercisable as determined by the Compensation Committee, but in no
event after ten (10) years from the date of grant. An SAR granted without
relationship to an option will entitle the holder, upon exercise of the SAR, to
receive payment of an amount determined by multiplying: (i) the difference
obtained by subtracting the fair market value of the a share of common stock on
the date the SAR was granted from the fair market value of a share of common
stock on the date of exercise of such SAR, by (ii) the number of shares as to
which such SAR is exercised. However, the Compensation Committee may limit the
amount payable upon exercise of an SAR. Any such limitation shall be determined
as of the date of grant and noted on the instrument evidencing the SAR granted.
At the discretion of the Compensation Committee, payment of the amount
determined under the Option Plan may be made solely in shares of common stock
valued at their fair market value on the date of exercise of the SAR, or solely
in cash, or in a combination of cash and shares.
Recapitalization, Reorganizations, Etc. In the event that the outstanding
shares of the common stock are changed into or exchanged for a different number
or kind of shares or other securities of the company or of another corporation
by reason of any reorganization, merger, consolidation, recapitalization,
reclassification, stock split-up, combination of shares, or dividends payable in
capital stock, appropriate adjustment shall be made in the number and kind of
shares as to which options and SARs may be granted under the Option Plan and as
to which outstanding options, SARs, or portions thereof then unexercised, shall
be exercisable, to the end that the proportionate interest of the grantee shall
be maintained as before the occurrence of such event; such adjustment in
outstanding options and SARs shall be made without change in the total price
applicable to the unexercised portion of such options and SARs and with a
corresponding adjustment in the option price per share. In addition, unless
otherwise determined by the Compensation Committee in its sole discretion, in
the case of any (i) sale or conveyance of all or substantially all of the
property and assets of the company or (ii) "change in control" (as defined) of
the company, the purchaser(s) of the company's assets or stock, in its sole
discretion, may deliver to the grantee the same kind of consideration that is
delivered to the stockholders of the company as a result of such sale,
conveyance or change in control, or the Compensation Committee may cancel all
outstanding options in exchange for consideration in cash or in kind, which
consideration in both cases shall be equal in value to the value of those shares
of stock or other securities the grantee would have received had the option been
exercised (but only to the extent then exercisable) and had no disposition of
the shares acquired upon such exercise been made prior to such sale, conveyance
or change in control, less the option price therefor. Upon receipt of such
consideration, all options (whether or not then exercisable) shall immediately
terminate and be of no further force or effect.
No Special Employment Rights. Nothing contained in the Option Plan or in
any option or SAR granted under the Option Plan shall confer upon any grantee
any right with respect to the continuation of his or her employment by the
company or any subsidiary or interfere in any way with the right of the company
or any subsidiary, subject to the terms of any separate employment agreement to
the contrary, at any time to terminate such employment.
Withholding. The company's obligation to deliver shares upon the exercise
by an employee of any NQSO granted under the Plan, or cash upon the exercise of
an SAR granted under the Plan, shall be subject to the grantee's satisfaction of
all applicable Federal, state and local income and employment tax withholding
requirements. The company and grantee may agree to withhold shares of common
stock purchased upon exercise of an option to satisfy the above-mentioned
withholding requirements.
Modification of Outstanding Options and SARs. Subject to any limitations
contained in the Option Plan, the Compensation Committee may authorize the
amendment of any outstanding option or SAR with the consent of the grantee when
and subject to such conditions as are deemed to be in the best interests of the
company and in accordance with the purposes of the Option Plan.
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Termination and Amendment of Plan. Unless sooner terminated as provided in
the Option Plan, the Option Plan shall terminate ten (10) years from the date
upon which the Option Plan was duly adopted by the Compensation Committee. The
Compensation Committee may at any time terminate the Option Plan or make such
modification or amendment thereof as it deems advisable; provided, however, that
(i) the Compensation Committee may not, without the approval of the stockholders
of the company, increase the maximum number of shares for which options and SARs
may be granted or change the designation of the class of persons eligible to
receive options and SARs under the Option Plan, and (ii) any such modification
or amendment of the Option Plan shall be approved by a majority of the
stockholders of the company to the extent that such stockholder approval is
necessary to comply with applicable provisions of the Code, rules promulgated
pursuant to Section 16 of the Exchange Act (if applicable), applicable state
law, or applicable NASD or exchange listing requirements. Termination or any
modification or amendment of the Option Plan shall not, without the consent of a
grantee, affect his or her rights under an option or SAR theretofore granted to
him or her.
Restrictions on ISOs. No ISO's may be granted to an employee who owns more
than 10% of the total combined voting power of all classes of stock of the
company or any of its subsidiaries unless (i) the option price is at least 110%
of the fair market value on the date of grant and (ii) the option by its terms
is not exercisable more than 5 years from the date of grant. ISOs granted under
the Option Plan may not be granted at a price less than the greater of par value
or 100% of the fair market value of the common stock on the date of grant (or
110% of fair market value in the case of persons holding 10% or more of the
voting stock of the company). The aggregate fair market value of shares of
common stock for which ISOs granted to any employee are exercisable under any
Option Plan for the first time by such employee during any calendar year may not
exceed $100,000. Options granted under the Option Plan will expire not more than
ten years from the date of grant (five years in the case of ISOs granted to
persons holding 10% or more of the voting stock of the company).
Grants
As of October 1, 1999, the company has granted options under the Option
Plan to purchase 1,062,500 shares. As of the date hereof none of these options
have been exercised. In addition, the company has awarded non plan options and
warrants to purchase an aggregate of 1,575,000 shares.
Federal Income Tax Consequences of Option Plan
The statements in the following paragraphs of the principal federal income
tax consequences of awards granted under the 1999 Plan are based on statutory
authority and judicial and administrative interpretations, as of the date of
this Proxy Statement, which are subject to change at any time (possibly with
retroactive effect). The law is technical and complex and the discussion below
represents only a general summary.
Incentive Stock Options.
An employee who receives an ISO pursuant to the Option Plan does not
recognize any taxable income upon the grant of such option. Similarly, the
exercise of an ISO generally does not give rise to federal income tax to the
employee, provided that (i) the federal "alternative minimum tax," which depends
on the employee's particular tax situation, does not apply and (ii) the employee
is employed by the company from the date of grant of the option until three
months prior to the exercise thereof, except where such employment terminates by
reason of disability (where the three month period is extended to one year) or
death (where this requirement does not apply). If an employee exercises an ISO
after these requisite periods, the ISO will be treated as a NQSO and will be
subject to the rules described below under "Non-Qualified Stock Options, and
Stock Appreciation Rights."
If, after exercising an ISO, an employee disposes of the shares so
acquired more than two years from the date of grant and more than one year from
the date of transfer of the shares pursuant to the exercise of such ISO (the
"applicable holding period"), the employee generally will recognize a capital
gain or loss equal to the difference, if any, between the amount received for
the shares and the exercise price. If, however, an employee does not hold the
shares so acquired for the applicable holding period, thereby making a
"disqualifying disposition," the employee would recognize ordinary income equal
to the excess of the fair market value of the shares at the time the
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ISO was exercised over the exercise price; the balance of any income received at
the time of such disqualifying disposition would be capital gain (provided the
employee held such shares as a capital asset at such time). If the disqualifying
disposition is a sale or exchange that would permit a loss to be recognized
under the Code (were a loss in fact to be realized), and the sales proceeds are
less than the fair market value of the shares on the date of exercise, the
employee's ordinary income therefrom would be limited to the gain (if any)
realized on the sale.
An employee who exercises an ISO by delivering shares previously acquired
pursuant to the exercise of another ISO before the expiration of their
applicable holding period is treated as making a "disqualifying disposition" of
such shares. Upon the exercise of an ISO with previously acquired shares after
the applicable holding period, it appears, despite some uncertainty, that the
employee would not recognize gain or loss with respect to such previously
acquired shares.
Nonqualified Stock Options and Stock Appreciation Rights.
An individual who receives a grant of a NQSO or an SAR, will not recognize
any taxable income upon such grant. However, the individual generally will
recognize ordinary income upon exercise of a NQSO in an amount equal to the
excess of the fair market value of the shares at the time of exercise over the
exercise price. Similarly, upon the receipt of cash or shares pursuant to the
exercise of an SAR, the individual generally will recognize ordinary income in
an amount equal to the sum of the cash and the fair market value of the shares
received.
An individual who exercises a NQSO by delivering common stock, other than
common stock previously acquired pursuant to the exercise of an ISO which is
treated as a "disqualifying disposition" as described above, will not recognize
gain or loss with respect to the exchange of such common stock, even if the fair
market value of the shares so delivered is different from the individual's tax
basis. The individual, however, will be taxed as described above with respect to
the exercise of the NQSO as if he or she had paid the exercise price in cash.
Consequences to the Company
The company will not be allowed a federal income tax deduction upon the
grant or exercise of an ISO or the disposition, after the applicable holding
period, of the shares acquired upon exercise of an ISO. In the event of a
disqualifying disposition of shares acquired upon exercise of an ISO, the
company generally will be entitled to a deduction in an amount equal to the
ordinary income included by the employee, provided that such amount constitutes
an ordinary and necessary business expense to the company and is reasonable and
the limitations of Sections 280G and 162(m) of the Code do not apply.
A federal income tax deduction generally will be allowed to the company in
an amount equal to the ordinary income included by the employee with respect to
his or her NQSO or SAR, provided that such amount constitutes an ordinary and
necessary business expense to the company and is reasonable, and the limitations
of Sections 280G and 162(m) of the Code do not apply.
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Plan Amendment Benefits Table
As of October 1, 1999 options to purchase an aggregate of 1,062,500 shares
of common stock have been issued under the Option Plan. The following table sets
forth, to the extent determinable, the benefits or amounts that will be received
by the following persons in the year following approval of the Plan Amendment;
(i) the Named Executive Officers; (ii) the current executive officers as a group
(four persons); (iii) the current directors who are not executive officers as a
group (five persons); (iv) each associate of any director, executive officer or
nominee; and (v) all employees, including all current officers who are not
executive officers, as a group.
PLAN AMENDMENT BENEFITS
1996 Stock Option Plan
Name and Position of Group Dollar Value ($)(1) Number of Units
-------------------------- ------------------- ---------------
Jesse Dylan Undeterminable
Chairman of the Board
and Chief Executive Officer
M. Jay Walkingshaw Undeterminable
President and Chief Operating Officer
Richard Flynn Undeterminable
Chief Financial Officer, Treasurer
and Secretary
Current Executive Officers as a Group Undeterminable
(3 persons) (2)
Current Non-Executive Directors as a Undeterminable
Group (2 persons) (3)
Employees (including Non-Executive Undeterminable
Officers) (as a group 41 persons)
(1) The dollar value of options and SARs granted under the Option Plan will
depend upon (i) in the case of options the spread between the exercise
price of the options and the value of the common stock on the date of
exercise of the options, and (ii) in the case of SAR's, the spread between
the fair market value of the shares on the date of grant and the fair
market value on the date of exercise.
(2) The company's current executive officers are comprised of Jesse Dylan, the
Chairman of the Board and Chief Executive Officer, M. Jay Walkingshaw,
President and Chief Operating Officer and Richard Flynn, Chief Financial
Officer. The total number of options which may be issued to the group is
not now determinable.
(3) The current non-executive directors are Thomas J. Edelman and Jeffrey
Rosen. The total number of options which may be issued to the group is not
now determinable.
Proposed Plan Amendment
On April 30, 1999 the Board resolved to amend Section 2(a) of the Option
Plan to read in its entirety as follows:
"2. Stock Subject to Plan
(a) The total number of shares of the authorized but unissued or
treasury shares of the common stock, par value of $.01 per share of
the company (the "Common Stock") for which options (the "Options")
and stock appreciation rights ("SARs") may be granted under the Plan
shall be 3,000,000, subject to adjustment as provided in Section 14
hereof."
Vote Required for Approval
Approval of the Plan Amendment requires the affirmative vote of a majority
of the shares of common stock present in person or represented by proxy at the
meeting and entitled to vote.
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The Board of Directors recommends a vote FOR Proposal No. 2
PROPOSAL NO. 3
APPROVAL OF CONSULTING AGREEMENT WITH JEFFREY ROSEN
On April 20, 1999, we entered into a consulting agreement with Jeffrey
Rosen, one of our non-executive directors, in which Mr. Rosen has agreed to
assist us in the structuring of proposed business ventures over and above his
services as a director. The term commenced April 20, 1999 and ends June 30,
2000. In consideration for his services, Mr. Rosen was awarded, subject to
stockholder approval, warrants to purchase 200,000 shares of common stock at a
purchase price of $5.25 per share.
Vote Required for Approval
Approval of the consulting agreement with Jeffrey Rosen requires the
affirmative vote of a majority of the shares of common stock present in person
or represented by proxy at the meeting and entitled to vote.
The Board of Directors recommends a vote FOR Proposal No. 3
PROPOSAL NO. 4
APPROVAL OF CONSULTING AGREEMENT WITH THOMAS J. EDELMAN
On April 8, 1999, we entered into a consulting agreement with Thomas J.
Edelman, one of our non-executive directors, in which Mr. Edelman has agreed to
assist us in the structuring of proposed business ventures over and above his
services as a director. The term commenced April 8, 1999 and ends June 30, 2000,
In consideration for his services, Mr. Edelman was awarded, subject to
stockholder approval, three year warrants to purchase 100,000 shares of common
stock at a purchase price of $5 per share.
Vote Required for Approval
Approval of the consulting agreement with Thomas J. Edelman requires the
affirmative vote of a majority of the shares of common stock present in person
or represented by proxy at the meeting and entitled to vote.
The Board of Directors recommends a vote FOR Proposal No. 4
OTHER BUSINESS
Management of the company knows of no other business which will be
presented for consideration at the meeting, but should any other matters be
brought before the meeting, it is intended that the persons named in the
accompanying proxy will vote such proxy in their discretion.
INDEPENDENT ACCOUNTANTS
The consolidated financial statement contained in this proxy statement for
the fiscal year ended June 30, 1999, have been audited by Rothstein Kass &
Company, P.C., independent public accountants, as stated in their report which
is also contained in this proxy statement. We expect representatives of
Rothstein, Kass & Company, P.C. to be present at the meeting, where they will
have the opportunity to make a statement if they desire to do so and are
expected to be available to respond to appropriate questions.
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ADDITIONAL INFORMATION
As required by law, we file reports, proxy statements and other
information with the SEC. These reports, proxy statements and other information
contain additional information about us. You can inspect and copy these
materials at the public reference facilities maintained by the SEC at Room 1024,
450 Fifth Street, N.W., Judiciary Street, Suite 1400, Chicago, Illinois 60661
and 7 World Trade Center, Suite 1300, New York, New York 10048. For further
information concerning the SEC's public reference rooms, you may call the SEC at
1-800-SEC-0330. Some of this information may also be accessed on the World Wide
Web through the SEC's Internet address at http://www.sec.gov.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROXY STATEMENT. WE
HAVE NOT AUTHORIZED ANYONE TO GIVE ANY INFORMATION DIFFERENT FROM THE
INFORMATION CONTAINED IN THIS PROXY STATEMENT. YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED IN THIS PROXY STATEMENT IS ACCURATE AS OF ANY DATE LATER
THAN THE DATE HEREOF, AND THE MAILING OF THIS PROXY STATEMENT TO STOCKHOLDERS
SHALL NOT CREATE ANY IMPLICATION TO THE CONTRARY.
SHAREHOLDER PROPOSALS FOR 2000 ANNUAL MEETING
Any stockholder desiring to present proposals to stockholders at the next
Annual meeting of the company must transmit such proposal to the company in
writing and such proposal must be received by the Secretary of the company at
its offices no later than November 15, 1999. All such proposals should be in
compliance with applicable SEC regulations.
By Order of the Board of Directors
Richard Flynn
Chief Financial Officer,
Secretary and Treasurer
48
<PAGE>
INDEX TO FINANCIAL STATEMENTS OF PARADISE AND SUBSIDIARIES
PAGE
----
Report of Independent Auditors F-2
Consolidated Balance Sheet F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-16
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Paradise Music & Entertainment, Inc.
We have audited the accompanying consolidated balance sheet of Paradise Music &
Entertainment, Inc. and Subsidiaries as of June 30, 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended June 30, 1999 and 1998. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Paradise Music &
Entertainment, Inc. and Subsidiaries as of June 30, 1999, and the results of
their operations and their cash flows for the years ended June 30, 1999 and
1998, in conformity with generally accepted accounting principles.
Roseland, New Jersey
August 10, 1999, except for Note 14 as to
which the date is September 24, 1999 Rothstein, Kass & Company, P.C.
F-2
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 1999
ASSETS
<TABLE>
<S> <C> <C>
CURRENT ASSETS:
Cash $ 930,642
Accounts receivable 810,922
Prepaid expenses and other current assets 2,496,106
------------
Total current assets $ 4,237,670
PROPERTY AND EQUIPMENT, net 1,125,316
OTHER ASSETS:
Security deposits and other 307,787
Deferred acquisition costs 95,000
------------
402,787
------------
$ 5,765,773
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued payroll and related expenses $ 491,001
Accounts payable and accrued expenses 1,230,716
------------
Total current liabilities $ 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 5,345,717 shares 53,457
Capital in excess of par value 11,811,489
Note receivable, stockholder (70,878)
Subscription receivable (100,000)
Accumulated deficit (7,650,012)
------------
Total stockholders' equity 4,044,056
------------
$ 5,765,773
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended
June 30,
----------------------------
1999 1998
------------ ------------
REVENUES $ 9,661,036 $ 13,593,426
------------ ------------
OPERATING EXPENSES
Cost of sales 6,305,511 9,761,508
Marketing, selling, general and administrative 7,101,023 6,828,087
------------ ------------
Total operating expenses 13,406,534 16,589,595
------------ ------------
LOSS FROM OPERATIONS (3,745,498) (2,996,169)
INTEREST INCOME 37,569 139,040
------------ ------------
LOSS BEFORE INCOME TAXES (3,707,929) (2,857,129)
INCOME TAXES 6,000 12,000
------------ ------------
NET LOSS $ (3,713,929) $ (2,869,129)
============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.98) $ (1.29)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
USED IN COMPUTING BASIC AND DILUTED
LOSS PER COMMON SHARE 3,802,805 2,230,042
============ ============
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<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, July 1, 1997 2,228,333 $ 22,283 $ 5,752,317 $ (1,066,954) $ -- $ (129,600)
COMMON STOCK, issued to
outside directors and
executive officer 16,810 168 39,832
WARRANTS GRANTED FOR 71,017
SERVICES
INITIAL PUBLIC OFFERING (1,667)
EXPENSES
NET LOSS (2,869,129)
------------ ------------ ------------ ------------ ------------ ------------
BALANCES, June 30, 1998 2,245,143 22,451 5,861,499 (3,936,083) (129,600)
SALES OF COMMON STOCK 2,276,249 22,763 2,352,600 (100,000)
COMMON STOCK, issued to
outside directors, consultants,
vendors and employees 824,325 8,243 1,527,892
WARRANTS GRANTED FOR
SERVICES 2,069,498
PAYMENTS OF NOTE
RECEIVABLE 58,722
NET LOSS (3,713,929)
------------ ------------ ------------ ------------ ------------ ------------
BALANCES, June 30, 1999 5,345,717 $ 53,457 $ 11,811,489 $ (7,650,012) $ (100,000) $ (70,878)
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,713,929) $(2,869,129)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 199,727 753,015
Loss on disposal of branch operation 89,646
Provision for returns 588,500
Common stock issued and warrants granted to outside
directors, consultants, vendors and employees 867,119 111,017
Increase (decrease) in cash attributable
to changes in assets and liabilities:
Restricted cash 464,603 (464,603)
Accounts receivable (4,335) (1,342,846)
Prepaid expenses and other current assets (141,528) (200,860)
Security deposits and other (187,707)
Other assets 26,826
Deferred revenues (266,636) (234,437)
Accrued payroll and related expenses 338,402 (221,991)
Accounts payable and accrued expenses (42,267) 1,383,675
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (2,370,079) (2,497,659)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property and equipment (152,224) (1,243,932)
Restricted cash 350,000 (350,000)
Deferred acquisition costs (95,000)
Note receivable, officer 58,722 (129,000)
----------- -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 161,498 (1,722,932)
----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES, proceeds from sales
of common stock, net of expenses 2,275,363 (1,667)
----------- -----------
NET INCREASE (DECREASE) IN CASH 66,782 (4,222,258)
CASH, beginning of year 863,860 5,086,118
----------- -----------
CASH, end of year $ 930,642 $ 863,860
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended June 30,
---------------------------
1999 1998
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION,
cash paid during the year for income taxes $ -- $ 7,092
============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Conversion of liabilities into common stock $ 481,750 $ --
============ ============
Warrants granted for services $ 2,256,764 $ --
============ ============
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS:
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) (see Note
14) incorporated in April 1999 in Delaware.
NOTE 2 - 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 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."
Cash - The Company maintains its cash in bank deposit accounts which,
at times, may exceed federally insured limits. The Company has not
incurred any losses in such accounts and believes it is not exposed to
any significant credit risk on cash.
F-8
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Property and Equipment - Property and equipment is stated at cost less
accumulated depreciation and amortization. Depreciation and
amortization is computed as follows:
Estimated
Asset Useful Lives Principal Method
----- ------------ ----------------
Furniture, fixtures and equipment 5-7 Years Straight-line
Leasehold improvements Term of Lease Straight-line
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.
Income Taxes - The Company complies with SFAS No. 109, "Accounting for
Income Taxes", which requires an asset and liability approach to
financial reporting for income taxes. Deferred income tax assets and
liabilities are computed for differences between the financial
statement and tax bases of assets and liabilities that will result in
taxable or deductible amounts in the future, based on enacted tax laws
and rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce the deferred income tax assets
to the amount expected to be realized.
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 years ended June 30, 1999 and 1998.
Unexercised stock options to purchase 1,062,500 and 144,000 shares of
the Company's common stock at June 30, 1999 and 1998 respectively were
not included in the computations of diluted earnings per common share
because their effect would have been antidilutive as a result of the
Company's losses.
Fair Value of Financial Instruments - The fair value of the Company's
assets and liabilities which qualify as financial instruments under
SFAS No. 107 "Disclosures about fair value of financial instruments,"
approximate the carrying amounts presented in the consolidated balance
sheet.
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.
F-9
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - PREPAID EXPENSES AND OTHER CURRENT ASSETS:
At June 30, 1999, prepaid expenses and other current assets consists of
the following:
Prepaid consulting costs $2,136,684
Prepaid advances 312,793
Other current assets 46,629
----------
$2,496,106
==========
NOTE 4 - PROPERTY AND EQUIPMENT:
At June 30, 1999, property and equipment consists of the following:
Furniture, fixtures and equipment $ 662,555
Leasehold improvements 886,750
----------
1,549,305
Less accumulated depreciation and amortization 423,989
----------
$1,125,316
==========
NOTE 5 - NOTE RECEIVABLE, STOCKHOLDER:
The Company has a promissory note receivable with a
stockholder/officer which provided for borrowings of approximately
$129,000, bearing interest at 8.5% per annum. The promissory note is
collateralized by 200,000 shares of the officers' common stock of the
Company and provides for mandatory repayments as defined in the note.
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
At June 30, 1999, accounts payable and accrued expenses consists of the
following:
Accounts payable $ 866,029
Accrued rent 214,840
Other 149,847
----------
$1,230,716
==========
F-10
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - INCOME TAXES:
The provision for income taxes consists of state and city taxes.
At June 30, 1999, the Company recorded deferred federal, state and city
income tax assets aggregating approximately $3,266,000 arising from net
operating loss carryforwards. A valuation allowance in the same amount
has been recorded, since management has no assurance that the tax
benefit will be realized.
At June 30, 1999, the Company has federal and New York State and City
net operating loss carryforwards of approximately $7,547,000 and
$7,614,000 respectively, which expire beginning in 2012.
The following reconciles income tax benefit computed at the federal
statutory rate to the actual provision for income taxes.
Years Ended
June 30,
-----------------
1999 1998
------ ------
Tax benefit computed
at federal statutory rate (34.00)% (34.00)%
Valuation allowance 34.00 34.00
------ ------
--% --%
====== ======
NOTE 8 - COMMITMENTS:
The Company has leases for office facilities which expire in various
years through July 2007. Rent expense for the years ended June 30, 1999
and 1998 was approximately $247,000 and $322,000, respectively.
The aggregate future minimum annual rental payments are as follows:
Year ending June 30,
2000 $ 297,000
2001 272,000
2002 270,000
2003 307,000
2004 310,000
Thereafter 956,000
-----------
$ 2,412,000
===========
F-11
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - COMMITMENTS (CONTINUED):
In June 1999, the Company entered into an oral agreement for consulting
services relating to restructuring, recapitalization and operations.
The agreement requires monthly payments of $33,333 per month through
December 1999.
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 (see Note 10). The Company valued the
warrants and stock issued at approximately $2,389,000. At June 30,
1999, approximately $1,939,000 remains unamortized.
During the year ended June 30, 1999, four executives of the Company
were being compensated based upon an employment modification agreement
entered into in September 1998. This agreement modified existing
employment agreements for the four executives and provided for base
compensation and certain bonuses as provided in the agreement. For the
years ended June 30, 1999 and 1998, approximately $1,391,000 and
$1,480,000 has been expensed under these employment agreements.
During the year, 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. As of June 30, 1999, approximately $35,000
was expensed under these agreements.
The Company has agreed to pay each of its outside directors $18,000 per
year, payable quarterly in the Company's common stock valued on the
last day of the applicable quarter. During 1999 and 1998, the Company
charged to operations $45,000 and $23,500, respectively, pursuant to
this agreement.
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 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 June 30, 1999 approximately $10,000 was expensed under these
agreements.
NOTE 9 - ECONOMIC DEPENDENCY:
Approximately $5,340,000 and $7,705,000 of television and film
production revenues for the years ended June 30, 1999 and 1998,
respectively, were derived from four and three customers respectively.
Approximately $2,806,000 of recorded music and artist management
revenues for the year ended June 30, 1998 was derived from three
customers. At June 30, 1999 and 1998, approximately $122,000 and
$96,000, respectively was owed in the aggregate to the Company related
to these revenues.
F-12
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCKHOLDERS' EQUITY:
In December 1998, investors represented by Cassandra Group, Inc., a
registered investment advisor ("Cassandra"), purchased 2,000,000
shares of common stock at a price of $1 per share or $2,000,000 in the
aggregate. The Company also raised $200,000 in December 1998 through
the sale of 200,000 shares to unaffiliated investors, at $1 per share.
In February 1999, the Company sold 10,000 shares of common stock to a
partner of the Company's outside legal counsel for $3 per share. In
addition, in February 1999, the Company issued to two of its executive
officers options to purchase an aggregate of 600,000 shares of the
Company's common stock under the Company's option plan, at an exercise
price of $5 per share expiring in three years.
In April 1999, the Company issued 200,000 shares of restricted common
stock to a consultant pursuant to an agreement whereby the consultant
will provide various services to the Company through June 30, 2000
(see Note 8).
In connection with an employment agreement, the Company issued options
to purchase 100,000 shares of common stock which vested immediately
exercisable at $3.00 per share and in July 1999 issued options to
purchase 250,000 shares of common stock which vested immediately
exercisable at $4.50 per share to an employee. The Company recorded an
expense of $100,000 related to this transaction.
NOTE 11 - STOCK OPTIONS:
On October 8, 1996, the Board of Directors adopted and the
stockholders approved the Option Plan. The Option Plan provides for
the granting of incentive stock options ("ISOs") within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), non-qualified stock options ("NQSOs") and/or Stock
Appreciation Rights (SARs) to certain directors, agents and employees
of, and consultants to the Company. The purpose of the Option Plan is
to attract and retain exemplary employees, agents, consultants and
directors. Options and SARs granted under the Option Plan may not be
exercisable for terms in excess of 10 years from the date of grant. In
addition, no options or SARs may be granted under the Option Plan
later than 10 years after the Option Plan's effective date. The total
number of shares of Common Stock with respect to which options and
SARs will be granted under the Option Plan is 1,500,000. The shares
subject to and available under the Option Plan may consist, in whole
or in part, of authorized but unissued stock or treasury stock not
reserved for any other purpose. Any shares subject to an option or SAR
that terminates, expires or lapses for any reason, and any shares
purchased pursuant to an option and subsequently repurchased by the
Company pursuant to the terms of the option, shall again be available
for grant under the Option Plan. At June 30, 1999 and 1998, options
under the Option Plan to purchase 1,027,500 and 109,000 shares of
common stock are outstanding, none of which have been exercised.
In addition, the Board of Directors approved the adoption of the
Outside Directors Stock Option Program (the "Program"). The Program
provides for the granting of an aggregate of 100,000 stock options to
eligible directors of the Company (as defined in the Program). Each
eligible director shall receive 5,000 stock options per annum, subject
to adjustment, for their services on the Board on each July 1, that
they are serving as an eligible director. The options are exercisable
at the fair market value of the common stock on the last date
preceding the date of grant. The Program further provides that the
maximum term of the stock options may not exceed 5 years and the stock
options may be exercised at any time for a period of 5 years after the
date of grant. At June 30, 1999 and 1998, options to purchase 35,000
shares of common stock were outstanding, none of which have been
exercised.
F-13
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - STOCK OPTIONS (CONTINUED):
The activity in the Option Plan and the Program are as follows:
Price
Per Share
Number of ------------
Options Range
------------ ------------
Balance outstanding,
July 1, 1997 35,000 $ 6.00
Granted 117,500 3.31 - 6.00
Cancelled 8,500 4.03
------------ ------------
Balance outstanding,
June 30, 1998 144,000 3.31 - 6.00
Granted 1,000,000 2.06 - 5.25
Cancelled 81,500 2.06 - 6.00
------------ ------------
Balance outstanding,
June 30, 1999 1,062,500 $2.06 - 6.00
============ ============
Exercisable
June 30, 1999 792,500 $2.06 - 6.00
============ ============
The Company has adopted the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation". The Company applies
Accounting Principles Board Opinion No. 25 and related interpretations
in accounting for its Option Plan and Program. Had compensation for
the Company's stock options been determined based on the fair value at
the grant dates, consistent with the provisions of SFAS No. 123, the
Company's consolidated net loss and loss per common share would have
been adjusted to the pro forma amounts indicated below:
Years Ended June 30,
--------------------------
1999 1998
------------ ------------
Net loss:
As reported $(3,713,929) $(2,869,129)
Pro forma (4,205,673) (2,975,323)
Basic and diluted loss per comon share:
As reported $ (0.98) $ (1.29)
Pro forma (1.11) (1.33)
F-14
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - STOCK OPTIONS (CONTINUED):
The fair value of each option grant is estimated on the grant date
using the Black-Scholes option pricing model with the following
assumptions for grants for the years ended June 30, 1999 and 1998:
risk-free interest rate 5.0% and 6.0%, respectively, no dividend
yield, expected life of 5 years and expected volatility of 115.2% and
44.0% percent, respectively.
NOTE 12- RETIREMENT PLANS
Profit Sharing Plan
Effective July 1, 1997, the Company formed a Profit Sharing Plan (the
"Plan") covering substantially all employees who meet certain
eligibility requirements. The Company can contribute, on a
discretionary basis, up to 3% of the employees base salary to the
Plan. For the years ended June 30, 1999 and 1998, profit sharing
expense was $13,000 and $38,000.
401(k) Plan
Effective July 1, 1997, the Company formed a 401(k) plan covering
substantially all employees. Employees can contribute up to 15% of
their annual base salary, not to exceed $10,000 in 1999 and 1998. The
Plan does not provide for a Company match.
NOTE 13- INFORMATION CONCERNING BUSINESS SEGMENTS
The Company adopted 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 during the year ended June 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).
Year ended June 30, 1999:
<TABLE>
<CAPTION>
Recorded Television &
Music & Artist Film
Management Production Corporate Consolidated
-------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues $ 1,158,701 $ 8,502,335 $ -- $ 9,661,036
Interest income 108 24,186 13,275 37,569
Depreciation and amortization 22,859 41,908 134,960 199,727
Pre tax income (loss) (1,298,166) 446,399 (2,856,162) (3,707,929)
Additions to long lived assets 5,794 41,653 104,777 152,224
Total assets 573,752 1,592,603 3,599,418 5,765,773
</TABLE>
F-15
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - INFORMATION CONCERNING BUSINESS SEGMENTS (CONTINUED):
Year ended June 30, 1998:
<TABLE>
<CAPTION>
Recorded Television &
Music & Artist Film
Management Production Corporate Consolidated
-------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues $ 3,099,084 $ 10,494,342 $ -- $ 13,593,426
Interest income 1,915 21,669 115,456 139,040
Depreciation and amortization 657,815 41,113 54,087 753,015
Pre tax income (loss) (1,948,719) 348,230 (1,256,640) (2,857,129)
Additions to long lived assets 75,334 139,882 1,028,716 1,243,932
Total assets 671,895 1,682,889 1,767,051 4,121,835
</TABLE>
NOTE 14 - 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 as of July, 1999 the Company employed an individual to
function as Chairman and Chief Executive Officer of the Company at a
rate of $750,000 per year. Upon the consumation of the Straw Dogs
acquisition such employment will be represented by an employment
agreement which provides for this salary rate plus 750,000 shares of
common stock under the option plan at $5.00 per share. These options
vest ratably over a three year period.
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 5,000,000 shares.
F-16
<PAGE>
INDEX TO FINANCIAL STATEMENTS OF STRAW DOGS
PAGE
----
Report of Independent Auditors F-18
Combined Balance Sheets F-19
Combined Statements of Income and Comprehensive Income F-20
Combined Statements of Stockholder's and Members' Equity F-21
Combined Statements of Cash Flows F-22-F-23
Notes to Combined Financial Statements F-24-F-27
F-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors, Members and Stockholder
Consolidated Entertainment, LLC, (d/b/a Straw Dogs) and Spur & Buckle, Inc.
We have audited the accompanying combined balance sheets of Consolidated
Entertainment, LLC, (d/b/a Straw Dogs) and Spur & Buckle, Inc. as of June 30,
1999 and 1998, and the related combined statements of income and comprehensive
income, stockholder's and members' equity, and cash flows for the years then
ended. These combined financial statements are the responsibility of the
Companies' managements. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Consolidated
Entertainment, LLC, (d/b/a Straw Dogs) and Spur & Buckle, Inc. as of June 30,
1999 and 1998, and the results of their operations and their cash flows for the
years then ended, in conformity with generally accepted accounting principles.
Rothstein, Kass & Company, P.C.
Roseland, New Jersey
August 30, 1999, except for Note 7
as to which the date is September 24, 1999
F-18
<PAGE>
CONSOLIDATED ENTERTAINMENT, LLC,
(d/b/a STRAW DOGS) AND SPUR & BUCKLE, INC.
COMBINED BALANCE SHEETS
June 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 19,318 $ 10,370
Marketable securities 140,625
Accounts receivable 1,525,449 1,446,258
Prepaid expenses and other current assets 118,513 98,095
---------- ----------
Total current assets 1,803,905 1,554,723
---------- ----------
PROPERTY AND EQUIPMENT, net 710,050 91,612
---------- ----------
OTHER ASSETS:
Due from affiliate 693,958 34,954
Due from officer 80,000 33,000
Intangible assets 135,572 143,641
Security deposits 35,110 22,206
---------- ----------
944,640 233,801
---------- ----------
$3,458,595 $1,880,136
========== ==========
LIABILITIES AND STOCKHOLDER'S AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Due to bank $ 987,418 $ 240,699
Accounts payable 413,315 413,178
Accrued expenses and other current liabilities 1,067,738 487,771
Capital lease obligation 10,905 17,570
---------- ----------
Total current liabilities 2,479,376 1,159,218
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, no par value, authorized 1,000,000 shares,
issued and outstanding 1,000 shares 1,000 1,000
Retained earnings 239,113 227,197
---------- ----------
Total stockholder's equity 240,113 228,197
---------- ----------
MEMBERS' EQUITY:
Equity 623,481 492,721
Accumulated other comprehensive income 115,625
---------- ----------
Total members' equity 739,106 492,721
---------- ----------
Total stockholder's and members' equity 979,219 720,918
---------- ----------
$3,458,595 $1,880,136
========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-19
<PAGE>
CONSOLIDATED ENTERTAINMENT, LLC,
(d/b/a STRAW DOGS) AND SPUR & BUCKLE, INC.
COMBINED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years Ended
June 30,
-------------------------
1999 1998
----------- -----------
REVENUES $19,806,393 $ 7,655,848
----------- -----------
OPERATING EXPENSES
Production costs 15,674,362 5,447,169
Sales expenses 637,416 221,439
General and administrative expenses 2,727,994 1,294,777
----------- -----------
Total operating expenses 19,039,772 6,963,385
----------- -----------
INCOME FROM OPERATIONS 766,621 692,463
OTHER INCOME 1,617 1,382
----------- -----------
NET INCOME $ 768,238 $ 693,845
=========== ===========
COMPREHENSIVE INCOME
NET INCOME $ 768,238 $ 693,845
OTHER COMPREHENSIVE INCOME,
Unrealized gain on marketable securities 115,625
----------- -----------
COMPREHENSIVE INCOME $ 883,863 $ 693,845
=========== ===========
See accompanying notes to combined financial statements.
F-20
<PAGE>
CONSOLIDATED ENTERTAINMENT, LLC,
(d/b/a STRAW DOGS) AND SPUR & BUCKLE, INC.
COMBINED STATEMENTS OF STOCKHOLDER'S AND MEMBERS' EQUITY
<TABLE>
<CAPTION>
Total
Accumulated Stockholder's
Other and
Common Retained Members' Comprehensive Members'
Stock Earnings Equity Income Equity
---------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES, July 1, 1997 $ 1,000 $ 74,149 $ -- $ -- $ 75,149
MEMBER LOANS PAYABLE
CONTRIBUTED TO
MEMBERS' EQUITY 62,610 62,610
MEMBERS' WITHDRAWALS (18,389) (18,389)
DIVIDENDS PAID (92,297) (92,297)
NET INCOME 245,345 448,500 693,845
---------- ---------- ---------- ---------- ----------
BALANCES, June 30, 1998 1,000 227,197 492,721 720,918
MEMBER LOANS PAYABLE
CONTRIBUTED TO
MEMBERS' EQUITY 4,193 4,193
MEMBERS' WITHDRAWALS (629,755) (629,755)
NET INCOME 11,916 756,322 768,238
OTHER COMPREHENSIVE INCOME,
Unrealized gain on marketable
securities 115,625 115,625
---------- ---------- ---------- ---------- ----------
BALANCES, June 30, 1999 $ 1,000 $ 239,113 $ 623,481 $ 115,625 $ 979,219
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-21
<PAGE>
CONSOLIDATED ENTERTAINMENT, LLC,
(d/b/a STRAW DOGS) AND SPUR & BUCKLE, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 768,238 $ 693,845
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 81,429 12,707
Interest expense credited to loan payable, officer 4,193 1,338
Increase (decrease) in cash attributable
to changes in assets and liabilities:
Increase in accounts receivable (79,191) (1,446,258)
Increase in prepaid expenses and other current assets (20,418) (92,921)
Increase in accounts payable 137 413,178
Increase in accrued expenses and other current liabilities 579,967 487,771
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,334,355 69,660
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (25,000)
Purchases of property and equipment (680,543) (74,652)
Advances to affiliate (659,004) (34,954)
Advances to officer (47,000) (33,000)
Payments for organizational costs (11,255) (50,430)
Payments for security deposits (12,904) (22,206)
Acquisition of business (100,000)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (1,435,706) (315,242)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVIITES:
Increase in due to bank 746,719 240,699
Payments on capital lease obligation (6,665) (4,241)
Dividends paid (92,297)
Advances from member 61,272
Members' capital withdrawals (629,755) (18,389)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 110,299 187,044
----------- -----------
NET INCREASE (DECREASE) IN CASH 8,948 (58,538)
CASH, beginning of year 10,370 68,908
----------- -----------
CASH, end of year $ 19,318 $ 10,370
=========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-22
<PAGE>
CONSOLIDATED ENTERTAINMENT, LLC,
(d/b/a STRAW DOGS) AND SPUR & BUCKLE, INC.
COMBINED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended June 30,
-------------------------
1999 1998
----------- -----------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Member loans payable contributed to members' equity $ 4,193 $ 62,610
=========== ===========
Equipment recorded under capital lease obligation $ -- $ 21,811
=========== ===========
See accompanying notes to combined financial statements.
F-23
<PAGE>
CONSOLIDATED ENTERTAINMENT, LLC,
(d/b/a STRAW DOGS) AND SPUR & BUCKLE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations - Consolidated Entertainment, LLC, (d/b/a Straw
Dogs) a television commercial production company and Spur & Buckle,
Inc. a motion picture development company (collectively the "Company")
are television commercial production companies located in the United
States.
Basis of Combination - The combined financial statements of the Company
include the accounts of Consolidated Entertainment, LLC, (d/b/a Straw
Dogs), a limited liability company, as of June 30, 1999 and 1998 and
for the year ended June 30, 1999 and the period February 14, 1998 (date
of inception) through June 30, 1998, and its affiliate through common
majority ownership, Spur & Buckle, Inc. as of June 30, 1999 and 1998
and for the years then ended. All significant intercompany transactions
and balances have been eliminated in combination.
Fair Value of Financial Instruments - The fair value of the Company's
assets and liabilities which qualify as financial instruments under
Statement of Financial Accounting Standards No. 107 approximates the
carrying amounts presented in the combined balance sheets.
Marketable Securities - The Company's marketable securities consist of
common stock. The securities are classified as available-for-sale and
are reported at their fair values as provided for under Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Available-for-sale
securities are carried at fair value with the unrealized gains reported
as a component of other comprehensive income.
Property and Equipment - Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and
amortization are computed using the straight-line method over estimated
useful lives of 5 years or the term of the respective lease.
Intangible Assets - Organizational costs are amortized on a
straight-line basis over 5 years.
Goodwill represents the excess of cost over the fair market value of
net assets of an acquired business and is being amortized over 15
years. The Company monitors the cash flows of the acquired operations
to assess whether any impairment of recorded goodwill has occurred.
Revenue Recognition - Revenue is recognized in the month in which the
production is filmed. Revenue for services is recognized as the
services are performed.
Use of Estimates - The preparation of 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 financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Income Taxes - The stockholder of Spur & Buckle, Inc. has elected to
treat the Company as an "S" Corporation for federal and state income
tax purposes. Accordingly, the individual stockholder is liable for tax
on corporate income and receives the benefit of corporate loss.
Consolidated Entertainment, LLC (d/b/a Straw Dogs) is a limited
liability company. Therefore, the members are liable for tax on income
and receive the benefit of losses. Effective January 1, 1999
Consolidated Entertainment, LLC (d/b/a Straw Dogs) elected to be taxed
as an "S" Corporation for federal and state income tax purposes.
F-24
<PAGE>
CONSOLIDATED ENTERTAINMENT, LLC,
(d/b/a STRAW DOGS) AND SPUR & BUCKLE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 2 - ACQUISITION:
In February 1998, Consolidated Entertainment, LLC acquired Straw Dogs
for a purchase price of $100,000, which was allocated to goodwill.
NOTE 3- PROPERTY AND EQUIPMENT:
Property and equipment consist of the following as of June 30, 1999 and
1998:
1999 1998
Computer equipment $ 71,127 $ 45,863
Office furniture and fixtures 192,842 26,004
Video vault equipment 35,910 24,596
Leasehold improvements 477,127
----------------------
777,006 96,463
Less accumulated depreciation
and amortization 66,956 4,851
----------------------
$ 710,050 $ 91,612
======================
NOTE 4- INTANGIBLE ASSETS:
Intangible assets consist of the following as of June 30, 1999 and
1998:
1999 1998
Organizational costs $ 62,752 $ 52,030
Goodwill 100,000 100,000
----------------------
162,752 152,030
Less accumulated amortization 27,180 8,389
----------------------
$ 135,572 $ 143,641
======================
F-25
<PAGE>
CONSOLIDATED ENTERTAINMENT, LLC,
(d/b/a STRAW DOGS) AND SPUR & BUCKLE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 5 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
At June 30, 1999 and 1998, accrued expenses and other current
liabilities consist of the following:
1999 1998
Accrued sales commissions $ 109,907 $ 78,854
Accrued production costs 364,557 151,986
Accrued director compensation 496,245 215,082
Accrued insurance 50,619 32,479
Other 46,410 9,370
-------------------------
$ 1,067,738 $ 487,771
=========================
NOTE 6 - DUE TO BANK:
Consolidated Entertainment, LLC has an informal agreement with a bank,
which allows the Company to overdraft its bank account, which bears
interest at 3% above the prime lending rate (7.75% at June 30, 1999).
NOTE 7 - RELATED PARTY:
The Company has advanced amounts to an officer and an affiliate, which
are non-interest bearing and have no specified repayment terms.
On September 24, 1999, the Company entered into an agreement to sell
the net assets of Straw Dogs and 100% of the stock of Spur & Buckle,
Inc. to Paradise Music & Entertainment, Inc. (Paradise) for an
aggregate of 1,441,000 shares of Paradise's common stock. The
transaction is pending stockholder approval by Paradise's stockholders
in addition to other customary closing conditions. The agreement
provides for, among other things, advances to the affiliate (a real
estate company owned by the members of the Company) of approximately
$700,000, to be partially repaid with the net capital of the Company
prior to the consummation of the sale. In addition, the affiliate is in
the process of refinancing the real estate owned and the proceeds of
this refinancing, not to exceed $500,000, will be used for repayment of
these advances. The remaining balance will be represented by a
promissory note. The note will require monthly payments of principal
and interest.
NOTE 8 - COMMITMENTS AND CONTINGENCIES:
The Company has various employment agreements with directors, which
expire through November 15, 1999, and provide for compensation
aggregating up to $86,000 per diem plus additional and special
compensation as defined in the agreements. One of the agreements
provides for a minimum annual guaranteed compensation of $150,000. For
the years ended June 30, 1999 and June 30, 1998, approximately
$4,175,000 and $1,020,000, respectively have been expensed under these
agreements. These costs are included in production costs.
F-26
<PAGE>
CONSOLIDATED ENTERTAINMENT, LLC,
(d/b/a STRAW DOGS) AND SPUR & BUCKLE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED):
Spur & Buckle, Inc. has an employment agreement with its key officer.
The agreement provides for the officer to earn all amounts received by
the employer which are attributable to the services of the employee,
less all business expenses attributable to the development, production,
realization and collection of such amounts. For the years ended June
30, 1999 and 1998, approximately $755,000 and $695,000 respectively,
was charged to operations pursuant to this agreement.
The Company is a defendant in various lawsuits related to matters
arising in the normal course of business. It is the opinion of
management that the disposition of these lawsuits will not individually
or in the aggregate materially adversely affect the combined financial
position, results of operations or cash flows of the Company.
The Company leases space for its Los Angeles office on a monthly basis
and its New York office, which expires in 2001. The leases provide for
minimum annual rent plus adjustments for increases in the Consumer
Price Index and certain expenses over base period amounts. Aggregate
future minimum rental payments are as follows:
Year ending June 30,
2000 $ 50,400
2001 50,400
2002 4,200
-----------
$ 105,000
===========
Rent expense for the years ended June 30, 1999 and 1998 was
approximately $190,000 and $55,000, respectively.
NOTE 9 - MAJOR CUSTOMERS:
Approximately $2,900,000 of commercial production revenues for the year
ended June 30, 1998 was derived from three advertising agencies, each
of which exceeded 10% of the Company's revenues.
F-27
<PAGE>
Appendix A
- --------------------------------------------------------------------------------
ASSET PURCHASE AGREEMENT
by and among
PARADISE MUSIC & ENTERTAINMENT, INC.
STRAW DOGS ACQUISITION CORP.
CONSOLIDATED ENTERTAINMENT, LLC
JESSE DYLAN
and
CRAIG RODGERS
- --------------------------------------------------------------------------------
Dated September __, 1999
<PAGE>
TABLE OF CONTENTS
ARTICLE I
SALE OF ASSETS
Section 1.1 Assets Transferred..............................................2
Section 1.2 Excluded Assets.................................................4
Section 1.3 Assumed Liabilities.............................................4
Section 1.4 Retained Liabilities............................................5
ARTICLE II
PURCHASE PRICE AND CLOSING
Section 2.1 Purchase Price..................................................6
2.1.1 Payment.........................................................6
2.1.2 Accounting Procedures...........................................7
2.1.3 Examination of Books and Records................................8
Section 2.2 Closing and Effective Date......................................8
Section 2.3 Further Assurance; Post Closing Cooperation.....................8
Section 2.4 Third-Party Consents............................................9
ARTICLE III
REPRESENTATIONS OF THE OWNERS
Section 3.1 Execution and Validity of Agreement; Restrictive Documents......9
3.1.1 Execution and Validity..........................................9
3.1.2 No Restrictions................................................10
3.1.4 Liabilities....................................................10
3.1.5 Interests in Customers, Suppliers, Etc.........................10
3.1.6 Company Controls...............................................11
3.1.7 Brokers........................................................11
3.1.8 Investment Representations.....................................11
Section 3.2 Execution and Validity of Agreement; Existence and Good
Standing.....................................................13
Section 3.3 Subsidiaries and Investments...................................14
3.3.1 Subsidiaries and Investments...................................14
3.3.2 Ownership Interests............................................14
Section 3.4 Financial Statements and No Material Changes...................14
Section 3.5 Books and Records..............................................14
Section 3.6 Title to Properties; Encumbrances..............................14
Section 3.7 Real Property..................................................15
3.7.1 Owned Real Property............................................15
3.7.2 Leased Real Property...........................................15
Section 3.8 Contracts......................................................15
i
<PAGE>
Section 3.9 Non-Contravention; Approvals and Consents......................16
3.9.1 Non-Contravention..............................................16
3.9.2 Approvals and Consents.........................................17
Section 3.10 Litigation.....................................................17
Section 3.11 Taxes..........................................................17
Section 3.12 Intentionally Omitted..........................................19
Section 3.13 Insurance......................................................19
Section 3.14 Intellectual Properties........................................19
Section 3.15 Compliance with Laws; Licenses and Permits.....................20
3.15.1 Compliance.....................................................20
3.15.2 Licenses.......................................................20
Section 3.16 Client Relations...............................................20
Section 3.17 Accounts Receivable; Work-in-Process; Accounts Payable.........20
Section 3.18 Employment Relations...........................................21
Section 3.20 Intentionally Omitted..........................................21
Section 3.21 Bank Accounts and Powers of Attorney...........................21
Section 3.22 Compensation of Employees......................................22
Section 3.23 No Changes Since the Balance Sheet Date........................22
Section 3.24 Intentionally Omitted..........................................23
Section 3.25 Intentionally Omitted..........................................23
Section 3.26 Year 2000 Compliant............................................23
3.26.1 Definition.....................................................23
3.26.2 Computer Systems...............................................24
3.26.3 Other Products and Services....................................24
Section 3.27 Prepayment for Services........................................24
Section 3.28 Intentionally Omitted..........................................24
Section 3.29 Copies of Documents............................................24
ARTICLE IV
REPRESENTATIONS OF THE PURCHASER AND PARADISE
Section 4.1 Existence and Good Standing....................................25
Section 4.2 Execution and Validity of Agreement............................25
Section 4.3 No Restrictions................................................25
Section 4.4 Non-Contravention; Approvals and Consents......................25
4.4.1 Non-Contravention..............................................25
4.4.2 Approvals and Consents.........................................26
Section 4.5 Compliance with Laws; Licenses and Permits.....................26
4.5.1 Compliance.....................................................26
4.5.2 Licenses.......................................................26
Section 4.6 Paradise Stock.................................................26
Section 4.7 Brokers........................................................26
ARTICLE V
ii
<PAGE>
COVENANTS OF THE COMPANY AND THE OWNERS
Section 5.1 Regulatory and Other Approvals.................................27
Section 5.2 Investigation by Paradise and the Purchaser....................27
Section 5.3 No Solicitations...............................................27
Section 5.4 Conduct of Business............................................28
Section 5.5 Notice and Cure................................................29
Section 5.6 Fulfillment of Conditions......................................29
ARTICLE VI
COVENANTS OF PARADISE AND THE PURCHASER
Section 6.1 Regulatory and Other Approvals.................................30
Section 6.2 Investigation by the Company and the Owners....................30
Section 6.3 Notice and Cure................................................30
Section 6.4 Fulfillment of Conditions......................................31
Section 6.5 Blue Sky.......................................................31
ARTICLE VII
MUTUAL COVENANTS
Section 7.1 Reasonable Efforts to Consummate Transaction...................31
Section 7.2 Public Announcements...........................................31
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF PARADISE AND THE PURCHASER
Section 8.1 Representations and Warranties.................................32
Section 8.2 Good Standing and Tax Certificates.............................32
Section 8.3 Performance....................................................32
Section 8.4 Certified Resolutions..........................................32
Section 8.5 No Litigation..................................................32
Section 8.6 Regulatory Consents and Approvals..............................33
Section 8.7 Required Approvals, Notices and Consents.......................33
Section 8.8 Employment Agreements..........................................33
Section 8.9 Opinion of Counsel.............................................33
Section 8.10 Repayment of Loans.............................................33
Section 8.11 Material Adverse Effect........................................34
Section 8.12 Proceedings....................................................34
Section 8.13 Spur & Buckle, Inc.............................................34
Section 8.14 Working Capital................................................34
Section 8.15 Brambilla Release..............................................34
Section 8.16 Net Worth......................................................34
Section 8.17 Financial Statements...........................................34
iii
<PAGE>
ARTICLE IX
CONDITIONS TO OBLIGATIONS OF THE COMPANY AND THE OWNERS
Section 9.1 Representations and Warranties.................................35
Section 9.2 Performance....................................................35
Section 9.3 Certified Resolutions..........................................35
Section 9.4 No Litigation..................................................35
Section 9.5 Regulatory Consents and Approvals..............................35
Section 9.6 Paradise Stockholder Approval..................................36
Section 9.7 Employment Agreements..........................................36
Section 9.8 Opinion of Counsel.............................................36
Section 9.9 Proceedings....................................................36
Section 9.10 Material Adverse Effect........................................36
Section 9.11 Spur & Buckle, Inc. Acquisition Agreement......................36
Section 9.12 Working Capital................................................36
Section 9.13 Insurance Policy...............................................36
Section 9.14 Brambilla Release..............................................37
ARTICLE X
ADDITIONAL AGREEMENTS
Section 10.1 Change of Doing Business Name of the Company...................37
Section 10.2 [Intentionally Omitted].........................................37
Section 10.3 Agreements Regarding Employees After Closing...................37
10.3.1 Affected Employees.............................................37
10.3.2 Service Credit.................................................38
Section 10.4 Apportioned Obligations........................................38
Section 10.5 Tax Liability..................................................38
Section 10.6 Successor Employer.............................................38
Section 10.7 Name of Purchaser..............................................38
Section 10.8 Termination....................................................38
Section 10.9 Effect of Termination..........................................39
Section 10.10 Registration Rights .........................................39
ARTICLE XI
SURVIVAL; INDEMNITY
Section 11.1 Survival.......................................................39
Section 11.2 Obligation of the Owners to Indemnify..........................40
11.2.1 General Indemnity..............................................40
11.2.2 Special Indemnity..............................................40
11.2.3 "Losses".......................................................41
Section 11.3 Obligation of Paradise and the Purchaser to Indemnify..........41
Section 11.4 Indemnification Procedures.....................................41
iv
<PAGE>
11.4.1 Non-Third-Party Claims.........................................41
11.4.2 Third-Party Claims.............................................42
Section 11.5 Limitations on and Other Matters Regarding Indemnification.....44
11.5.1 Indemnity Cushion and Cap......................................44
11.5.2 Termination of Indemnification Obligations of the Company
and the Owners...............................................44
11.5.3 Termination of Indemnification Obligations of Paradise and
the Purchaser................................................45
11.5.4 Exceptions.....................................................45
11.5.5 Control by Paradise............................................45
ARTICLE XII
MISCELLANEOUS
Section 12.1 Expenses.......................................................46
Section 12.2 Governing Law..................................................46
Section 12.3 Jurisdiction...................................................46
Section 12.4 "Person" Defined...............................................46
Section 12.5 "Knowledge" Defined............................................46
Section 12.6 "Affiliate" Defined............................................47
Section 12.7 Captions.......................................................47
Section 12.8 Confidentiality................................................47
Section 12.9 Notices........................................................47
Section 12.10 Parties in Interest............................................48
Section 12.11 Severability...................................................49
Section 12.12 Counterparts...................................................49
Section 12.13 Entire Agreement...............................................49
Section 12.14 Amendment......................................................49
Section 12.15 Third Party Beneficiaries......................................49
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EXHIBITS AND APPENDICES
Exhibit A-1 Employment Agreement for Dylan
Exhibit A-2 Employment Agreement for Rodgers
Exhibit B-1 Opinion of Cohen, Primiani & Foster
Exhibit B-2 Opinion of James A. Melman, Esq.
Exhibit C Opinion of Davis & Gilbert LLP
Appendix A Registration Rights Provisions
SCHEDULES
Schedule 1.1(vi) Tangible Personal Property
Schedule 3.1.5 Interests in Customers; Suppliers
Schedule 3.1.7 Brokers
Schedule 3.2 Foreign Qualifications
Schedule 3.3.2 Ownership Interests
Schedule 3.4 Financial Statements
Schedule 3.5 Books and Records
Schedule 3.6 Tangible Personal Property; Encumbrances
Schedule 3.7 Real Property
Schedule 3.8 Contracts
Schedule 3.9 Consents and Approvals
Schedule 3.10 Litigation
Schedule 3.11 Taxes
Schedule 3.13 Insurance
Schedule 3.14 Intellectual Properties
Schedule 3.16 Client Relations
Schedule 3.19 Employee Benefit Plans
Schedule 3.21 Bank Accounts and Powers of Attorney
Schedule 3.22 Compensation of Employees
Schedule 3.23 Changes Since the Balance Sheet Date
Schedule 3.26 Year 2000 Compliant
Schedule 3.27 Prepayment for Services
Schedule 4.4.1 Approvals and Consents
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ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT (the "Agreement") dated September ___, 1999
(the "Execution Date") by and among PARADISE MUSIC & ENTERTAINMENT CORP., a
Delaware corporation ("Paradise"); STRAW DOGS ACQUISITION CORP., a Delaware
corporation and wholly-owned subsidiary of Paradise (the "Purchaser");
CONSOLIDATED ENTERTAINMENT, LLC, a California limited liability company (the
"Company"), JESSE DYLAN ("Dylan") and CRAIG RODGERS ("Rodgers"; together with
Dylan, collectively, the "Owners" and individually an "Owner").
W I T N E S S E T H :
WHEREAS, the Company is in the business of producing television
commercials;
WHEREAS, the Company wishes to transfer, and the Purchaser wishes to
acquire substantially all of the assets of the Company, subject to substantially
all of the Company's liabilities, in a tax-free reorganization as described in
ss. 368(a)(1)(C) of the Internal Revenue Code, upon the terms and subject to the
conditions of this Agreement; and
WHEREAS, the Owners together own 100% of the ownership interests of the
Company and are actively involved in managing the business of the Company and
accordingly are in a position to make certain representations, warranties and
covenants in respect of the Company.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties do hereby
agree as follows:
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ARTICLE I
SALE OF ASSETS
Section 1.1 Assets Transferred. On the terms and subject to the conditions
set forth in this Agreement, except for the Excluded Assets set forth in Section
1.2 below, the Company will sell, transfer, convey, assign and deliver to the
Purchaser, and the Purchaser will purchase, on the Closing Date (as defined in
Section 2.2), all of the Company's right, title and interest in, to and under
the following assets, properties and rights of the Company, as the same exist on
the Effective Date (as defined in Section 2.2), (collectively, the "Assets"),
which Assets constitute substantially all of the assets of the Company, free and
clear of all mortgages, liens, security interests, encumbrances, claims, charges
and restrictions of any kind or character (collectively, "Liens") except for the
Liens set forth on Schedule 3.6 which the Purchaser has agreed to accept as
indicated on such Schedule:
(i) Balance Sheet Assets. All of the assets, properties and rights of the
Company reflected on the Balance Sheet referred to in Section 3.4, as
modified or changed between the Balance Sheet Date (as defined in Section
3.4) and the Effective Date without violation of the provisions of Section
3.23 (the "Balance Sheet Assets");
(ii) Cash. All cash on hand or in bank deposits, and all certificates of
deposit (the "Cash");
(iii) Real Property Leases. (A) The real property leases, subleases,
licenses and other occupancy agreements listed on Schedule 3.7.2 as to
which the Company is the lessor or sublessor and (B) the real property
leases, subleases, licenses and other occupancy agreements listed on
Schedule 3.7.2 as to which the Company is the lessee or sublessee,
together with any options to purchase the underlying property and
leasehold improvements thereon, and in each case all other rights,
subleases, licenses, permits, deposits and profits appurtenant to or
related to such leases, subleases, licenses and other occupancy agreements
(the leases, subleases, licenses and other occupancy agreements described
in subclauses (A) and (B) are collectively referred to herein as the "Real
Property Leases");
(iv) Inventory. All inventories of work-in-process, active job orders,
office and other supplies, and other accessories related thereto, which
are used or held for use by the Company, together with all rights of the
Company against suppliers of such inventories (the "Inventory");
(v) Accounts Receivable. All trade accounts receivable and all notes,
bonds and other evidences of indebtedness of and rights to receive
payments arising out of sales, including without limitation, any rights of
the Company with respect to any third party collection procedures or any
other actions or proceedings which have been commenced in
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connection therewith, together with the proceeds in respect of any such
accounts receivable (the "Accounts Receivable");
(vi) Tangible Personal Property. All furniture, fixtures, equipment,
machinery and other tangible personal property (other than Inventory),
including without limitation, but not limited to the items listed on
Schedule 1.1(vi), including any of the foregoing purchased subject to any
conditional sales or title retention agreement in favor of any other
Person (as defined in Section 12.4) (the "Tangible Personal Property");
(vii) Personal Property Leases. (A) The leases or subleases of Tangible
Personal Property (including but not limited to those listed on Schedule
3.8) as to which the Company is the lessor or sublessor and (B) the leases
of Tangible Personal Property (including but not limited to those listed
on Schedule 3.8) as to which the Company is the lessee or sublessee,
together with any options to purchase the underlying property (the leases
and subleases described in subclauses (A) and (B) are collectively
referred to herein as the "Personal Property Leases");
(viii) Client List. The Company's current and prospective client list and
customer data (the "Client List");
(ix) Contracts. All of the Company's existing agreements, commitments,
leases, licenses, evidences of indebtedness, mortgages, indentures,
security agreements, instruments or other contracts (other than the Real
Property Leases, the Personal Property Leases, Licenses (as defined below)
and the Accounts Receivable) to which the Company is a party, including
without limitation, contracts with clients (and the right to service such
clients), purchase orders and the other agreements listed on Schedule 3.8
other than any agreement by and between the Owners and the Company (the
"Contracts");
(x) Prepaid Expenses. All prepaid expenses, other than prepaid insurance
on policies not being transferred hereunder (the "Prepaid Expenses");
(xi) Intangible Personal Property. All Intellectual Property (as defined
in Section 3.14 below), used or held for use by the Company (including the
Company's goodwill therein) and all rights, privileges, claims, causes of
action and options relating or pertaining to the business of the Company
or the Assets, including but not limited to the name "Straw Dogs" (or any
variations thereof) (the "Intangible Personal Property");
(xii) Licenses. All licenses, permits and other governmental certificates,
authorizations and approvals, including applications therefor (the
"Licenses");
(xiii) Security Deposits. All security deposits deposited by or on behalf
of the Company as lessee or sublessee under the Real Property Leases or
other security deposits relating to the Company's business (the "Security
Deposits");
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(xiv) Books and Records. All books and records of the Company, including
but not limited to financial statements, journals, ledgers,
correspondence, customer records, employment records for current
employees, books of account and accountant's and attorney's work product
(excluding any property of the accountants and attorneys);
(xv) Goodwill. All of the goodwill associated with the Company's business
(the "Goodwill");
(xvi) Insurance Policies. All of the Company's Insurance Policies listed
on Schedule 3.13 (the "Insurance Policies"); and ;
(xvii) Other Assets. All other assets and properties of every kind and
nature owned or held by the Company, or in which the Company has an
interest, known or unknown, fixed, unfixed, choate or inchoate, accrued,
absolute, contingent, or otherwise, whether or not specifically referred
to in this Agreement (the "Other Assets").
Section 1.2 Excluded Assets. Notwithstanding anything to the contrary in
this Agreement, the following assets and properties and rights (the "Excluded
Assets") shall be excluded from and shall not constitute Assets transferred to
the Purchaser: (i) the corporate seal, minute book, charter documents and stock
records of the Company; (ii) payments made and to be made to the Company, and
other rights of the Company, under this Agreement; (iii) rights under any
insurance policies not being assumed by the Purchaser hereunder; (iv) any tax
refunds, credits or similar tax assets relating to periods prior to the
Effective Date; (v) the rights of the Company in, to and under any contract or
agreement of any nature which is not an Assumed Liability (as defined in Section
1.3 below); (vi) all claims, rights or causes of action related to any Excluded
Asset or Retained Liability (as defined in Section 1.4 below); and (vii) any
non-transferable or non-transferred License.
Section 1.3 Assumed Liabilities. In connection with the sale, transfer,
conveyance, assignment and delivery of the Assets pursuant to this Agreement, on
the terms and subject to the conditions set forth in this Agreement, at the
Closing, the Purchaser will assume on the Closing Date and agrees to pay,
perform and discharge when due the following obligations of the Company (the
"Assumed Liabilities"), and no others:
(i) Balance Sheet Obligations. All obligations of the Company with respect
to liabilities reflected or reserved against on the Balance Sheet, as
modified or changed between the Balance Sheet Date and the Effective Date
in the ordinary course of business without violation of Section 3.23,
unless any such liability is specifically excluded under Section 1.4
below;
(ii) Real Property Lease Obligations. All obligations of the Company under
the Real Property Leases to be performed only on or after the Effective
Date, and excluding any obligations under the Real Property Leases to be
performed prior to the Effective Date;
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(iii) Personal Property Lease Obligations. All obligations of the Company
under the Personal Property Leases to be performed only on or after the
Effective Date, and excluding any obligations under the Personal Property
Leases to be performed prior to the Effective Date;
(iv) Obligations under Contracts, and Licenses. All obligations of the
Company under the Contracts, Licenses, and licenses to and for the
Intangible Personal Property assumed by the Purchaser to be performed only
on or after the Effective Date, and excluding any obligations thereunder
to be performed prior to the Effective Date; and
(v) Obligations to Affected Employees. All obligations of the Company to
the Affected Employees (as defined in Section 10.3) to be performed only
on and after the Effective Date, and excluding any obligations to the
Affected Employees to be performed prior to the Effective Date.
Section 1.4 Retained Liabilities. Except for the Assumed Liabilities, the
Purchaser shall not assume by virtue of this Agreement or the transactions
contemplated hereby, and shall have no liability for, any liabilities of the
Company of any kind, character or description whatsoever (the "Retained
Liabilities"). Without limiting the generality of the foregoing, the Purchaser
shall not assume the following:
(i) any liability or obligation of the Company or the Owners arising out
of or in connection with the negotiation and preparation of this Agreement
and consummation and performance of the transactions contemplated hereby,
including without limitation, legal and accounting fees (other than as set
forth in Section 12.1), brokerage commissions, finder's fees or similar
fees or commissions, and income, sales or other liability for Taxes (as
defined in Section 3.11) so arising;
(ii) any liability or obligation of the Company to distribute to the
Owners all or any part of the Purchase Price (as defined in Section 2.1);
(iii) any liability or obligation of the Company arising from the failure
of the Company to perform or discharge any of its agreements contained in
this Agreement;
7
(iv) any liability or obligation of the Company which was required to be
disclosed to the Purchaser pursuant to this Agreement and which was not so
disclosed;
(v) any liability or obligation of the Company with respect to any
insurance policies (unless specifically assumed by the Purchaser under
this Agreement);
(vi) any liability or obligation of the Company to the Owners except for
unpaid current compensation incurred in the ordinary course and
non-reimbursed travel and business expenses incurred in the ordinary
course but only to the extent accrued for on the Effective Date Balance
Sheet (as defined in Section 2.1.2(i));
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(vii) any obligation of the Company for Taxes (as defined in Section 3.11)
in respect of all periods through the Effective Date;
(viii) any liability or obligation of the Company to (x) any of its
employees who are offered employment by the Purchaser as provided in
Section 10.3 hereof but who on the Closing Date do not accept such
employment and (y) any former employees of the Company;
(ix) any claim, cause of action, proceeding or other litigation pending or
threatened on the Effective Date or which is initiated at any time
thereafter against the Company which is based on acts, facts,
circumstances, events or conditions occurring or existing prior to the
Effective Date (except as set forth on Schedule 3.10 which liabilities the
Purchaser is assuming);
(x) any liability or obligation of the Company relating to any Excluded
Assets;
(xi) any liability or obligation of the Company under any Plan, including
any liability or obligation resulting from a termination of any such
Plans; and
(xii) any liability or obligation of the Company incurred by or accruing
to the Company after the Effective Date.
The Company shall discharge in a timely manner or shall make adequate provision
for all of the Retained Liabilities, provided that the Company shall have the
ability to contest, in good faith, any such claim of liability asserted in
respect thereof by any Person other than the Purchaser.
ARTICLE II
PURCHASE PRICE AND CLOSING
Section 2.1 Purchase Price. In full consideration for the purchase by the
Purchaser of the Assets, the purchase price (the "Purchase Price") shall be paid
by the Purchaser as follows:
2.1.1 Payment. (a) At the Closing, the Purchaser will pay the Company
900,000 shares of Paradise Music & Entertainment, Inc. common stock, par value
$.01 per share ("Paradise Stock").
(b) As soon as practicable after the Closing Date, the Company will
distribute the Paradise Stock to the Owners in accordance with their percentage
ownership interests in the Company as set forth on Schedule 3.3.2 to this
Agreement. At the request of the Company, Paradise will cause certificates for
the appropriate number of shares of Paradise Stock to be registered in the names
of the Owners.
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(c) The Paradise Stock shall be restricted stock and shall be
saleable by the Owners only in accordance with the terms of the Registration
Rights Agreement described in Section 8.9 of this Agreement or as otherwise
permitted pursuant to applicable securities laws.
2.1.2 Accounting Procedures.
(i) The Purchaser shall cause Rothstein, Kass & Company, P.C., or another
independent accounting firm chosen by the Purchaser (the "Accountants"), as soon
as practicable after the Effective Date and prior to the Closing, to prepare in
accordance with generally accepted accounting principles, consistently applied
("GAAP"), a report containing an audited balance sheet of the Company as of the
close of business on the Effective Date (the "Effective Date Balance Sheet"),
together with a statement of the Accountants based upon such report and stating
that it was prepared in accordance with this Agreement and setting forth the Net
Worth (as defined in Section 8.16) of the Company (the "Special Determination").
If the Company does not agree that the Special Determination correctly states
the Net Worth, the Company shall promptly (but not later than 45 days after the
delivery to it of the Special Determination) give written notice to the
Purchaser of any exceptions thereto (in reasonable detail describing the nature
of the disagreement asserted). If the Company and the Purchaser reconcile their
differences, the Net Worth calculation shall be adjusted accordingly and shall
thereupon become binding, final and conclusive upon all of the parties hereto
and enforceable in a court of law. If the Company and the Purchaser are unable
to reconcile their differences in writing within 20 days after written notice of
exceptions is delivered to the Purchaser (the "Reconciliation Period"), the
items in dispute shall be submitted to a mutually acceptable accounting firm
(other than the Accountants) selected from any of the five largest accounting
firms in the United States in terms of gross revenues (the "Independent
Auditors") for final determination, and the Net Worth calculation shall be
deemed adjusted in accordance with the determination of the Independent Auditors
and shall become binding, final and conclusive upon all of the parties hereto
and enforceable in a court of law. The Independent Auditors shall consider only
the items in dispute and shall be instructed to act within 20 days (or such
longer period as the Company and the Purchaser may agree) to resolve all items
in dispute. If the Company does not give notice of any exception within 45 days
after the delivery to it of the Special Determination or if the Company gives
written notification of its acceptance of the Net Worth prior to the end of such
45 day period, the Net Worth set forth in the Special Determination shall
thereupon become binding, final and conclusive upon all the parties hereto and
enforceable in a court of law.
(ii) In the event the Independent Auditors are for any reason unable or
unwilling to perform the services required of it under this Section 2.1, then
the Purchaser and the Company agree to select another accounting firm from among
the five largest accounting firms in the United States in terms of gross
revenues to perform the services to be performed under this Section 2.1.2 by the
Independent Auditors. For purposes of this Section 2.1 the term "Independent
Auditors" shall include such other accounting firm chosen in accordance with
this clause (ii).
(iii) The Independent Auditors shall determine the party (i.e., the
Purchaser or the Company) whose asserted position as to the calculation of Net
Worth for the period under examination before the Independent Auditors is
furthest from the determination of Net Worth by
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the Independent Auditors, which non-prevailing party shall pay the fees and
expenses of the Independent Auditors.
2.1.3 Examination of Books and Records. The books and records of the
Company shall be made available during normal business hours upon reasonable
advance notice at the principal office of the Company, to the parties hereto,
the Accountants and the Independent Auditors to the extent required to determine
the calculations required under this Section 2.1. Any such examination shall be
conducted so as to minimize disruption of business. The parties hereto shall
cause the Company and the Purchaser to make arrangements to make available to
the parties hereto and their respective representatives (including auditors) any
back-up materials generated by the Company or the Accountants, as the case may
be, with respect to any adjustments made by them to the financial statements in
the process of preparing the Special Determination. In addition, the Company, on
the one hand, and the Purchaser, on the other hand, shall make available to the
other party and their representatives (including auditors) any back-up materials
generated by them to support a position which is contrary to the position taken
by the other party.
Section 2.2 Closing and Effective Date. Not more than one business day
from the approval of this Agreement at the special meeting of stockholders of
Paradise contemplated by Section 9.6, Paradise shall notify the other parties to
this Agreement of its desire to close, specifying a closing date not more than
five business days thereafter. The transfer of the Assets and Assumed
Liabilities to the Purchaser and delivery of the Purchase Price in exchange
therefor (the "Closing") shall take place at 10:00 a.m. at the offices of Davis
& Gilbert LLP, 1740 Broadway, New York, New York on the date so determined (the
"Closing Date"). In the event a proceeding shall have been instituted attacking
the legality of this Agreement or seeking to enjoin its consummation, then the
Closing Date shall be suspended pending a final determination of any such
proceeding. The transfer of the Assets and the assumption of the Assumed
Liabilities by the Purchaser shall be deemed effective as of the close of
business on June 1, 1999 (the "Effective Date"). As of and after the Effective
Date, all income received by the Company shall be for the benefit of the
Purchaser and all expenses of the Company shall be the obligation of the
Purchaser.
Section 2.3 Further Assurance; Post Closing Cooperation. All transactions
at the Closing shall be deemed to have taken place simultaneously. At the
Closing, the Purchaser shall deliver to the Company one or more written
instruments of assumption in such form as the Company or its counsel shall
reasonably request to effect the assumption by the Purchaser as required by this
Agreement of all of the Assumed Liabilities. The Company will, from time to
time, at the request of the Purchaser, whether at or after the Closing Date,
execute and deliver such other and further instruments of conveyance,
assignment, transfer and consent as the Purchaser or its counsel may reasonably
require for the most effectual conveyance and transfer of the Assets to the
Purchaser, and the Company will assist the Purchaser in the collection and
reduction to possession of the Assets. Following the Closing, each party will
afford the other party, its counsel and its accountants, during normal business
hours, reasonable access to the books, records and other data relating to the
Company in its possession with respect to periods prior to the Closing and the
right to make copies and extracts therefrom, to the extent that such access may
be reasonably required by the requesting party in connection with (i) the
preparation
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of tax returns, (ii) the determination or enforcement of rights and obligations
under this Agreement, (iii) compliance with the requirements of any Governmental
or Regulatory Authority (as defined in Section 3.1.3), (iv) the determination or
enforcement of the rights and obligations of any Indemnified Party (as defined
in Section 11.4 below) or (v) in connection with any actual or threatened action
or proceeding.
Section 2.4 Third-Party Consents. Anything in this Agreement to the
contrary notwithstanding, in the event an assignment or purported assignment to
the Purchaser of any Contract, License, Real Property Lease or Personal Property
Lease, or any claim, right or benefit arising thereunder or resulting therefrom,
without the consent of other parties thereto, would constitute a breach thereof
or would not result in the Purchaser receiving all of the rights of the Company
thereunder, such Contract, License, Real Property Lease or Personal Property
Lease shall be deemed not to have been assigned by the Company to the Purchaser.
In those circumstances, if requested by the Purchaser, after the Closing, the
Owners, the Purchaser and the Company will use their reasonable commercial
efforts to obtain any such consent. If such consent is not obtained and is
required to effectively assign a Contract, License, Real Property Lease or
Personal Property Lease to the Purchaser, the Company will cooperate with the
Purchaser in any reasonable arrangement to provide the Purchaser with the full
claims, rights and benefits under any such Contract, License, Real Property
Lease or Personal Property Lease, including enforcement at the cost and for the
benefit of the Purchaser of any and all rights of the Company, as the case may
be, against a third party thereto arising out of the breach or cancellation by
such third party or otherwise, and any amount received by the Company in respect
thereof shall be held for and paid over to the Purchaser.
ARTICLE III
REPRESENTATIONS OF THE OWNERS
A. Each of the Owners, severally and only with respect to such Owner and
not with respect to the other Owner, represents and warrants to and with the
Purchaser and Paradise as follows as of the Effective Date:
Section 3.1 Execution and Validity of Agreement; Restrictive Documents.
3.1.1 Execution and Validity. The Owner has the full legal right and
capacity to enter into this Agreement and to perform his obligations hereunder.
This Agreement has been duly and validly executed and delivered by the Owner
and, assuming due authorization, execution and delivery by the Purchaser and
Paradise, constitutes a legal, valid and binding obligation of the Owner,
enforceable against the Owner in accordance with its terms.
3.1.2 No Restrictions. There is no suit, action, claim, investigation or
inquiry by any Governmental or Regulatory Authority, and no legal,
administrative or arbitration proceeding pending or, to the Owner's knowledge,
threatened against the Owner, with respect to the execution, delivery and
performance of this Agreement or the transactions contemplated hereby
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or any other agreement entered into by the Owner in connection with the
transactions contemplated hereby.
3.1.3 Non-Contravention. The execution, delivery and performance by the
Owner of his obligations hereunder and the consummation of the transactions
contemplated hereby, will not (a) result in the violation by the Owner of any
statute, law, rule, regulation or ordinance (collectively, "Laws"), or any
judgment, decree, order, writ, permit or license (collectively, "Orders"), of
any court, tribunal, arbitrator, authority, agency, commission, official or
other instrumentality of the United States, any foreign country or any domestic
or foreign state, county, city or other political subdivision (a "Governmental
or Regulatory Authority"), applicable to the Owner or any of his assets or
properties, or (b) require the Owner to obtain any consent, approval or action
of, make any filing with or give any notice to, or result in or give to any
Person any right of payment or reimbursement, termination, cancellation,
modification or acceleration of any of the terms, conditions or provisions of
any Contract or License to which the Owner is a party or by which the Owner or
any of his assets or properties are bound.
3.1.4 Liabilities. Except as set forth in the Balance Sheet, the Company
does not have any outstanding claims, liabilities or indebtedness of any nature
whatsoever (collectively in this Section 3.12, "Liabilities"), whether accrued,
absolute or contingent, determined or undetermined, asserted or unasserted, and
whether due or to become due, other than (i) Liabilities specifically disclosed
in any Schedule hereto; (ii) Liabilities under Contracts of the type required to
be disclosed by the Company on any Schedule and so disclosed or which because of
the dollar amount or other qualifications are not required to be listed on such
Schedule; and (iii) Liabilities incurred in the ordinary course of business and
consistent with past practice since the Balance Sheet Date not involving
borrowings by the Company.
3.1.5 Interests in Customers, Suppliers, Etc. Except as set forth on
Schedule 3.1.5, neither (x) such Owner nor any Person controlled by such Owner
nor (y) to the knowledge of such Owner (without making any inquiry of any member
of the Related Group, as hereinafter defined), any officer, director, or
employee of the Company, any parent, brother, sister, child or spouse of any
such officer, director or employee or of such Owner (collectively, the "Related
Group"), or any entity controlled by anyone in the Related Group:
(i) owns, directly or indirectly, any interest in (excepting for
ownership, directly or indirectly, of less than 5% of the issued and
outstanding shares of any class of securities of a publicly held and
traded company) or received or has any right to receive payments from, or
is an officer, director, employee or consultant of, any Person which is,
or is engaged in business as, a competitor, lessor, lessee, supplier,
distributor, sales agent, customer or client of the Company;
(ii) owns, directly or indirectly, in whole or in part, any tangible or
intangible property (including, but not limited to Intellectual Property)
that the Company uses in the conduct of the business of the Company, other
than immaterial personal items owned and used by employees at their work
stations; or
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(iii) has any cause of action or other claim whatsoever against, or owes
any amount to, the Company, except for claims in the ordinary course of
business such as for accrued vacation pay, accrued benefits under employee
benefit plans, and similar matters and agreements existing on the date
hereof.
3.1.6 Company Controls. Neither such Owner, nor, to the knowledge of such
Owner, any officer, authorized agent, employee or any other Person while acting
on behalf of the Company, has, directly or indirectly: used any company fund for
unlawful contributions, gifts, or other unlawful expenses relating to political
activity; made any unlawful payment to foreign or domestic government officials
or employees or to foreign or domestic political parties or campaigns from
Company funds; established or maintained any unlawful or unrecorded fund of
Company monies or other assets; made any false or fictitious entry on its books
or records; made any bribe, rebate, payoff, influence payment, kickback, or
other unlawful payment, or other payment of a similar or comparable nature, to
any Person, private or public, regardless of form, whether in money, property,
or services, to obtain favorable treatment in securing business or to obtain
special concessions, or to pay for favorable treatment for business secured or
for special concessions already obtained, and the Company has not participated
in any illegal boycott or other similar illegal practices affecting any of its
actual or potential customers.
3.1.7 Brokers. Except as set forth on Schedule 3.1.7, no broker, finder,
agent or similar intermediary has acted on behalf of the Company or such Owner
in connection with this Agreement or the transactions contemplated hereby, and
no brokerage commissions, finder's fees or similar fees or commissions are
payable by the Company or such Owner in connection therewith based on any
agreement, arrangement or understanding with any of them.
3.1.8 Investment Representations.
(a) The Company is acquiring the Paradise Stock for investment
purposes only and does not intend to resell, distribute or subdivide the
Paradise Stock other than to the Owners as contemplated by this Agreement and
such Owner does not intend to resell, distribute or subdivide the Paradise Stock
other than pursuant to an effective registration statement or an available
exemption under the Securities Act of 1933, as amended (the "Act"). The Company
and such Owner are each acquiring the Paradise Stock for its own account and no
other person will have any beneficial interest in the Paradise Stock.
(b) The Company and such Owner acknowledge that Paradise is offering
and selling the Paradise Stock pursuant to exemptions from registration under
the Act and exemptions from qualification under the securities laws of certain
states, for transactions not involving any public offering, and that Paradise is
relying on the representations and warranties included herein to obtain those
exemptions. The Company and such Owner further represent and warrant to Paradise
and the Purchaser as follows:
(i) The Company and such Owner has the financial ability to
bear the economic risk of its or his investment in the Paradise Stock (including
the possible loss of such investment in its entirety), has adequate means of
providing for its or his current needs and
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personal contingencies, and has no need for liquidity with respect to its or his
investment in Paradise; and
(ii) Neither the Company nor such Owner is an "underwriter" as
such term is defined under the Act and the Company and such Owner has such
knowledge and experience in financial and business matters as to be capable of
evaluating the merits and risks of an investment in Paradise and has obtained,
in the best judgment of the Company and such Owner, sufficient information from
Paradise to evaluate the merits and risks of an investment in Paradise.
(c) The Company and such Owner understand that the Paradise Stock
has not been registered under the Act or qualified under the securities laws of
any state, and therefore cannot be transferred, resold, pledged, hypothecated,
assigned, or otherwise disposed of unless it is subsequently registered under
the Act and qualified under applicable state securities laws and in compliance
with any other applicable securities laws, or an exemption from registration
and/or qualification is available. The Company and such Owner will not sell,
distribute, dispose of or otherwise transfer the Paradise Stock or any part
thereof, or interest therein (other than the contemplated transfer by the
Company to the Owners), except pursuant to an effective registration under the
Act or pursuant to an exemption from the registration requirements of the Act
and in compliance with any other applicable securities laws. The Company and
such Owner understand that all stock certificates representing the Paradise
Stock shall bear a legend reflecting the restrictions contained in this clause
(c).
(d) The Company and such Owner have been given the opportunity to
ask questions of, and receive answers from, and conduct due diligence meetings
with representatives of Paradise concerning the terms and conditions of this
offering and other matters pertaining to this investment and have been given the
opportunity to obtain such additional information as is necessary to evaluate
the merits and risks of an investment in Paradise, in all cases to the extent
that Paradise possessed such information. The Company's and such Owner's
decision to acquire the Paradise Stock was made on the basis of the Company's
and such Owner's independent analysis of the terms of the purchase and arms'
length discussions with representatives of Paradise.
(e) The Company and such Owner are not relying on Paradise or any
representative of Paradise, for advice as to tax, legal, or economic
considerations as they relate to the Company's or such Owner's circumstances. No
such representations or warranties have been made to the Company or such Owner
by Paradise, or any employee or agent of Paradise. In particular, the Company
and such Owner acknowledge that there have been no representations, guarantees
or warranties made to any of them by Paradise, its employees or agents, or by
any other person, with respect to (i) the approximate length of time that will
be required to remain as the owner of the Paradise Stock; or (ii) the percentage
of profit and/or amount of or type of consideration, profit or loss to be
realized, if any, as a result of this investment.
(f) The Company and such Owner have determined that the Paradise
Stock is a suitable investment in light of their investment goals, ability to
sustain losses, needs for liquidity
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and previous decisions to invest in securities such as the Paradise Stock or
securities bearing similar risks.
(g) The Company and such Owner is an "Accredited Investor" as that
term is defined in Rule 501(a) of Regulation D.
B. The Company and the Owners, jointly and severally, represent and
warrant to and with the Purchaser and Paradise, as follows as of the Effective
Date:
Section 3.2 Execution and Validity of Agreement; Existence and Good
Standing. The Company has the full power and authority to enter into this
Agreement and to perform its obligations hereunder. The execution and delivery
of this Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby have been duly authorized by all required
action on behalf of the Company and its Owners. This Agreement has been duly and
validly executed and delivered by the Company and, assuming due authorization,
execution and delivery by the Purchaser and Paradise, constitutes the legal,
valid and binding obligations of the Company enforceable against it in
accordance with its terms. The Company was duly organized and is validly
existing and in good standing as a limited liability company under the laws of
California, with the full power and authority to own its property and to carry
on its business all as and in the places where such properties are now owned or
operated or such business is now being conducted. The Company is duly qualified,
licensed or admitted to do business and is in good standing in those
jurisdictions set forth on Schedule 3.2. The Company is qualified, licensed or
admitted to do business in all jurisdictions in which the ownership, use or
leasing of its assets and properties, or the conduct or nature of its business,
makes such qualification, licensing or admission necessary, except for
jurisdictions where failure to be so qualified would not have Material Adverse
Effect. For purposes of this Agreement, "Material Adverse Effect" shall mean any
material and adverse effect on the financial condition, results of operations,
assets, properties or business of the Company, Paradise or the Purchaser, as
applicable.
Section 3.3 Subsidiaries and Investments.
3.3.1 Subsidiaries and Investments. The Company does not own any capital
stock or other equity or proprietary or ownership interest in any Person, other
than investments of publicly-traded debt and equity securities held for
investment.
3.3.2 Ownership Interests. Schedule 3.3.2 sets forth the ownership of all
ownership interests in the Company. Except as set forth on Schedule 3.3.2, there
are no outstanding options, warrants, rights, calls, commitments, conversion
rights, rights of exchange, plans or other agreements of any character
(collectively "Options") providing for the purchase, issuance or sale of any
ownership interests in the Company.
Section 3.4 Financial Statements and No Material Changes. Prior to the
Closing Date, the Company and the Owners will deliver Schedule 3.4 to Paradise
and the Purchaser; provided however, failure to deliver said Schedule 3.4 shall
not be a breach of this Agreement by
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the Company and/or the Owners. Schedule 3.4 will set forth an audited balance
sheet of the Company as at June 30, 1999, and the related audited statement of
income, retained earnings and cash flow for the twelve months then ended,
prepared by Rothstein, Kass & Company, P.C., certified public accountants (the
balance sheet of the Company as at June 30, 1999, including the footnotes
thereto, being referred to in this Agreement as the "Balance Sheet"). Such
financial statements will have been prepared in accordance with GAAP throughout
the periods indicated. The Balance Sheet will fairly present the financial
condition of the Company at the date thereof and will reflect all claims against
and all debts and liabilities of the Company, fixed or contingent, as at the
date thereof, required to be shown thereon under GAAP and the related statements
of income , retained earnings and cash flow will fairly present the results of
operations of the Company for the period indicated. Except as set forth on
Schedule 3.23, since June 30, 1999 (the "Balance Sheet Date"), there has been no
material adverse change in the assets or liabilities, or in the business or
condition, financial or otherwise, or in the results of operations of the
Company.
Section 3.5 Books and Records. All accounts, books, ledgers and official
and other records material to the Company of whatsoever kind have been properly
and accurately kept and are complete in all material respects, and there are no
material inaccuracies or discrepancies of any kind contained or reflected
therein. Except as set forth on Schedule 3.5, the Company does not have any of
its records, systems, controls, data or information recorded, stored,
maintained, operated or otherwise wholly or partly dependent on or held by any
means (including any electronic, mechanical or photographic process, whether
computerized or not) which (including all means of access thereto and therefrom)
are not under the exclusive ownership and possession of the Company.
Section 3.6 Title to Properties; Encumbrances. The Company has good and
valid title to, or enforceable leasehold interests in or valid rights under
contract to use all the material Assets owned or used by it (personal, tangible
and intangible), including, without limitation (a) all the Assets reflected in
the Balance Sheet, (b) all the Assets purchased or otherwise contracted for by
the Company since the Balance Sheet Date (except for Assets reflected in the
Balance Sheet or acquired or otherwise contracted for since the Balance Sheet
Date that have been sold or otherwise disposed of in the ordinary course of
business), and (c) all Assets leased by the Company, in each case free and clear
of all Liens, except for Liens set forth on Schedule 3.6. The property, plant
and equipment owned or otherwise contracted for by the Company is in a state of
good maintenance and repair (ordinary wear and tear excepted) and is adequate
and suitable in all material respects for the purposes for which they are
presently being used.
Section 3.7 Real Property.
3.7.1 Owned Real Property. The Company does not own any real property
including ground leases) or hold any option or right of first refusal or first
offer to acquire any real property, and the Company is not obligated by Contract
or otherwise to purchase any real property.
3.7.2 Leased Real Property. Schedule 3.7.2 contains an accurate and
complete list of all Real Property Leases, including without limitation, any
modification, amendment or supplement
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thereto and any other related document or agreement executed or entered into by
the Company (including, without limitation, any Real Property Lease which the
Company has subleased or assigned to another Person and as to which the Company
remains liable). Except as set forth on Schedule 3.7.3, each Real Property Lease
set forth on Schedule 3.7.2 (or required to be set forth on Schedule 3.7.2): (a)
is valid, binding and in full force and effect; (b) all rents and additional
rents and other sums, expenses and charges due to the Effective Date have been
paid; (c) the lessee has been in peaceable possession since the commencement of
the original term thereof; (d) no waiver, indulgence or postponement of the
lessee's obligations thereunder has been granted by the lessor; (e) there exists
no default or event of default by the Company or to the knowledge of the Company
and the Owners, by any other party thereto; (f) there exists no occurrence,
condition or act (including the purchase of the Assets hereunder) which, with
the giving of notice, the lapse of time or the happening of any further event or
condition, would become a default or event of default by the Company thereunder;
and (g) there are no outstanding claims of breach or indemnification or notice
of default or termination thereunder. The Company holds the leasehold estate on
all Real Property Leases, free and clear of all Liens, except as set forth on
Schedule 3.6 and the liens of mortgagees of the real property in which such
leasehold estate is located. Except as set forth on Schedule 3.7.2, the real
property leased by the Company is in a state of good maintenance and repair and
is adequate and suitable for the purposes for which it is presently being used,
and there are no material repair or restoration works likely to be required in
connection with any of the leased real properties. The Company is in physical
possession and actual and exclusive occupation of the whole of each of its
leased properties. The Company does not owe any brokerage commission with
respect to any Real Property Lease.
Section 3.8 Contracts. Schedule 3.8 hereto contains an accurate and
complete list of the following Contracts: (a) all employee benefit plans (as
defined in Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA") and all bonus, incentive, deferred compensation, retiree
medical or life insurance; supplemental retirement, severance or other benefit
plans, programs or arrangements which are maintained by the Company
(collectively, "Plans"); (b) any Personal Property Lease with a fixed annual
rental of $10,000 or more; (c) any Contract relating to capital expenditures
which involves payments of $25,000 or more in any single transaction or series
of related transactions; (d) any Contract relating to the making of a loan or
advance to, or investment in, any other Person; (e) any Contract evidencing or
relating in any way to indebtedness for money borrowed or to be borrowed,
whether directly or indirectly, by way of loan, purchase money obligation,
guarantee (other than the endorsement of negotiable instruments for collection
in the ordinary course of business), conditional sale, purchase or otherwise;
(f) any management service, employment, consulting or similar type of Contract
which is not cancelable by the Company without penalty or other financial
obligation within 30 days; (g) any Contract limiting the Company's freedom to
engage in any line of business or to compete with any other Person, including
agreements limiting the ability of the Company or any of its affiliates to
service competitive accounts during or after the term thereof; (h) any
collective bargaining or union agreement; (i) any Contract with any of its
officers or directors or the Owners not covered by subsection (f) above
(including indemnification agreements); (j) any secrecy or confidentiality
agreement (other than standard confidentiality agreements in computer software
license agreements or agreements with clients entered into in the ordinary
course of business); (k) any Contract with respect to any Intellectual Property
of the Company, other than
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"shrink-wrap" and similar end-user licenses; (l) any agreement with a client
required to be listed on Schedule 3.16; (m) any joint venture agreement
involving a sharing of profits not covered by clauses (a) through (l)above; and
(n) any Contract (not covered by another subsection of this Section 3.8) which
involves $25,000 or more over the unexpired term thereof and is not cancelable
by the Company without penalty or other financial obligation within 30 days.
Notwithstanding the foregoing, (x) production expenses which are fully
reimbursable from clients, and (y) estimates or purchase orders given in the
ordinary course of business relating to the execution of projects, do not have
to be set forth on Schedule 3.8. Each Contract to which the Company is a party,
including, but not limited to those set forth on Schedule 3.8, is in full force
and effect, and there exists no default or event of default by the Company or to
the knowledge of the Owners and the Company, by any other Person, or, except as
set forth in Schedule 3.9.2, occurrence, condition, or act (including the
purchase of the Assets hereunder) which, with the giving of notice, the lapse of
time or the happening of any other event or condition, would become a default or
event of default thereunder by the Company, and there are no outstanding claims
of breach or indemnification or notice of default or termination of any such
Contract.
Section 3.9 Non-Contravention; Approvals and Consents.
3.9.1 Non-Contravention . The execution, delivery and performance by the
Company of its obligations hereunder and the consummation of the transactions
contemplated hereby, will not (a) violate, conflict with or result in the breach
of any provision of the Certificate of Incorporation or By-Laws (or other
comparable charter documents) of the Company, or (b) result in the violation by
the Company of any Laws or Orders of any Governmental or Regulatory Authority,
applicable to the Company or any of its assets or properties, or (c) if the
consents and notices set forth on Schedule 3.9.2 are obtained, given or waived,
conflict with, result in a violation or breach of, constitute (with or without
notice or lapse of time or both) a default under, or (except as set forth on
Schedule 3.9.2) require the Company to obtain any consent, approval or action
of, make any filing with or give any notice to, or result in or give to any
Person any right of payment or reimbursement, termination, cancellation,
modification or acceleration of, or result in the creation or imposition of any
Lien upon any of the Assets, under any of the terms, conditions or provisions of
any Contract to which the Company is a party or by which the Company or any of
its assets or properties are bound.
3.9.2 Approvals and Consents. Except as disclosed on Schedule 3.9.2, no
consent, approval or action of, filing with or notice to any Governmental or
Regulatory Authority or other Person is necessary or required under any of the
terms, conditions or provisions of any Law or Order of any Governmental or
Regulatory Authority or any Contract to which the Company is a party or by which
its assets or properties are bound for the execution and delivery of this
Agreement by the Company, the performance by the Company of its obligations
hereunder or the consummation of the transactions contemplated hereby.
Section 3.10 Litigation. Except as set forth on Schedule 3.10, there is no
action, suit, proceeding at law or in equity by any Person, or any arbitration
or any administrative or other proceeding by or before (or to the knowledge of
the Company and the Owners, any investigation
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by) any Governmental or Regulatory Authority, pending or, to the knowledge of
the Company and the Owners , threatened against the Company with respect to this
Agreement or the transactions contemplated hereby, or against or affecting the
Company or the Assets; and to the knowledge of the Company and the Owners, no
acts, facts, circumstances, events or conditions occurred or exist which are a
basis for any such action, proceeding or investigation. Schedule 3.10 also sets
forth with respect to each pending or threatened action, suit or proceeding
listed thereon, the amount of costs, expenses or damages the Company has
incurred to date and reasonably expects to incur through conclusion thereof. The
Company is not subject to any Order entered in any lawsuit or proceeding.
Section 3.11 Taxes. The Company has timely filed, or caused to be filed,
taking into account any valid extensions of due dates, completely and
accurately, all federal, state, local and foreign tax or information returns
(including estimated tax returns or information returns) required under the
statutes, rules or regulations of such jurisdictions to be filed by the Company
with respect to income, accumulated earnings, franchise, capital stock,
employees' income withholding, back-up withholding, withholding on payments to
foreign persons, social security, unemployment, disability, real property,
personal property, sales, use, excise, transfer and other taxes (including
interest, penalties or additions to tax in respect of the foregoing) whether
disputed or not (all of the foregoing collectively referred to as "Taxes"). All
Taxes shown on said returns to be due and all additional assessments received
prior to the Balance Sheet Date have been paid or are being contested in good
faith, in which case, such contested assessments are set forth on Schedule 3.11.
The amount set up as an accrual for Taxes on the Balance Sheet is sufficient for
the payment of all unpaid Taxes of the Company, whether or not disputed, for all
periods ended on and prior to the date thereof. Since the Balance Sheet Date,
the Company has not incurred any liabilities for Taxes other than in the
ordinary course of business. The Company has delivered to the Purchaser correct
and complete copies of all federal and state income tax returns and information
returns filed with respect to the Company for all taxable periods beginning on
or after January 1, 1997. Except as set forth on Schedule 3.11, none of the
federal, state or local tax returns of the Company (or its Owners with respect
to any items of income or gain pertaining to the Company) has ever been audited
by the Internal Revenue Service or any other Governmental or Regulatory
Authority. No audit or examination of any return of the Company by any
Governmental or Regulatory Authority is currently in progress, and the Company
has not received notice of any proposed audit or examination. No deficiency in
the payment of Taxes by the Company for any period has been asserted in writing
by any taxing authority and remains unsettled at the date of this Agreement. The
Company has not made any agreement, waiver or other arrangement providing for an
extension of time with respect to the assessment or collection of any tax
against it. Except as disclosed on Schedule 3.11, the Company is not (and has
not been since its formation) subject to entity-level income or gross receipts
tax. The Company has not been a member of an affiliated group filing
consolidated federal income tax returns nor has it been included in any combined
consolidated or unitary state or local income tax return. The Company is not a
party to any tax allocation or tax sharing agreement nor does it have any
contractual obligation to indemnify any other person with respect to Taxes. The
Company has not been a United States real property holding corporation within
the meaning of Section 897(c)(2) of the Code within the period specified in
Section 897(c)(1)(A)(ii) of the Code. The Company will not be required as a
result of a change in
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accounting method for any period ending on or before the Effective Date or as a
result of the transactions contemplated herein to include any adjustment under
Section 481 of the Code (or any similar provision of state, local or foreign
income tax law) in income for any period ending after the Closing Date.
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Section 3.12 Intentionally Omitted
Section 3.13 Insurance. Schedule 3.13 contains a true and complete list
(including the names and addresses of the insurers, the names of the Persons to
whom such insurance policies have been issued, the expiration dates thereof, the
annual premiums and payment terms thereof, whether it is a "claims made" or an
"occurrence" policy and a brief description of the interests insured thereby) of
all liability, property, workers' compensation and other insurance policies
currently in effect that insure the property, assets or business of the Company
or its employees (other than self-obtained insurance policies by such
employees). Each such insurance policy is valid and binding and in full force
and effect, all premiums due thereunder have been paid and the Company has not
received any notice of cancellation or termination in respect of any such policy
or default thereunder. To the knowledge of the Company and the Owners, such
insurance policies are placed with financially sound and reputable insurers, and
in light of the nature of the Company" business, assets and properties, the
Company believes they are in amounts and have coverage that are reasonable and
customary for persons engaged in such business and having such assets and
properties. Neither the Company nor to the Company's and the Owner's knowledge,
the Person to whom such policy has been issued has received notice that any
insurer under any policy referred to in this Section is denying liability with
respect to a claim thereunder or defending under a reservation of rights clause.
Except as set forth on Schedule 3.13, within the last two years the Company has
not filed for any claims exceeding $25,000 against any of its insurance
policies, exclusive of automobile and health insurance policies. None of such
policies shall lapse or terminate by reason of the transactions contemplated by
this Agreement and all such policies shall continue in effect after the Closing
Date for the benefit of the Purchaser. The Company has not received any notice
of cancellation of any such policy. The Company has not received written notice
from any of its insurance carriers that any premiums will be materially
increased in the future or that any insurance coverage listed on Schedule 3.13
will not be available in the future on substantially the same terms now in
effect.
Section 3.14 Intellectual Properties. Schedule 3.14 hereto contains an
accurate and complete list of all Intellectual Property (as defined below) owned
by the Company and all agreements under which any Person has granted a license
for any Intellectual Property to the Company (other than license agreements for
"off the shelf" third party computer software not included within the Company's
products or services). The Company has all right, title and interest in, a valid
and binding license to use, or has the requisite permission and authority to use
all Intellectual Property used in the conduct of its business. No claim of
infringement or misappropriation of Intellectual Property is or has been pending
or, to the knowledge of the Company and the Owners, threatened against the
Company and/or the Owners and, to the knowledge of the Company and the Owners,
the Company and/or the Owners are not infringing or misappropriating any
Intellectual Property of any Person. The Company has not expressly granted any
license, franchise or permit in effect on the date hereof to any Person to use
any of the trade names or any of the trademarks owned by it. The term
"Intellectual Property" means patents and patent rights, trademarks and
trademark rights, tradenames and tradename rights, service marks and service
mark rights, service names and service name rights, copyright and copyright
rights, trade secrets and trade secret rights, rights of privacy and publicity,
and other
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proprietary intellectual property and personal rights and all pending
applications for and registrations of any of the foregoing.
Section 3.15 Compliance with Laws; Licenses and Permits.
3.15.1 Compliance. The Company is and its business has been conducted, in
compliance with all applicable Laws and Orders, except in each case (other than
with respect to compliance with environmental Laws and Orders relating to the
regulation or protection of the environment; "Environmental Laws and Orders")
where the failure to so comply would not reasonably be expected to have a
Material Adverse Effect, including without limitation: (a) all Laws and Orders
promulgated by the Federal Trade Commission or any other Governmental or
Regulatory Authority; (b) all Environmental Laws and Orders; and (c) all Laws
and Orders relating to labor, civil rights, and occupational safety and health
laws, worker's compensation, employment and wages, hours and vacations, or pay
equity. The Company has not been charged with, or, to the knowledge of the
Company and the Owners threatened with or under any investigation with respect
to, any charge concerning any violation of any Laws or Orders.
3.15.2 Licenses. The Company has all Licenses required by any Governmental
or Regulatory Authority for the operation of its business and the use of its
Assets as presently operated or used, except where the failure to have such
Licenses would not reasonably be expected to have a Material Adverse Effect. All
of the Licenses are in full force and effect and no action or claim is pending,
nor to the knowledge of the Company and the Owners is threatened, to revoke or
terminate any of such Licenses or declare any such License invalid in any
material respect.
Section 3.16 Client Relations. Schedule 3.16 sets forth for the Company
(a) the 10 largest clients (measured by revenues), and the revenues from each
such client and from all clients (in the aggregate) for the calendar year ended
December 31, 1998 and (b) the 10 largest clients (measured by revenues) based on
the Company's results for the period from January 1, 1999 through the date of
this Agreement. Except as set forth on Schedule 3.16, no client of the Company
has advised the Company or the Owners in writing that it is (x) terminating or
considering terminating the handling of its business by the Company as a whole
or in respect of any particular product, project or service or (y) planning to
reduce its future spending with the Company in any material manner; and to the
knowledge of the Company and the Owners (without making any special inquiry of
any clients), no client has orally advised the Company or the Owners of any of
the foregoing events.
Section 3.17 Accounts Receivable; Work-in-Process; Accounts Payable. The
amount of all work-in-process, Accounts Receivable, unbilled invoices (including
without limitation unbilled invoices for services and out-of-pocket expenses)
and other debts due or recorded in the records and books of account of the
Company as being due to the Company and reflected on the Balance Sheet and the
Effective Date Balance Sheet represent or will represent valid obligations
arising from sales actually made or services actually performed in the ordinary
course of business, and to the knowledge of the Company and the Owners, none of
the Accounts Receivable or other debts (or Accounts Receivable arising from any
such work-in-process or
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unbilled invoices) is or will be subject to any counterclaim or set-off except
to the extent of any provision, reserve or adjustment therefor reflected on the
Balance Sheet and the Effective Date Balance Sheet. There has been no material
adverse change since the Balance Sheet Date in the amount or aging of the
work-in-process, Accounts Receivable, unbilled invoices, or other debts due to
the Company, or the reserves with respect thereto, or accounts payable of the
Company.
Section 3.18 Employment Relations. (a) Neither the Company nor the Owners
have any knowledge of any acts which would give rise to any unfair labor
practice claims against the Company; (b) no unfair labor practice complaint
against the Company is pending before any Governmental or Regulatory Authority;
(c) there is no organized labor strike, dispute, slowdown or stoppage actually
pending or to the knowledge of the Company and the Owners threatened against or
involving the Company; (d) there are no labor unions representing or, to the
knowledge of the Company and the Owners, attempting to represent the employees
of the Company; (e) no claim or grievance nor any arbitration proceeding arising
out of or under any collective bargaining agreement is pending and to the
knowledge of the Company and the Owners, no such claim or grievance has been
threatened; (f) no collective bargaining agreement is currently being negotiated
by the Company; and (g) the Company has not experienced any work stoppage or
similar organized labor dispute during the last three years. There is no legal
action, suit, proceeding or claim pending or, to the knowledge of the Company
and the Owners, threatened between the Company and any of its employees, former
employees, agents, former agents, job applicants or any association or group of
any of its employees, except as set forth on Schedule 3.10.
Section 3.19 Employee Benefit Plans. Except as set forth on Schedule 3.19,
the Company does not maintain or contribute to any Plan which could in any way
impose any liability on Purchaser as a result of the transactions contemplated
hereby. Each Plan of the Company has been operated materially in accordance with
the requirements of all applicable law, including, without limitation, ERISA and
the Internal Revenue Code of 1986, as amended (the "Code") and the regulations
and authorities published thereunder. All reports, disclosures, notices and
filings with respect to such Plans required to be made to employees,
participants, beneficiaries, alternate payees and government agencies have been
timely made or an extension has been timely obtained. There has been no
prohibited transactions (within the meaning of Section 406 of ERISA or Section
4975 of the Code) with respect to any Plan maintained by the Company. All
contributions, premiums or payments required to be made, paid or accrued with
respect to any such Plan have been made, paid or accrued on or before their due
dates, including extensions thereof.
Section 3.20 Intentionally Omitted
Section 3.21 Bank Accounts and Powers of Attorney. Set forth in Schedule
3.21 is an accurate and complete list showing (a) the name of each bank in which
the Company has an account, credit line or safe deposit box and the names of all
Persons authorized to draw thereon or to have access thereto, and (b) the names
of all Persons, if any, holding powers of attorney from the Company and a
summary statement of the terms thereof.
Section 3.22 Compensation of Employees. Schedule 3.22 is an accurate and
complete list showing (a) the names and positions of all employees and exclusive
consultants who are
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currently being compensated by the Company at an annualized rate of $75,000 or
more, together with a statement of the current annual salary, and the annual
salary, bonus and incentive compensation paid or payable with respect to
calendar years 1998 and 1999, and the material fringe benefits of such employees
and exclusive consultants not generally available to all employees of the
Company; (b) all bonus and incentive compensation paid or payable (whether by
agreement, custom or understanding) to any employee of the Company not listed in
clause (a) above for services rendered during calendar years 1998 and 1999; (c)
the names of all retired employees, if any, of the Company who are receiving or
entitled to receive any healthcare or life insurance benefits or any payments
from the Company not covered by any pension plan to which the Company is a
party, their ages and current unfunded pension rate, if any; and (d) a
description of the current severance and vacation policy of the Company. The
Company has not, because of past practices or previous commitments with respect
to its employees, established any rights on the part of any of its employees to
additional compensation with respect to any period after the Closing Date (other
than wage increases in the ordinary course of business).
Section 3.23 No Changes Since the Balance Sheet Date. Since the Balance
Sheet Date, except as specifically stated on Schedule 3.23, the Company has not
(a) incurred any liability or obligation of any nature (whether accrued,
absolute, contingent or otherwise), except in the ordinary course of business;
(b) permitted any Asset to be subjected to any Lien; (c) sold, transferred or
otherwise disposed of any Asset except in the ordinary course of business; (d)
made any capital expenditure or commitment therefor which individually or in the
aggregate exceeded $25,000; (e) declared or paid any distributions on any
ownership interests in the Company, or redeemed, purchased or otherwise acquired
any of its ownership interests of the Company or any option, warrant or other
right to purchase or acquire any of such ownership interests; (f) made any bonus
or profit sharing distribution; (g) increased or prepaid its indebtedness for
borrowed money, except current borrowings under credit lines listed on Schedule
3.8, or made any loan to any Person other than to any Affected Employee for
normal travel and expense advances; (h) written down the value of any
work-in-process, or written off as uncollectible any notes or Accounts
Receivable, except write-downs and write-offs in the ordinary course of
business, none of which, individually or in the aggregate, is material to the
Company; (i) granted any increase in the rate of wages, salaries, bonuses or
other remuneration of any employee who, whether as a result of such increase or
prior thereto, receives aggregate compensation from the Company at an annual
rate of $50,000 or more, or except in the ordinary course of business to any
other employees; (j) entered into an employment or exclusive consultant
agreement which is not cancelable without penalty or other financial obligation
within 30 days; (k) canceled or waived any claims or rights of material value;
(l) made any change in any method of accounting procedures; (m) otherwise
conducted its business or entered into any transaction, except in the usual and
ordinary manner and in the ordinary course of its business; (n) amended or
terminated any agreement which is material to its business; (o) renewed,
extended or modified any Real Property Lease or except in the ordinary course of
business, any Personal Property Lease; (p) adopted, amended or terminated any
Plan; or (q) agreed, whether or not in writing, to do any of the actions set
forth in any of the above clauses.
Section 3.24 Intentionally Omitted
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Section 3.25 Intentionally Omitted
Section 3.26 Year 2000 Compliant.
3.26.1 Definition. The term "Year 2000 Compliant" shall mean:
(i) the functions, calculations and other computer processes of all
computer hardware, software and systems, including but not limited to
internal and outsourced MIS systems and embedded computer features within
other systems of the Company (collectively, "Processes"), perform properly
in a consistent manner regardless of the date in time on which the
Processes are actually performed and regardless of the date of input to
the software, whether before, on or after January 1, 2000 and whether or
not the dates are affected by leap years;
(ii) the computer hardware, software and systems accept, calculate,
compare, sort, extract, sequence and otherwise process data inputs and
date values, and return and display date values, in a consistent manner
regardless of the dates used, whether before, on or after January 1, 2000;
(iii) the computer hardware, software and systems will function
properly without interruptions or extraordinary manual intervention caused
by the date in time on which the Processes are actually performed or by
the date of input to the software, whether before, on or after January 1,
2000;
(iv) the computer hardware, software and systems accept and respond
to two-digit year data input in the Processes in a manner that resolves
any ambiguities as to the century in a defined, predetermined and
appropriate manner; and
(v) the computer hardware, software and systems store and display
data information in the Processes in ways that are unambiguous as to the
determination of the century.
3.26.2 Computer Systems. Except as set forth on Schedule 3.26, (a) the
current computer hardware, software and systems, and accompanying documentation,
of the Company will be Year 2000 Compliant in a full production version, with
accompanying documentation, in all material respects, on or before December 31,
1999; and (b) the Company will use reasonable efforts to obtain confirmation
that Year 2000 Compliant computer hardware, software and systems will be
provided to the Company in a timely manner under current supplier contracts or
standard maintenance and support plans without additional fee or charge of any
kind (including any installation, freight, or other costs or fees) to the
Company.
3.26.3 Other Products and Services. Except as set forth on Schedule 3.26,
(a) the Company's products will be delivered and its services will be scheduled
and performed in a timely manner without interruptions caused by the date in
time on which the product is ordered or is actually delivered or the services
are scheduled or actually performed under normal procedures in
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the ordinary course, whether before, on or after January 1, 2000; and (b) the
Company has made reasonable efforts to obtain confirmation that the Company's
essential suppliers of products and services, including the suppliers of its
infrastructure systems, have Year 2000 Compliant programs in place to avoid
interruptions in the supplier-customer trading relationship which could have a
Material Adverse Effect, whether before, on or after January 1, 2000.
Section 3.27 Prepayment for Services Except as disclosed on Schedule 3.27,
the Company has not prior to the Effective Date received any payments from any
of its clients with respect to services to be rendered by the Company after the
Effective Date.
Section 3.28 Intentionally Omitted.
Section 3.29 Copies of Documents. The Company has caused to be made
available for inspection and copying by the Purchaser and Paradise and its
advisers, true, complete and correct copies of all documents referred to in this
Article III or in any Schedule. Summaries of all oral contracts contained in
Schedule 3.8 are complete and accurate in all material respects.
ARTICLE IV
REPRESENTATIONS OF THE PURCHASER AND PARADISE
Each of the Purchaser and Paradise, jointly and severally, represent,
warrant and agree to and with the Company and the Owners as follows as of the
Effective Date:
Section 4.1 Existence and Good Standing. Each of the Purchaser and
Paradise is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware with full corporate power and authority
to own its property and to carry on its business all as and in the places where
such properties are now owned or operated or such business is now being
conducted, except for jurisdictions where the failure to be so qualified would
not have a Material Adverse Effect. Paradise is qualified to do business in New
York.
Section 4.2 Execution and Validity of Agreement. Each of the Purchaser and
Paradise has the full corporate power and authority to make, execute, deliver
and perform this Agreement by the Purchaser and Paradise and the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all required corporate action on behalf of the Purchaser and Paradise, and
this Agreement has been duly and validly executed and delivered by the Purchaser
and Paradise and, assuming due authorization, execution and delivery by the
Company and the Owners, constitutes legal, valid and binding obligations of the
Purchaser, enforceable against it in accordance with its terms.
Section 4.3 No Restrictions. There is no suit, action, claim,
investigation or inquiry by any Governmental or Regulatory Authority, and no
legal, administrative or arbitration proceeding pending or, to the knowledge of
Purchaser and Paradise, threatened against the Purchaser or
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Paradise with respect to the execution, delivery and performance of this
Agreement or the transactions contemplated hereby, and to the knowledge of
Paradise and the Purchaser, no acts, facts, circumstances, events or conditions
occurred or exist which are a basis for any such action, proceeding or
investigation.
Section 4.4 Non-Contravention; Approvals and Consents.
4.4.1 Non-Contravention. The execution, delivery and performance by each
of the Purchaser and Paradise of its obligations hereunder and the consummation
of the transactions contemplated hereby will not (a) violate, conflict with or
result in the breach of any provision of the Certificate of Incorporation or
By-laws of the Purchaser or Paradise, or (b) result in the violation by the
Purchaser or Paradise of any Laws or Orders of any Governmental or Regulatory
Authority applicable to the Purchaser or any of its assets or properties, or (c)
result in a violation or breach of, constitute (with or without notice or lapse
of time or both) a default under, or except as set forth on Schedule 4.4.1,
require the Purchaser or Paradise to obtain any consent, approval or action of,
make any filing with or give any notice to, or result in or give to any Person
any right of payment or reimbursement, termination, cancellation, modification
or acceleration of, or result in the creation or imposition of any Lien upon any
of the assets or properties of the Purchaser or Paradise, under any of the
terms, conditions or provisions of any contract to which the Purchaser or
Paradise is a party or by which the Purchaser or Paradise or any of their
respective assets or properties are bound.
4.4.2 Approvals and Consents. Except as set forth on Schedule 4.4.1, no
consent, approval or action of, filing with or notice to any Governmental or
Regulatory Authority or other public or private third party is necessary or
required under any of the terms, conditions or provisions of any Law or Order of
any Governmental or Regulatory Authority or any contract to which the Purchaser
or Paradise is a party or by which the Purchaser or Paradise or any of their
assets or properties are bound for the execution and delivery of this Agreement
by the Purchaser and Paradise, the performance by the Purchaser and Paradise of
their obligations hereunder or the consummation of the transactions contemplated
hereby by the Purchaser and Paradise.
Section 4.5 Compliance with Laws; Licenses and Permits.
4.5.1 Compliance. Each of Paradise and the Purchaser is and its business
has been conducted, in compliance with all applicable Laws and Orders, except in
each case (other than with respect to compliance with environmental Laws and
Orders relating to the regulation or protection of the environment;
"Environmental Laws and Orders") where the failure to so comply would not
reasonably be expected to have a Material Adverse Effect, including without
limitation: (a) all Laws and Orders promulgated by the Federal Trade Commission
or any other Governmental or Regulatory Authority; (b) all Environmental Laws
and Orders; and (c) all Laws and Orders relating to labor, civil rights, and
occupational safety and health laws, worker's compensation, employment and
wages, hours and vacations, or pay equity. Neither Paradise nor the Purchaser
has been charged with, or, to the knowledge of Paradise and the Purchaser
threatened with or under any investigation with respect to, any charge
concerning any violation of any Laws or Orders.
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4.5.2 Licenses. Each of Paradise and the Purchaser has all Licenses
required by any Governmental or Regulatory Authority for the operation of its
business and the use of its assets as presently operated or used, except where
the failure to have such Licenses would not reasonably be expected to have a
Material Adverse Effect. All of the Licenses are in full force and effect and no
action or claim is pending, nor to the knowledge of Paradise and the Purchaser
is threatened, to revoke or terminate any of such Licenses or declare any such
License invalid in any material respect.
Section 4.6 Paradise Stock. The shares of Paradise Stock to be delivered
to the Company pursuant to this Agreement, when delivered as provided herein,
will be validly issued and outstanding shares of voting common stock of
Paradise, fully paid and non-assessable, and will not be subject to pre-emptive
rights of any Person.
Section 4.7 Brokers. No broker, finder, agent or similar intermediary has
acted on behalf of the Purchaser, Paradise or any of their affiliates in
connection with this Agreement or the transactions contemplated hereby, and no
brokerage commissions, finders' fees or similar fees or commissions are payable
by the Purchaser, Paradise or any of their affiliates in connection therewith
based on any agreement, arrangement or understanding with any of them.
ARTICLE V
COVENANTS OF THE COMPANY AND THE OWNERS
The Company and the Owners covenant and agree with Paradise and the
Purchaser that, at all times from and after the Execution Date until the Closing
or earlier termination of this Agreement, the Company and the Owners will comply
with all covenants and provisions of this Article V, except to the extent
Paradise (on behalf of itself and the Purchaser) may otherwise consent in
writing.
Section 5.1 Regulatory and Other Approvals. Subject to the confidentiality
provisions of Section 12.8, the Company and the Owners will take all
commercially reasonable steps necessary or desirable, and proceed diligently and
in good faith and use all commercially reasonable efforts, as promptly as
practicable to obtain all consents and approvals required of the Company and
Owners to consummate the transactions contemplated hereby. The Company and
Owners will provide prompt notification to Paradise when any such consent or
approval is obtained.
Section 5.2 Investigation by Paradise and the Purchaser. Subject to the
confidentiality provisions of Section 12.8, the Company and the Owners will (a)
provide Paradise and the Purchaser and their respective officers, employees,
counsel, accountants, financial advisors, consultants and other representatives
(collectively, "Representatives") with full access, upon reasonable prior notice
and during normal business hours, to the executive officers and agents of the
Company who have any material responsibility for the conduct of the business of
the Company and to the Company's accountants and their work papers, but only to
the extent that such access does not unreasonably interfere with the business of
the Company and (b) furnish Paradise, the Purchaser and the
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Representatives with all such information and data concerning the business of
the Company as Paradise, the Purchaser or the Representatives reasonably may
request in connection with such investigation, except to the extent that
furnishing any such information or data would violate any Law, Order, Contract
or License applicable to the Company.
Section 5.3 No Solicitations. Neither the Company nor the Owners will
take, nor will they permit any affiliate of the Company or the Owners (or
authorize or permit any investment banker, financial advisor, attorney,
accountant or other Person retained by or acting for or on behalf of the
Company, the Owners or any such affiliate) to take, directly or indirectly, any
action to solicit, encourage, negotiate, assist or otherwise facilitate
(including by furnishing confidential information with respect to the business
of the Company or permitting access to the Assets of the Company ) any offer or
inquiry concerning the acquisition of the Company (whether by sale of assets,
sale of stock, merger or otherwise) from any Person other than Paradise or the
Purchaser.
Section 5.4 Conduct of Business. From the Execution Date to the Closing
Date or earlier termination of this Agreement, except as contemplated or
otherwise permitted under the terms of this Agreement, the Company and the
Owners will operate the business of the Company only in the ordinary course
consistent with past practice. Without limiting the generality of the foregoing,
except as contemplated by or otherwise permitted by the terms of this Agreement
or any Schedule to this Agreement, the Company will refrain and the Owners will
cause the Company to refrain, from taking any of the following actions unless
consented to in writing by Paradise (on behalf of itself and the Purchaser),
which consent shall not be unreasonably withheld:
(i) selling, leasing or otherwise disposing of all or substantially all
of its assets or business;
(ii) amending its Certificate of Formation or operating agreement;
(iii) changing its capitalization;
(iv) engaging in any acquisition of the stock, assets or business of
another Person or making any equity investment of funds of the
Company in another Person other than short-term investments in cash
equivalents;
(v) merging or consolidating with and into any Person or merging or
consolidating any Person with and into it;
(vi) engaging in any liquidation or dissolution;
(vii) making any loans to any Person other than normal employee travel and
expense advances consistent with past practice.
(viii) entering into any real estate, lease or personal property lease;
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(ix) granting any compensation increase to any existing employee whose
compensation is or will become (as a result of such increase) over
$75,000;
(x) entering into any contract or agreement with any officer, manager or
employee;
(xi) declaring or paying any distributions to its Owners or bonuses to
any employees except as set forth in Schedule 3.23;
(xii) amending any Contract in any material respect;
(xiii) entering into any severance agreement involving a payment, or
obligation to pay, any amount in excess of the Company's normal
severance benefit;
(xiv) releasing, canceling or assigning any indebtedness for borrowed
money owed to it, or waiving any material right relating to its
properties;
(xv) creating or modifying any Plan or entering into or modifying any
employment agreement which is not cancelable without penalty or
other obligation on 30 days notice;
(xvi) entering into any transaction or performing any act which would be
reasonably likely to result in any of the representations and
warranties of the Company and the Owners contained in this Agreement
not being true and correct; or agreeing to take any of the actions
that are prohibited herein or which would constitute a violation of
any of the covenants of the Company and the Owners contained herein;
and
(xvii) delegating to any other Person the power to take any of the actions
prohibited by any of the foregoing clauses.
Section 5.5 Notice and Cure. The Company or the Owners will notify
Paradise in writing of, and contemporaneously will provide Paradise with true
and complete copies of any and all information or documents relating to, and
will use all commercially reasonable efforts to cure before the Closing, any
event, transaction or circumstance, as soon as practicable after it becomes
known to the Company or the Owners, occurring after the Execution Date that
causes or will cause any covenant or agreement of the Company or the Owners
under this Agreement to be breached or that renders or will render untrue any
representation or warranty of the Company or the Owners contained in this
Agreement as if the same were made on or as of the date of such event,
transaction or circumstance. The Company or the Owners also will notify Paradise
in writing of, and will use all commercially reasonable efforts to cure, before
the Closing, any other violation or breach, as soon as practicable after it
becomes known to the Company or the Owners, of any representation, warranty,
covenant or agreement made by the Company or the Owners in this Agreement. No
notice given pursuant to this Section shall have any effect on the
representations, warranties, covenants or agreements contained in this Agreement
for purposes of determining satisfaction of any condition contained herein;
provided, however, if the Company or
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the Owners have cured such violation or breach prior to the Closing to the
reasonable satisfaction of Paradise, Paradise and the Purchaser shall not have
the right to terminate this Agreement based on such violation or breach.
Section 5.6 Fulfillment of Conditions. The Company and each Owner will
execute and deliver at the Closing each agreement that the Company and each
Owner is required hereby to execute and deliver as a condition to the Closing,
will take all commercially reasonable steps necessary or desirable and proceed
diligently and in good faith to satisfy each other condition to the obligations
of Paradise and the Purchaser contained in this Agreement.
ARTICLE VI
COVENANTS OF PARADISE AND THE PURCHASER
Paradise and the Purchaser covenant and agree with the Company and the
Owners that, at all times from and after the Execution Date until the Closing or
the earlier termination of this Agreement, Paradise and the Purchaser will
comply with all covenants and provisions of this Article VI, except to the
extent the Company and the Owners may otherwise consent in writing.
Section 6.1 Regulatory and Other Approvals. Paradise and the Purchaser
will (a) take all commercially reasonable steps necessary or desirable, and
proceed diligently and in good faith and use all commercially reasonable
efforts, as promptly as practicable to obtain all consents, approvals or actions
of, to make all filings with and to give all notices to Governmental or
Regulatory Authorities or any other Person required of Paradise or the Purchaser
to consummate the transactions contemplated hereby, including without limitation
those described on Schedule 4.4.1, (b) provide such other information and
communications to such Governmental or Regulatory Authorities or other Persons
as such Governmental or Regulatory Authorities or other Persons may reasonably
request in connection therewith and (c) provide reasonable cooperation to the
Company and the Owners in obtaining all consents or approvals required of the
Company and the Owners to consummate the transactions contemplated hereby.
Paradise will provide prompt notification to the Company and the Owners when any
such consent, approval, action, filing or notice referred to in clause (a) above
is obtained, taken, made or given, as applicable.
Section 6.2 Investigation by the Company and the Owners. Paradise and the
Purchaser will (a) provide the Company and the Owners and their respective
officers, employees, counsel, accountants, financial advisors, consultants and
other representatives (collectively, "Representatives") with full access, upon
reasonable prior notice and during normal business hours, to the executive
officers and agents of Paradise who have any material responsibility for the
conduct of the business of Paradise and to Paradise's accountants and their work
papers, but only to the extent that such access does not unreasonably interfere
with the business of Paradise and (b) furnish the Company, the Owners and the
Representatives with all such information and data concerning the business of
Paradise as the Company, the Owners or the Representatives reasonably may
request in connection with such investigation, except to the extent that
furnishing any such information or data would violate any Law, Order, Contract
or License applicable to the Company.
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Section 6.3 Notice and Cure. Paradise or the Purchaser will notify the
Company and the Owners in writing of, and contemporaneously, will provide the
Company and the Owners with true and complete copies of any and all information
or documents relating to, and will use all commercially reasonable efforts to
cure before the Closing, any event, transaction or circumstance, as soon as
practicable after it becomes known to Paradise or the Purchaser, occurring after
the Execution Date that causes or will cause any covenant or agreement of
Paradise or the Purchaser under this Agreement to be breached or that renders or
will render untrue any representation or warranty of Paradise or the Purchaser
contained in this Agreement as if the same were made on or as of the date of
such event, transaction or circumstance. Paradise or the Purchaser also will
notify the Company and the Owners in writing of, and will use all commercially
reasonable efforts to cure, before the Closing, any other violation or breach,
as soon as practicable after it becomes known to Paradise or the Purchaser, of
any representation, warranty, covenant or agreement made by Paradise or the
Purchaser in this Agreement. No notice given pursuant to this Section shall have
any effect on the representations, warranties, covenants or agreements contained
in this Agreement for purposes of determining satisfaction of any condition
contained herein; provided, however, if Paradise or the Purchaser have cured
such violation or breach prior to the Closing to the reasonable satisfaction of
the Company and the Owners, the Company and the Owners shall not have the right
to terminate this Agreement based on such violation or breach.
Section 6.4 Fulfillment of Conditions. Paradise and the Purchaser will
execute and deliver or cause the execution and delivery at the Closing each
agreement that Paradise and the Purchaser or one of their affiliates is hereby
required to execute and deliver as a condition to the Closing, will take all
commercially reasonable steps necessary or desirable and proceed diligently and
in good faith to satisfy each other condition to the obligations of the Company
and the Owners contained in this Agreement.
Section 6.5 Blue Sky. Paradise and the Purchaser will use their best
efforts to obtain all necessary state securities and blue sky authorizations
required to issue the Paradise Stock as contemplated by this Agreement.
ARTICLE VII
MUTUAL COVENANTS
Paradise, the Purchaser, the Company and the Owners mutually covenant and
agree with each other as follows:
Section 7.1 Reasonable Efforts to Consummate Transaction. Paradise, the
Purchaser, the Company and the Owners will each use its reasonable efforts and
will fully cooperate with each other to consummate the transactions contemplated
by this Agreement.
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Section 7.2 Public Announcements.Paradise, the Purchaser, the Company and
the Owners will consult with each other before issuing any press releases or
otherwise making any public statements with respect to this Agreement or any of
the transactions contemplated hereby and shall not issue any such press release
or make any public statement without the prior consent of the other parties
which shall not be unreasonably withheld, except as may be required by law or by
obligations pursuant to any listing agreements with any securities exchange.
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF PARADISE AND THE PURCHASER
The obligations of the Purchaser hereunder to purchase the Assets and
issue the Paradise stock and to assume and pay, perform and discharge the
Assumed Liabilities are subject to the fulfillment, at or before the Closing, of
each of the following conditions (except with respect to Section 8.4, all or any
of which may be waived in whole or in part by Paradise, on behalf of itself and
the Purchaser, in its sole discretion):
Section 8.1 Representations and Warranties. The representations and
warranties made by the Company and the Owners in this Agreement, or in any
Schedule delivered pursuant hereto, shall be true and correct in all material
respects on and as of the Closing Date with the same force and effect as though
made on and as of the Closing Date or, in the case of representations and
warranties made as of a specified date earlier than the Closing Date, on and as
of such earlier date, and Company and the Owners shall have delivered to
Paradise and the Purchaser a certificate, dated the Closing Date, to such
effect.
Section 8.2 Good Standing and Tax Certificates The Company and the Owners
shall have delivered to Paradise and the Purchaser (i) a copy of the Company's
Articles of Organization, including all amendments, certified by the Secretary
of State (or comparable official) of the State of California, (ii) a certificate
from the Secretary of State (or comparable official) of the State of California,
to the effect that the Company is in good standing in California and (iii) a
certificate as to the tax status of the Company in the State of California.
Section 8.3 Performance. The Company and the Owners shall have performed
and complied with the agreements, covenants and obligations required by this
Agreement to be so performed or complied with by the Company and the Owners at
or before the Closing, and the Company and the Owners shall have delivered to
Paradise and the Purchaser a certificate, dated the Closing Date, to such
effect.
Section 8.4 Certified Resolutions. The Company and the Owners shall have
delivered to Paradise and the Purchaser a copy of resolutions of the Owners of
the Company authorizing the execution, delivery and performance of this
Agreement and the transactions contemplated hereby, certified to by a manager or
officer of the Company.
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Section 8.5 No Litigation. There shall not be pending any litigation,
proceeding, investigation, review, arbitration or claim by Governmental or
Regulatory Authority, and no preliminary or permanent injunction or other order
shall have been issued, to restrain or invalidate the consummation by the
Company and the Owners of this Agreement and the transactions contemplated
hereby, and no material litigation shall be pending or to the knowledge of the
Company and the Owners threatened against the Company or the Owners with respect
to this Agreement or the transactions contemplated hereby or arising out of the
actions required or permitted to be taken by any of them pursuant to this
Agreement, or against or affecting either the Company or the Owners or any of
their properties or rights which, if adversely determined, would be reasonably
likely to have a Material Adverse Effect.
Section 8.6 Regulatory Consents and Approvals. All consents, approvals and
actions of, filings with and notices to any Governmental or Regulatory Authority
necessary to permit Paradise, the Purchaser, the Company and the Owners to
perform their obligations under this Agreement and to consummate the
transactions contemplated hereby shall have been duly obtained, made or given
and shall be in full force and effect.
Section 8.7 Required Approvals, Notices and Consents. The Company and the
Owners shall have obtained or given, as the case may be, at no expense to
Paradise or the Purchaser and there shall not have been withdrawn or modified
any notices, consents, approvals or other actions listed on Schedule 3.9.2
hereof (including without limitation, obtaining all consents, approvals and/or
waivers required under the contracts listed on Schedule 3.8 in order to permit
the consummation of the transactions contemplated by this Agreement without
causing or resulting in a default, event of default, acceleration event or
termination event under any of such documents and without entitling any party to
any of such documents to exercise any other right or remedy adverse to the
interests of Paradise, the Purchaser or the Company thereunder). Each such
consent shall be in form reasonably satisfactory to counsel for Paradise and the
Purchaser.
Section 8.8 Employment Agreements. Dylan shall have entered into an
Employment Agreement with Paradise, in the form of Exhibit A-1 hereto and
Rodgers shall have entered into an Employment Agreement with the Purchaser in
the form of Exhibit A-2 hereto.
Section 8.9 Opinion of Counsel. Paradise and the Purchaser shall have
received (i) the opinion of Cohen, Primiani & Foster, counsel to the Company and
Dylan, dated the Closing Date, substantially in the form and to the effect of
Exhibit B-1 hereto, and (ii) the opinion of James A. Melman, Esq., counsel to
Rodgers, dated the Closing Date, substantially in form and to the effect of
Exhibit B-2 hereto.
Section 8.10 Repayment of Loans. All indebtedness of the Owners to the
Company, if any, shall have been repaid in full, other than routine travel and
expense advances in the ordinary course of business consistent with past
practice, and the Company and the Owners shall have delivered to Paradise and
the Purchaser a certificate, dated the Closing Date, to such effect.
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Section 8.11 Material Adverse Effect. Except for the execution and
delivery of this Agreement and the transactions required or permitted to take
place pursuant hereto on or prior to the Closing Date, since the Execution Date
there shall not have occurred any Material Adverse Effect, or any event or
development which, individually or together with such events, could reasonably
be expected to result in a Material Adverse Effect and the Company and Owners
shall have delivered to Paradise and the Purchaser, a certificate dated the
Closing Date to such effect.
Section 8.12 Proceedings. All proceedings to be taken in connection with
the transactions contemplated by this Agreement and all documents incident
thereto must be reasonably satisfactory in form and substance to Paradise and
the Purchaser, and Paradise and the Purchaser shall have received copies of all
such documents and other evidences as Paradise and the Purchaser may reasonably
request in order to establish the consummation of such transactions and the
taking of all proceedings in connection therewith.
Section 8.13 Spur & Buckle, Inc. On the Closing Date, the transactions
contemplated in the Stock Purchase Agreement of even date herewith between
Paradise and Dylan (the "Spur & Buckle, Inc. Agreement") shall have been
consummated contemporaneously with the Closing hereunder.
Section 8.14 Working Capital. Appropriate working capital lines of credit,
as determined by Paradise and subject to the reasonable approval of the Owners,
shall have been obtained for the Purchaser and Paradise.
Section 8.15 Brambilla Release. The Company and the Owners shall have
received (and delivered a copy to Paradise) a release from Marco Brambilla
releasing the Company and the Owners from all claims.
Section 8.16 Net Worth The Net Worth (as defined below) of the Company as
of the Effective Date shall not have been less than $1.00, as finally determined
pursuant to the procedures set forth in Section 2.1.2 above. As used in this
Section 8.16, the term "Net Worth" shall mean the aggregate net book value of
the Company as represented by the aggregate value of the Assets, minus the
aggregate value of the Assumed Liabilities, conveyed or assumed under this
Agreement, calculated in accordance GAAP.
Section 8.17 Financial Statements The Company and the Owners shall have
delivered Schedule 3.4 (Financial Statements) to Paradise and the Purchaser;
provided, however, failure to deliver said Schedule 3.4 shall not be a breach of
this Agreement by the Company and/or the Owners.
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ARTICLE IX
CONDITIONS TO OBLIGATIONS OF THE COMPANY AND THE OWNERS
The obligations of the Company and the Owners hereunder to sell the Assets
are subject to the fulfillment, at or before the Closing, of each of the
following conditions (except with respect to Section 9.6, all or any of which
may be waived in whole or in part by the Company and the Owners in their sole
discretion):
Section 9.1 Representations and Warranties. The representations and
warranties made by Paradise and the Purchaser in this Agreement or in any
Schedule delivered pursuant hereto, shall be true and correct in all material
respects on and as of the Closing Date with the same force and effect as though
made on and as of the Closing Date, and Paradise and the Purchaser shall have
delivered to the Company and the Owners a certificate, dated the Closing Date,
to such effect.
Section 9.2 Performance. Paradise and the Purchaser shall have performed
and complied with the agreements, covenants and obligations required by this
Agreement to be so performed or complied with by Paradise and the Purchaser at
or before the Closing, and Paradise and the Purchaser shall have delivered to
the Company and the Owners a certificate, dated the Closing Date, to such
effect.
Section 9.3 Certified Resolutions. Paradise and the Purchaser shall have
delivered to the Company and the Owners a copy of the resolutions of the boards
of directors of each of Paradise and the Purchaser authorizing the execution,
delivery and performance of this Agreement and the transactions contemplated
hereby, certified to by an officer of Paradise and the Purchaser, respectively.
Section 9.4 No Litigation. There shall not be pending any litigation,
proceeding, investigation, review, arbitration or claim by Governmental or
Regulatory Authority, and no preliminary or permanent injunction or other order
shall have been issued to restrain or invalidate the consummation by Paradise or
the Purchaser of this Agreement and the transactions contemplated hereby, and no
material litigation shall be pending or to the knowledge of Paradise and the
Purchaser, threatened against Paradise or the Purchaser with respect to this
Agreement or the transactions contemplated hereby or arising out of the actions
required or permitted to be taken by any of them pursuant to this Agreement, or
against or affecting either Paradise or the Purchaser or any of their properties
or rights which, if adversely determined, would be reasonably likely to have a
Material Adverse Effect.
Section 9.5 Regulatory Consents and Approvals. All consents, approvals and
actions of, filings with and notices to any Governmental or Regulatory Authority
necessary to permit the Company and the Owners, Paradise and the Purchaser to
perform their obligations under this Agreement and to consummate the
transactions contemplated hereby shall have been duly obtained, made or given
and shall be in full force and effect.
Section 9.6 Paradise Stockholder Approval. The special meeting of
stockholders of Paradise shall have been duly held and at such meeting the
requisite affirmative vote of Paradise stockholders
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shall have been recorded to authorize and to approve the transactions
contemplated hereby in accordance with applicable provisions of Delaware law.
Section 9.7 Employment Agreements. Paradise shall have entered into an
Employment Agreement with Dylan in the form of Exhibit A-1 hereto and the
Purchaser shall have entered into an Employment Agreement with Rodgers in the
form of Exhibit A-2 hereto.
Section 9.8 Opinion of Counsel. The Company and the Owners shall have
received the opinion of Davis & Gilbert LLP, counsel to Paradise and the
Purchaser, dated the Closing Date, substantially in the form and to the effect
of Exhibit C hereto.
Section 9.9 Proceedings. All proceedings to be taken on the part of
Paradise and the Purchaser in connection with the transactions contemplated by
this Agreement and all documents incident thereto shall be reasonably
satisfactory in form and substance to the Company and the Owners , and the
Company and the Owners shall have received copies of all such documents and
other evidences as the Company and the Owners may reasonably request in order to
establish the consummation of such transactions and the taking of all
proceedings in connection therewith.
Section 9.10 Material Adverse Effect. Since the Execution Date there shall
not have occurred any Material Adverse Effect, or any event or development
which, individually or together with such events, could reasonably be expected
to result in a Material Adverse Effect and Paradise shall have delivered to the
Company and the Owners a certificate, dated the Closing Date, to such effect.
Section 9.11 Spur & Buckle, Inc. Acquisition Agreement. On the Closing
Date, the transactions contemplated by the Spur & Buckle Agreement shall have
been consummated contemporaneously with the Closing hereunder.
Section 9.12 Working Capital. Appropriate working capital lines of credit,
as determined by Paradise and subject to the reasonable approval of the Owners,
shall have been obtained for the Purchaser and Paradise.
Section 9.13 Insurance Policy. The Company and the Owners shall have
approved the terms of Paradise's Directors and Officers Errors and Omissions
Insurance policy.
Section 9.14 Brambilla Release. The Company and the Owners shall have
received a release from Marco Brambilla releasing the Company and the Owners
from all claims.
ARTICLE X
ADDITIONAL AGREEMENTS
Section 10.1 Change of Doing Business Name of the Company. At the Closing,
the Company shall execute appropriate documents to change its doing business
name to a name not
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including the "Straw Dogs" designation, or any variation thereof, and promptly
thereafter shall file such documents with the appropriate authorities in
California.
Section 10.2 [Intentionally Omitted]
Section 10.3 Agreements Regarding Employees After Closing
10.3.1 Affected Employees. The Purchaser shall offer employment to all of
the employees of the Company effective as of the Closing Date. Such personnel
who accept such employment (the "Affected Employees") will be employed by the
Purchaser with the same salaries and wages under which such Affected Employees
were employed by the Company immediately prior to the Closing Date (other than
as may be provided in the Employment Agreements referred to in Section 8.8
above), but nothing herein contained shall be deemed to create an employment
contract between the Purchaser and/or any of its affiliates and any such
Affected Employee. With respect to any welfare benefits plans (within the
meaning of Section 3(1) of ERISA) maintained by the Purchaser or Paradise in
which an Affected Employee may participate on or after the Closing Date, the
Purchaser or Paradise shall use its reasonable commercial efforts (i) to waive
any pre-existing condition limitations, (ii) to give effect in determining
deductible and maximum out-of-pocket limitations to claims incurred and amounts
paid by and amounts reimbursed to, such employees with respect to similar plans
maintained by the Company prior to the Closing Date and (iii) to permit those
Affected Employees who are eligible as of the Closing Date to participate in the
Company's applicable welfare plans to participate immediately in any applicable
welfare plan of the Purchaser or Paradise. In the event any employee of the
Company shall be deemed to have been terminated solely by reason of the
consummation of this Agreement, all liability for severance benefits or damages
shall be borne by the Company. Employees of the Company that become employees of
the Purchaser shall be subject to all rules, regulations, requirements and
policies applicable to all new hires of the Purchaser (except as otherwise
provided in this Section 10.3), and any such employees who may be subsequently
terminated will be entitled to severance benefits in accordance with the policy
of the Purchaser as then applicable, except to the extent that written
agreements with such employees that are assumed by the Purchaser or subsequently
entered into, provide otherwise.
10.3.2 Service Credit. To the extent that any plan, program, practice,
policy, arrangement or agreement providing compensation or benefits to an
Affected Employee takes into account a participant's service with the Purchaser,
whether for the purposes of determining eligibility, vesting, level or benefits
or otherwise, the Affected Employee's service shall include his or her whole and
partial years of service with the Company prior to the Closing Date.
Section 10.4 Apportioned Obligations. All real property taxes, personal
property taxes and similar ad valorem obligations levied with respect to the
Assets for a taxable period which includes (but does not end on) the Effective
Date (collectively, the "Apportioned Obligations") shall be apportioned between
the Company and the Purchaser on the Closing Date based on the number of days of
such taxable period included in the Pre-Effective Tax Period and the number of
days of such taxable period included in the Post-Effective Date Tax Period. The
Company shall be liable for the proportionate amount of such taxes that is
attributable to the Pre-
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Effective Date Tax Period, and the Purchaser shall be liable for the
proportionate amount of such taxes that is attributable to the Post-Effective
Date Tax Period. After the Closing Date, the Company and the Purchaser shall
cooperate to ensure timely payment of all the Apportioned Obligations in
accordance with the foregoing principles. For the purposes of the foregoing,
"Pre-Effective Date Tax Period" means any Tax period (or portion thereof) ending
on or before the close of business on the Effective Date; and "Post-Effective
Date Tax Period" means any Tax period (or portion thereof) ending after the
Effective Date.
Section 10.5 Tax Liability. To the extent that the transfer of any Assets
to the Purchaser gives rise to sales tax liability or other transfer, purchase
or recordation documentary tax and fees (collectively, "Sales Taxes"), the
Company shall promptly pay such Sales Taxes to the appropriate tax authorities.
Section 10.6 Successor Employer. If applicable, the Purchaser agrees that
it shall elect treatment as a "successor employer" for withholding tax purposes
with respect to the 1999 calendar year.
Section 10.7 Name of Purchaser. The parties hereto agree that immediately
after the Closing, the corporate name of the Purchaser will be changed to "Straw
Dogs, Inc."
Section 10.8 Termination. This Agreement may be terminated and the sale of
Assets and other transactions contemplated herein may be abandoned at any time
prior to the Closing, notwithstanding the adoption of this Agreement by the
Owners of the Company or the stockholders of Paradise by:
(a) mutual consent of the Boards of Directors of each of the
Company, Paradise and the Purchaser and the Owners of the Company;
(b) either Paradise and the Purchaser, on the one hand, or the
Company and the Owners , on the other hand, (provided the terminating party is
not then in breach hereof and has not received notice of any breach) if the
other party breaches its representations, warranties or covenants hereunder in
any material respect and such breach is not cured within 15 days after the
delivery of written notice thereof to such breaching party unless the breach of
any such representation, warranty, or covenant does not materially adversely
affect the business or assets of the breaching party or the ability of any or
all parties to consummate the transactions contemplated hereby;
(c) the Boards of Directors of either Paradise and the Purchaser or
the Company and the Owners of the Company in the event a final and nonappealable
order, decree or judgment of any court, agency, commission or governmental
authority is issued or existing against the parties or any of them or any of
their directors which would enjoin the transactions contemplated hereby; or
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(d) either Paradise and the Purchaser, on the one hand, or the
Company and the Owners, on the other hand, if the Closing Date has not occurred
prior to the close of business on September 30, 1999.
Section 10.9 Effect of Termination. If this Agreement is terminated as
provided in Section 10.8 hereof, this Agreement (except as otherwise herein
provided) shall forthwith become void and there shall be no liability on the
part of any party hereto or its respective officers or directors arising from
the act of such permitted termination. Nothing herein shall preclude, however,
any action or claim for damages to which any party is otherwise entitled as a
result of breach by the other party hereto. In the event of any termination,
each of the parties shall promptly return to the other, all documents and other
written information received from the other in connection with the transactions
contemplated by this Agreement and shall not retain any copies or summaries
thereof.
Section 10.10 Registration Rights. After the Closing Date, the Owners
shall have the registration rights set forth in Appendix A to this Agreement
with respect to the Paradise Stock acquired by them pursuant to this Agreement.
ARTICLE XI
SURVIVAL; INDEMNITY
Section 11.1 Survival. Notwithstanding any right of any party hereto fully
to investigate the affairs of any other party, and notwithstanding any knowledge
of facts determined or determinable pursuant to such investigation or right of
investigation, each party hereto shall have the right to rely fully upon the
representations, warranties, covenants and agreements of the other parties
contained in this Agreement and the Schedules, if any, furnished by any other
party pursuant to this Agreement, or in any certificate delivered at the Closing
by any other party. Subject to the limitations set forth in Sections 11.5.2,
11.5.3 and 11.5.4, the respective representations, warranties, covenants and
agreements (including but not limited to, the confidentiality obligations of
Section 12.8) of the Company, the Owners, Paradise and the Purchaser contained
in this Agreement shall survive the Closing.
Section 11.2 Obligation of the Owners to Indemnify
11.2.1 General Indemnity Subject to the limitations contained in Section
11.5, each of the Owners hereby severally agrees to indemnify Paradise, the
Purchaser and their affiliates, shareholders, officers, directors, employees,
agents, representatives and successors, permitted assignees of the Paradise the
Purchaser and their affiliates (individually a "Purchaser Indemnified Party" and
collectively, the "Purchaser Indemnified Parties") against, and to protect, save
and keep harmless the Purchaser Indemnified Parties from, and to pay on behalf
of or reimburse the Purchaser Indemnified Parties as and when incurred for, any
and all liabilities (including liabilities for Taxes), obligations, losses,
damages, penalties, demands, claims, actions, suits, judgments, settlements,
penalties, interest, out-of-pocket costs, expenses and disbursements (including
reasonable costs of investigation, and reasonable attorneys', accountants' and
expert
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witnesses' fees) of whatever kind and nature (collectively, "Losses"), that may
be imposed on or incurred by any Purchaser Indemnified Party as a consequence
of, in connection with, incident to, resulting from or arising out of or in any
way related to or by virtue of: (a) any misrepresentation, inaccuracy or breach
of any warranty or representation contained in Article III.B hereof or in any
certificate delivered by the Company or the Owners at the Closing; (b) any
action, demand, proceeding, investigation or claim by any third party (including
any Governmental or Regulatory Authority) against or affecting any Purchaser
Indemnified Party which may give rise to or evidence the existence of or relate
to a misrepresentation or breach of any of the representations and warranties of
the Company or the Owners contained in Article III.B hereof or in any
certificate delivered by the Owners at the Closing; (c) any breach or failure by
the Company or the Owners to comply with, perform or discharge any obligation,
agreement or covenant by the Company or the Owners contained in this Agreement;
and (d) any liability or obligation or any assertion against any Purchaser
Indemnified Party, arising out of or relating, directly or indirectly, to any
Retained Liability.
11.2.2 Special Indemnity. Subject to the limitations contained in Section
11.5, each of the Owners hereby severally agrees to indemnify the Purchaser
Indemnified Parties against, and to protect, save and keep harmless the
Purchaser Indemnified Parties from, and to assume liability for, the payment of
all Losses that may be imposed on or incurred by any Purchaser Indemnified Party
as a consequence of or in connection with, incident to, resulting from or
arising out of or in any way related to or by virtue of: (a) any
misrepresentation, inaccuracy or breach of a representation or warranty by such
Owners contained in Article III.A hereof; and (b) any action, demand,
proceeding, investigation or claim by any third party (including any
Governmental or Regulatory Authority) against or affecting any Purchaser
Indemnified Party which may give rise to or evidence the existence of or relate
to a misrepresentation or breach of any of the representations and warranties of
such Owners contained in Article III.A hereof or in any certificate delivered by
such Owner at the Closing. Any claim for indemnity made under this Section
11.2.2 shall not be construed as a claim under Section 11.2.1 hereof even if a
Purchaser Indemnified Party could have made a claim under Section 11.2.1 hereof
in respect of the same matters.
11.2.3 "Losses". The term "Losses" as used in this Agreement is not
limited to matters asserted by third parties against an Indemnified Party, but
includes Losses incurred or sustained by an Indemnified Party in the absence of
third party claims.
Section 11.3 Obligation of Paradise and the Purchaser to Indemnify.
Subject to the limitations set forth in Section 11.5.2 hereof, Paradise and the
Purchaser hereby agree, jointly and severally, to indemnify the Company and the
Owners and their affiliates, Owners, officers, directors, employees, agents,
representatives and successors, permitted assigns of the Company and the Owners
and their affiliates (individually a "Company Indemnified Party" and
collectively, the "Company Indemnified Parties") against, and to protect, save
and keep harmless the Company Indemnified Parties from, and to pay on behalf of
or reimburse the Company Indemnified Parties as and when incurred for, any and
all Losses that may be imposed on or incurred by any Company Indemnified Party
as a consequence of, in connection with, incident to, resulting from or arising
out of or in any way related to or by virtue of: (a) any
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misrepresentation, inaccuracy or breach of any warranty or representation of
Paradise or the Purchaser contained in Article IV hereof or in any certificate
delivered by Paradise or the Purchaser at the Closing; (b) any action, demand,
proceeding, investigation or claim by any third party (including any
Governmental or Regulatory Authority) against or affecting any Company
Indemnified Party which may give rise to or evidence the existence of or relate
to a misrepresentation or breach of any of the representations and warranties of
Paradise or the Purchaser contained in Article IV hereof or in any certificate
delivered by Paradise or the Purchaser at the Closing; (c) any breach or failure
by Paradise or the Purchaser to comply with, perform or discharge any
obligation, agreement or covenant by Paradise or the Purchaser contained in this
Agreement; and (d) any liability or obligation or any assertion against any
Company Indemnified Party arising out of or relating, directly or indirectly, to
any Assumed Liability.
Section 11.4 Indemnification Procedures.
11.4.1 Non-Third-Party Claims. In the event that any Person entitled to
indemnification under this Agreement (an "Indemnified Party") asserts a claim
for indemnification which does not involve a Third Party Claim (as defined in
Section 11.4.2 below), against which a party to this Agreement is required to
provide indemnification under this Agreement (an "Indemnifying Party"), the
Indemnifiying Party may acknowledge and agree by notice to the Indemnified Party
in writing to satisfy such claim within 20 days of receipt of notice of such
claim from the Indemnified Party. In the event that the Indemnifying Party
disputes such claim, the Indemnifying Party shall provide written notice of such
dispute to the Indemnified Party within 20 days of receipt of notice of such
claim, setting forth a reasonable basis of such dispute. In the event that the
Indemnifying Party shall fail to provide written notice to the Indemnified Party
within 20 days of receipt of notice from the Indemnified Party that the
Indemnifying Party either acknowledges and agrees to pay such claim or disputes
such claim, the Indemnifying Party shall be deemed to have acknowledged and
agreed to pay such claim in full and to have waived any right to dispute such
claim. Once the Indemnifying Party has acknowledged and agreed to pay any claim
pursuant to this Section 11.4.1, or once any dispute under this Section 11.4.1
has been finally resolved in favor of indemnification by a court or other
tribunal of competent jurisdiction, subject to Section 11.5.1, the Indemnifying
Party shall pay the amount of such claim to the Indemnified Party within 10 days
of the date of acknowledgement or resolution, as the case may be, to such
account and in such manner as is designated in writing by the Indemnified Party.
11.4.2 Third-Party Claims.
(a) In the event that any Indemnified Party asserts a claim for
indemnification or receives notice of the assertion of any claim or
of the commencement of any action or proceeding by any Person who is
not a party to this Agreement or an affiliate of a party to this
Agreement (a "Third Party Claim") against an Indemnifying Party, the
Indemnified Party shall give written notice together with a
statement of any available information regarding such claim to the
Indemnifying Party within 30 days after learning of such claim (or
within such shorter time as may be necessary to give the
Indemnifying Party a
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reasonable opportunity to respond to such claim). The Indemnifying
Party shall have the right, upon written notice to the Indemnified
Party (the "Defense Notice") within 15 days after receipt from the
Indemnified Party of notice of such claim, which Defense Notice by
the Indemnifying Party shall specify the counsel it will appoint to
defend such claim ("Defense Counsel"), to conduct at its expense the
defense against such claim in its own name, or if necessary in the
name of the Indemnified Party; provided, however, that the
Indemnified Party shall have the right to approve the Defense
Counsel, which approval shall not be unreasonably withheld or
delayed, and in the event the Indemnifying Party and the Indemnified
Party cannot agree upon such counsel within 10 days after the
Defense Notice is provided, then the Indemnifying Party shall
propose an alternate Defense Counsel, which shall be subject again
to the Indemnified Party's approval which approval shall not be
unreasonably withheld or delayed. If the parties still fail to agree
on the Defense Counsel, then, at such time, they shall mutually
agree in good faith on a procedure to determine the Defense Counsel.
(b) In the event that the Indemnifying Party shall fail to give the
Defense Notice within such 15 day period, it shall be deemed to have
elected not to conduct the defense of the subject claim, and in such
event the Indemnified Party shall have the right to conduct the
defense and to compromise and settle the claim without prior consent
of the Indemnifying Party and the Indemnifying Party will be liable
for all reasonable costs, expenses, settlement amounts or other
Losses paid or incurred in connection therewith.
(c) In the event that the Indemnifying Party does deliver a Defense
Notice and thereby elects to conduct the defense of the subject
claim, the Indemnifying Party shall be entitled to have the
exclusive control over the defense and settlement of the subject
claim and the Indemnified Party will cooperate with and make
available to the Indemnifying Party such assistance and materials as
it may reasonably request, all at the expense of the Indemnifying
Party; the Indemnified Party shall have the right at its expense to
participate in the defense assisted by counsel of its own choosing
at its expense. In such an event, the Indemnifying Party will not
settle the subject claim without the prior written consent of the
Indemnified Party, which consent will not be unreasonably withheld
or delayed.
(d) Without the prior written consent of the Indemnified Party, the
Indemnifying Party will not enter into any settlement of any Third
Party Claim or cease to defend against such claim, if pursuant to or
as a result of such settlement or cessation, (i) injunctive relief
or specific performance would be imposed against the Indemnified
Party, or (ii) such settlement or cessation would lead to liability
or create any financial or other obligation on the part of the
Indemnified Party for which the Indemnified Party is not entitled to
indemnification hereunder.
(e) If an Indemnified Party refuses to consent to a bona fide offer of
settlement which provides for a full release of the Indemnified
Party and its affiliates and solely for a
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monetary payment which the Indemnifying Party wishes to accept, the
Indemnified Party may continue to pursue such matter, free of any
participation by the Indemnifying Party, at the sole expense of the
Indemnified Party. In such an event, the obligation of the
Indemnifying Party shall be limited to the amount of the offer of
settlement which the Indemnified Party refused to accept plus the
costs and expenses of the Indemnified Party incurred prior to the
date the Indemnifying Party notified the Indemnified Party of the
offer of settlement.
(f) Notwithstanding clause (b) above, the Indemnifying Party shall not
be entitled to control, but may participate in, and the Indemnified
Party shall be entitled to have sole control over, the defense or
settlement of any claim (i) that seeks a temporary restraining
order, a preliminary or permanent injunction or specific performance
against the Indemnified Party, (ii) to the extent such claim
involves criminal allegations against the Indemnified Party, (iii)
that if unsuccessful, would set a precedent that would materially
interfere with, or have a material adverse effect on, the business
or financial condition of the Indemnified Party or (iv) if such
claim would impose liability on the part of the Indemnified Party
for which the Indemnified Party is not entitled to indemnification
hereunder. In such an event, the Indemnifying Party will still have
all of its obligations hereunder provided that the Indemnified Party
will not settle the subject claim without the prior written consent
of the Indemnifying Party, which consent will not be unreasonably
withheld or delayed.
(g) Any final judgment entered or settlement agreed upon in the manner
provided herein shall be binding upon the Indemnifying Party, and
shall conclusively be deemed to be an obligation with respect to
which the Indemnified Party is entitled to prompt indemnification
hereunder.
(h) A failure by an Indemnified Party to give timely, complete or
accurate notice as provided in this Section 11.5 will not affect the
rights or obligations of any party hereunder except and only to the
extent that, as a result of such failure, any party entitled to
receive such notice was deprived of its right to recover any payment
under its applicable insurance coverage or was otherwise directly
and materially damaged as a result of such failure to give timely
notice.
Section 11.5 Limitations on and Other Matters Regarding Indemnification.
11.5.1 Indemnity Cushion and Cap. Subject to Section 11.5.4 below, the
Owners shall not have any liability to any Purchaser Indemnified Party with
respect to Losses arising out of any of the matters referred to in Section 11.2
until such time as the amount of such liability shall exceed in the aggregate
(i) $50,000, plus (ii) the amount by which Net Worth of the Company (as defined
in Section 8.16) as of the Effective Date exceeded $1.00 (the "Aggregate
Cushion") (in which case the Owners shall be liable for all Losses in excess of
the Aggregate Cushion); provided, however, the Aggregate Cushion shall not apply
to any Losses arising out of or
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resulting from a misrepresentation, inaccuracy or breach of any warranty or
representation contained in Sections 3.1.1, 3.1.2, 3.1.3, 3.1.5, 3.1.7 and
3.1.8. Subject to Section 11.5.4 below, the indemnity obligations of each of the
Owners with respect to Losses arising out of any matter referred to in Section
11.2 shall not exceed the value of the Paradise Stock delivered to the Owners at
the Closing (the "Cap"); provided, however, the Cap shall not apply to any
Losses arising out of or resulting from a misrepresentation, inaccuracy or
breach of any warranty or representation contained in Sections 3.1.1, 3.1.2,
3.1.3, 3.1.5, 3.1.7 and 3.1.8. For purposes of calculating the value of the
Paradise Stock received by the Owners, the Paradise Stock shall be valued at its
fair market value, which shall be the average closing price for Paradise Stock
on the Nasdaq Small Cap Market for the ten trading days ending two business days
immediately prior to the date of payment.
11.5.2 Termination of Indemnification Obligations of the Company and the
Owners. The obligation of the Company and the Owners to indemnify under Section
11.2 hereof shall terminate one year from the Closing Date, except (a) as to
matters as to which the Purchaser Indemnified Party has made a claim for
indemnification on or prior to such date and (b) with respect to any claim for
Losses pertaining to a misrepresentation or a breach of representation or
warranty under Section 3.11 or any other Section of Article III of this
Agreement relating to Taxes. The obligation to indemnify referred to in:
(i) the preceding clause (a) shall survive the expiration of such period
until such claim for indemnification is finally resolved and any
obligations with respect thereto are fully satisfied; and
(ii) the preceding clause (b) shall terminate 180 days after the
expiration of the relevant Federal, state or local statute of limitations
(taking into account any extensions or waivers thereof), except as to
matters as to which any Indemnified Party has made a claim for
indemnification on or prior to such date, in which case the right to
indemnification with respect thereto shall survive the expiration of any
such period until such claim for indemnification is finally resolved and
any obligations with respect thereto are fully satisfied.
11.5.3 Termination of Indemnification Obligations of Paradise and the
Purchaser. The obligation of Paradise and the Purchaser to indemnify under
Section 11.3 hereof shall terminate one year from the Closing Date except as to
matters as to which any Company Indemnified Party has made a claim for
indemnification on or prior to such date, in which case the right to
indemnification with respect thereto shall survive such period until such claim
for indemnification is resolved and any obligations with respect thereto are
fully satisfied.
11.5.4 Exceptions. Each of the limitations set forth above in this Section
11.5 shall in no event (a) apply to any Losses incurred by a Purchaser
Indemnified Party which relate, directly or indirectly, to (i) any fraudulent
acts committed by the Company or the Owners (including without limitation, fraud
in connection with the transaction contemplated hereby and any fraudulent acts
by any manager, officer, employee, agent or equity holder of the Company); (ii)
any indemnification obligation under Section 11.2.1(c) or 11.2.1(d); and (iii)
the Company's and the
43
<PAGE>
Owners' obligations set forth in Section 12.1 to pay certain expenses; or (b)
apply to any Losses incurred by a Company Indemnified Party which relate,
directly or indirectly, to (i) any fraudulent acts committed by Paradise, the
Purchaser (including without limitation, fraud in connection with the
transaction contemplated hereby and any fraudulent acts by any officer,
director, employee, agent or shareholder of Paradise or the Purchaser); (ii) any
indemnification obligation under Section 11.3(c) or 11.3(d); and (iii)
Paradise's obligations set forth in Section 12.1 to pay certain expenses.
11.5.5 Control by Paradise. All decisions and determinations to be made by
the Purchaser and/or a Purchaser Indemnified Party under this Article XI shall
be made by Paradise in the name of and on behalf of the Purchaser or such other
the Purchaser Indemnified Party.
ARTICLE XII
MISCELLANEOUS
Section 12.1 Expenses. Except for the costs of auditing the Company's
financial statements, (as described in Sections 2.1.2 and 3.4), which costs
shall be paid by Paradise, the parties hereto shall pay all of their own
expenses relating to the transactions contemplated by this Agreement, including,
without limitation, the fees and expenses of their respective counsel and
financial advisors.
Section 12.2 Governing Law. The interpretation and construction of this
Agreement, and all matters relating hereto, (including, without limitation, the
validity or enforcement of this Agreement), shall be governed by the laws of the
State of Delaware without reference to its conflict of laws provisions.
Section 12.3 Jurisdiction. Any judicial proceeding brought against any of
the parties to this Agreement on any dispute arising out of this Agreement or
any matter related hereto shall be brought in (i) the courts of the State of New
York or in the United States District Court for the Southern District of New
York, if the principal office of Paradise is then located in New York, or (ii)
the courts of the State of California or in the United States District Court for
the Central District of California, if the principal office of Paradise is then
located in California. Each party hereto irrevocably waives to the fullest
extent permitted by law any objection that it may now or hereafter have to the
laying of the venue of any judicial proceeding brought in such courts and any
claim that any such judicial proceeding has been brought in an inconvenient
forum. The foregoing consent to jurisdiction shall not constitute general
consent to service of process in the States of New York or California for any
purpose except as provided above and shall not be deemed to confer rights on any
person other than the respective parties to this Agreement. EACH PARTY HEREBY
WAIVES TRIAL BY JURY IN ANY JUDICIAL PROCEEDINGS UNDER THIS AGREEMENT.
Section 12.4 "Person" Defined. "Person" shall mean and include an
individual, a company, a partnership, a joint venture, a corporation (including
any non-profit corporation), a
44
<PAGE>
trust, an estate, a limited liability company, a limited liability partnership,
an unincorporated organization and a government or other department or agency
thereof.
Section 12.5 "Knowledge" Defined. Where any representation and warranty
contained in this Agreement is expressly qualified by reference to the knowledge
of the Owners, such term shall be limited to the actual knowledge of the Owners
and unless otherwise stated such knowledge that would have been discovered by
the Owners after reasonable inquiry. Where any representation and warranty
contained in this Agreement is expressly specified by reference to the knowledge
of the Company, Paradise or the Purchaser, as the case may be, such term shall
be limited to the actual knowledge of the executive officers of such entity and
unless otherwise stated, such knowledge that would have been discovered by such
executive officers after reasonable inquiry.
Section 12.6 "Affiliate" Defined. As used in this Agreement, an
"affiliate" of any Person, shall mean any Person that directly, or indirectly
through one or more intermediaries, controls, or is controlled by, or is under
common control with such Person.
Section 12.7 Captions. The Article and Section captions used herein are
for reference purposes only, and shall not in any way affect the meaning or
interpretation of this Agreement.
Section 12.8 Confidentiality. Unless and until the Closing shall have
occurred and except as may be required in connection with (i) any public
announcement that Paradise, the Purchaser, the Company and the Owners have
executed this Agreement, or (ii) any governmental filings contemplated under
this Agreement, Paradise, the Purchaser, the Company and the Owners shall, and
shall cause their respective employees, agents, consultants and representatives
to, maintain in confidence and not otherwise use or permit the use of
information, documents, and data respecting any other party to this Agreement
furnished to them, or to any person or entity on their behalf except to the
extent that such information is elsewhere available to the public or otherwise
rightfully obtained without violation of this Section 12.8 or any other
agreement. If this Agreement is terminated pursuant to Section 10.8 hereof or
otherwise, each party shall (and Paradise the Purchaser and the Company shall
cause any third party to whom it has made permitted disclosures to) (i) return
to the other party or destroy all written information, documents, and data
furnished to it or to any person or entity on its behalf, and (ii) maintain in
confidence all information received by it, or by any person or entity on its
behalf, and shall not use or permit the use of such information by others except
to the extent that such information is elsewhere available to the public or
otherwise rightfully obtained without violation of this Section 12.8 or any
other agreement. Notwithstanding the foregoing, the foregoing provision shall
not apply to the extent that Paradise is required to make any announcement or
file information relating to or arising out of this Agreement by virtue of the
federal securities laws of the United States or the rules and regulations
promulgated thereunder or other rules of the Nasdaq Small Cap Market, or any
announcement by any party pursuant to applicable law or regulations.
Section 12.9 Notices. Unless otherwise provided herein, any notice,
request, instruction or other document to be given hereunder by any party to any
other party shall be in writing and shall be deemed to have been given (a) upon
personal delivery, if delivered by hand or by courier,
45
<PAGE>
(b) three days after the date of deposit in the mails, postage prepaid, if
mailed by certified or registered mail, or (c) the next business day if sent by
facsimile transmission (if receipt is electronically confirmed) or by a prepaid
overnight courier service, and in each case at the respective addresses or
numbers set forth below or such other address or number as such party may have
fixed by notice:
If to either Paradise or to the Purchaser, addressed to:
Paradise Music & Entertainment, Inc.
53 West 23rd Street, 11th Floor
New York, New York 10010
Attention: President
Fax: 212-845-6480
with a copy to:
Davis & Gilbert LLP
1740 Broadway
New York, New York 10019
Attention: Walter M. Epstein, Esq.
Fax: (212) 468-4888
If to either the Company or the Owners, addressed to:
Consolidated Entertainment, LLC
8330 W. Third Street
Los Angeles, CA 90048
Attention: Jesse Dylan and Craig Rodgers
Fax: (310) 458-9833
with a copy to:
Cohen, Primiani & Foster
2029 Century Park East, Suite 400
Los Angeles, CA 90067
Attention: Michael Foster, Esq.
Fax: (310) 277-4351
and
James A. Melman, Esq.
815 Moraga Drive
Los Angeles, CA 90049
Fax: (310) 472-4091
46
<PAGE>
Section 12.10 Parties in Interest. This Agreement may not be transferred,
assigned pledged or hypothecated by any party hereto, other than by operation of
law. Any purported transfer, assignment, pledge or hypothecation (other than by
operation of law) shall be void and ineffective. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
heirs, executors, administrators, successors and permitted assigns.
Section 12.11 Severability. In the event any provision of this Agreement
is found to be void and unenforceable by a court of competent jurisdiction, the
remaining provisions of this Agreement shall nevertheless be binding upon the
parties with the same effect as though the void or unenforceable part had been
severed and deleted.
Section 12.12 Counterparts. This Agreement may be executed in two or more
counterparts, all of which taken together shall constitute one instrument.
Section 12.13 Entire Agreement. This Agreement, including the other
documents referred to herein which form a part hereof, contains the entire
understanding of the parties hereto with respect to the subject matter contained
herein and therein. This Agreement supersedes all prior oral and written
agreements and understandings between the parties with respect to such subject
matter.
Section 12.14 Amendment. This Agreement may not be amended, supplemented
or modified orally, but only by an agreement in writing signed on behalf of each
of the parties hereto.
Section 12.15 Third Party Beneficiaries. Each party hereto intends that
this Agreement shall not benefit or create any right or cause of action in or on
behalf of any person other than the parties hereto and their respective
successors and assigns as permitted under Section 12.10. Notwithstanding the
foregoing, the parties agree that in the event the provisions of this Agreement
inuring to the benefit of the Company are expressly assigned in writing to the
Owners in their individual capacity, such benefits shall be given to the Owners
in place of the Company.
47
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Asset Purchase
Agreement, on the day and year first above written.
PARADISE MUSIC &
ENTERTAINMENT, INC.
By:___________________________________
Name:
Title:
STRAW DOGS ACQUISITION CORP.
By:___________________________________
Name:
Title:
CONSOLIDATED
ENTERTAINMENT, LLC
By:___________________________________
Name:
Title:
______________________________________
JESSE DYLAN
______________________________________
CRAIG RODGERS
48
<PAGE>
AMENDMENT, dated October ___, 1999, to Asset Purchase Agreement (the
"Asset Purchase Agreement"), dated September 23, 1999, by and among Paradise
Music and Entertainment, Inc., Straw Dogs Acquisition Corp., Consolidated
Entertainment, LLC, Jesse Dylan and Craig Rodgers. Any term used in his
Amendment without definition shall have the meaning ascribed to such term in the
Asset Purchase Agreement.
W I S T N E S S E T H
WHEREAS, the parties wish to amend the Asset Purchase Agreement as
set forth below.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties do hereby agree as
follows:
1. Section 10.8(d) of the Asset Purchase Agreement is hereby amended
to read in its entirety as follows:
"(d) either Paradise and the Purchaser, on the one hand, or the
Company and the Owners, on the other hand, if the Closing Date has not occurred
prior to the close of business on December 31, 1999."
Except as amended herein, the Asset Purchase Agreement shall remain
in full force and effect in accordance with its terms.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
to the Asset Purchase Agreement, on the day and year first above written.
PARADISE MUSIC &
ENTERTAINMENT, INC.
By:_____________________________________
Name:
Title:
STRAW DOGS ACQUISITION CORP.
By:_____________________________________
Name:
Title:
CONSOLIDATED
ENTERTAINMENT, LLC
By:_____________________________________
Name:
Title:
________________________________________
JESSE DYLAN
________________________________________
CRAIG RODGERS
<PAGE>
Paradise Music & Entertainment, Inc.
53 West 23rd Street, 11th Floor
New York, New York 10010
September 22, 1999
Consolidated Entertainment, LLC
8330 W. Third Street
Los Angeles, California 90048
Re: Asset Purchase Agreement
Gentlemen:
The terms of this letter agreement supplement the terms of the Asset
Purchase Agreement by and among Paradise Music & Entertainment, Inc., Straw Dogs
Acquisition Corp., Consolidated Entertainment, LLC, Jesse Dylan and Craig
Rodgers executed simultaneously herewith. In accordance with the understanding
of the parties hereto, the terms set forth in Exhibit 1 to this letter represent
the agreement of the parties with respect to the treatment of the capital
accounts of Messrs. Dylan and Rodgers as owners of Consolidated Entertainment,
LLC ("Straw Dogs") through May 31, 1999 as well as the treatment of certain
amounts due from affiliated entities to Straw Dogs. Set forth in Exhibit 2 to
this letter are the agreed upon terms covering the leasing of space by Paradise
Music & Entertainment, Inc. from 8330 West 3rd Street LLC.
<PAGE>
Very truly yours,
Paradise Music & Entertainment, Inc.
By______________________________________
Accepted and Agreed:
Consolidated Entertainment, LLC
By_________________________________
___________________________________
Jesse Dylan
___________________________________
Craig Rodgers
Straw Dogs Acquisition Corporation
By_________________________________
2
<PAGE>
Exhibit 1
Resolution of Capital Accounts of Consolidated Entertainment, LLC ("Straw Dogs")
and Amounts Due From 8330 West Third Street, LLC ("8330")
Set forth below are the terms agreed to by the parties with regard to the
capital accounts of Jesse Dylan and Craig Rodgers as at May 31, 1999, and
amounts due to Straw Dogs from 8330:
(a) As of September 1, 1999 it is projected that the amount due from 8330 to
Straw Dogs is $1,795,000. This amount is subject to verification at the
date of closing.
(b) 8330 will receive a credit against the amount due equal to the verified
amount of the capital accounts as mutually agreed; projected to be between
$614,000 and $774,000, such amount to be reduced by the tax distribution
in (d).
(c) 8330 will endeavor to complete the refinancing of the facilities being
leased by Straw Dogs and will pay Straw Dogs up to $500,000 upon
completion of the refinancing contingent upon net cash available from the
refinancing.
(d) Straw Dogs will distribute to Dylan and Rodgers from their capital
accounts, the sum equal to their tax liability for the period January 1,
1999 through May 31, 1999 (an amount assumed to be approximately $177,000)
and will distribute the sum equal to their tax liability for the period
June 1, 1999 to closing without charge to their capital account or any
other loan account.
(e) The amount due from 8330 will be reduced by $400,000 as a leasehold tenant
improvement contribution.
(f) The remaining amount due from 8330 will be represented by a promissory
note executed by 8330 to be amortized over 10 years and paid monthly -
interest at prime plus 1%; floating quarterly with a floor of 6% and
capped at 12 1/2% - self amortizing schedule to provide for full pay out
over 10 years. In the event the refinancing described in (c) above is not
completed, the parties shall negotiate in good faith, appropriate
adjustments to the promissory note terms, taking into account Paradise'
capital situation and the expressed needs of 8330 as already discussed by
the parties.
<PAGE>
(g) By way of example and assuming the information provided by Jesse Dylan and
Craig Rodgers is accurate the following calculation would result:
Due from 8330: $ 1,795,000 (a)
Credit from Cap. Account: ( 774,000)(b)
Cash payment to Straw Dogs
from Refinancing Proceeds: ( 500,000)(c)
Tax payments distribution from
capital accounts to Dylan/Rodgers: $ 177,000 (d)
Tenant Contribution ( 400,000)(e)
-----------
Loan from Straw Dogs
to 8330 $ 298,000*
* Note that the parties wish to leave a cushion of $50,000 in the capital
accounts for potential adjustments so that the loan amount will assume capital
accounts are drawn down to an aggregate of $50,000. To the extent the $50,000
cushion is not used for adjustments when the analysis is completed the remaining
amount of the cushion will be used to reduce the loan amount from 8330 to Straw
Dogs.
<PAGE>
Exhibit 2
Set forth below are the terms for the leasing of the 8330 facilities by
Paradise:
1. Sq. footage of 10,000 at no less than $2.25 per square foot (psf) and no
more than $2.40 psf, based upon the average market rate as determined by
two appraisers (taking into account all relevant lease terms).
2. Triple Net Lease.
3. 10 year term - entire building and parking facilities located at the
premises.
4. Form of lease as presented with changed economic terms generally
acceptable, but without any key man clause regarding Jesse Dylan.
5. No escalations for first 5 years. 6th year - 5 year cumulative CPI
increase capped at 15%. Thereafter year to year CPI increase with a
minimum of 3% and a maximum of 6% annually; subject to 2 appraisers
agreeing that the floor and ceiling of the escalation clause is typical of
the market.
<PAGE>
Appendix B
- --------------------------------------------------------------------------------
STOCK PURCHASE AGREEMENT
by and among
PARADISE MUSIC & ENTERTAINMENT, INC.
STRAW DOGS ACQUISITION CORP.
and
JESSE DYLAN
- --------------------------------------------------------------------------------
Dated September __, 1999
<PAGE>
TABLE OF CONTENTS
ARTICLE I
SALE OF SHARES
Section 1.1 Sale of the Shares...............................................1
ARTICLE II
PURCHASE PRICE AND CLOSING
Section 2.1 Purchase Price...................................................2
2.1.1 Payment........................................................2
2.1.2 Accounting Procedures..........................................2
2.1.3 Examination of Books and Records...............................3
Section 2.2 Closing and Effective Date.......................................3
ARTICLE III
REPRESENTATIONS OF THE STOCKHOLDER
Section 3.1 Execution and Validity of Agreements; Restrictive Documents......4
3.1.1 Execution and Validity.........................................4
3.1.2 Stock Ownership................................................4
3.1.3 No Options.....................................................4
3.1.4 No Restrictions................................................4
3.1.5 Non-Contravention..............................................5
Section 3.2 Capital Stock; Existence and Good Standing........................5
3.2.1 Capital Stock..................................................5
3.2.2 Existence and Good Standing....................................5
Section 3.3 Subsidiaries and Investments.....................................6
Section 3.4 Financial Statements and No Material Changes.....................6
Section 3.5 Books and Records................................................6
Section 3.6 Titles to Properties; Encumbrances................................6
Section 3.7 Real Property....................................................7
3.7.1 Owned Real Property............................................7
3.7.2 Leased Real Property...........................................7
Section 3.8 Contracts........................................................7
Section 3.9 Non-Contravention; Approvals and Consents........................8
3.9.1 Non-Contravention..............................................8
3.9.2 Approvals and Consents.........................................9
Section 3.10 Litigation......................................................9
Section 3.11 Taxes...........................................................9
Section 3.12 Liabilities....................................................10
Section 3.13 Insurance......................................................10
Section 3.14 Intellectual Properties........................................11
i
<PAGE>
Section 3.15 Compliance with Laws; Licenses and Permits.....................11
3.15.1 Compliance...................................................11
3.15.2 Licenses.....................................................12
Section 3.16 Intentionally Omitted..........................................12
Section 3.17 Accounts Receivable; Work-in-Process; Accounts Payable.........12
Section 3.18 Employment Relations...........................................12
Section 3.19 Employee Benefit Plans.........................................13
Section 3.20 Interests in Customers, Suppliers, Etc.........................13
Section 3.21 Bank Accounts and Powers of Attorney...........................14
Section 3.22 Compensation of Employees......................................14
Section 3.23 No Changes Since the Balance Sheet Date........................14
Section 3.24 Company Controls...............................................14
Section 3.25 Brokers........................................................15
Section 3.26 Year 2000 Compliant............................................15
3.26.1 Definition...................................................15
3.26.2 Computer Systems.............................................16
3.26.3 Other Products and Services..................................16
Section 3.27 Prepayment for Services.........................................16
Section 3.28 Investment Representations.....................................16
Section 3.30 Copies of Documents............................................18
ARTICLE IV
REPRESENTATIONS OF THE PURCHASER AND PARADISE
Section 4.1 Existence and Good Standing.....................................18
Section 4.2 Execution and Validity of Agreement.............................18
Section 4.3 No Restrictions.................................................19
Section 4.4 Non-Contravention; Approvals and Consents.......................19
4.4.1 Non-Contravention.............................................19
4.4.2 Approvals and Consents........................................19
Section 4.5 Compliance with Laws; Licenses and Permits......................19
4.5.1 Compliance....................................................19
4.5.2 Licenses......................................................20
Section 4.6 Paradise Stock..................................................20
Section 4.7 Brokers.........................................................20
ARTICLE V
COVENANTS OF THE COMPANY AND THE OWNERS
Section 5.1 Regulatory and Other Approvals..................................20
Section 5.2 Investigation by Paradise and the Purchaser.....................21
Section 5.3 No Solicitations................................................21
Section 5.4 Conduct of Business.............................................21
Section 5.5 Notice and Cure.................................................23
ii
<PAGE>
Section 5.6 Fulfillment of Conditions.......................................23
ARTICLE VI
COVENANTS OF PARADISE AND THE PURCHASER
Section 6.1 Regulatory and Other Approvals..................................23
Section 6.2 Investigation by the Stockholder................................24
Section 6.3 Notice and Cure.................................................24
Section 6.4 Fulfillment of Conditions.......................................25
Section 6.5 Blue Sky........................................................25
ARTICLE VII
MUTUAL COVENANTS
Section 7.1 Reasonable Efforts to Consummate Transaction....................25
Section 7.2 Public Announcements............................................25
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF PARADISE AND THE PURCHASER
Section 8.1 Representations and Warranties..................................26
Section 8.2 Good Standing and Tax Certificates..............................26
Section 8.3 Performance.....................................................26
Section 8.4 No Litigation...................................................26
Section 8.5 Regulatory Consents and Approvals...............................26
Section 8.6 Required Approvals, Notices and Consents........................27
Section 8.7 Opinion of Counsel..............................................27
Section 8.9 Repayment of Loans..............................................27
Section 8.10 Material Adverse Effect........................................27
Section 8.11 Proceedings....................................................27
Section 8.12 Wonderous Strange Acquisition Agreement........................27
Section 8.13 Working Capital................................................28
Section 8.13 Net Worth......................................................28
Section 8.14 Financial Statements...........................................28
ARTICLE IX
CONDITIONS TO OBLIGATIONS OF THE STOCKHOLDER
Section 9.1 Representations and Warranties..................................28
Section 9.2 Performance.....................................................28
Section 9.3 Certified Resolutions...........................................29
Section 9.4 No Litigation...................................................29
Section 9.5 Regulatory Consents and Approvals...............................29
Section 9.6 Paradise Stockholder Approval...................................29
Section 9.7 Opinion of Counsel..............................................29
iii
<PAGE>
Section 9.8 Proceedings.....................................................29
Section 9.9 Material Adverse Effect.........................................30
Section 9.10 Wonderous Strange Acquisition Agreement........................30
Section 9.11 Working Capital................................................30
ARTICLE X
ADDITIONAL AGREEMENTS
Section 10.1 Name of Purchaser..............................................30
Section 10.2 Termination....................................................30
Section 10.3 Effect of Termination..........................................31
Section 10.4 Registration Rights............................................31
ARTICLE XI
SURVIVAL; INDEMNITY
Section 11.1 Survival.......................................................31
Section 11.2 Obligation of the Stockholder to Indemnify.....................31
11.2.1 General Indemnity.............................................31
11.2.3 Losses.......................................................32
Section 11.3 Obligation of the Paradise and the Purchaser to Indemnify......32
Section 11.4 Indemnification Procedures.....................................33
11.4.1 Non-Third Party Claims.......................................33
11.4.2 Third-Party Claims...........................................33
Section 11.5 Limitations on and Other Matters Regarding Indemnification.....35
11.5.1 Indemnity Cushion............................................35
11.5.2 Termination of Indemnification Obligations of the
Stockholder................................................36
11.5.3 Termination of Indemnification Obligations of
Paradise and the Purchaser.................................36
11.5.4 Exceptions...................................................36
11.5.5 Control by Paradise..........................................37
ARTICLE XII
MISCELLANEOUS
Section 12.1 Expenses.......................................................37
Section 12.2 Governing Law..................................................37
Section 12.3 Jurisdiction...................................................37
Section 12.4 "Person" Defined...............................................37
Section 12.5 "Knowledge"....................................................38
Section 12.6 Affiliate Defined..............................................38
Section 12.7 Captions.......................................................38
Section 12.8 Confidentiality................................................38
Section 12.9 Notices........................................................39
Section 12.10 Parties in Interest...........................................40
iv
<PAGE>
Section 12.11 Severability..................................................40
Section 12.12 Counterparts..................................................40
Section 12.13 Entire Agreement..............................................40
Section 12.14 Amendment.....................................................40
Section 12.15 Third Party Beneficiaries.....................................40
v
<PAGE>
EXHIBITS AND APPENDICES
Exhibit A Opinion of Cohen, Primiani & Foster
Exhibit B Opinion of Davis & Gilbert LLP
Appendix A Registration Rights Provisions
SCHEDULES
Schedule 1.1(vi) Tangible Personal Property
Schedule 3.2 Foreign Qualifications
Schedule 3.3.2 Ownership Interests
Schedule 3.4 Financial Statements
Schedule 3.5 Books and Records
Schedule 3.6 Tangible Personal Property; Encumbrances
Schedule 3.7 Real Property
Schedule 3.8 Contracts
Schedule 3.9 Consents and Approvals
Schedule 3.10 Litigation
Schedule 3.11 Taxes
Schedule 3.13 Insurance
Schedule 3.14 Intellectual Properties
Schedule 3.20 Interests in Customers; Suppliers
Schedule 3.21 Bank Accounts and Powers of Attorney
Schedule 3.22 Compensation of Employees
Schedule 3.23 Changes Since the Balance Sheet Date
Schedule 3.25 Brokers
Schedule 3.26 Year 2000 Compliant
Schedule 3.27 Prepayment for Services
Schedule 4.4.1 Approvals and Consents
vi
<PAGE>
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT (the "Agreement") dated September ___, 1999
(the "Execution Date") by and among PARADISE MUSIC & ENTERTAINMENT CORP., a
Delaware corporation ("Paradise"); STRAW DOGS ACQUISITION CORP., a Delaware
corporation and wholly-owned subsidiary of Paradise (the "Purchaser"); and JESSE
DYLAN ("the Stockholder").
W I T N E S S E T H :
WHEREAS, the Stockholder owns 100% of the issued and outstanding shares of
common stock, no par value per share (the "Shares") of Spur & Buckle, Inc., a
California corporation; (the "Company"); and
WHEREAS, the Stockholder wishes to transfer, and the Purchaser wishes to
acquire100% of the Shares, in a tax-free reorganization as described in ss.
368(a)(1)(B) of the Internal Revenue Code, upon the terms and subject to the
conditions of this Agreement; and
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties do hereby
agree as follows:
ARTICLE I
SALE OF THE SHARES
Section 1.1 Sale of the Shares. Subject to the terms and conditions of
this Agreement, the Stockholder agrees to sell, assign, transfer and deliver the
Shares to the Purchaser on the Closing Date (as defined in Section 2.2) and the
purchaser agrees to purchase the Shares from the Stockholder on the Closing
Date. All certificates representing the Shares shall be duly endorsed by the
Stockholder, with all necessary transfer tax and other revenue stamps, acquired
at the Stockholder's expense, affixed and canceled.
<PAGE>
ARTICLE II
PURCHASE PRICE AND CLOSING
Section 2.1 Purchase Price. In full consideration for the purchase by the
Purchaser of the Shares, the purchase price (the "Purchase Price") shall be paid
by the Purchaser as follows:
2.1.1 Payment. (a) At the Closing, the Purchaser will pay the Stockholder
541,000 shares of Paradise Music & Entertainment, Inc. common stock, par value
$.01 per share ("Paradise Stock").
(b) The Paradise Stock shall be restricted stock and shall be
saleable by the Stockholder only in accordance with the terms of the
Registration Rights Agreement described in Section 8.8 of this Agreement or as
otherwise permitted pursuant to applicable securities laws.
2.1.2 Accounting Procedures.
(i) The Purchaser shall cause Rothstein, Kass & Company, P.C., or another
independent accounting firm chosen by the Purchaser (the "Accountants"), as soon
as practicable after the Closing, to prepare in accordance with generally
accepted accounting principles consistently applied ("GAAP"), a report
containing an audited balance sheet of the Company as of the close of business
on the Effective Date (the "Effective Date Balance Sheet"), together with a
statement of the Accountants based upon such report and stating that it was
prepared in accordance with this Agreement and setting forth the Net Worth (as
defined in section 8.13) of the Stockholder (the "Special Determination"). If
the Stockholder does not agree that the Special Determination correctly states
the Net Worth, the Stockholder shall promptly (but not later than 45 days after
the delivery to it of the Special Determination) give written notice to the
Purchaser of any exceptions thereto (in reasonable detail describing the nature
of the disagreement asserted). If the Stockholder and the Purchaser reconcile
their differences, the Net Worth calculation shall be adjusted accordingly and
shall thereupon become binding, final and conclusive upon all of the parties
hereto and enforceable in a court of law. If the Stockholder and the Purchaser
are unable to reconcile their differences in writing within 20 days after
written notice of exceptions is delivered to the Purchaser (the "Reconciliation
Period"), the items in dispute shall be submitted to a mutually acceptable
accounting firm (other than the Accountants) selected from any of the five
largest accounting firms in the United States in terms of gross revenues (the
"Independent Auditors") for final determination, and the Net Worth calculation
shall be deemed adjusted in accordance with the determination of the Independent
Auditors and shall become binding, final and conclusive upon all of the parties
hereto and enforceable in a court of law. The Independent Auditors shall
consider only the items in dispute and shall be instructed to act within 20 days
(or such longer period as the Stockholder and the Purchaser may agree) to
resolve all items in dispute. If the Stockholder does not give notice of any
exception within 45 days after the delivery to it of the Special Determination
or if the Stockholder gives written notification of its
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acceptance of the Net Worth prior to the end of such 45 day period, the Net
Worth set forth in the Special Determination shall thereupon become binding,
final and conclusive upon all the parties hereto and enforceable in a court of
law.
(ii) In the event the Independent Auditors are for any reason unable or
unwilling to perform the services required of it under this Section 2.1, then
the Purchaser and the Stockholder agree to select another accounting firm from
among the five largest accounting firms in the United States in terms of gross
revenues to perform the services to be performed under this Section 2.1.2 by the
Independent Auditors. For purposes of this Section 2.1 the term "Independent
Auditors" shall include such other accounting firm chosen in accordance with
this clause (ii).
(iii) The Independent Auditors shall determine the party (i.e., the
Purchaser or the Stockholder) whose asserted position as to the calculation of
Net Worth for the period under examination before the Independent Auditors is
furthest from the determination of Net Worth by the Independent Auditors, which
non-prevailing party shall pay the fees and expenses of the Independent
Auditors.
2.1.3 Examination of Books and Records. The books and records of the
Company shall be made available during normal business hours upon reasonable
advance notice at the principal office of the Company, to the parties hereto,
the Accountants and the Independent Auditors to the extent required to determine
the calculations required under this Section 2.1. Any such examination shall be
conducted so as to minimize disruption of the Business. The parties hereto shall
cause the Company and the Purchaser to make arrangements to make available to
the parties hereto and their respective representatives (including auditors) any
back-up materials generated by the Company or the Accountants, as the case may
be, with respect to any adjustments made by them to the financial statements in
the process of preparing the Special Determination. In addition, the
Stockholder, on the one hand, and the Purchaser, on the other hand, shall make
available to the other party and their representatives (including auditors) any
back-up materials generated by them to support a position which is contrary to
the position taken by the other party.
Section 2.2 Closing and Effective Date. Not more than one business day
from the approval of this Agreement at the special meeting of stockholders of
Paradise contemplated by Section 9.6, Paradise shall notify the other parties to
this Agreement of its desire to close, specifying a closing date not more than
five business days thereafter. The transfer of the Shares to the Purchaser and
delivery of the Purchase Price in exchange therefor (the "Closing") shall take
place at 10:00 a.m. at the offices of Davis & Gilbert LLP, 1740 Broadway, New
York, New York on the date so determined (the "Closing Date"). In the event a
proceeding shall have been instituted attacking the legality of this Agreement
or seeking to enjoin its consummation, then the Closing Date shall be suspended
pending a final determination of any such proceeding. The transfer of the Shares
by the Stockholder shall be deemed effective as of the close of business on June
1, 1999 (the "Effective Date").
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ARTICLE III
REPRESENTATIONS OF THE STOCKHOLDER
The Stockholder represents and warrants to and with the Purchaser
and Paradise as follows:
Section 3.1 Execution and Validity of Agreement; Restrictive Documents.
3.1.1 Execution and Validity. The Stockholder has the full legal right and
capacity to enter into this Agreement and to perform his obligations hereunder.
This Agreement has been duly and validly executed and delivered by the
Stockholder and, assuming due authorization, execution and delivery by the
Purchaser and Paradise, constitutes a legal, valid and binding obligation of the
Stockholder, enforceable against the Stockholder in accordance with its terms.
3.1.2 Stock Ownership. The Stockholder is the true and lawful owner of the
Shares and all of the Shares have been duly and validly authorized and issued
and are fully paid, nonassessable and free of preemptive rights with no personal
liability attaching to the ownership thereof, except as such liability may be
imposed pursuant to applicable laws, and such ownership is free and clear of all
mortgages, liens, security interests, encumbrances, claims charges and
restrictions of any kind or character (collectively, "Liens").
3.1.3 No Options. There are no outstanding subscriptions, options, rights
(including "phantom stock rights"), warrants, calls, commitments,
understandings, arrangements, plans or other agreements of any kind
(collectively "Options") to acquire any Shares from the Stockholder and there
are no arrangements or understandings with respect to the sale or transfer of
any Shares by the Stockholder.
3.1.4 No Restrictions. There is no suit, action, claim, investigation or
inquiry by any Governmental or Regulatory Authority, (as defined in Section
3.1.5 below), and no legal, administrative or arbitration proceeding pending or,
to the Stockholder's knowledge, threatened against the Stockholder or any of the
Stockholder's properties or assets, with respect to the execution, delivery and
performance of this Agreement or the transactions contemplated hereby or any
other agreement entered into by the Stockholder in connection with the
transactions contemplated hereby.
3.1.5 Non-Contravention. The execution, delivery and performance by the
Stockholder of his obligations hereunder and the consummation of the
transactions contemplated hereby, will not (a) result in the violation by the
Stockholder of any statute, law, rule, regulation or ordinance (collectively,
"Laws"), or any judgment, decree, order, writ, permit or license (collectively,
"Orders"), of any court, tribunal, arbitrator, authority, agency, commission,
official or other instrumentality of the United States, any foreign country or
any domestic or foreign state, county, city or other political subdivision (a
"Governmental or Regulatory Authority"), applicable to the Stockholder or any of
the Shares, or (b) conflict with, result in a violation or breach of, constitute
(with or without notice or lapse of time or both) a default under, or require
the
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Stockholder to obtain any consent, approval or action of, make any filing with
or give any notice to, or result in or give to any Person any right of payment
or reimbursement, termination, cancellation, modification or acceleration of, or
result in the creation or imposition of any Lien upon any of the Shares, under
any of the terms, conditions or provisions of any agreement, commitment, lease,
license, evidence of undebtedness, mortgage, indenture, security agreement,
instrument, note, bond, franchise, permit, concession, or other instrument,
obligation or agreement of any kind (collectively "Stockholder Contracts")"), to
which the Stockholder is a party or by which the Stockholder or any of his
assets or properties are bound.
Section 3.2 Capital Stock; Existence and Good Standing.
3.2.1 Capital Stock. The Company has an authorized capitalization
consisting of 1,000,000 shares of common stock, no par value, of which 1,000
shares are issued and outstanding, and no shares are held in the treasury of the
Company. All such shares have been duly authorized and validly issued, are fully
paid and non-assessable, and have not been issued in violation of any preemptive
rights of Stockholders. No other class of capital stock of the Company is
authorized or outstanding. There are no outstanding Options providing for the
purchase, issuance or sale of any shares of the capital stock of the Company by
the Company.
3.2.2 Existence and Good Standing. The Company was duly organized and is
validly existing and in good standing under the laws of California, with the
full power and authority to own its property and to carry on its business all as
and in the places where such properties are now owned or operated or such
business is now being conducted. The Company is duly qualified, licensed or
admitted to do business and is in good standing in those jurisdictions set forth
on Schedule 3.2. The Company is qualified, licensed or admitted to do business
in all jurisdictions in which the ownership, use or leasing of its assets and
properties, or the conduct or nature of its business, makes such qualification,
licensing or admission necessary, except for jurisdictions where a failure to be
so qualified would not have a Material Adverse Effect. For purposes of this
Agreement, "Material Adverse Effect" shall mean any material and adverse effect
on the financial condition, results of operations, assets, properties or
business of the Company, Paradise or the Purchaser, as applicable.
Section 3.3 Subsidiaries and Investments. The Company does not own any
capital stock or other equity or proprietary or ownership interest in any
Person, other than investments of publicly-traded debt and equity securities
held for investment.
Section 3.4 Financial Statements and No Material Changes. Prior to the
Closing Date, the Stockholder will deliver Schedule 3.4 to Paradise and the
Purchaser; provided, however, failure to deliver said Schedule 3.4 shall not be
a breach of this Agreement by the Stockholder. Schedule 3.4 will set forth an
audited balance sheet of the Company as at June 30, 1999, and the related
audited statement of income, retained earnings and cash flow for the twelve
months then ended, prepared by Rothstein, Kass & Company, P.C., certified public
accountants (the balance sheet of the Company as at June 30, 1999, including the
footnotes thereto, being referred to in this Agreement as the "Balance Sheet").
Such financial statements will have been prepared in accordance with GAAP
throughout the periods indicated. The Balance Sheet will
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fairly present the financial condition of the Company at the date thereof and
will reflect all claims against and all debts and liabilities of the Company,
fixed or contingent, as at the date thereof, required to be shown thereon under
GAAP and the related statements of income , retained earnings and cash flow will
fairly present the results of operations of the Company for the period
indicated. Since June 30, 1999 (the "Balance Sheet Date"), there has been no
material adverse change in the assets or liabilities, or in the business or
condition, financial or otherwise, or in the results of operations of the
Company.
Section 3.5 Books and Records. All accounts, books, ledgers and official
and other records material to the Company of whatsoever kind have been properly
and accurately kept and are complete in all material respects, and there are no
material inaccuracies or discrepancies of any kind contained or reflected
therein. Except as set forth on Schedule 3.5, the Company does not have any of
its records, systems, controls, data or information recorded, stored,
maintained, operated or otherwise wholly or partly dependent on or held by any
means (including any electronic, mechanical or photographic process, whether
computerized or not) which (including all means of access thereto and therefrom)
are not under the exclusive ownership and possession of the Company.
Section 3.6 Title to Properties; Encumbrances. The Company has good and
valid title to, or enforceable leasehold interests in or valid rights under
contract to use all the material properties and assets owned or used by it
(personal, tangible and intangible), including, without limitation (a) all the
properties and assets reflected in the Balance Sheet, (b) all the properties and
assets purchased or otherwise contracted for by the Company since the Balance
Sheet Date (except for properties and assets reflected in the Balance Sheet or
acquired or otherwise contracted for since the Balance Sheet Date that have been
sold or otherwise disposed of in the ordinary course of business), and (c) all
properties and assets leased by the Company, in each case free and clear of all
Liens, except for Liens set forth on Schedule 3.6. The property, plant and
equipment owned or otherwise contracted for by the Company is in a state of good
maintenance and repair (ordinary wear and tear excepted) and is adequate and
suitable in all material respects for the purposes for which they are presently
being used.
Section 3.7 Real Property.
3.7.1 Owned Real Property. The Company does not own any real property
including ground leases) or hold any option or right of first refusal or first
offer to acquire any real property, and the Company is not obligated by Contract
or otherwise to purchase any real property.
3.7.2 Leased Real Property. Schedule 3.7.2 contains an accurate and
complete list of all real property leases, subleases, licenses and other
occupancy agreements, including without limitation, any modification, amendment
or supplement thereto and any other related document or agreement executed or
entered into by the Company (each individually, a "Real Property Lease" and
collectively the "Real Property Leases") to which to Company is a party
(including, without limitation, any Real Property Lease which the Company has
subleased or assigned to another
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Person and as to which the Company remains liable). Except as set forth on
Schedule 3.7.2, each Real Property Lease set forth on Schedule 3.7.2 (or
required to be set forth on Schedule 3.7.2): (a) is valid, binding and in full
force and effect; (b) all rents and additional rents and other sums, expenses
and charges due to the Effective Date have been paid; (c) the lessee has been in
peaceable possession since the commencement of the original term thereof; (d) no
waiver, indulgence or postponement of the lessee's obligations thereunder has
been granted by the lessor; (e) there exists no default or event of default by
the Company or to the knowledge of the Stockholder, by any other party thereto;
(f) there exists no occurrence, condition or act which, with the giving of
notice, the lapse of time or the happening of any further event or condition,
would become a default or event of default by the Company thereunder; and (g)
there are no outstanding claims of breach or indemnification or notice of
default or termination thereunder. The Company holds the leasehold estate on all
Real Property Leases, free and clear of all Liens, except as set forth on
Schedule 3.6 and the liens of mortgagees of the real property in which such
leasehold estate is located. Except as set forth on Schedule 3.7.2, the real
property leased by the Company is in a state of good maintenance and repair and
is adequate and suitable for the purposes for which it is presently being used,
and there are no material repair or restoration works likely to be required in
connection with any of the leased real properties. The Company is in physical
possession and actual and exclusive occupation of the whole of each of its
leased properties. The Company does not owe any brokerage commission with
respect to any Real Property Lease.
Section 3.8 Contracts. Schedule 3.8 hereto contains an accurate and
complete list of the following agreements, commitments, leases, licenses,
evidences of indebtedness, mortgages, indentures, security agreements,
instruments, notes, bonds, franchises, permits, concessions, or other
instruments, obligations or agreements of any kind to which the Company is a
party (collectively, "Contracts"): (a) all employee benefit plans (as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") and all bonus, incentive, deferred compensation, retiree medical or
life insurance; supplemental retirement, severance or other benefit plans,
programs or arrangements which are maintained by the Company (collectively,
"Plans"); (b) any personal property lease with a fixed annual rental of $10,000
or more; (c) any Contract relating to capital expenditures which involves
payments of $25,000 or more in any single transaction or series of related
transactions; (d) any Contract relating to the making of a loan or advance to,
or investment in, any other Person; (e) any Contract evidencing or relating in
any way to indebtedness for money borrowed or to be borrowed, whether directly
or indirectly, by way of loan, purchase money obligation, guarantee (other than
the endorsement of negotiable instruments for collection in the ordinary course
of business), conditional sale, purchase or otherwise; (f) any management
service, employment, consulting or similar type of Contract which is not
cancelable by the Company without penalty or other financial obligation within
30 days; (g) any Contract limiting the Company's freedom to engage in any line
of business or to compete with any other Person, including agreements limiting
the ability of the Company or any of its affiliates to service competitive
accounts during or after the term thereof; (h) any collective bargaining or
union agreement; (i) any Contract with any of its officers or directors or the
Stockholder not covered by subsection (f) above (including indemnification
agreements); (j) any secrecy or confidentiality agreement (other than standard
confidentiality agreements in computer software license agreements or agreements
with clients entered into in the ordinary
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course of business); (k) any Contract with respect to any Intellectual Property
(as defined in Section 3.14) of the Company, other than "shrink-wrap" and
similar end-user licenses; (l) any agreement with a client required to be listed
on Schedule 3.16; (m) any joint venture agreement involving a sharing of profits
not covered by clauses (a) through (l)above; and (n) any Contract (not covered
by another subsection of this Section 3.8) which involves $25,000 or more over
the unexpired term thereof and is not cancelable by the Company without penalty
or other financial obligation within 30 days. Notwithstanding the foregoing, (x)
production expenses which are fully reimbursable from clients, and (y) estimates
or purchase orders given in the ordinary course of business relating to the
execution of projects, do not have to be set forth on Schedule 3.8. Each
Contract to which the Company is a party, including, but not limited to those
set forth on Schedule 3.8, is in full force and effect, and there exists no
default or event of default by the Company or to the knowledge of the
Stockholder, by any other Person, or except as set forth on Schedule 3.9.2,
occurrence, condition, or act (including the purchase of the Shares hereunder)
which, with the giving of notice, the lapse of time or the happening of any
other event or condition, would become a default or event of default thereunder
by the Company, and there are no outstanding claims of breach or indemnification
or notice of default or termination of any such Contract.
Section 3.9 Non-Contravention; Approvals and Consents.
3.9.1 Non-Contravention . The execution, delivery and performance by the
Stockholder of his obligations hereunder and the consummation of the
transactions contemplated hereby, will not (a) violate, conflict with or result
in the breach of any provision of the Certificate of Incorporation or By-Laws
(or other comparable charter documents) of the Company, or (b) result in the
violation by the Company of any Laws or Orders of any Governmental or Regulatory
Authority, applicable to the Company or any of its assets or properties, or (c)
if the consents and notices set forth on Schedule 3.9.2 are obtained, given or
waived, conflict with, result in a violation or breach of, constitute (with or
without notice or lapse of time or both) a default under, or (except as set
forth on Schedule 3.9.2) require the Company to obtain any consent, approval or
action of, make any filing with or give any notice to, or result in or give to
any Person any right of payment or reimbursement, termination, cancellation,
modification or acceleration of, or result in the creation or imposition of any
Lien upon any of the assets of the Company, under any of the terms, conditions
or provisions of any Contract to which the Company is a party or by which the
Company or any of its assets or properties are bound.
3.9.2 Approvals and Consents. Except as disclosed on Schedule 3.9.2, no
consent, approval or action of, filing with or notice to any Governmental or
Regulatory Authority or other Person is necessary or required under any of the
terms, conditions or provisions of any Law or Order of any Governmental or
Regulatory Authority or any Contract to which the Company is a party or by which
its assets or properties are bound for the execution and delivery of this
Agreement by the Stockholder, the performance by the Stockholder of his
obligations hereunder or the consummation of the transactions contemplated
hereby.
Section 3.10 Litigation. Except as set forth on Schedule 3.10, there is no
action, suit, proceeding at law or in equity by any Person, or any arbitration
or any administrative or other
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proceeding by or before (or to the knowledge of the Stockholder, any
investigation by) any Governmental or Regulatory Authority, pending or, to the
knowledge of the Stockholder, threatened against the Company with respect to
this Agreement or the transactions contemplated hereby, or against or affecting
the Company or its assets; and to the knowledge of the Stockholder, no acts,
facts, circumstances, events or conditions occurred or exist which are a basis
for any such action, proceeding or investigation. Schedule 3.10 also sets forth
with respect to each pending or threatened action, suit or proceeding listed
thereon, the amount of costs, expenses or damages the Company has incurred to
date and reasonably expects to incur through conclusion thereof. The Company is
not subject to any Order entered in any lawsuit or proceeding.
Section 3.11 Taxes. The Company has timely filed, or caused to be filed,
taking into account any valid extensions of due dates, completely and
accurately, all federal, state, local and foreign tax or information returns
(including estimated tax returns) required under the statutes, rules or
regulations of such jurisdictions to be filed by the Company with respect to
income, accumulated earnings, franchise, capital stock, employees' income
withholding, back-up withholding, withholding on payments to foreign persons,
social security, unemployment, disability, real property, personal property,
sales, use, excise, transfer and other taxes (including interest, penalties or
additions to tax in respect of the foregoing) whether disputed or not (all of
the foregoing collectively referred to as "Taxes"). All Taxes shown on said
returns to be due and all additional assessments received prior to the Balance
Sheet Date have been paid or are being contested in good faith, in which case,
such contested assessments are set forth on Schedule 3.11. The amount set up as
an accrual for Taxes on the Balance Sheet is sufficient for the payment of all
unpaid Taxes of the Company, whether or not disputed, for all periods ended on
and prior to the date thereof. Since the Balance Sheet Date, the Company has not
incurred any liabilities for Taxes other than in the ordinary course of
business. The Company has delivered to the Purchaser correct and complete copies
of all federal and state income tax returns filed with respect to the Company
for all taxable periods beginning on or after January 1, 1997. Except as set
forth on Schedule 3.11, none of the federal, state or local tax returns of the
Company has ever been audited by the Internal Revenue Service or any other
Governmental or Regulatory Authority. No audit or examination of any return of
the Company by any Governmental or Regulatory Authority is currently in
progress, and the Company has not received notice of any proposed audit or
examination. No deficiency in the payment of Taxes by the Company for any period
has been asserted in writing by any taxing authority and remains unsettled at
the date of this Agreement. The Company has not made any agreement, waiver or
other arrangement providing for an extension of time with respect to the
assessment or collection of any tax against it. Except as disclosed on Schedule
3.11, the Company is not (and has not been since its formation) subject to
entity-level income or gross receipts tax. The Company has not been a member of
an affiliated group filing consolidated federal income tax returns nor has it
been included in any combined consolidated or unitary state or local income tax
return. The Company is not a party to any tax allocation or tax sharing
agreement nor does it have any contractual obligation to indemnify any other
person with respect to Taxes. The Company has not been a United States real
property holding corporation within the meaning of Section
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897(c)(2) of the Code within the period specified in Section 897(c)(1)(A)(ii) of
the Code. The Company will not be required as a result of a change in accounting
method for any period ending on or before the Closing Date or as a result of the
transactions contemplated herein to include any adjustment under Section 481 of
the Code (or any similar provision of state, local or foreign income tax law) in
income for any period ending after the Closing Date.
Section 3.12 Liabilities. Except as set forth in the Balance Sheet, the
Company does not have any outstanding claims, liabilities or indebtedness of any
nature whatsoever (collectively in this Section 3.12, "Liabilities"), whether
accrued, absolute or contingent, determined or undetermined, asserted or
unasserted, and whether due or to become due, other than (i) Liabilities
specifically disclosed in any Schedule hereto; (ii) Liabilities under Contracts
of the type required to be disclosed by the Stockholder on any Schedule and so
disclosed or which because of the dollar amount or other qualifications are not
required to be listed on such Schedule; and (iii) Liabilities incurred in the
ordinary course of business and consistent with past practice since the Balance
Sheet Date not involving borrowings by the Company.
Section 3.13 Insurance. Schedule 3.13 contains a true and complete list
(including the names and addresses of the insurers, the names of the Persons to
whom such insurance policies have been issued, the expiration dates thereof, the
annual premiums and payment terms thereof, whether it is a "claims made" or an
"occurrence" policy and a brief description of the interests insured thereby) of
all liability, property, workers' compensation and other insurance policies
currently in effect that insure the property, assets or business of the Company
or its employees (other than self-obtained insurance policies by such
employees). Each such insurance policy is valid and binding and in full force
and effect, all premiums due thereunder have been paid and the Company has not
received any notice of cancellation or termination in respect of any such policy
or default thereunder. To the knowledge of the Stockholder, such insurance
policies are placed with financially sound and reputable insurers, and in light
of the nature of the Company's business, assets and properties, the Stockholder
believes they are in amounts and have coverage that are reasonable and customary
for Persons engaged in such business and having such assets and properties.
Neither the Company nor to the Stockholder's knowledge, the Person to whom such
policy has been issued has received notice that any insurer under any policy
referred to in this Section is denying liability with respect to a claim
thereunder or defending under a reservation of rights clause. Except as set
forth on Schedule 3.13, within the last two years the Company has not filed for
any claims exceeding $25,000 against any of its insurance policies, exclusive of
automobile and health insurance policies. None of such policies shall lapse or
terminate by reason of the transactions contemplated by this Agreement and all
such policies shall continue in effect after the Closing Date for the benefit of
the Purchaser. The Company has not received any notice of cancellation of any
such policy. The Company has not received written notice from any of its
insurance carriers that any premiums will be materially increased in the future
or that any insurance coverage listed on Schedule 3.13 will not be available in
the future on substantially the same terms now in effect.
Section 3.14 Intellectual Properties. Schedule 3.14 hereto contains an
accurate and complete list of all Intellectual Property (as defined below) owned
by the Company and all agreements under which any Person has granted a license
for any Intellectual Property to the Company (other than license agreements for
"off the shelf" third party computer software not
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included within the Company's products or services). The Company has all right,
title and interest in, a valid and binding license to use, or has the requisite
permission and authority to use all Intellectual Property used in the conduct of
its business. No claim of infringement or misappropriation of Intellectual
Property is or has been pending or, to the knowledge of the Stockholder,
threatened against the Company and/or the Stockholder and, to the knowledge of
the Stockholder, the Company and/or the Stockholder are not infringing or
misappropriating any Intellectual Property of any Person. The Company has not
expressly granted any license, franchise or permit in effect on the date hereof
to any Person to use any of the trade names or any of the trademarks owned by
it. The term "Intellectual Property" means patents and patent rights, trademarks
and trademark rights, tradenames and tradename rights, service marks and service
mark rights, service names and service name rights, copyright and copyright
rights, trade secrets and trade secret rights, rights of privacy and publicity,
and other proprietary intellectual property and personal rights and all pending
applications for and registrations of any of the foregoing.
Section 3.15 Compliance with Laws; Licenses and Permits.
3.15.1 Compliance. The Company is and its business has been conducted, in
compliance with all applicable Laws and Orders, except in each case (other than
with respect to compliance with environmental Laws and Orders relating to the
regulation or protection of the environment; "Environmental Laws and Orders")
where the failure to so comply would not reasonably be expected to have a
Material Adverse Effect, including without limitation: (a) all Laws and Orders
promulgated by the Federal Trade Commission or any other Governmental or
Regulatory Authority; (b) all Environmental Laws and Orders; and (c) all Laws
and Orders relating to labor, civil rights, and occupational safety and health
laws, worker's compensation, employment and wages, hours and vacations, or pay
equity. The Company has not been charged with, or, to the knowledge of the
Stockholder threatened with or under any investigation with respect to, any
charge concerning any violation of any Laws or Orders.
3.15.2 Licenses. The Company has all Licenses required by any Governmental
or Regulatory Authority for the operation of its business and the use of its
assets as presently operated or used, except where the failure to have such
Licenses would not reasonably be expected to have a Material Adverse Effect. All
of the Licenses are in full force and effect and no action or claim is pending,
nor to the knowledge of the Stockholder is threatened, to revoke or terminate
any of such Licenses or declare any such License invalid in any material
respect.
Section 3.16 Intentionally Omitted
Section 3.17 Accounts Receivable; Work-in-Process; Accounts Payable. The
amount of all work-in-process, accounts receivable, unbilled invoices (including
without limitation unbilled invoices for services and out-of-pocket expenses)
and other debts due or recorded in the records and books of account of the
Company as being due to the Company and reflected on the Balance Sheet and the
Effective Date Balance Sheet represent or will represent valid obligations
arising from sales actually made or services actually performed in the ordinary
course of business,
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and none of the accounts receivable or other debts (or accounts receivable
arising from any such work-in-process or unbilled invoices) is or will be
subject to any counterclaim or set-off except to the extent of any provision,
reserve or adjustment therefor reflected on the Balance Sheet and the Effective
Date Balance Sheet. There has been no material adverse change since the Balance
Sheet Date in the amount or aging of the work-in-process, accounts receivable,
unbilled invoices, or other debts due to the Company, or the reserves with
respect thereto, or accounts payable of the Company.
Section 3.18 Employment Relations. (a) The Stockholder has no knowledge of
any acts which would give rise to any unfair labor practice claims against the
Company ; (b) no unfair labor practice complaint against the Company is pending
before any Governmental or Regulatory Authority; (c) there is no organized labor
strike, dispute, slowdown or stoppage actually pending or to the knowledge of
the Stockholder threatened against or involving the Company; (d) there are no
labor unions representing or, to the knowledge of the Stockholder, attempting to
represent the employees of the Company; (e) no claim or grievance nor any
arbitration proceeding arising out of or under any collective bargaining
agreement is pending and to the knowledge of the Stockholder, no such claim or
grievance has been threatened; (f) no collective bargaining agreement is
currently being negotiated by the Company; and (g) the Company has not
experienced any work stoppage or similar organized labor dispute during the last
three years. There is no legal action, suit, proceeding or claim pending or, to
the knowledge of the Stockholder, threatened between the Company and any of its
employees, former employees, agents, former agents, job applicants or any
association or group of any of its employees, except as set forth on Schedule
3.10.
Section 3.19 Employee Benefit Plans. The Company does not maintain or
contribute to any Plan which could in any way impose any liability on Purchaser
as a result of the transactions contemplated hereby. Each Plan of the Company
has been operated materially in accordance with the requirements of all
applicable law, including, without limitation, ERISA and the Internal Revenue
Code of 1986, as amended (the "Code") and the regulations and authorities
published thereunder. All reports, disclosures, notices and filings with respect
to such Plans required to be made to employees, participants, beneficiaries,
alternate payees and government agencies have been timely made or an extension
has been timely obtained. There has been no prohibited transactions (within the
meaning of Section 406 of ERISA or Section 4975 of the Code) with respect to any
Plan maintained by the Company. All contributions, premiums or payments required
to be made, paid or accrued with respect to any such Plan have been made, paid
or accrued on or before their due dates, including extensions thereof.
Section 3.20 Interests in Customers, Suppliers, Etc. Except as set forth
on Schedule 3.20, (x) neither the Stockholder nor any Person controlled by the
Stockholder nor (y) to the knowledge of the Stockholder (without making any
inquiry of any member of the Related Group, as hereinafter defined), any
officer, director, or employee of the Company, any parent, brother, sister,
child or spouse of any such officer, director or employee or of the Stockholder
(collectively, the "Related Group"), or any entity controlled by anyone in the
Related Group:
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(i) owns, directly or indirectly, any interest in (excepting for
ownership, directly or indirectly, of less than 5% of the issued and
outstanding shares of any class of securities of a publicly held and
traded company) or received or has any right to receive payments from, or
is an officer, director, employee or consultant of, any Person which is,
or is engaged in business as, a competitor, lessor, lessee, supplier,
distributor, sales agent, customer or client of the Company;
(ii) owns, directly or indirectly, in whole or in part, any tangible or
intangible property (including, but not limited to Intellectual Property)
that the Company uses in the conduct of the business of the Company, other
than immaterial personal items owned and used by employees at their work
stations; or
(iii) has any cause of action or other claim whatsoever against, or owes
any amount to, the Company, except for claims in the ordinary course of
business such as for accrued vacation pay, accrued benefits under employee
benefit plans, and similar matters and agreements existing on the date
hereof.
Section 3.21 Bank Accounts and Powers of Attorney. Set forth in Schedule
3.21 is an accurate and complete list showing (a) the name of each bank in which
the Company has an account, credit line or safe deposit box and the names of all
Persons authorized to draw thereon or to have access thereto, and (b) the names
of all Persons, if any, holding powers of attorney from the Company and a
summary statement of the terms thereof.
Section 3.22 Compensation of Employees. Since its formation, the
Stockholder has been the only employee of the Company and the Company has never
engaged any exclusive consultant. Schedule 3.22 sets forth the Stockholder's
current annual salary, and the annual salary, bonus and incentive compensation
paid or payable to him with respect to calendar years 1998 and 1999, and his
material fringe benefits. The Company has not, because of past practices or
previous commitments with respect to the Stockholder, established any rights on
the part of the Stockholder to additional compensation with respect to any
period after the Closing Date (other than wage increases in the ordinary course
of business).
Section 3.23 No Changes Since the Balance Sheet Date. Since the Balance
Sheet Date, except as specifically stated on Schedule 3.23, the Company has not
(a) incurred any liability or obligation of any nature (whether accrued,
absolute, contingent or otherwise), except in the ordinary course of business;
(b) permitted any asset of the Company to be subjected to any Lien; (c) sold,
transferred or otherwise disposed of any asset of the Company except in the
ordinary course of business; (d) made any capital expenditure or commitment
therefor which individually or in the aggregate exceeded $25,000; (e) declared
or paid any dividends or made any distributions on any shares of its capital
stock or any option, warrant or other right to purchase or acquire any such
shares; (f) made any bonus or profit sharing distribution; (g) increased or
prepaid its indebtedness for borrowed money, except current borrowings under
credit lines listed on Schedule 3.8, or made any loan to any Person other than
to the Stockholder for normal travel and expense advances; (h) written down the
value of any work-in-process, or written off as uncollectible any notes or
accounts receivable, except write-downs and write-offs in the ordinary
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course of business, none of which, individually or in the aggregate, is material
to the Company; (i) granted any increase in the rate of wages, salaries, bonuses
or other remuneration of the Stockholder; (j) entered into an employment or
exclusive consultant agreement which is not cancelable without penalty or other
financial obligation within 30 days; (k) canceled or waived any claims or rights
of material value; (l) made any change in any method of accounting procedures;
(m) otherwise conducted its business or entered into any transaction, except in
the usual and ordinary manner and in the ordinary course of its business; (n)
amended or terminated any agreement which is material to its business; (o)
renewed, extended or modified any Real Property Lease or except in the ordinary
course of business, any personal property lease; (p) adopted, amended or
terminated any Plan; or (q) agreed, whether or not in writing, to do any of the
actions set forth in any of the above clauses.
Section 3.24 Company Controls. Neither the Stockholder, nor, to the
knowledge of the Stockholder, any officer, authorized agent, employee or any
other Person while acting on behalf of the Company, has, directly or indirectly:
used any company fund for unlawful contributions, gifts, or other unlawful
expenses relating to political activity; made any unlawful payment to foreign or
domestic government officials or employees or to foreign or domestic political
parties or campaigns from company funds; established or maintained any unlawful
or unrecorded fund of company monies or other assets; made any false or
fictitious entry on its books or records; made any bribe, rebate, payoff,
influence payment, kickback, or other unlawful payment, or other payment of a
similar or comparable nature, to any Person, private or public, regardless of
form, whether in money, property, or services, to obtain favorable treatment in
securing business or to obtain special concessions, or to pay for favorable
treatment for business secured or for special concessions already obtained, and
the Company has not participated in any illegal boycott or other similar illegal
practices affecting any of its actual or potential customers.
Section 3.25 Brokers. Except as set forth on Schedule 3.25, no broker,
finder, agent or similar intermediary has acted on behalf of the Company or the
Stockholder in connection with this Agreement or the transactions contemplated
hereby, and no brokerage commissions, finder's fees or similar fees or
commissions are payable by the Company or the Stockholder in connection
therewith based on any agreement, arrangement or understanding with any of them.
Section 3.26 Year 2000 Compliant.
3.26.1 Definition. The term "Year 2000 Compliant" shall mean:
(i) the functions, calculations and other computer processes of all
computer hardware, software and systems, including but not limited to
internal and outsourced MIS systems and embedded computer features within
other systems of the Company (collectively, "Processes"), perform properly
in a consistent manner regardless of the date in time on which the
Processes are actually performed and regardless of the date of input to
the software, whether before, on or after January 1, 2000 and whether or
not the dates are affected by leap years;
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(ii) the computer hardware, software and systems accept, calculate,
compare, sort, extract, sequence and otherwise process data inputs and
date values, and return and display date values, in a consistent manner
regardless of the dates used, whether before, on or after January 1, 2000;
(iii) the computer hardware, software and systems will function
properly without interruptions or extraordinary manual intervention caused
by the date in time on which the Processes are actually performed or by
the date of input to the software, whether before, on or after January 1,
2000;
(iv) the computer hardware, software and systems accept and respond
to two-digit year data input in the Processes in a manner that resolves
any ambiguities as to the century in a defined, predetermined and
appropriate manner; and
(v) the computer hardware, software and systems store and display
data information in the Processes in ways that are unambiguous as to the
determination of the century.
3.26.2 Computer Systems. Except as set forth on Schedule 3.26, (a) the
current computer hardware, software and systems, and accompanying documentation,
of the Company will be Year 2000 Compliant in a full production version, with
accompanying documentation, in all material respects, on or before December 31,
1999; and (b) the Company will use reasonable efforts to obtain confirmation
that Year 2000 Compliant computer hardware, software and systems will be
provided to the Company in a timely manner under current supplier contracts or
standard maintenance and support plans without additional fee or charge of any
kind (including any installation, freight, or other costs or fees) to the
Company.
3.26.3 Other Products and Services. Except as set forth on Schedule 3.26,
(a) the Company's products will be delivered and its services will be scheduled
and performed in a timely manner without interruptions caused by the date in
time on which the product is ordered or is actually delivered or the services
are scheduled or actually performed under normal procedures in the ordinary
course, whether before, on or after January 1, 2000; and (b) the Company has
made reasonable efforts to obtain confirmation that the Company's essential
suppliers of products and services, including the suppliers of its
infrastructure systems, have Year 2000 Compliant programs in place to avoid
interruptions in the supplier-customer trading relationship which could have a
Material Adverse Effect, whether before, on or after January 1, 2000.
Section 3.27 Prepayment for Services Except as disclosed on Schedule 3.27,
the Company has not prior to the Closing Date received any payments from any of
its clients with respect to services to be rendered by the Company after the
Closing Date.
Section 3.28 Investment Representations.
(a) The Stockholder is acquiring the Paradise Stock for investment
purposes only and does not intend to resell, distribute or subdivide the
Paradise Stock other than pursuant
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to an effective registration statement or an available exemption under the
Securities Act of 1933, as amended (the "Act"). The Stockholder is acquiring the
Paradise Stock for his own account and no other person will have any beneficial
interest in the Paradise Stock.
(b) The Stockholder acknowledges that Paradise is offering and
selling the Paradise Stock pursuant to exemptions from registration under the
Act and exemptions from qualification under the securities laws of certain
states, for transactions not involving any public offering, and that Paradise is
relying on the representations and warranties included herein to obtain those
exemptions. The Stockholder further represents and warrants to Paradise and the
Purchaser as follows:
(i) The Stockholder has the financial ability to bear the
economic risk of its or his investment in the Paradise Stock (including the
possible loss of such investment in its entirety), has adequate means of
providing for his current needs and personal contingencies, and has no need for
liquidity with respect to his investment in Paradise; and
(ii) The Stockholder is not an "underwriter" as such term is
defined under the Act and the Stockholder has such knowledge and experience in
financial and business matters as to be capable of evaluating the merits and
risks of an investment in Paradise and has obtained, in the best judgment of the
Stockholder, sufficient information from Paradise to evaluate the merits and
risks of an investment in Paradise.
(c) The Stockholder understands that the Paradise Stock has not been
registered under the Act or qualified under the securities laws of any state,
and therefore cannot be transferred, resold, pledged, hypothecated, assigned, or
otherwise disposed of unless they are subsequently registered under the Act and
qualified under applicable state securities laws and in compliance with any
other applicable securities laws, or an exemption from registration and/or
qualification is available. The Stockholder will not sell, distribute, dispose
of or otherwise transfer the Paradise Stock or any part thereof, or interest
therein, except pursuant to an effective registration under the Act or pursuant
to an exemption from the registration requirements of the Act and in compliance
with any other applicable securities laws. The Stockholder understands that all
stock certificates representing the Paradise Stock shall bear a legend
reflecting the restrictions contained in this clause (c).
(d) The Stockholder has been given the opportunity to ask questions
of, and receive answers from, and conduct due diligence meetings with
representatives of Paradise concerning the terms and conditions of this offering
and other matters pertaining to this investment and have been given the
opportunity to obtain such additional information as is necessary to evaluate
the merits and risks of an investment in Paradise, in all cases to the extent
that Paradise possessed such information. The Stockholder's decision to acquire
the Paradise Stock was made on the basis of the Stockholder's independent
analysis of the terms of the purchase and arms' length discussions with
representatives of Paradise.
(e) The Stockholder is not relying on Paradise or any representative
of Paradise, for advice as to tax, legal, or economic considerations as they
relate to the Stockholder's
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circumstances. No such representations or warranties have been made to the
Stockholder by Paradise, or any employee or agent of Paradise. In particular,
the Stockholder acknowledges that there have been no representations, guarantees
or warranties made to him by Paradise, its employees or agents, or by any other
person, with respect to (i) the approximate length of time that will be required
to remain as the owner of the Paradise Stock; or (ii) the percentage of profit
and/or amount of or type of consideration, profit or loss to be realized, if
any, as a result of this investment.
(f) The Stockholder has determined that the Paradise Stock is a
suitable investment in light of his investment goals, ability to sustain losses,
needs for liquidity and previous decisions to invest in securities such as the
Paradise Stock or securities bearing similar risks.
(g) The Stockholder is an "Accredited Investor" as that term is
defined in Rule 501(a) of Regulation D.
Section 3.29 Copies of Documents. The Company has caused to be made
available for inspection and copying by the Purchaser and Paradise and its
advisers, true, complete and correct copies of all documents referred to in this
Article III or in any Schedule. Summaries of all oral contracts contained in
Schedule 3.8 are complete and accurate in all material respects.
ARTICLE IV
REPRESENTATIONS OF THE PURCHASER AND PARADISE
Each of the Purchaser and Paradise, jointly and severally, represent,
warrant and agree to and with the Stockholder as follows:
Section 4.1 Existence and Good Standing. Each of the Purchaser and
Paradise is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware with full corporate power and authority
to own its property and to carry on its business all as and in the places where
such properties are now owned or operated or such business is now being
conducted, except for jurisdictions where the failure to be so qualified would
not have a Material Adverse Effect. For purposes of this Agreement, "Material
Adverse Effect" shall mean any material and adverse effect on the financial
condition, results of operations, assets, properties or business of Paradise or
the purchaser. Paradise is qualified to do business in New York.
Section 4.2 Execution and Validity of Agreement. Each of the Purchaser and
Paradise has the full corporate power and authority to make, execute, deliver
and perform this Agreement by the Purchaser and Paradise and the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all required corporate action on behalf of the Purchaser and Paradise, and
this Agreement has been duly and validly executed and delivered by the Purchaser
and Paradise and, assuming due authorization, execution and delivery by the
Stockholder,
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constitutes legal, valid and binding obligations of the Purchaser and Paradise,
enforceable against them in accordance with its terms.
Section 4.3 No Restrictions. There is no suit, action, claim,
investigation or inquiry by any Governmental or Regulatory Authority, and no
legal, administrative or arbitration proceeding pending or, to the knowledge of
Purchaser and Paradise, threatened against the Purchaser or Paradise with
respect to the execution, delivery and performance of this Agreement or the
transactions contemplated hereby, and to the knowledge of Paradise and the
Purchaser, no acts, facts, circumstances, events or conditions occurred or exist
which are a basis for any such action, proceeding or investigation.
Section 4.4 Non-Contravention; Approvals and Consents.
4.4.1 Non-Contravention. The execution, delivery and performance by each
of the Purchaser and Paradise of its obligations hereunder and the consummation
of the transactions contemplated hereby will not (a) violate, conflict with or
result in the breach of any provision of the Certificate of Incorporation or
By-laws of the Purchaser or Paradise, or (b) result in the violation by the
Purchaser or Paradise of any Laws or Orders of any Governmental or Regulatory
Authority applicable to the Purchaser or any of its assets or properties, or (c)
result in a violation or breach of, constitute (with or without notice or lapse
of time or both) a default under, or except as set forth on Schedule 4.4.1,
require the Purchaser or Paradise to obtain any consent, approval or action of,
make any filing with or give any notice to, or result in or give to any Person
any right of payment or reimbursement, termination, cancellation, modification
or acceleration of, or result in the creation or imposition of any Lien upon any
of the assets or properties of the Purchaser or Paradise, under any of the
terms, conditions or provisions of any contract to which the Purchaser or
Paradise is a party or by which the Purchaser or Paradise or any of their
respective assets or properties are bound.
4.4.2 Approvals and Consents. Except as set forth on Schedule 4.4.1, no
consent, approval or action of, filing with or notice to any Governmental or
Regulatory Authority or other public or private third party is necessary or
required under any of the terms, conditions or provisions of any Law or Order of
any Governmental or Regulatory Authority or any contract to which the Purchaser
or Paradise is a party or by which the Purchaser or Paradise or any of their
assets or properties are bound for the execution and delivery of this Agreement
by the Purchaser and Paradise, the performance by the Purchaser and Paradise of
their obligations hereunder or the consummation of the transactions contemplated
hereby by the Purchaser and Paradise.
Section 4.5 Compliance with Laws; Licenses and Permits.
4.5.1 Compliance. Each of Paradise and the Purchaser is and its business
has been conducted, in compliance with all applicable Laws and Orders, except in
each case (other than with respect to compliance with environmental Laws and
Orders relating to the regulation or protection of the environment;
"Environmental Laws and Orders") where the failure to so comply would not
reasonably be expected to have a Material Adverse Effect, including without
limitation: (a) all Laws and Orders promulgated by the Federal Trade Commission
or any other
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Governmental or Regulatory Authority; (b) all Environmental Laws and Orders; and
(c) all Laws and Orders relating to labor, civil rights, and occupational safety
and health laws, worker's compensation, employment and wages, hours and
vacations, or pay equity. Neither Paradise nor the Purchaser has been charged
with, or, to the knowledge of Paradise and the Purchaser threatened with or
under any investigation with respect to, any charge concerning any violation of
any Laws or Orders.
4.5.2 Licenses. Each of Paradise and the Purchaser has all Licenses
required by any Governmental or Regulatory Authority for the operation of its
business and the use of its assets as presently operated or used, except where
the failure to have such Licenses would not reasonably be expected to have a
Material Adverse Effect. All of the Licenses are in full force and effect and no
action or claim is pending, nor to the knowledge of Paradise and the Purchaser
is threatened, to revoke or terminate any of such Licenses or declare any such
License invalid in any material respect.
Section 4.6 Paradise Stock. . The shares of Paradise Stock to be delivered
to the Stockholder pursuant to this Agreement, when delivered as provided
herein, will be validly issued and outstanding shares of voting common stock of
Paradise, fully paid and non-assessable, and will not be subject to pre-emptive
rights of any Person.
Section 4.7 Brokers. No broker, finder, agent or similar intermediary has
acted on behalf of the Purchaser, Paradise or any of their affiliates in
connection with this Agreement or the transactions contemplated hereby, and no
brokerage commissions, finders' fees or similar fees or commissions are payable
by the Purchaser, Paradise or any of their affiliates in connection therewith
based on any agreement, arrangement or understanding with any of them.
ARTICLE V
COVENANTS OF THE STOCKHOLDER
The Stockholder covenants and agrees with Paradise and the Purchaser that,
at all times from and after the Execution Date until the Closing or earlier
termination of this Agreement, the Stockholder will comply, and will cause the
Company to comply, with all covenants and provisions of this Article V, except
to the extent Paradise (on behalf of itself and the Purchaser) may otherwise
consent in writing.
Section 5.1 Regulatory and Other Approvals. The Stockholder will take all
commercially reasonable steps necessary or desirable, and proceed diligently and
in good faith and use all commercially reasonable efforts, as promptly as
practicable to obtain all consents and approvals required of the Company and
Stockholder to consummate the transactions contemplated hereby. The Stockholder
will provide prompt notification to Paradise when any such consent or approval
is obtained.
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Section 5.2 Investigation by Paradise and the Purchaser. Subject to the
confidentiality provisions of Section 12.8, the Company and the Stockholder will
(a) provide Paradise and the Purchaser and their respective officers, employees,
counsel, accountants, financial advisors, consultants and other representatives
(collectively, "Representatives") with full access, upon reasonable prior notice
and during normal business hours, to the executive officers and agents of the
Company who have any material responsibility for the conduct of the business of
the Company and to the Company's accountants and their work papers, but only to
the extent that such access does not unreasonably interfere with the business of
the Company and (b) furnish Paradise, the Purchaser and the Representatives with
all such information and data concerning the business of the Company as
Paradise, the Purchaser or the Representatives reasonably may request in
connection with such investigation, except to the extent that furnishing any
such information or data would violate any Law, Order, Contract or License
applicable to the Company.
Section 5.3 No Solicitations. The Stockholder will not, and will cause the
Company to not, nor will they permit any affiliate of the Company or the
Stockholder (or authorize or permit any investment banker, financial advisor,
attorney, accountant or other Person retained by or acting for or on behalf of
the Company, the Stockholder or any such affiliate) to take, directly or
indirectly, any action to solicit, encourage, negotiate, assist or otherwise
facilitate (including by furnishing confidential information with respect to the
business of the Company or permitting access to the assets of the Company ) any
offer or inquiry concerning the acquisition of the Company (whether by sale of
assets, sale of stock, merger or otherwise) from any Person other than Paradise
or the Purchaser.
Section 5.4 Conduct of Business. From the Execution Date to the Closing
Date, except as contemplated or otherwise permitted under the terms of this
Agreement, the Company and the Stockholder will operate the business of the
Company only in the ordinary course consistent with past practice. Without
limiting the generality of the foregoing, except as contemplated by or otherwise
permitted by the terms of this Agreement or any Schedule to this Agreement, the
Stockholder will refrain and the Stockholder will cause the Company to refrain,
from taking any of the following actions unless consented to in writing by
Paradise (on behalf of itself and the Purchaser), which consent shall not be
unreasonably withheld:
(i) selling, leasing or otherwise disposing of all or substantially
all of its assets or business;
(ii) amending its Certificate of Incorporation or by-laws;
(iii) changing its capitalization;
(iv) engaging in any acquisition of the stock, assets or business of
another Person or making any equity investment of funds of the
Company in another Person other than short-term investments in
cash equivalents;
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(v) merging or consolidating with and into any Person or merging or
consolidating any Person with and into it;
(vi) engaging in any liquidation or dissolution;
(vii) entering into any new line of business;
(viii) making any loans to any Person other than normal employee travel
and expense advances consistent with past practice.
(ix) entering into any real estate, lease or personal property lease;
(x) granting any compensation increase to the Stockholder;
(xi) entering into any Contract with any officer, director or employee;
(xii) declaring or paying any dividends or other distributions or
bonuses to the Stockholder except as set forth on Schedule 3.23;
(xiii) amending any contract or agreement in any material respect;
(xiv) entering into any severance agreement involving a payment, or
obligation to pay, any amount in excess of the Company's normal
severance benefit;
(xv) releasing, canceling or assigning any indebtedness for borrowed
money owed to it, or waiving any material right relating to its
properties;
(xvi) creating or modifying any Plan or entering into or modifying any
employment agreement with the Stockholder which is not cancelable
without penalty or other obligation on 30 days notice;
(xvii) entering into any transaction or performing any act which would be
reasonably likely to result in any of the representations and
warranties of the Stockholder contained in this Agreement not
being true and correct; or agreeing to take any of the actions
that are prohibited herein or which would constitute a violation
of any of the covenants of the Stockholder contained herein; and
(xviii) delegating to any other Person the power to take any of the
actions prohibited by any of the foregoing clauses.
Section 5.5 Notice and Cure. The Stockholder will notify Paradise in
writing of, and contemporaneously will provide Paradise with true and complete
copies of any and all information or documents relating to, and will use all
commercially reasonable efforts to cure
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before the Closing, any event, transaction or circumstance, as soon as
practicable after it becomes known to the Stockholder, occurring after the
Execution Date that causes or will cause any covenant or agreement of the
Stockholder under this Agreement to be breached or that renders or will render
untrue any representation or warranty of the Stockholder contained in this
Agreement as if the same were made on or as of the date of such event,
transaction or circumstance. The Stockholder also will notify Paradise in
writing of, and will use all commercially reasonable efforts to cure, before the
Closing, any other violation or breach, as soon as practicable after it becomes
known to the Stockholder, of any representation, warranty, covenant or agreement
made by the Stockholder in this Agreement. No notice given pursuant to this
Section shall have any effect on the representations, warranties, covenants or
agreements contained in this Agreement for purposes of determining satisfaction
of any condition contained herein; provided, however, if the Stockholder has
cured such violation or breach prior to the Closing to the reasonable
satisfaction of Paradise, Paradise and the Purchaser shall not have the right to
terminate this Agreement based on such violation or breach.
Section 5.6 Fulfillment of Conditions. The Stockholder will execute and
deliver at the Closing each agreement that the Stockholder is required hereby to
execute and deliver as a condition to the Closing, will take all commercially
reasonable steps necessary or desirable and proceed diligently and in good faith
to satisfy each other condition to the obligations of Paradise and the Purchaser
contained in this Agreement.
ARTICLE VI
COVENANTS OF PARADISE AND THE PURCHASER
Paradise and the Purchaser covenant and agree with the Stockholder that,
at all times from and after the Execution Date until the Closing or earlier
termination of this Agreement, Paradise and the Purchaser will comply with all
covenants and provisions of this Article VI, except to the extent the
Stockholder may otherwise consent in writing.
Section 6.1 Regulatory and Other Approvals. Paradise and the Purchaser
will (a) take all commercially reasonable steps necessary or desirable, and
proceed diligently and in good faith and use all commercially reasonable
efforts, as promptly as practicable to obtain all consents, approvals or actions
of, to make all filings with and to give all notices to Governmental or
Regulatory Authorities or any other Person required of Paradise or the Purchaser
to consummate the transactions contemplated hereby, including without limitation
those described on Schedule 4.4.1, (b) provide such other information and
communications to such Governmental or Regulatory Authorities or other Persons
as such Governmental or Regulatory Authorities or other Persons may reasonably
request in connection therewith and (c) provide reasonable cooperation to the
Stockholder in obtaining all consents or approvals required of the Stockholder
to consummate the transactions contemplated hereby. Paradise will provide prompt
notification to the Stockholder
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when any such consent, approval, action, filing or notice referred to in clause
(a) above is obtained, taken, made or given, as applicable.
Section 6.2 Investigation by the Stockholder . Paradise and the Purchaser
will (a) provide the Stockholder and its counsel, accountants, financial
advisors, consultants and other representatives (collectively,
"Representatives") with full access, upon reasonable prior notice and during
normal business hours, to the executive officers and agents of Paradise who have
any material responsibility for the conduct of the business of Paradise and to
Paradise's accountants and their work papers, but only to the extent that such
access does not unreasonably interfere with the business of Paradise and (b)
furnish the Stockholder and the Representatives with all such information and
data concerning the business of Paradise as the Stockholder or the
Representatives reasonably may request in connection with such investigation,
except to the extent that furnishing any such information or data would violate
any Law, Order, Contract or License applicable to the Company.
Section 6.3 Notice and Cure. Paradise or the Purchaser will notify the
Stockholder in writing of, and contemporaneously will provide the Stockholder
with true and complete copies of any and all information or documents relating
to, and will use all commercially reasonable efforts to cure before the Closing,
any event, transaction or circumstance, as soon as practicable after it becomes
known to Paradise or the Purchaser, occurring after the Execution Date that
causes or will cause any covenant or agreement of Paradise or the Purchaser
under this Agreement to be breached or that renders or will render untrue any
representation or warranty of Paradise or the Purchaser contained in this
Agreement as if the same were made on or as of the date of such event,
transaction or circumstance. Paradise or the Purchaser also will notify the
Stockholder in writing of, and will use all commercially reasonable efforts to
cure, before the Closing, any other violation or breach, as soon as practicable
after it becomes known to Paradise or the Purchaser, of any representation,
warranty, covenant or agreement made by Paradise or the Purchaser in this
Agreement. No notice given pursuant to this Section shall have any effect on the
representations, warranties, covenants or agreements contained in this Agreement
for purposes of determining satisfaction of any condition contained herein;
provided, however, if Paradise or the Purchaser have cured such violation or
breach prior to the Closing to the reasonable satisfaction of the Stockholder,
the Stockholder shall not have the right to terminate this Agreement based on
such violation or breach.
Section 6.4 Fulfillment of Conditions. Paradise and the Purchaser will
execute and deliver or cause the execution and delivery at the Closing each
agreement that Paradise and the Purchaser or one of their affiliates is hereby
required to execute and deliver as a condition to the Closing, will take all
commercially reasonable steps necessary or desirable and proceed diligently and
in good faith to satisfy each other condition to the obligations of the
Stockholder contained in this Agreement.
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Section 6.5 Blue Sky. Paradise and the Purchaser will use their best
efforts to obtain all necessary state securities and blue sky authorizations
required to issue the Paradise Stock as contemplated by this Agreement.
ARTICLE VII
MUTUAL COVENANTS
Paradise, the Purchaser and the Stockholder mutually covenant and agree
with each other as follows:
Section 7.1 Reasonable Efforts to Consummate Transaction. Paradise, the
Purchaser, and the Stockholder will each use its reasonable efforts and will
fully cooperate with each other to consummate the transactions contemplated by
this Agreement.
Section 7.2 Public Announcements.Paradise, the Purchaser, and the
Stockholder will consult with each other before issuing any press releases or
otherwise making any public statements with respect to this Agreement or any of
the transactions contemplated hereby and shall not issue any such press release
or make any public statement without the prior consent of the other parties
which shall not be unreasonably withheld, except as may be required by law or by
obligations pursuant to any listing agreements with any securities exchange.
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF PARADISE AND THE PURCHASER
The obligations of the Purchaser hereunder to purchase the Shares and
issue Paradise Stock are subject to the fulfillment, at or before the Closing,
of each of the following conditions, all or any of which may be waived in whole
or in part by Paradise, on behalf of itself and the Purchaser, in its sole
discretion:
Section 8.1 Representations and Warranties. The representations and
warranties made by the Stockholder in this Agreement, or in any Schedule
delivered pursuant hereto, shall be true and correct in all material respects on
and as of the Closing Date with the same force and effect as though made on and
as of the Closing Date or, in the case of representations and warranties made as
of a specified date earlier than the Closing Date, on and as of such earlier
date, and Stockholder shall have delivered to Paradise and the Purchaser a
certificate, dated the Closing Date, to such effect.
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Section 8.2 Good Standing and Tax Certificates The Stockholder shall have
delivered to Paradise and the Purchaser (i) a copy of the Company's Articles of
Incorporation, including all amendments, certified by the Secretary of State (or
comparable official) of the State of California, (ii) a certificate from the
Secretary of State (or comparable official) of the State of California, to the
effect that the Company is in good standing in California and (iii) a
certificate as to the tax status of the Company in the State of California.
Section 8.3 Performance. The Stockholder shall have performed and complied
with the agreements, covenants and obligations required by this Agreement to be
so performed or complied with by the Stockholder at or before the Closing, and
the Stockholder shall have delivered to Paradise and the Purchaser a
certificate, dated the Closing Date, to such effect.
Section 8.4 No Litigation. There shall not be pending any litigation,
proceeding, investigation, review, arbitration or claim by Governmental or
Regulatory Authority, and no preliminary or permanent injunction or other order
shall have been issued, to restrain or invalidate the consummation by the
Stockholder of this Agreement and the transactions contemplated hereby, and no
material litigation shall be pending or to the knowledge of the Stockholder
threatened against the Company or the Stockholder with respect to this Agreement
or the transactions contemplated hereby or arising out of the actions required
or permitted to be taken by any of them pursuant to this Agreement, or against
or affecting either the Company or the Stockholder or any of their properties or
rights which, if adversely determined, would be reasonably likely to have a
Material Adverse Effect.
Section 8.5 Regulatory Consents and Approvals. All consents, approvals and
actions of, filings with and notices to any Governmental or Regulatory Authority
necessary to permit Paradise, the Purchaser, and the Stockholder to perform
their obligations under this Agreement and to consummate the transactions
contemplated hereby shall have been duly obtained, made or given and shall be in
full force and effect.
Section 8.6 Required Approvals, Notices and Consents. The Stockholder
shall have obtained or given, as the case may be, at no expense to Paradise or
the Purchaser and there shall not have been withdrawn or modified any notices,
consents, approvals or other actions listed on Schedule 3.9.2 hereof (including
without limitation, obtaining all consents, approvals and/or waivers required
under the contracts listed on Schedule 3.8 in order to permit the consummation
of the transactions contemplated by this Agreement without causing or resulting
in a default, event of default, acceleration event or termination event under
any of such documents and without entitling any party to any of such documents
to exercise any other right or remedy adverse to the interests of Paradise, the
Purchaser or the Company thereunder). Each such consent shall be in form
reasonably satisfactory to counsel for Paradise and the Purchaser.
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Section 8.7 Opinion of Counsel. Paradise and the Purchaser shall have
received the opinion of Cohen, Primiani & Foster, counsel to the Stockholder,
dated the Closing Date, substantially in the form and to the effect of Exhibit A
hereto.
Section 8.8 Repayment of Loans. All indebtedness of the Stockholder to the
Company, if any, shall have been repaid in full, other than routine travel and
expense advances in the ordinary course of business consistent with past
practice, and the Stockholder shall have delivered to Paradise and the Purchaser
a certificate, dated the Closing Date, to such effect.
Section 8.9 Material Adverse Effect. Except for the execution and delivery
of this Agreement and the transactions required or permitted to take place
pursuant hereto on or prior to the Closing Date, since the Execution Date there
shall not have occurred any Material Adverse Effect, or any event or development
which, individually or together with such events, could reasonably be expected
to result in a Material Adverse Effect and the Stockholder shall have delivered
to Paradise and the Purchaser, a certificate dated the Closing Date to such
effect.
Section 8.10 Proceedings. All proceedings to be taken in connection with
the transactions contemplated by this Agreement and all documents incident
thereto must be reasonably satisfactory in form and substance to Paradise and
the Purchaser, and Paradise and the Purchaser shall have received copies of all
such documents and other evidences as Paradise and the Purchaser may reasonably
request in order to establish the consummation of such transactions and the
taking of all proceedings in connection therewith.
Section 8.11 Straw Dogs Acquisition Agreement. On the Closing Date, the
transactions contemplated in the Asset Purchase Agreement of even date herewith
between Paradise, the Purchaser, Consolidated Entertainment, LLC (d/b/a/ Straw
Dogs), the Stockholder and Craig Rodgers (the "Straw Dogs Agreement"), shall
have been consummated contemporaneously with the Closing hereunder.
Section 8.12 Working Capital. Appropriate working capital lines of credit,
as determined by Paradise and subject to the reasonable approval of the
Stockholder, shall have been obtained for the Purchaser and Paradise.
Section 8.13 Net Worth .The Net Worth (as defined below) of the Company as
of the Effective Date shall not have been less than $1.00, as finally determined
pursuant to the procedures set forth in Section 2.1.2 above. As used in this
Section 8.13, the term "Net Worth" shall mean the aggregate net book value of
the Company as of the Effective Date as represented by the aggregate value of
its assets, minus the aggregate value of it liabilities, calculated as of the
Effective Date in accordance with GAAP.
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Section 8.14 Financial Statements. The Stockholder shall have delivered
Schedule 3.4 (Financial Statements) to Paradise and the Purchaser; provided,
however, failure to deliver said Schedule 3.4 shall not be a breach of this
Agreement by the Stockholder.
ARTICLE IX
CONDITIONS TO OBLIGATIONS OF THE STOCKHOLDER
The obligations of the Stockholder hereunder to sell the Shares are
subject to the fulfillment, at or before the Closing, of each of the following
conditions (except with respect to Section 9.6, all or any of which may be
waived in whole or in part by the Stockholder in his sole discretion):
Section 9.1 Representations and Warranties. The representations and
warranties made by Paradise and the Purchaser in this Agreement or in any
Schedule delivered hereto, shall be true and correct in all material respects on
and as of the Closing Date with the same force and effect as though made on and
as of the Closing Date, and Paradise and the Purchaser shall have delivered to
the Stockholder a certificate, dated the Closing Date, to such effect.
Section 9.2 Performance. Paradise and the Purchaser shall have performed
and complied with the agreements, covenants and obligations required by this
Agreement to be so performed or complied with by Paradise and the Purchaser at
or before the Closing, and Paradise and the Purchaser shall have delivered to
the Stockholder a certificate, dated the Closing Date, to such effect.
Section 9.3 Certified Resolutions. Paradise and the Purchaser shall have
delivered to the Stockholder a copy of the resolutions of the boards of
directors of each of Paradise and the Purchaser authorizing the execution,
delivery and performance of this Agreement and the transactions contemplated
hereby, certified to by an officer of Paradise and the Purchaser, respectively.
Section 9.4 No Litigation. There shall not be pending any litigation,
proceeding, investigation, review, arbitration or claim by Governmental or
Regulatory Authority, and no preliminary or permanent injunction or other order
shall have been issued to restrain or invalidate the consummation by Paradise or
the Purchaser of this Agreement and the transactions contemplated hereby, and no
material litigation shall be pending or to the knowledge of Paradise and the
Purchaser, threatened against Paradise or the Purchaser with respect to this
Agreement or the transactions contemplated hereby or arising out of the actions
required or permitted to be taken by any of them pursuant to this Agreement, or
against or affecting either Paradise or the Purchaser or any of their properties
or rights which, if adversely determined, would be reasonably likely to have a
Material Adverse Effect.
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Section 9.5 Regulatory Consents and Approvals. All consents, approvals and
actions of, filings with and notices to any Governmental or Regulatory Authority
necessary to permit the Stockholder, Paradise and the Purchaser to perform their
obligations under this Agreement and to consummate the transactions contemplated
hereby shall have been duly obtained, made or given and shall be in full force
and effect.
Section 9.6 Paradise Stockholder Approval. The special meeting of
stockholders of Paradise shall have been duly held and at such meeting the
requisite affirmative vote of the Paradise stockholders shall have been recorded
to authorize and to approve the transactions contemplated hereby in accordance
with applicable provisions of Delaware law.
Section 9.7 Opinion of Counsel. The Stockholder shall have received the
opinion of Davis & Gilbert LLP, counsel to Paradise and the Purchaser, dated the
Closing Date, substantially in the form and to the effect of Exhibit B hereto.
Section 9.8 Proceedings. All proceedings to be taken on the part of
Paradise and the Purchaser in connection with the transactions contemplated by
this Agreement and all documents incident thereto shall be reasonably
satisfactory in form and substance to the Stockholder, and the Stockholder shall
have received copies of all such documents and other evidences as the
Stockholder may reasonably request in order to establish the consummation of
such transactions and the taking of all proceedings in connection therewith.
Section 9.9 Material Adverse Effect. Since the Execution Date there shall
not have occurred any Material Adverse Effect, or any event or development
which, individually or together with such events, could reasonably be expected
to result in a Material Adverse Effect and Paradise shall have delivered to the
Stockholder a certificate, dated the Closing Date, to such effect.
Section 9.10 Straw Dogs Acquisition Agreement. On the Closing Date, the
transactions contemplated by the Straw Dogs Agreement shall have been
consummated contemporaneously with the Closing hereunder.
Section 9.11 Working Capital. Appropriate working capital lines of credit,
as determined by Paradise and subject to the reasonable approval of the
Stockholder , shall have been obtained for the Purchaser and Paradise.
ARTICLE X
ADDITIONAL AGREEMENTS
Section 10.1 Name of Purchaser. The parties hereto agree that immediately
after the Closing, the corporate name of the Purchaser will be changed to "Straw
Dogs, Inc."
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Section 10.2 Termination. This Agreement may be terminated and the sale of
Shares and other transactions contemplated herein may be abandoned at any time
prior to the Closing, notwithstanding the adoption of this Agreement by the
Stockholder or the stockholders of Paradise by:
(a) mutual consent of the Boards of Directors of each Paradise and
the Purchaser, and the Stockholder;
(b) either Paradise and the Purchaser, on the one hand, or the
Stockholder, on the other hand, (provided the terminating party is not then in
breach hereof and has not received notice of any breach) if the other party
breaches its representations, warranties or covenants hereunder in any material
respect and such breach is not cured within 15 days after the delivery of
written notice thereof to such breaching party unless the breach of any such
representation, warranty, or covenant does not materially adversely affect the
business or assets of the breaching party or the ability of any or all parties
to consummate the transactions contemplated hereby;
(c) the Boards of Directors of either Paradise and the Purchaser,
and the Stockholder in the event a final and nonappealable order, decree or
judgment of any court, agency, commission or governmental authority is issued or
existing against the parties or any of them or any of their directors which
would enjoin the transactions contemplated hereby; or
(d) either Paradise and the Purchaser, on the one hand, or the
Stockholder, on the other hand, if the Closing Date has not occurred prior to
the close of business on September 30, 1999.
Section 10.3 Effect of Termination. If this Agreement is terminated as
provided in Section 10.8 hereof, this Agreement (except as otherwise herein
provided) shall forthwith become void and there shall be no liability on the
part of any party hereto or its respective officers or directors arising from
the act of such permitted termination. Nothing herein shall preclude, however,
any action or claim for damages to which any party is otherwise entitled as a
result of breach by the other party hereto. In the event of any termination,
each of the parties shall promptly return to the other, all documents and other
written information received from the other in connection with the transactions
contemplated by this Agreement and shall not retain any copies or summaries
thereof.
Section 10.4 Registration Rights. After the Closing Date, the Stockholder
shall have the registration rights set forth in Appendix A to this Agreement
with respect to the Paradise Stock acquired by him pursuant to this Agreement.
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ARTICLE XI
SURVIVAL; INDEMNITY
Section 11.1 Survival. Notwithstanding any right of any party hereto fully
to investigate the affairs of any other party, and notwithstanding any knowledge
of facts determined or determinable pursuant to such investigation or right of
investigation, each party hereto shall have the right to rely fully upon the
representations, warranties, covenants and agreements of the other parties
contained in this Agreement and the Schedules, if any, furnished by any other
party pursuant to this Agreement, or in any certificate delivered at the Closing
by any other party. Subject to the limitations set forth in Sections 11.5.2,
11.5.3 and 11.5.4, the respective representations, warranties, covenants and
agreements (including but not limited to, the confidentiality obligations of
Section 12.8) of the Stockholder, Paradise and the Purchaser contained in this
Agreement shall survive the Closing.
Section 11.2 Obligation of the Stockholder to Indemnify
11.2.1 General Indemnity Subject to the limitations contained in Section
11.5, the Stockholder hereby agrees, to indemnify Paradise, the Purchaser and
their affiliates, shareholders, officers, directors, employees, agents,
representatives and successors, permitted assignees of the Paradise the
Purchaser and their affiliates (including the Company) (individually a
"Purchaser Indemnified Party" and collectively, the "Purchaser Indemnified
Parties") against, and to protect, save and keep harmless the Purchaser
Indemnified Parties from, and to pay on behalf of or reimburse the Purchaser
Indemnified Parties as and when incurred for, any and all liabilities (including
liabilities for Taxes), obligations, losses, damages, penalties, demands,
claims, actions, suits, judgments, settlements, penalties, interest,
out-of-pocket costs, expenses and disbursements (including reasonable costs of
investigation, and reasonable attorneys', accountants' and expert witnesses'
fees) of whatever kind and nature (collectively, "Losses"), that may be imposed
on or incurred by any Purchaser Indemnified Party as a consequence of, in
connection with, incident to, resulting from or arising out of or in any way
related to or by virtue of: (a) any misrepresentation, inaccuracy or breach of
any warranty or representation contained in Article III hereof or in any
certificate delivered by the Stockholder at the Closing; (b) any action, demand,
proceeding, investigation or claim by any third party (including any
Governmental or Regulatory Authority) against or affecting any Purchaser
Indemnified Party which may give rise to or evidence the existence of or relate
to a misrepresentation or breach of any of the representations and warranties of
the Stockholder contained in Article III hereof or in any certificate delivered
by the Stockholder at the Closing; and (c) any breach or failure by the
Stockholder to comply with perform or discharge any obligation, agreement or
covenant by the Stockholder contained in this Agreement.
11.2.2 "Losses". The term "Losses" as used in this Agreement is not
limited to matters asserted by third parties against an Indemnified Party, but
includes Losses incurred or sustained by an Indemnified Party in the absence of
third party claims. All Losses suffered by the Purchaser by virtue of a state of
facts which constitutes a misrepresentation, inaccuracy or breach of a warranty
or representation by the Stockholder shall (without duplication) be deemed to
have been suffered
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by the Purchaser and, accordingly, the Purchaser shall have the right, but not
the obligation, to make indemnification claims that may be made by the
Stockholder in respect of such Losses, in its own name and for its own benefit.
Section 11.3 Obligation of Paradise and the Purchaser to Indemnify.
Subject to the limitations set forth in Section 11.5.2 hereof, Paradise and the
Purchaser hereby agree, jointly and severally, to indemnify the Stockholder and
his affiliates, officers, directors, employees, agents, representatives and
successors, permitted assigns of the Stockholder and his affiliates (the
"Stockholder Indemnified Party") against, and to protect, save and keep harmless
the Stockholder Indemnified Party from, and to pay on behalf of or reimburse the
Stockholder Indemnified Party as and when incurred for, any and all Losses that
may be imposed on or incurred by the Stockholder Indemnified Party as a
consequence of, in connection with, incident to, resulting from or arising out
of or in any way related to or by virtue of: (a) any misrepresentation,
inaccuracy or breach of any warranty or representation of Paradise or the
Purchaser contained in Article IV hereof or in any certificate delivered by
Paradise or the Purchaser at the Closing; (b) any action, demand, proceeding,
investigation or claim by any third party (including any Governmental or
Regulatory Authority) against or affecting the Stockholder Indemnified Party
which may give rise to or evidence the existence of or relate to a
misrepresentation or breach of any of the representations and warranties of
Paradise or the Purchaser contained in Article IV hereof or in any certificate
delivered by Paradise or the Purchaser at the Closing; and (c) any breach or
failure by Paradise or the Purchaser to comply with, perform or discharge any
obligation, agreement or covenant by Paradise or the Purchaser contained in this
Agreement.
Section 11.4 Indemnification Procedures.
11.4.1 Non-Third-Party Claims. In the event that any Person entitled to
indemnification under this Agreement (an "Indemnified Party") asserts a claim
for indemnification which does not involve a Third Party Claim (as defined in
Section 11.4.2 below), against which a party to this Agreement is required to
provide indemnification under this Agreement (an "Indemnifying Party"), the
Indemnifying Party may acknowledge and agree by notice to the Indemnifying Party
in writing to satisfy such claim within 20 days of receipt of notice of such
claim from the Indemnified Party. In the event that the Indemnifying Party
disputes such claim, the Indemnifying Party shall provide written notice of such
dispute to the Indemnified Party within 20 days of receipt of notice of such
claim, setting forth a reasonable basis of such dispute. In the event that the
Indemnifying Party shall fail to provide written notice to the Indemnified Party
within 20 days of receipt of notice from the Indemnified Party that the
Indemnifying Party either acknowledges and agrees to pay such claim or disputes
such claim, the Indemnifying Party shall be deemed to have acknowledged and
agreed to pay such claim in full and to have waived any right to dispute such
claim. Once the Indemnifying Party has acknowledged and agreed to pay any claim
pursuant to this Section 11.4.1, or once any dispute under this Section 11.4.1
has been finally resolved in favor of indemnification by a court or other
tribunal of competent jurisdiction, subject to Section 11.5.1, the Indemnifying
Party shall pay the amount of such claim to the Indemnified Party within 10 days
of the date of acknowledgement or resolution, as the case may be, to such
account and in such manner as is designated in writing by the Indemnified Party.
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11.4.2 Third-Party Claims.
(a) In the event that any Indemnified Party asserts a claim for
indemnification or receives notice of the assertion of any claim or of the
commencement of any action or proceeding by any Person who is not a party
to this Agreement or an affiliate of a party to this Agreement (a "Third
Party Claim") against an Indemnifying Party, the Indemnified Party shall
give written notice together with a statement of any available information
regarding such claim to the Indemnifying Party within 30 days after
learning of such claim (or within such shorter time as may be necessary to
give the Indemnifying Party a reasonable opportunity to respond to such
claim). The Indemnifying Party shall have the right, upon written notice
to the Indemnified Party (the "Defense Notice") within 15 days after
receipt from the Indemnified Party of notice of such claim, which Defense
Notice by the Indemnifying Party shall specify the counsel it will appoint
to defend such claim ("Defense Counsel"), to conduct at its expense the
defense against such claim in its own name, or if necessary in the name of
the Indemnified Party; provided, however, that the Indemnified Party shall
have the right to approve the Defense Counsel, which approval shall not be
unreasonably withheld or delayed, and in the event the Indemnifying Party
and the Indemnified Party cannot agree upon such counsel within 10 days
after the Defense Notice is provided, then the Indemnifying Party shall
propose an alternate Defense Counsel, which shall be subject again to the
Indemnified Party's approval which approval shall not be unreasonably
withheld or delayed. If the parties still fail to agree on the Defense
Counsel, then, at such time, they shall mutually agree in good faith on a
procedure to determine the Defense Counsel.
(b) In the event that the Indemnifying Party shall fail to give the
Defense Notice within such 15 day period, it shall be deemed to have
elected not to conduct the defense of the subject claim, and in such event
the Indemnified Party shall have the right to conduct the defense and to
compromise and settle the claim without prior consent of the Indemnifying
Party and the Indemnifying Party will be liable for all reasonable costs,
expenses, settlement amounts or other Losses paid or incurred in
connection therewith.
(c) In the event that the Indemnifying Party does deliver a Defense
Notice and thereby elects to conduct the defense of the subject claim, the
Indemnifying Party shall be entitled to have the exclusive control over
the defense and settlement of the subject claim and the Indemnified Party
will cooperate with and make available to the Indemnifying Party such
assistance and materials as it may reasonably request, all at the expense
of the Indemnifying Party; the Indemnified Party shall have the right at
its expense to participate in the defense assisted by counsel of its own
choosing. In such an event, the Indemnifying Party will not settle the
subject claim without the prior written consent of the Indemnified Party,
which consent will not be unreasonably withheld or delayed.
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(d) Without the prior written consent of the Indemnified Party, the
Indemnifying Party will not enter into any settlement of any Third Party
Claim or cease to defend against such claim, if pursuant to or as a result
of such settlement or cessation, (i) injunctive relief or specific
performance would be imposed against the Indemnified Party, or (ii) such
settlement or cessation would lead to liability or create any financial or
other obligation on the part of the Indemnified Party for which the
Indemnified Party is not entitled to indemnification hereunder.
(e) If an Indemnified Party refuses to consent to a bona fide offer
of settlement which provides for a full release of the Indemnified Party
and its affiliates and solely for a monetary payment which the
Indemnifying Party wishes to accept, the Indemnified Party may continue to
pursue such matter, free of any participation by the Indemnifying Party,
at the sole expense of the Indemnified Party. In such an event, the
obligation of the Indemnifying Party shall be limited to the amount of the
offer of settlement which the Indemnified Party refused to accept plus the
costs and expenses of the Indemnified Party incurred prior to the date the
Indemnifying Party notified the Indemnified Party of the offer of
settlement.
(f) Notwithstanding clause (b) above, the Indemnifying Party shall
not be entitled to control, but may participate in, and the Indemnified
Party shall be entitled to have sole control over, the defense or
settlement of any claim (i) that seeks a temporary restraining order, a
preliminary or permanent injunction or specific performance against the
Indemnified Party, (ii) to the extent such claim involves criminal
allegations against the Indemnified Party, (iii) that if unsuccessful,
would set a precedent that would materially interfere with, or have a
material adverse effect on, the business or financial condition of the
Indemnified Party or (iv) if such claim would impose liability on the part
of the Indemnified Party for which the Indemnified Party is not entitled
to indemnification hereunder. In such an event, the Indemnifying Party
will still have all of its obligations hereunder provided that the
Indemnified Party will not settle the subject claim without the prior
written consent of the Indemnifying Party, which consent will not be
unreasonably withheld or delayed.
(g) Any final judgment entered or settlement agreed upon in the
manner provided herein shall be binding upon the Indemnifying Party, and
shall conclusively be deemed to be an obligation with respect to which the
Indemnified Party is entitled to prompt indemnification hereunder.
(h) A failure by an Indemnified Party to give timely, complete or
accurate notice as provided in this Section 11.4 will not affect the
rights or obligations of any party hereunder except and only to the extent
that, as a result of such failure, any party entitled to receive such
notice was deprived of its right to recover any payment under its
applicable insurance coverage or was otherwise directly and materially
damaged as a result of such failure to give timely notice.
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Section 11.5 Limitations on and Other Matters Regarding Indemnification.
11.5.1 Indemnity Cushion and Cap. Subject to Section 11.5.4 below, the
Stockholder shall not have any liability to any Purchaser Indemnified Party with
respect to Losses arising out of any of the matters referred to in Section
11.2.1 until such time as the amount of such liability shall exceed in the
aggregate (i) $25,000, plus (ii) the amount by which Net Worth of the Company
(as defined in Section 8.13) as of the Effective Date exceeded $1.00 (the
"Aggregate Cushion") (in which case the Stockholder shall be liable for all
Losses in excess of the Aggregate Cushion). Subject to Section 11.5.4 below, the
indemnity obligations of the Stockholder with respect to Losses arising out of
any matter referred to in Section 11.2.1 shall not exceed the value of the
Paradise Stock delivered to the Stockholder at the Closing. For purposes of
calculating the value of the Paradise Stock received by the Stockholder, the
Paradise Stock shall be valued at its fair market value, which shall be the
average closing price for Paradise Stock on the Nasdaq Small Cap Market for the
ten trading days ending two business days immediately prior to the date of
payment.
11.5.2 Termination of Indemnification Obligations of the Stockholder . The
obligation of the Stockholder to indemnify under Section 11.2 hereof shall
terminate one year from the Closing Date, except (a) as to matters as to which
the Purchaser Indemnified Party has made a claim for indemnification on or prior
to such date and (b) with respect to any claim for Losses pertaining to a
misrepresentation or a breach of representation or warranty under Section 3.11
or any other Section of Article III of this Agreement relating to Taxes . The
obligation to indemnify referred to in:
(i) the preceding clause (a) shall survive the expiration of such period
until such claim for indemnification is finally resolved and any
obligations with respect thereto are fully satisfied; and
(ii) the preceding clause (b) shall terminate 180 days after the
expiration of the relevant Federal, state or local statute of limitations
(taking into account any extensions or waivers thereof), except as to
matters as to which any Indemnified Party has made a claim for
indemnification on or prior to such date, in which case the right to
indemnification with respect thereto shall survive the expiration of any
such period until such claim for indemnification is finally resolved and
any obligations with respect thereto are fully satisfied.
11.5.3 Termination of Indemnification Obligations of Paradise and the
Purchaser. The obligation of Paradise and the Purchaser to indemnify under
Section 11.3 hereof shall terminate one year from the Closing Date except as to
matters as to which the Stockholder Indemnified Party has made a claim for
indemnification on or prior to such date, in which case the right to
indemnification with respect thereto shall survive such period until such claim
for indemnification is resolved and any obligations with respect thereto are
fully satisfied.
11.5.4 Exceptions. Each of the limitations set forth above in this Section
11.5 shall in no event (a) apply to any Losses incurred by a Purchaser
Indemnified Party which relate, directly or
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indirectly, to (i) any fraudulent acts committed by the Stockholder (including
without limitation, fraud in connection with the transaction contemplated hereby
and any fraudulent acts by any manager, officer, employee, agent or equity
holder of the Stockholder or the Company); (ii) any indemnification obligation
under Section 11.2.1(c); and (iii) the Stockholder's obligations set forth in
Section 12.1 to pay certain expenses; or (b) apply to any Losses incurred by the
Stockholder Indemnified Party which relate, directly or indirectly, to (i) any
fraudulent acts committed by Paradise, the Purchaser (including without
limitation, fraud in connection with the transaction contemplated hereby and any
fraudulent acts by any officer, director, employee, agent or shareholder of
Paradise or the Purchaser); (ii) any indemnification obligation under Section
11.3(c); and (iii) Paradise's obligations set forth in Section 12.1 to pay
certain expenses.
11.5.5 Control by Paradise. All decisions and determinations to be made by
the Purchaser and/or a Purchaser Indemnified Party under this Article XI shall
be made by Paradise in the name of and on behalf of the Purchaser or such other
the Purchaser Indemnified Party.
ARTICLE XII
MISCELLANEOUS
Section 12.1 Expenses. Except for the costs of auditing the Company's
financial statements (as described in Sections 2.1.2 and 3.4), which costs shall
be paid by Paradise, the parties hereto shall pay all of their own expenses
relating to the transactions contemplated by this Agreement, including, without
limitation, the fees and expenses of their respective counsel and financial
advisors.
Section 12.2 Governing Law. The interpretation and construction of this
Agreement, and all matters relating hereto, (including, without limitation, the
validity or enforcement of this Agreement), shall be governed by the laws of the
State of Delaware without reference to its conflict of laws provisions.
Section 12.3 Jurisdiction. Any judicial proceeding brought against any of
the parties to this Agreement on any dispute arising out of this Agreement or
any matter related hereto shall be brought in (i) the courts of the State of New
York or in the United States District Court for the Southern District of New
York, if the principal office of Paradise is then located in New York, or (ii)
the courts of the State of California or in the United States District Court for
the Southern District of California, if the principal office of paradise is then
located in California. Each party hereto irrevocably waives to the fullest
extent permitted by law any objection that it may now or hereafter have to the
laying of the venue of any judicial proceeding brought in such courts and any
claim that any such judicial proceeding has been brought in an inconvenient
forum. The foregoing consent to jurisdiction shall not constitute general
consent to service of process in the States of New York or California for any
purpose except as provided above and shall not be deemed to confer rights on any
person other than
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the respective parties to this Agreement. EACH PARTY HEREBY WAIVES TRIAL BY JURY
IN ANY JUDICIAL PROCEEDINGS UNDER THIS AGREEMENT.
Section 12.4 "Person" Defined. "Person" shall mean and include an
individual, a company, a partnership, a joint venture, a corporation (including
any non-profit corporation), a trust, an estate, a limited liability company, a
limited liability partnership, an unincorporated organization and a government
or other department or agency thereof.
Section 12.5 "Knowledge" Defined. Where any representation and warranty
contained in this Agreement is expressly qualified by reference to the knowledge
of the Stockholder, such term shall be limited to the actual knowledge of the
Stockholder and unless otherwise stated such knowledge that would have been
discovered by the Stockholder after reasonable inquiry. Where any representation
and warranty contained in this Agreement is expressly specified by reference to
the knowledge of Paradise or the Purchaser, as the case may be, such term shall
be limited to the actual knowledge of the executive officers of such entity and
unless otherwise stated, such knowledge that would have been discovered by such
executive officers after reasonable inquiry.
Section 12.6 "Affiliate"Defined. As used in this Agreement, an "affiliate"
of any Person, shall mean any Person that directly, or indirectly through one or
more intermediaries, controls, or is controlled by, or is under common control
with such Person.
Section 12.7 Captions. The Article and Section captions used herein are
for reference purposes only, and shall not in any way affect the meaning or
interpretation of this Agreement.
Section 12.8 Confidentiality. Unless and until the Closing shall have
occurred and except as may be required in connection with (i) any public
announcement that Paradise, the Purchaser and the Stockholder have executed this
Agreement, or (ii) any governmental filings contemplated under this Agreement,
Paradise, the Purchaser and the Stockholder shall, and shall cause their
respective employees, agents, consultants and representatives to, maintain in
confidence and not otherwise use or permit the use of information, documents,
and data respecting any other party to this Agreement furnished to them, or to
any person or entity on their behalf except to the extent that such information
is elsewhere available to the public or otherwise rightfully obtained without
violation of this Section 12.8 or any other agreement. If this Agreement is
terminated pursuant to Section 10.2 hereof or otherwise, each party shall (and
Paradise the Purchaser and the Stockholder shall cause any third party to whom
it has made permitted disclosures to) (i) return to the other party or destroy
all written information, documents, and data furnished to it or to any person or
entity on its behalf, and (ii) maintain in confidence all information received
by it, or by any person or entity on its behalf, and shall not use or permit the
use of such information by others except to the extent that such information is
elsewhere available to the public or otherwise rightfully obtained without
violation of this Section 12.8 or any other agreement. Notwithstanding the
foregoing, the foregoing provision shall not apply to the extent that Paradise
is required to make any announcement or file
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information relating to or arising out of this Agreement by virtue of the
federal securities laws of the United States or the rules and regulations
promulgated thereunder or other rules of the Nasdaq Small Cap Market, or any
announcement by any party pursuant to applicable law or regulations.
Section 12.9 Notices. Unless otherwise provided herein, any notice,
request, instruction or other document to be given hereunder by any party to any
other party shall be in writing and shall be deemed to have been given (a) upon
personal delivery, if delivered by hand or by courier, (b) three days after the
date of deposit in the mails, postage prepaid, if mailed by certified or
registered mail, or (c) the next business day if sent by facsimile transmission
(if receipt is electronically confirmed) or by a prepaid overnight courier
service, and in each case at the respective addresses or numbers set forth below
or such other address or number as such party may have fixed by notice:
If to either Paradise or to the Purchaser, addressed to:
Paradise Music & Entertainment, Inc.
53 West 23rd Street, 11th Floor
New York, New York 10010
Attention: President
Fax: 212-845-6480
with a copy to:
Davis & Gilbert LLP
1740 Broadway
New York, New York 10019
Attention: Walter M. Epstein, Esq.
Fax: (212) 468-4888
If to the Stockholder, addressed to:
Consolidated Entertainment, LLC
8330 W. Third Street
Los Angeles, CA 90048
Attention: Jesse Dylan
Fax: (310) 458-9833
with a copy to:
Cohen, Primiani & Foster
2029 Century Park East, Suite 400
Los Angeles, CA 90067
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Attention: Michael Foster, Esq.
Fax: (310) 277-4351
Section 12.10 Parties in Interest. This Agreement may not be transferred,
assigned pledged or hypothecated by any party hereto, other than by operation of
law. Any purported transfer, assignment, pledge or hypothecation (other than by
operation of law) shall be void and ineffective. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
heirs, executors, administrators, successors and permitted assigns.
Section 12.11 Severability. In the event any provision of this Agreement
is found to be void and unenforceable by a court of competent jurisdiction, the
remaining provisions of this Agreement shall nevertheless be binding upon the
parties with the same effect as though the void or unenforceable part had been
severed and deleted.
Section 12.12 Counterparts. This Agreement may be executed in two or more
counterparts, all of which taken together shall constitute one instrument.
Section 12.13 Entire Agreement. This Agreement, including the other
documents referred to herein which form a part hereof, contains the entire
understanding of the parties hereto with respect to the subject matter contained
herein and therein. This Agreement supersedes all prior oral and written
agreements and understandings between the parties with respect to such subject
matter.
Section 12.14 Amendment. This Agreement may not be amended, supplemented
or modified orally, but only by an agreement in writing signed on behalf of each
of the parties hereto.
Section 12.15 Third Party Beneficiaries. Each party hereto intends that
this Agreement shall not benefit or create any right or cause of action in or on
behalf of any person other than the parties hereto and their respective
successors and assigns as permitted under Section 12.10.
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IN WITNESS WHEREOF, the parties hereto have executed this Stock Purchase
Agreement, on the day and year first above written.
PARADISE MUSIC &
ENTERTAINMENT, INC.
By:_______________________________________
Name:
Title:
STRAW DOGS ACQUISITION CORP.
By:_______________________________________
Name:
Title:
__________________________________________
JESSE DYLAN
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Appendix C
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 1st day of July, 1999, ("Effective Date") by and
between Paradise Music & Entertainment, Inc. ("Employer") and Jesse Dylan, an
individual (the "Executive").
W I T N E S S E T H :
WHEREAS, entering into this Agreement is a condition of closing under the
Asset Purchase Agreement dated _______, 1999 (the "Purchase Agreement") pursuant
to which Employer, through its wholly-owned subsidiary Straw Dogs Acquisition
Corp. ("New Straw Dogs"), will acquire all of the assets, subject to disclosed
liabilities, and the on-going business of Consolidated Entertainment, LLC (d/b/a
Straw Dogs) ("Old Straw Dogs"); and
WHEREAS, Employer intends that New Straw Dogs will conduct the business
previously conducted by Old Straw Dogs as a separate subsidiary of Employer; and
WHEREAS, the Executive was an owner of Old Straw Dogs and was employed by
Old Straw Dogs and Employer wishes to ensure his employment with Employer and
the Executive wishes to accept such employment upon the terms and conditions
hereinafter set forth.
NOW, THEREFORE, the parties hereto agree as follows:
1. Employment. Employer agrees to employ the Executive for the Term
specified in Section 2 and in the capacities set forth in Section 3 and the
Executive agrees to accept such employment, upon the terms and conditions
hereinafter set forth. This Agreement shall only be effective if the closing of
the Purchase Agreement takes place.
2. Term. This Agreement shall be for a term commencing on the Effective
Date and expiring on June 30, 2004 ("Term").
3. Duties and Responsibilities.
(a) During the Term, the Executive shall serve as Chairman and Chief
Executive Officer of Employer. The Executive shall report to the Board of
Directors of Employer. All employees of Employer, its subsidiaries and
affiliates, shall report to the Executive or his designee.
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(b) Except as otherwise provided for herein, the Executive shall
devote substantially all his business efforts to the affairs of Employer. The
Executive will (i) devote his best efforts, skill and ability to promote
Employer's interests; (ii) carry out his duties in a competent and professional
manner; (iii) work with other employees of Employer in a competent and
professional manner; and (iv) generally promote the best interests of Employer.
Notwithstanding the foregoing, the Executive may engage as a passive investor
and to the extent indicated on Schedule 1 in limited active involvement in the
additional activities listed on Schedule 1 to this Agreement, provided that such
activities do not materially interfere with the performance of his services,
duties and responsibilities under this Agreement. In addition, the Executive may
perform directing and producing services either through the entities listed on
Schedule 1 or otherwise provided that all compensation of any kind paid with
respect to such services is paid to Employer. The Executive shall have the right
to continue to own the interests in the entities listed on Schedule 1. Employer
shall give the Executive notice of and a 20 day period to cure any breach of the
provisions of this Section 3(b).
(c) The Executive shall be headquartered in Los Angeles County,
California and, subject to reasonable travel, the Executive's duties shall be
performed in Los Angeles County, California unless mutually agreed upon by the
Executive and Employer.
(d) Employer shall nominate the Executive as a member of the
management slate at each annual meeting of stockholders during his employment
hereunder when the term of the Executive's seat on Employer's Board of Directors
expires.
4. Compensation.
(a) As compensation for services rendered hereunder and in
consideration of his agreement not to compete as set forth in Section 11 below,
Employer shall pay the Executive at a rate of $750,000 ("Annual Salary") per
annum payable in accordance with Employer's normal payroll practices. The
Executive's compensation will be reviewed annually by Employer's Compensation
Committee with bonus awards or increases in salary to be considered based on the
Executive's and Employer's performance. The determination of bonus awards will
take into account Employer's and New Straw Dogs' overall profitability, growth,
capital appreciation, unused vacation and any compensation paid to Employer in
connection with the Executive's services as a producer or director pursuant to
Section 3(b), above. Such awards may consist of all or a combination of cash,
stock, stock options, stock warrants, stock appreciation rights or other forms
of non-cash compensation as mutually agreed upon between the Compensation
Committee and the Executive.
(b) In addition to the compensation set forth in paragraph 4(a)
above, the Executive will receive ten year options for 750,000 shares of
Employer's Common Stock, $.01 par value. The exercise price for such options is
$5.00. One-third of such options (i.e. 250,000 options) will vest one year after
the Effective Date; one-third of such options will vest two years after the
Effective Date; and one-third of such options will vest three years after the
Effective Date, provided that, in each case, the Executive is employed by
Employer on the applicable vesting date; provided, however, in the event of the
Executive's death during the first one year vesting period, options for 250,000
shares shall vest upon the
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Executive's death. If the Executive's employment by Employer terminates for any
reason, the Executive (or his estate) shall have 90 days (five years in the case
of the Executive's estate) after such termination date to exercise all vested
options. Employer shall promptly file and continue to keep effective and
supplemented, without cost to the Executive, an S-8 registration statement
covering the shares to be issued upon exercise of the option, as well as an S-8
reoffer prospectus pursuant to which the Executive can make unrestricted sales
of the shares.
5. Benefits.
(a) During the Term, the Executive shall be entitled to participate
in the benefit plans established by Employer for the benefit of its key
executives, except to the extent that any such benefits duplicate Directors
Guild of America coverage. The Executive's membership in the Directors Guild of
America shall be maintained at Employer's expense to the extent not normally
covered and paid for from operating budgets of projects directed by the
Executive. In addition, during the Term, the Employer shall provide the
Executive with life insurance in the amount of $1,500,000 assuming that the
Executive is insurable at reasonable rates. Employer will cooperate with the
Executive with respect to the Executive's assignment of such policy to a life
insurance trust for estate planning purposes.
(b) The Executive shall be entitled to four (4) weeks of paid
vacation per year.
(c) Employer hereby agrees to indemnify, release and hold harmless
the Executive when and if (i) he is the subject of any claim or is or becomes a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, administrative,
investigative or criminal by reason of the fact that he is or was an officer,
director, employee, consultant or agent to Employer, its subsidiaries and/or
affiliates, or by reason of any action alleged to have been taken or omitted in
such capacity; (ii) against any and all costs, charges and expenses, including,
without limitation, reasonable attorneys' and other fees and expenses,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by the Executive in connection therewith and any appeal therefrom if the
Executive acted in good faith and in a manner he reasonably believed to be in
the best interests of the Employer, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any civil action, suit or proceeding by settlement or consent
decree shall not, of itself, create a presumption that the Executive did not
satisfy the foregoing standard of conduct to the extent applicable thereto. The
Executive shall be added as an additional insured under all liability insurance
policies now in force or hereafter obtained covering any officer of the Company
in his capacity as an officer. In addition, Employer has obtained and will pay
all premiums on a separate directors and officers liability insurance policy in
the amount of $5,000,000 to cover the Executive personally. A copy of such
policy is attached to this Agreement as Annex A.
(d) Employer shall reimburse the Executive for all properly
vouchered reasonable business expenses.
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6. Key Man Insurance. Employer shall have the right to obtain key man life
insurance for the benefit of Employer on the life of the Executive. If requested
by Employer, the Executive shall submit to such physical examination and
otherwise take such actions and execute and deliver such documents as may be
reasonably necessary to enable Employer to obtain such life insurance. The
Executive has no reason to believe that his life is not insurable with a
reputable insurance company at rates now prevailing in the City of Los Angeles
for healthy men of his age.
7. Discharge by Employer.
(a) Discharge for Cause. Employer shall be entitled to immediately
terminate the Term and to discharge the Executive for cause, which shall be
limited to the following grounds:
(i) Conviction of a felony involving any financial impropriety
or which would materially interfere with the Executive's ability to perform his
services required under this Agreement; or
(ii) Commission of a willful or intentional act of moral
turpitude which reasonably could be expected to materially injure the
reputation, business or business relationships of Employer, including acts of
moral turpitude such as continuing alcohol or substance abuse or the violation
of the terms of Sections 10 and 11 hereof, which is not cured within 30 days
after Executive has received a written notice from the Company stating in
reasonable detail the willful or intentional act(s) at issue and the nature of
the injury or damage. The preceding terms of this paragraph 7(a)(ii) shall not
be applicable to any acts of the Executive that are undertaken in good faith in
executing the duties of Chairman, Chief Executive Officer, or as a producer or
director on behalf of Employer.
(b) Termination Without Cause. In the event the Executive's
employment hereunder is terminated by Employer other than pursuant to Paragraph
7(a) or Paragraph 8, or if the Executive's employment is terminated by the
Executive for Good Reason (as hereinafter defined), the Executive shall be
entitled to receive the following:
(i) The Annual Salary that the Executive would have received
for the remaining balance of the Term. The greater of (a) one-half of such
amount or (b) one year's salary shall be paid to the Executive in a lump sum
within five days after the date of termination and the balance of such amount
shall be paid to the Executive on the date which is at the mid-point between the
termination date and the end of the Term as provided in this Agreement;
provided, however, if the remainder of the Term is less than one year, the
entire amount shall be paid to the Executive within five days after the date of
termination; and further provided, if Employer has $10,000,000 in cash reserves
in the bank at the date of termination, the entire amount shall be paid to the
Executive 5 days after the date of termination.
(ii) Employer shall pay for the cost of 18 months of COBRA
continuation coverage for the Executive. In the event Employer has been making
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contributions on the Executive's behalf to one or more benefit plans maintained
by the Directors Guild of America, Employer shall continue making such payments
for 12 months following the date of termination.
(iii) Full vesting of all stock options issued to the
Executive and not yet vested at the time of such termination. The Executive
shall have the right to exercise such options during the remainder of the ten
year option exercise term.
(iv) All premiums on any directors and officers liability
insurance policy maintained by Employer on the Executive's behalf which are
necessary to cover any claims with respect to events, actions, etc. which arose
prior to the Executive's termination and which claims are made prior to the
expiration of the applicable statute of limitations.
(v) All other reimbursements, unpaid bonuses and other
payments due to the Executive shall be paid in full within ten (10) business
days following the effective date of such termination.
For purposes of this Agreement, "Good Reason" shall mean, without the express
written consent of the Executive, the occurrence of any of the following events
unless such events are fully corrected within 30 days following written
notification by the Executive to Employer that he intends to terminate his
employment hereunder for one of the reasons set forth below, which notice shall
specify the nature of such breach or event in reasonable detail:
(i) A material breach by Employer of any provision of this
Agreement; or
(ii) Any change in the Board of Directors of Employer pursuant
to a "change in control" of Employer.
8. Disability, Death.
(a) If the Executive shall be unable to perform his duties hereunder
by virtue of illness or physical or mental incapacity or disability (from any
cause or causes whatsoever) in substantially the manner and to the extent
required hereunder prior to the commencement of such disability as determined by
a competent medical doctor (all such causes being herein referred to as
"Disability") and the Executive shall fail to have performed substantially such
duties for 90 consecutive days or for periods aggregating 180 days, whether or
not continuous, in any continuous period of one year (such 90th or 180th day to
be known as the "Disability Date"), Employer shall have the right to terminate
the Executive's employment hereunder as at the end of any calendar month
thereafter upon written notice to him. The Executive shall be entitled to his
Annual Salary for the remainder of the fiscal year in which the Disability Date
occurred plus all bonuses earned through the Disability Date for such fiscal
year.
(b) In case of the death of the Executive, this Agreement shall
terminate and Employer shall be obligated to pay to the Executive's estate or as
otherwise directed by
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the Executive's duly appointed and authorized legal representative, the Annual
Salary for the remainder of the fiscal year in which death occurs and all
bonuses earned through the date of death for such fiscal year.
9. Voluntary Termination. If the Executive voluntarily terminates his
employment prior to the end of the Term, he shall only be entitled to receive
compensation accrued through the date of termination. Nothing contained in this
paragraph 9 shall be deemed or construed to provide or grant Employer the right
to terminate this Agreement other than in accordance with Section 7 or Section
8.
10. Confidential Information. The Executive recognizes that he will occupy
a position of trust with respect to business and technical information of a
secret or confidential nature which is the property of Employer, or any of its
affiliates, and which has been and will be imparted to him from time to time in
the course of his employment with Employer. In light of this understanding, the
Executive agrees that:
(a) the Executive shall not at any time knowingly use or disclose,
directly or indirectly, any of the confidential information or trade secrets
which is the property of Employer, or any of its affiliates, to any person,
except that he may use and disclose to authorized Employer personnel, licensees
or franchisees in the course of his employment; and
(b) within five (5) days from the date upon which his employment
with Employer is terminated, for any reason or for no reason, or otherwise upon
the request of Employer, he shall return to Employer any and all documents and
materials which constitute or contain the confidential information or trade
secrets of Employer, or any of its affiliates.
For purposes of this Agreement, the terms "confidential information" or "trade
secrets" shall include all information of any nature and in any form which is
owned by Employer, or any of its affiliates, and which is not publicly available
or generally known to persons engaged in businesses similar to that of Employer,
or any of its affiliates. Notwithstanding the foregoing, when the Executive's
employment with Employer is terminated, for whatever reason, the limitations
provided in this Section 10 shall not prevent the Executive from using for his
own benefit any information which he acquired prior to the Effective Date.
11. Non-Competition.
(a) The Executive agrees that his services hereunder are of a
special character, and his position with Employer places him in a position of
confidence and trust with Employer's artists, clients, customers and employees.
The Executive and Employer agree that in the course of employment hereunder, the
Executive has and will continue to develop a personal acquaintanceship and
relationship with Employer's artists, clients and customers, and a knowledge of
those artists', clients' and customers' affairs and requirements which may
constitute Employer's primary or only contact with such artists, clients and
customers. The Executive consequently agrees that it is reasonable and necessary
for the protection of the goodwill and business of Employer that the Executive
make the covenants contained herein and that Employer would not have entered
into this Agreement or
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the Purchase Agreement unless the covenants set forth in this Section 11 were
contained in this Agreement. Accordingly, the Executive agrees that while he is
in Employer's employ, and for a three month period thereafter with respect to
the television commercial business only, the Executive will not, without the
prior written consent of Employer, either directly or indirectly, or in any
capacity whether as a promoter, proprietor, partner, joint venturer, employee,
agent, consultant, director, officer, manager, equity holder (except (i) as an
equity holder holding less than five percent (5%) of a publicly traded company's
issued and outstanding equity securities, or otherwise or (ii) as a passive
investor in private companies in amounts up to $1,000,000, provided that
investments above $1,000,000 shall be permitted if first offered to Employer),
work for, act as a consultant to or own any interest in any direct competitor of
Employer which operates in or provides services essentially the same as Employer
in any portion of the geographic territory where Employer operates or sells its
products or services, except as allowed pursuant to Section 3(b) of this
Agreement. Subject to paragraph 3(b), the preceding sentence shall not prevent
or preclude the Executive from engaging in a business activity that is not
competitive with Employer if Employer thereafter engages in such business
activity. The foregoing restrictions are hereinafter referred to as the
"Non-Compete Restrictions". The Executive further agrees that during the Term,
and for the one year period following the Executive's termination of employment
with Employer, the Executive will not solicit any employee of Employer (i) to
become, an employee of Employer, (ii) to alter, terminate or refrain from
extending or renewing any contractual or other relationship with Employer, or
(iii) to commence a similar or substantially similar relationship with the
Executive, any entity with whom the Executive is affiliated or employed by or
any direct competitor of Employer. The restrictions in the immediately preceding
sentence are hereinafter referred to as the "Non-Solicitation Restrictions". If
the Executive voluntarily terminates his employment prior to the end of the Term
or if Employer terminates the Executive's employment for reasons of cause prior
to the end of the Term, the Non-Compete Restrictions with respect to the
television commercial business only shall apply for a period of one year
following such termination; provided, however, the Executive shall be permitted
to direct television commercials for any direct competitor of Employer, but not
to otherwise engage in the television commercial business as an executive or
otherwise; and the Non-Solicitation Restrictions shall apply for a period of one
year following such termination. Notwithstanding the foregoing, if Employer
breaches any provision of this Agreement, which breach is not cured within 10
days after written notice thereof from the Executive to Employer, the
Non-Compete Restrictions shall not apply.
(b) As used in this Section 11, the term "Employer" shall include
subsidiaries, of Employer, and the term "employee" shall mean any person who is
then, or who had been at any time during the three month period immediately
preceding the date of termination of the Executive's employment, an employee of
Employer.
(c) The parties hereto agree that the duration and area for which
the covenant not to compete set forth herein is to be effective are reasonable.
In the event that any court determines that the time period or the area, or both
of them, are unreasonable and that such covenant is to that extent
unenforceable, the parties hereto agree that the covenant shall remain in fall
force and effect for the greatest time period and in the greatest area that
would not render it unenforceable.
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(d) The existence of any claim or cause of action of the Executive
against Employer, whether predicated on this Agreement or otherwise, shall not
constitute a defense to the enforcement by Employer of those covenants and
agreements.
12. Resolution of Disputes. Any dispute by and among the parties hereto
arising out of or relating to this Agreement, the terms, conditions or a breach
thereof, or the rights or obligations of the parties with respect thereto, shall
be arbitrated in the City of Los Angeles, California, before and pursuant to
then applicable commercial rules and regulations of Jams - Endispute, or any
successor organization. The arbitration proceedings shall be conducted by a
panel of three arbitrators, one of whom shall be selected by Employer, one by
the Executive (or his legal representative) and the third arbitrator by the
first two so chosen. The parties shall use their best efforts to assure that the
selection of the arbitrators shall be completed within 30 days and the parties
shall use their best efforts to complete the arbitration as quickly as possible.
In such proceeding, the arbitration panel shall determine who is a substantially
prevailing party and shall award to such party its reasonable attorneys',
accountants' and other professionals' fees and its costs incurred in connection
with the proceeding. The award of the arbitration panel shall be final, binding
upon the parties and nonappealable and may be entered in and enforced by any
court of competent jurisdiction. Such court may add to the award of the
arbitration panel additional reasonable attorneys' fees and costs incurred by
the substantially prevailing party in attempting to enforce such award.
13. Enforceability. The failure of either party at any time to require
performance by the other party of any provision hereunder shall in no way affect
the right of that party thereafter to enforce the same, nor shall it affect any
other party's right to enforce the same, or to enforce any of the other
provisions of this Agreement; nor shall the waiver by either party of the breach
of any provision hereof be taken or held to be a waiver of any subsequent breach
of such provision or as a waiver of the provision itself.
14. Assignment. This Agreement is a personal contract and the Executive's
rights and obligations hereunder may not be sold, transferred, assigned, pledged
or hypothecated by the Executive. The rights and obligations of Employer
hereunder shall be binding upon and run in favor of the successors and assigns
of Employer. If any assignment or transfer of rights hereunder is attempted by
the Executive contrary to the provisions hereof, Employer shall have no further
liability for payments hereunder.
15. Modification. This Agreement may not be canceled, changed, modified or
amended orally, and no cancellation, change, modification or amendment shall be
effective or binding, unless it is in writing, signed by both parties to this
Agreement.
16. Severability, Survival. If any provision of this Agreement is held to
be void and unenforceable by a court of competent jurisdiction, the remaining
provisions of this Agreement nevertheless shall be binding upon the parties with
the same effect as though the void or enforceable part has been Severed and
deleted.
17. Notice. Notices given pursuant to the provisions of this Agreement
shall be sent by certified mail, postage prepaid, or by overnight courier, or by
telex, telecopier or
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telegraph, charges prepaid, to the following address or such other address as
shall be specified by written notice:
To Employer: Paradise Music & Entertainment, Inc.
53 West 23rd Street
New York, New York 10010
Attention: Chief Operating Officer
with a copy to: Davis & Gilbert LLP
1740 Broadway, 3rd Floor
New York, New York 10019
Attn: Walter M. Epstein, Esq.
To the Executive: Jesse Dylan
c/o Consolidated Entertainment, LLC
8330 W. Third Street
Los Angeles, CA 90048
with a copy to: Cohen Primiani & Foster
2029 Century Park East, Suite 400
Los Angeles, CA 90067
Attention: Michael Foster, Esq.
18. Applicable Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
19. No Conflict. The Executive represents and warrants that he is not
subject to any agreement, instrument, order, judgment or decree of any kind, or
any other restrictive agreement of any character, which would prevent him from
entering into this agreement or which would be breached by the Executive upon
his performance of his duties pursuant to this agreement.
20. Entire Agreement. This agreement represents the entire agreement
between Employer and the Executive with respect to the subject matter hereof,
and all prior agreements relating to the employment of the Executive, written or
oral, are nullified and superseded hereby.
21. Representations of Employer. Employee has the full corporate power and
authority to make, execute, deliver and perform this Agreement. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all required corporate action
on behalf of Employer, and this Agreement has been duly and validly executed and
delivered by Employer and assuming due authorization, execution and delivery by
the Executive, constitutes legal, valid and binding obligations of Employer,
enforceable against it in accordance with its terms. Employer is a
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<PAGE>
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware with full corporate power and authority to own its
property and to carry on its business all as and in the places where such
properties are now owned or operated or such business is now being conducted.
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<PAGE>
IN WITNESS WHEREOF, the parties have set their hands and seals on and as
of the day and year first above written.
PARADISE MUSIC & ENTERTAINMENT, INC.
By:
---------------------------------
Name:
Title:
------------------------------------
Jesse Dylan
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<PAGE>
Appendix D
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 1st day of July, 1999, ("Effective Date") by and
between Straw Dogs Acquisition Corp. (to be renamed "Straw Dogs Inc.")
("Employer") and Craig Rodgers, an individual (the "Executive").
W I T N E S S E T H:
WHEREAS, entering into this Agreement is a condition of closing under the
Asset Purchase Agreement dated _______, 1999 (the "Purchase Agreement") pursuant
to which Employer, a wholly-owned subsidiary of Paradise Music & Entertainment,
Inc., ("Paradise"), will acquire all of the assets, subject to disclosed
liabilities, and the on-going business of Consolidated Entertainment, LLC (d/b/a
Straw Dogs) ("Old Straw Dogs"); and
WHEREAS, Paradise and Employer intend that Employer will conduct the
business previously conducted by Old Straw Dogs as a separate subsidiary of
Paradise; and
WHEREAS, the Executive was an owner of Old Straw Dogs and was employed by
Old Straw Dogs and Employer wishes to ensure his employment with Employer and
the Executive wishes to accept such employment upon the terms and conditions
hereinafter set forth.
NOW, THEREFORE, the parties hereto agree as follows:
1. Employment. Employer agrees to employ the Executive for the Term
specified in Section 2 and in the capacities set forth in Section 3 and the
Executive agrees to accept such employment, upon the terms and conditions
hereinafter set forth. This Agreement shall only be effective if the closing of
the Purchase Agreement takes place.
2. Term. This Agreement shall be for a term commencing on the Effective
Date and expiring on June 30, 2002 ("Term").
3. Duties and Responsibilities.
(a) During the Term, the Executive shall serve as Chief Executive
Officer of Employer subject only to thc review of the Chief Operating Officer of
Paradise (so long as the Chief Operating Officer is Jay Walkingshaw) and the
Chief Executive Officer of Paradise.
<PAGE>
(b) The Executive shall devote substantially all his business
efforts to the affairs of Employer. The Executive will (i) devote his best
efforts, skill and ability to promote Employer's interests; (ii) carry out his
duties in a competent and professional manner; (iii) work with other employees
of Employer in a competent and professional manner; and (iv) generally promote
the best interests of Employer.
(c) The Executive shall be headquartered in Los Angeles County,
California and, subject to reasonable travel, the Executive's duties shall be
performed in Los Angeles County, California unless mutually agreed upon by the
Executive and Employer.
4. Compensation.
(a) As compensation for services rendered hereunder and in
consideration of the Non-Compete Restrictions and the Non-Solicitation
Restrictions as set forth in Section 11 below, Employer shall pay the Executive
at a rate of $350,000 ("Annual Salary") per annum payable in accordance with
Employer's normal payroll practices. The Executive's compensation will be
reviewed annually by Employer's Compensation Committee with bonus awards or
increases in salary to be considered based on the Executive's and Employer's
performance. The determination of bonus awards will take into account Employer's
overall profitability, growth and capital appreciation. Such awards may consist
of all or a combination of cash, stock, stock options, stock warrants, stock
appreciation rights or other forms of non-cash compensation as mutually agreed
upon between the Compensation Committee and the Executive.
(b) In addition to the compensation set forth in Section 4(a) above,
the Executive shall be entitled to an annual bonus award of $100,000 per year if
the profit before tax ("PBT") (as hereinafter defined) of Employer at the end of
each fiscal year (i.e. July 1 through June 30) commencing on the Effective Date
is at least $850,000. If PBT for any such fiscal year is less than $850,000, the
determination of the amount of the bonus award, if any, shall be made by the
Board of Directors of Employer in its sole discretion. If PBT for any such
fiscal year is greater than $850,000, the determination of the amount of any
bonus award above $100,000, if any, shall be made by the Board of Directors of
Employer in its sole discretion.
For purposes of this Agreement, PBT of Employer at the end of any fiscal year
shall be the profit (or loss) resulting from Employer's gross income from its
operations for such fiscal year, after deduction for all of Employer's expenses,
charges and reserves, including without limitation, all operating expenses
(exclusive of amortization for goodwill and any overhead charges); and before
provision for taxes based on the income of Employer. PBT shall be determined by
the Chief Financial Officer of Paradise in accordance with generally accepted
accounting principles consistently applied ("GAAP") and Paradise's management
accounting practices to the extent consistent with GAAP. The bonus for each
fiscal year shall be paid within 45 days after the end of the applicable fiscal
year.
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Employer's records of its PBT shall be open to inspection at
reasonable times during normal business hours by Executive or his duly
authorized accountants or agents who shall have the right to examine and make
copies of such records. Such inspection and examination shall be at Executive's
cost and expense, provided, however, if it is determined that Employer
understated PBT by more than 5%, Employer shall pay the cost of such inspection
and examination.
(c) In addition to the compensation set forth in paragraphs 4(a) and
4(b) above, the Executive will receive ten year options for 100,000 shares of
Paradise's Common Stock, $.01 par value. One-third of such options will vest one
year after the Effective Date; one-third of such options will vest two years
after the Effective Date; and one-third of such options will vest three years
after the Effective Date, provided that, in each case the Executive is employed
by Employer on the applicable vesting date; provided, however, if the
Executive's employment is terminated by Employer other than pursuant to
paragraph 7 or paragraph 8, or if the Executive's employment is terminated by
the Executive for "Good Reason" (as defined in paragraph 9), all unvested stock
options shall vest at the time of such termination. The exercise price for such
options is $5.00. If the Executive's employment by Employer terminates for any
reason, the Executive (or his estate) shall have 90 days after such termination
date to exercise all vested options. Employer shall promptly file and continue
to keep effective and supplemented, without cost to the Executive, an S-8
registration statement covering the shares to be issued upon exercise of the
option, as well as an S-8 reoffer prospectus pursuant to which the Executive can
make unrestricted sales of the shares.
5. Benefits.
(a) During the Term, the Executive shall be entitled to participate
in any and all group, life, disability income, health or accident insurance
programs or other fringe benefits applicable to any personnel of Employer or
Paradise and in effect at any time during the period of the Executive's
employment, subject only to eligibility restrictions of such programs. The
Executive shall also have the right to participate in any and all employee
retirement benefits plans or profit-sharing plan which Employer or Paradise
maintains for its personnel and in effect at any time during the period of
Executive's employment, subject only to eligibility requirements of such plans.
(b) The Executive shall be entitled to four (4) weeks of paid
vacation per year.
(c) Employer shall reimburse the Executive for all properly
vouchered business expenses. The nature of such expenses shall be commensurate
with the senior executive position of the Executive.
(d) Employer hereby agrees to indemnify, release and hold harmless
the Executive against any and all costs, charges and expenses, including,
without limitation, reasonable attorneys' and other fees and expenses,
judgements, fines and amount paid in
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<PAGE>
settlement actually and reasonably incurred by the Executive therewith and any
appeal therefrom, when and if (i) he is the subject of any claim or is or
becomes a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, administrative,
investigative or criminal by reason of the fact that he is or was an officer,
director, employee, consultant or agent to Employer, or by reason of any action
alleged to have been taken or omitted in such capacity; and (ii) if the
Executive acted in good faith and in a manner he reasonably believed to be in
the best interests of the Employer, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any civil action, suit or proceeding by settlement or consent
decree shall not, of itself, create a presumption that the Executive did not
satisfy the foregoing standard of conduct to the extent applicable thereto.
Employer shall obtain and maintain, or cause Paradise to obtain and maintain, a
policy of liability insurance covering the contractual liability of Employer
arising out of the indemnities provided for herein in amounts and issued by
issuers reasonably satisfactory to the Executive.
(e) Employer shall use all reasonable efforts to obtain disability
income insurance for the benefit of the Executive, such insurance to be
commensurate with Paradise's disability insurance coverage. The Executive shall
cooperate with Employer in obtaining said disability insurance by submitting to
a customary medical examination, if required, and by supplying the insurance
company with all necessary information.
6. Key Man Insurance. Employer shall have the right to obtain key man life
insurance for the benefit of Employer on the life of the Executive. If requested
by Employer, the Executive shall submit to such physical examination and
otherwise take such actions and execute and deliver such documents as may be
reasonably necessary to enable Employer to obtain such life insurance. The
Executive has no reason to believe that his life is not insurable with a
reputable insurance company at rates now prevailing in the City of Los Angeles
for healthy men of his age.
7. Discharge by Employer. Employer shall be entitled to immediately
terminate the Term and to discharge the Executive for cause, which shall be
limited to the following grounds:
(a) Conviction of a felony with respect to any criminal act
involving Employer or
(b) Commission of a willful or intentional act which reasonably
could be expected to materially injure the reputation, business or business
relationships of Employer, including acts of moral turpitude such as continuing
alcohol or substance abuse or the violation of the terms of Sections 10 and 11
hereof, which is not cured within 10 days after Executive has received a written
notice from the Company stating in reasonable detail the willful or intentional
act(s) at issue and the nature of the injury or damage.
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<PAGE>
8. Disability, Death.
(a) If the Executive shall be unable to perform his duties hereunder
by virtue of illness or physical or mental incapacity or disability (from any
cause or causes whatsoever) in substantially the manner and to the extent
required hereunder prior to the commencement of such disability as determined by
a competent medical doctor (all such causes being herein referred to as
"Disability") and the Executive shall fail to have performed substantially such
duties for 90 consecutive days or for periods aggregating 180 days, whether or
not continuous, in any continuous period of one year (such 90th or 180th day to
be known as the "Disability Date"), Employer shall have the right to terminate
the Executive's employment hereunder upon written notice to him within ten days
after such Disability Date. The Executive shall be entitled to his Annual Salary
for the remainder of the fiscal year in which the Disability Date occurred plus
all bonuses accrued through the Disability Date for such fiscal year.
If at any time during the Term, the Executive shall become subject
to a Disability, Employer shall continue to pay to the Executive the amounts
provided in this Agreement, provided that all payments received during said 90
or 180-day period by the Executive under any policies of disability income
insurance purchased by Employer shall be deemed to be a credit against and shall
be offset against any compensation payable by Employer to the Executive pursuant
to this Agreement.
The determinations of whether the Executive is disabled and the
commencement, duration, and termination of any such Disability shall be made
jointly by the Executive and the Board of Directors of Employer. In the absence
of agreement between them, the aforesaid determinations shall be made by a
reputable physician selected by the parties hereto. The Executive shall submit
to an examination by the physician agreed upon and the results of such
examination, when evidenced in writing by such physician, shall be final and
binding upon the parties hereto.
(b) In case of the death of the Executive, this Agreement shall
terminate and Employer shall be obligated to pay to the Executive's estate or as
otherwise directed by the Executive's duly appointed and authorized legal
representative, the Annual Salary for the remainder of the fiscal year in which
death occurs and all bonuses accrued through the date of death for such fiscal
year.
9. Termination by Executive. Executive may terminate this Agreement upon
ten days notice for "Good Reason". "Good Reason" shall mean Employer's material
violation of its obligations hereunder or the diminution of Executive's duties
and responsibilities, which breach is not cured within 30 days after Employer
has received a written notice from the Executive stating in reasonable detail
the nature of the breach. If the Executive terminates his employment prior to
the end of the Term for Good Reason, he shall be entitled to receive all the
compensation due hereunder through the expiration date of the Term set forth in
Section 2. If the Executive voluntarily terminates his employment prior to the
end of the
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<PAGE>
Term other than for Good Reason, he shall only be entitled to receive
compensation accrued through the date of termination.
10. Confidential Information. The Executive recognizes that he will occupy
a position of trust with respect to business and technical information of a
secret or confidential nature which is the property of Employer, or any of its
affiliates, and which has been and will be imparted to him from time to time in
the course of his employment with Employer. In light of this understanding, the
Executive agrees that:
(a) the Executive shall not at any time knowingly use or disclose,
directly or indirectly, any of the confidential information or trade secrets
which is the property of Employer, or any of its affiliates, to any person,
except that he may use and disclose to authorized Employer personnel, licensees
or franchisees in the course of his employment; and
(b) within five (5) days from the date upon which his employment
with Employer is terminated, for any reason or for no reason, or otherwise upon
the request of Employer, he shall return to Employer any and all documents and
materials which constitute or contain the confidential information or trade
secrets of Employer, or any of its affiliates.
For purposes of this Agreement, the terms "confidential information" or "trade
secrets" shall include all information of any nature and in any form which is
owned by Employer, or any of its affiliates, and which is not publicly available
or generally known to persons engaged in businesses similar to that of Employer,
or any of its affiliates. Notwithstanding the foregoing, when the Executive's
employment with Employer is terminated, for whatever reason, the limitations
provided in this Section 10 shall not prevent the Executive from using for his
own benefit any information which he acquired prior to the Effective Date.
11. Non-Competition.
(a) The Executive agrees that his services hereunder are of a
special character, and his position with Employer places him in a position of
confidence and trust with Employer's artists, clients, customers and employees.
The Executive and Employer agree that in the course of employment hereunder, the
Executive has and will continue to develop a personal acquaintanceship and
relationship with Employer's artists, clients and customers, and a knowledge of
those artists', clients' and customers' affairs and requirements which may
constitute Employer's primary or only contact with such artists, clients and
customers and that Employer would not have entered into this Agreement or the
Purchase Agreement unless the covenants set forth in this Section 11 were
contained in this Agreement. The Executive consequently agrees that it is
reasonable and necessary for the protection of the goodwill and business of
Employer that the Executive make the covenants contained herein and that
Employer would not have entered into this Agreement or the Purchase Agreement
unless the covenants set forth in this Section 11 were contained in this
Agreement. Accordingly, the Executive agrees that while he is in Employer's
employ the Executive will not, without the prior written consent of Employer,
either directly or
6
<PAGE>
indirectly, or in any capacity whether as a promoter, proprietor, partner, joint
venturer, employee, agent, consultant, director, officer, manager, equity holder
(except as an equity holder holding less than five percent (5%) of a publicly
traded company's issued and outstanding equity securities, or otherwise), work
for, act as a consultant to or own any interest in any direct competitor of
Employer which operates in or provides services essentially the same as Employer
in any portion of the geographic territory where Employer operates or sells its
products or services. The foregoing restrictions are hereinafter referred to as
the "Non-Compete Restrictions". The Executive further agrees that during the
Term, and for the one year period following the Executive's termination of
employment with Employer, the Executive will not solicit, entice, induce or
persuade: (i) any employee, artist, client or customer of Employer, or (ii) any
person or entity that had been engaged in negotiations with Employer to become,
an employee, artist, client or customer of Employer during the six month period
prior to the Executive's termination of employment with Employer, to alter,
terminate or refrain from extending or renewing any contractual or other
relationship with Employer, or commence a similar or substantially similar
relationship with the Executive, any entity with whom the Executive is
affiliated or employed by or any direct competitor of Employer. The restrictions
in the immediately preceding sentence are hereinafter referred to as the
"Non-Solicitation Restrictions". If the Executive voluntarily terminates his
employment prior to the end of the Term or if Employer terminates the
Executive's employment for reasons of cause prior to the end of the Term, the
Non-Compete Restrictions shall continue to apply through the end of the Term
(unless the Executive voluntarily terminates his employment for Good Reason),
and the Non-Solicitation Restrictions shall continue to apply through the period
ending one year after the end of the Term. Notwithstanding the foregoing, when
the Executive's employment with Employer is terminated, for whatever reason, the
Executive may continue to do business, without violating the terms hereof, with,
any customer, client or artist of Employer which was a customer, client or
artist of Old Straw Dogs, or any company which employed the Executive, prior to
the date of this Agreement.
(b) As used in this Section 11, the term "Employer" shall include
subsidiaries of Employer with respect to which Executive has managerial
authority, the term "customer" shall mean any person or entity who is then, or
who had been at any time during the one year period immediately preceding the
date of termination of the Executive's employment, a customer of Employer, and
the term "artist or client" shall mean any person or entity who is then, or who
had been at any time during the one year period immediately preceding the date
of termination of the Executive's employment, an artist or client represented
by, signed by, working for or collaborating with Employer.
(c) The parties hereto agree that the duration and area for which
the covenant not to compete set forth herein is to be effective are reasonable.
In the event that any court determines that the time period or the area, or both
of them, are unreasonable and that such covenant is to that extent
unenforceable, the parties hereto agree that the covenant shall remain in full
force and effect for the greatest time period and in the greatest area that
would not render it unenforceable.
7
<PAGE>
(d) If the Executive commits a material breach or is about to commit
a material breach, of any of the above provisions of this Section 11, Employer
shall have the right to temporary and preliminary injunctive relief to prevent
the continuance or commission of such breach prior to any hearing on the merits
and to have the provisions of this Agreement specifically enforced by any court
having equity jurisdiction it being acknowledged and agreed that any such breach
or threatened breach will cause irreparable injury to Employer. In addition,
Employer may take all such other actions and remedies available to it under law
or in equity and shall be entitled to such damages as it can show it has
sustained by reason of such breach.
12. Resolution of Disputes. Any dispute by and among the parties hereto
arising out of or relating to this Agreement, the terms, conditions or a breach
thereof, or the rights or obligations of the parties with respect thereto, shall
be arbitrated in the City of Los Angeles, California, before and pursuant to
then applicable commercial rules and regulations of Jams - Endispute, or any
successor organization. The arbitration proceedings shall be conducted by a
panel of three arbitrators, one of whom shall be selected by Employer, one by
the Executive (or his legal representative) and the third arbitrator by the
first two so chosen. The parties shall use their best efforts to assure that the
selection of the arbitrators shall be completed within 30 days and the parties
shall use their best efforts to complete the arbitration as quickly as possible.
In such proceeding, the arbitration panel shall determine who is a substantially
prevailing party and shall award to such party its reasonable attorneys',
accountants' and other professionals' fees and its costs incurred in connection
with the proceeding. The award of the arbitration panel shall be final, binding
upon the par-ties and nonappealable and may be entered in and enforced by any
court of competent jurisdiction. Such court may add to the award of the
arbitration panel additional reasonable attorneys' fees and costs incurred by
the substantially prevailing party in attempting to enforce such award.
13. Enforceability. The failure of either party at any time to require
performance by the other party of any provision hereunder shall in no way affect
the right of that party thereafter to enforce the same, nor shall it affect any
other party's right to enforce the same, or to enforce any of the other
provisions of this Agreement; nor shall the waiver by either party of the breach
of any provision hereof be taken or held to be a waiver of any subsequent breach
of such provision or as a waiver of the provision itself.
14. Assignment. This Agreement is a personal contract and the Executive's
rights and obligations hereunder may not be sold, transferred, assigned, pledged
or hypothecated by the Executive. The rights and obligations of Employer
hereunder shall be binding upon and run in favor of the successors and assigns
of Employer. If any assignment or transfer of rights hereunder is attempted by
the Executive contrary to the provisions hereof, Employer shall have no further
liability for payments hereunder.
15. Modification. This Agreement may not be canceled, changed, modified or
amended orally, and no cancellation, change, modification or amendment shall be
effective or binding, unless it is in writing, signed by both parties to this
Agreement.
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16. Severability, Survival. If any provision of this Agreement is held to
be void and unenforceable by a court of competent jurisdiction, the remaining
provisions of this Agreement nevertheless shall be binding upon the parties with
the same effect as though the void or enforceable part has been severed and
deleted.
17. Notice. Notices given pursuant to the provisions of this Agreement
shall be sent by certified mail, postage prepaid, or by overnight courier, or by
telex, telecopier or telegraph, charges prepaid, to the following address or
such other address as shall be specified by written notice:
To Employer: Paradise Music & Entertainment, Inc.
53 West 23rd Street
New York, New York 10010
Attention: Chief Executive Officer
with a copy to: Davis & Gilbert LLP
1740 Broadway, 3rd Floor
New York, New York 10019
Attn: Walter M. Epstein, Esq.
To the Executive: Craig Rodgers
c/o Consolidated Entertainment, LLC
8330 W. Third Street
Los Angeles, CA 90048
with a copy to: James A. Melman, Esq.
815 Moraga Drive
Los Angeles, CA 90049
18. Applicable Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
19. No Conflict. The Executive represents and warrants that he is not
subject to any agreement, instrument, order, judgment or decree of any kind, or
any other restrictive agreement of any character, which would prevent him from
entering into this Agreement or which would be breached by the Executive upon
his performance of his duties pursuant to this agreement.
20. Entire Agreement. This Agreement and the Purchase Agreement represents
the entire agreement between Employer and the Executive with respect to the
subject matter hereof, and all prior agreements relating to the employment of
the Executive by Employer, written or oral, are nullified and superseded hereby.
9
<PAGE>
IN WITNESS WHEREOF, the parties have set their hands and seals on and as
of the day and year first above written.
Employer:
STRAW DOGS ACQUISITION CORP.
By:
----------------------------------
Name:
Title:
Executive:
-------------------------------------
Craig Rodgers
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GUARANTY
Paradise Music & Entertainment, Inc. ("Paradise"), hereby
unconditionally guarantees (a) full, complete and prompt payment to Craig
Rodgers ("Rodgers") of all compensation and reimbursement of expenses provided
in the Employment Agreement dated as of July 1, 1999 (the "Agreement"), between
Straw Dogs Acquisition Corp. ("Employer") and Rodgers and (b) the full and
prompt performance of each and every obligation of Employer under the Agreement.
Paradise hereby waives and agrees not to assert or take advantage of
(a) any right to require Rodgers to proceed against Employer or any other
person, or to proceed against or exhaust any security held by Rodgers at any
time, or to pursue any other remedy in his power before proceeding against
Paradise; (b) notice of acceptance of this guaranty by Rodgers, notice of
presentment or demand for payment, notice of protest and notice of every other
kind; (c) any and all other suretyship defenses.
No exercise or nonexercise by Rodgers of any right hereby given and
no change, impairment or suspension of any right or remedy of Rodgers given by
Rodgers with respect to Employer shall in any way affect any of the obligations
of Paradise hereunder or give Paradise any recourse against Rodgers.
Paradise hereby represents and warrants to Rodgers that at the time
of the execution and delivery of this Guaranty, nothing exists to impair the
enforceability of the obligations of Employer under the Agreement and that such
obligations are good and collectible by usual legal proceedings, if taken with
reasonable diligence.
This Guaranty shall be governed and construed in accordance with the
laws of the State of California and shall inure to the benefit of Rodgers, his
successors and assigns and shall bind the successors and assigns of paradise.
IN WITNESS WHEREOF, PARADISE MUSIC & ENTERTAINMENT, INC., has
executed this Guaranty as of the first day of July, 1999.
PARADISE MUSIC & ENTERTAINMENT, INC.
By:
--------------------------------------
Name:
Title:
<PAGE>
Appendix E
PROPOSED AMENDMENT TO 1996 STOCK OPTION PLAN
Subject to stockholder approval, on April 30, 1999, the Board of Directors
adopted the following amendment to the Paradise Music & Entertainment, Inc. 1996
Stock Option Plan:
"2. Stock Subject to Plan
(a) The total number of shares of the authorized but unissued or
treasury shares of the common stock, par value of $.01 per share of
the company (the "Common stock") for which options (the "Options")
and stock appreciation rights ("SARs") may be granted under the Plan
shall be 3,000,000, subject to adjustment as provided in Section 14
hereof."
<PAGE>
Appendix F
PARADISE MUSIC & ENTERTAINMENT, INC.
53 West 23rd Street, 11th Floor, New York, NY 10010
FORM OF PROXY FOR THE SPECIAL MEETING OF STOCKHOLDERS
November 15, 1999
The undersigned hereby appoints M. Jay Walkingshaw and Rick Flynn as
Proxies, with the power to appoint his substitute, and hereby authorizes each of
them to represent and to vote, as designated below, all of the shares of common
stock, $.01 par value, of PARADISE MUSIC & ENTERTAINMENT, INC., held of record
by the undersigned at the close of business on October 18, 1999 at the Special
Meeting of Stockholders (the "Meeting") of PARADISE MUSIC & ENTERTAINMENT, INC.
on November 15, 1999, at 10:00 am, or at any adjournments thereof.
1. To approve the stock purchase agreement, the asset purchase agreement, the
employment agreements with each of Jesse Dylan and Craig Rodgers and the
transactions contemplated by each of the preceding agreements.
|_| FOR |_| AGAINST |_| ABSTAIN
2. To approve the amendment to the 1996 Stock Option Plan.
|_| FOR |_| AGAINST |_| ABSTAIN
3. To approve the consulting agreement with Jeffrey Rosen and the issuance of
warrants to purchase 200,000 shares contemplated thereby.
|_| FOR |_| AGAINST |_| ABSTAIN
4. To approve the consulting agreement with Thomas J. Edelman and the
issuance of warrants to purchase 100,000 shares contemplated thereby.
|_| FOR |_| AGAINST |_| ABSTAIN
5. In their discretion, the proxy is authorized to vote upon such other
business as may properly come before the meeting or any adjournments
thereof.
|_| FOR |_| AGAINST |_| ABSTAIN
(To be signed below)
<PAGE>
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN ACCORDANCE WITH THE
INSTRUCTIONS GIVEN ABOVE
Please sign exactly as your name appears hereon. When shares are held by
joint tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please indicate the capacity in which
signing. When a ballot is given by a corporation, please give your full
corporation name and have the ballot signed by the president or other authorized
officer. If a partnership, please sign in partnership name by authorized person.
DATED: ________________, 1999
----------------------------------------
Shareholder Name
----------------------------------------
Shareholder Signature
----------------------------------------
Shareholder if held jointly
PLEASE MARK, SIGN, DATE AND RETURN THE
PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
