UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1998
-------------------------------------------------
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
----------------------- ---------------------
Commission file number 1-12635
---------------------------------------------------------
PARADISE MUSIC & ENTERTAINMENT, INC.
- --------------------------------------------------------------------------------
(Name of small business issuer as specified in its charter)
Delaware 13-3906452
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
53 West 23rd Street, New York, New York 10010
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(Issuer's telephone number) (212) 590-2100
----------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
At February 10, 1999, the Issuer had 5,035,375 shares of Common Stock, $.01 par
value, issued and outstanding.
Transitional Small Business Disclosure Format Yes |_| No |X|
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets as of
December 31, 1998 (Unaudited) and June 30, 1998 3
Consolidated Statements of Operations for the
Six and Three Months Ended December 31, 1998
and 1997 (Unaudited) 4
Consolidated Statements of Stockholders' Equity
for the Six Months Ended December 31, 1998 (Unaudited) 5
Consolidated Statements of Cash Flows for the
Six Months Ended December 31, 1998 and 1997 (Unaudited) 6-7
Notes to Consolidated Financial Statements (Unaudited) 8-12
Pro Forma Balance Sheet as of December 31, 1998 (Note 8) 12
Item 2. Management's Discussion and Plan of Operation 13-17
Changes in Securities and Use of Proceeds 18
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 609,118 $ 863,860
Restricted cash 105,490 464,603
Accounts receivable, less reserve for returns of $76,414
at December 31, 1998 and $271,188 at June 30, 1998 788,764 806,586
Prepaid video production costs 184,408 52,882
Prepaid record master costs 281,000 93,750
Inventory 44,359 14,717
Other current assets 57,341 115,268
----------- -----------
Total current assets 2,070,480 2,411,666
PROPERTY AND EQUIPMENT, less accumulated
depreciation and amortization 1,273,749 1,262,465
----------- -----------
OTHER:
Note receivable, officer 71,478 70,878
Restricted cash 350,000
Security deposits 192,804
Other 15,671 26,826
----------- -----------
279,953 447,704
----------- -----------
$ 3,624,182 $ 4,121,835
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes Payable $ 48,020 $ --
Deferred revenues 131,112 266,636
Accrued payroll and related expenses 17,535 152,599
Accrued expenses and other current liabilities 1,916,902 1,754,733
----------- -----------
Total current liabilities 2,113,569 2,173,968
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
authorized 5,000,000 shares, none issued
Common stock, $.01 par value,
authorized 20,000,000 shares,
issued and outstanding 2,407,200 shares and
2,245,143 shares, respectively 24,072 22,451
Capital in excess of par value 8,795,536 5,861,499
Subscription receivable (2,628,175 shares at December 31, 1998) (2,028,175)
Accumulated deficit (5,280,820) (3,936,083)
----------- -----------
Total stockholders' equity 1,510,613 1,947,867
----------- -----------
$ 3,624,182 $ 4,121,835
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
December 31, December 31,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES $ 5,779,131 $ 6,491,032 $ 3,934,665 $ 2,303,047
------------ ------------ ------------ ------------
OPERATING EXPENSES
Cost of sales 3,925,989 4,426,581 3,270,969 1,246,897
Selling, general and administrative 3,223,416 2,940,606 1,253,250 1,657,803
------------ ------------ ------------ ------------
Total operating expenses 7,149,405 7,367,187 4,524,219 2,904,700
------------ ------------ ------------ ------------
OPERATING LOSS (1,370,274) (876,155) (589,554) (601,653)
INTEREST INCOME 25,537 93,330 8,954 34,716
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (1,344,737) (782,825) (580,600) (566,937)
INCOME TAX PROVISION (BENEFIT) 9,000 (4,000)
------------ ------------ ------------ ------------
LOSS APPLICABLE TO
COMMON SHAREHOLDERS $ (1,344,737) $ (791,825) $ (580,600) $ (562,937)
============ ============ ============ ============
BASIC AND DILUTED LOSS
PER COMMON SHARE $ (0.57) $ (0.36) $ (0.24) $ (0.25)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES USED IN
COMPUTING BASIC AND DILUTED
LOSS PER COMMON SHARE 2,349,899 2,228,801 2,407,200 2,229,240
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Six Months Ended December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Capital in
------------------------- Excess of Subscription Accumulated
Shares Amount Par Value Receivable Deficit
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
BALANCES, June 30, 1998 2,245,143 $ 22,451 $ 5,861,499 $ -- $(3,936,083)
SALES OF COMMON STOCK 66,249 663 187,242
COMMON STOCK, issued to outside directors
and consultants 95,808 958 113,652
WARRANTS GRANTED FOR SERVICES 4,968
COMMON STOCK SUBSCRIBED 2,028,175 (2,028,175)
COMMON STOCK TO BE ISSUED 600,000
NET LOSS (1,344,737)
----------- ----------- ----------- ----------- -----------
BALANCES, December 31, 1998 2,407,200 $ 24,072 $ 8,795,536 $(2,028,175) $(5,280,820)
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,344,737) $ (791,825)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 14,863 249,876
Expenses recorded in connection with warrants granted 4,968 34,233
Provision for returns 508,649
Common stock issued to outside directors and consultants (for services) 114,610 9,000
Restricted cash 359,113
Increase (decrease) in cash attributable
to changes in assets and liabilities:
Accounts receivable 17,822 (2,190,951)
Accrued interest receivable 15,156
Prepaid video production costs (131,526) (181,357)
Prepaid record master costs (187,250) (95,805)
Inventory (29,642)
Other current assets (195) (144,668)
Other 11,155 (23,747)
Deferred revenues (135,524) 193,738
Accrued payroll and related expenses (135,064) (236,597)
Accrued expenses and other current liabilities 162,169 864,592
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,279,238) (1,789,706)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property and equipment (26,147) (103,446)
Construction in progress (733,541)
Payments for security deposits (192,804)
Note receivable, officer 57,522
Restricted cash 350,000 (350,000)
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 188,571 (1,186,987)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceed from sale of common stock 187,905 (1,667)
Proceeds from note payable 48,020
Proceeds from common stock to be issued 600,000
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 835,925 (1,667)
----------- -----------
NET DECREASE IN CASH (254,742) (2,978,360)
CASH, beginning of period 863,860 5,086,118
----------- -----------
CASH, end of period $ 609,118 $ 2,107,758
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES, common stock subscribed $ 2,028,175 $ --
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION,
cash paid during the period for income taxes $ 5,430 $ 10,010
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
7
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION:
The financial statements included herein have been prepared by
Paradise Music & Entertainment, Inc. and subsidiaries (the
"Company") pursuant to the rules and regulations of the Securities
and Exchange Commission (the "SEC") and reflect all adjustments,
consisting of normal recurring adjustments, which are, in the
opinion of management, necessary for a fair presentation of results
of operations for interim periods. Certain information and footnote
disclosures have been omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. It is
suggested that these financial statements be read in conjunction
with the financial statements and the notes thereto included in the
Company's Report for the year ended June 30, 1998 on Form 10-KSB and
Report for the period ending September 30, 1998 on Form 10-QSB.
The consolidated results of operations for the three and six months
ended December 31, 1998 are not necessarily indicative of the
results to be expected for the full fiscal year.
NOTE 2 - BUSINESS AND ORGANIZATION:
The Company was formed on July 18, 1996 and in July 1996 issued
125,000 shares of common stock. In October 1996, the Company issued
873,000 shares of common stock in exchange for the outstanding stock
of its subsidiaries in a transaction accounted for as a pooling of
interests, whereby the financial statements for all periods prior to
the combination were restated to reflect the combined operations of
its subsidiaries, All Access Entertainment Management Group, Inc.
("All Access"), a musical artist management company incorporated in
New York, Picture Vision, Inc. ("Picture Vision"), a television and
video production company incorporated in Tennessee, and John Leffler
Music, Inc. (which operates under the name of Rave Music and
Entertainment) ("Rave"), a creator of music scores and advertising
themes for television and radio, which was incorporated in New York.
In February 1997, the Company incorporated a new subsidiary, Push
Records Inc. ("Push") to operate in the recorded music business.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation - The consolidated financial statements
include the accounts of Paradise Music & Entertainment, Inc. and its
wholly-owned subsidiaries, Rave, Picture Vision, All Access and
Push. All significant intercompany transactions and balances have
been eliminated in consolidation.
Cash and Equivalents - Cash and equivalents include cash on hand and
highly liquid investments with maturities of less than three months
from the purchase date, which at times exceeds the Federal Deposit
Insurance Corporation coverage of $100,000. Management regularly
monitors the financial condition of the financial institutions where
such cash is held on account to keep the potential risks related to
the failure of any such institution to a minimum.
8
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Revenue Recognition - Commercial music production revenues and the
related production costs are recognized upon acceptance of the music
production by the client. Royalty and residual income is recognized
when received. For projects which are short in duration (primarily
less than one month), video production revenues and related
production costs are recorded upon completion of the video. For
projects that have a longer term, video production revenues and
related production costs are recorded using the
percentage-of-completion method which recognizes income as work on
the project progresses. Music artist management revenues are
recognized when received and, in accordance with industry custom,
the Company frequently operates its business based on oral
agreements and purchase orders with its artists and customers.
Pursuant to these arrangements the Company receives up to 20% of the
gross revenues received in connection with artist entertainment
related earnings less certain standard industry costs. Record label
revenues are recognized when records are shipped and a reserve for
returns is established against gross revenues. Costs incurred in
connection with the start-up of the Company's record label have been
expensed. Costs which are directly related to the production of the
Company's sound recordings are capitalized and amortized over the
expected life of the record, to the extent there is reasonable
assurance that these costs will be recoverable from future sales.
The Company is accounting for these costs in accordance with
Statement of Financial Accounting Standards (SFAS) No. 50,
"Financial Reporting in the Record and Music Industry".
Loss Per Common Share - Effective December 31, 1997, the Company
adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS No. 128). SFAS No. 128 requires dual
presentation of basic and diluted earnings per share for all periods
presented. Basic earnings per share excludes dilution and is
computed by dividing income (loss) available to common shareholders
by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution
that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of the
entity. Prior period income (loss) information has been restated as
required by the SFAS No. 128. The restatement had no effect on
previously reported loss per share.
Use of Estimates - The preparation of consolidated financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
NOTE 4 - LIQUIDITY:
The Company's consolidated financial statements have been prepared
on the basis that it is a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the
normal course of business. The Company has incurred net losses of
approximately $1,345,000 and $792,000 for the six months ended
December 31, 1998 and 1997, respectively, has an accumulated deficit
of $5,280,820 as of December 31, 1998 and believes it will require
additional working capital to support its business plan. The Company
is in the process of seeking additional equity or debt financing.
Continuation of the Company as a going concern remains dependent on
its ability to raise additional capital and attain future profitable
operations. The financial statements do not include any adjustments
that might result from this uncertainty.
9
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 - COMMITMENTS:
In October 1997, the Company entered into employment agreements, as
amended (the "Agreements"), with Messrs. Loeffler, Doyle, Small and
Flynn (the "Executives"). Each of the Agreements was for a period of
three years and provided for annual base salaries of $150,000 plus
bonuses.
Effective July 1, 1997, these Agreements were replaced by New
Agreements. Each of the New Agreements is for a period of two years
and provides for annual salaries between $300,000 and $325,000. If
an Executive's subsidiary reports a pretax loss, such related
Executive's salary will be reduced, but not below $150,000 per
annum, to reflect a pretax breakeven and such reduction will be
recorded as an advance with interest payable at prime plus 1% and
will be payable over three years. In addition, such Executive's
salary will be reduced for the subsequent year by the amount of such
reduction but not below $150,000. Pursuant to these agreements, two
bonus plans have been established for the benefit of the Executives
based upon attainment of certain financial results.
In September 1998, each of the Executives entered into a letter
agreement (the "Employment Modification Agreement") with the Company
which amended certain provisions of the New Agreements. In the case
of Messrs. Doyle and Flynn, the Employment Modification Agreement is
subject to approval by the Compensation Committee of the Board of
Directors of a definitive budget for fiscal year 1999 for Push,
which budget has not yet been approved. In consideration of reduced
base salaries (which were reduced in the aggregate by $300,000),
other compensation concessions and more stringent non-compete terms
reflected in the Employment Modification Agreement, the Compensation
Committee of the Board of Directors treated all monies paid to the
executives in fiscal year 1998 and the three months ended September
30, 1998 as compensation, as opposed to treating any portion thereof
as "advances" subject to recoupment. In recognition of Picture
Vision's profitability for fiscal year 1998 and the other
achievements of Mr. Small, the Compensation Committee also awarded
Mr. Small a bonus of $150,000 for fiscal year 1998, which bonus was
paid in July of 1998. According to its terms, the Employment
Modification Agreement expired on October 30, 1998 since initial
funding under the Pines Investment Agreement (as described in Note
8) had not occurred. However, Messrs. Loeffler, Doyle and Flynn
agreed as of December 2, 1998, to abide by the reduced salary level
under the Employment Modification Agreement through June 30, 2001 or
until new employment agreements can be executed. In addition,
effective as of December 8, 1998, each of Messrs. Loeffler, Doyle
and Flynn will receive additional compensation in the amount of
$25,000 per annum.
On October 1, 1997, the Company entered into an employment agreement
(the "Agreement") with an individual who will manage the Company's
Los Angeles commercial music division. The Agreement provides for
the individual to receive as compensation an amount equal to 75% of
the first $350,000 of the division's gross margin and 15% of the
division's gross margin above $350,000. In addition, this individual
has been granted options to purchase 100,000 shares of the Company's
common stock at $4.75 per share which vest at various times during
the term of the Agreement.
For the six and three months ended December 31, 1998 and 1997
approximately $589,000 and $623,000 and $264,000 and $317,000,
respectively, has been expensed under the bonus plans and employment
agreements and are included in marketing, selling, general and
administrative expenses.
10
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 - STOCKHOLDERS' EQUITY:
On December 11, 1998, investors represented by The Cassandra Group,
Inc., a registered investment advisor ("Cassandra"), purchased
500,000 shares of Common Stock at a price of $1 per share or
$500,000 in the aggregate and on December 15, 1998 additional
investors represented by Cassandra purchased an aggregate of
1,500,000 shares of Common Stock at a purchase price of $1 per share
or $1,500,000 in the aggregate. The Company received the first
payment of $500,000 on December 11, 1998. The payment for the
remaining 1,500,000 shares was made in January 1999. The purchase
price was higher than both the market price on NASDAQ and the book
value on the date of payment or date of irrevocable commitment.
The Company also raised $100,000 on or about December 23, 1998
through the sale of 100,000 shares to an unaffiliated investor, at
$1 per share. In addition, certain employees, directors, trade
vendors and professionals agreed to convert $528,175 owed to them
for 528,175 shares, the same price paid by the other investors.
NOTE 7 - ECONOMIC DEPENDENCY:
Approximately $364,000 and $158,000 of commercial production
revenues for the six months ended December 31, 1998 and 1997,
respectively, were derived from one advertising agency. For the
three months ended December 31, 1998 and 1997 approximately $118,000
and $103,000 of commercial production revenues were derived from the
same advertising agency, respectively. Approximately $312,000 and
$370,000 of musical talent management revenues for the six months
ended December 31, 1998 and 1997, respectively, were derived from
three musical artists. For the three months ended December 31, 1998
approximately $45,000 of musical talent management revenues were
derived from one musical artist. For the six months ended December
31, 1998 and 1997, approximately $2,622,000 and $2,716,000,
respectively, of video production revenues were derived from two and
one artists. For the three months ended December 31, 1998 and 1997
approximately $2,622,000 and $108,000 of video production revenues
were derived from two and one artists, respectively. For the six
months ended December 31, 1998 and 1997, approximately $409,000 and
$1,510,000 of record label revenues were derived from one customer.
For the three months ended December 31, 1998 and 1997, approximately
$64,000 and $1,124,000 of record label revenues were derived from
one customer. At December 31, 1998 and 1997, approximately $279,000
and $1,534,000 was owed in the aggregate to the Company from these
artists and customers.
NOTE 8 - RECENT AND SUBSEQUENT EVENTS:
As of November 17, 1998, a proposed financing involving Pines
Resorts International, Inc. ("Pines") had not closed due to the
failure to make timely payments by Pines and the Company declared
the Pines investment agreement and a related advisory agreement with
CCF Capital Group, Inc., an affiliate of Pines, to have been
breached. The Company has retained the sum of $50,000 received from
Pines as partial damages and has reserved its rights to assert
additional damages.
On or about January 21, 1999, the Board of Directors was expanded
from six to nine members and Ms. Soledad Bastiancich and Messrs.
Jesse Dylan and Jeffrey Rosen were appointed to serve as Board
members. Ms. Bastiancich and Messrs. Rosen and Dylan were nominated
by Cassandra and approved by the then existing Board.
11
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8 - RECENT AND SUBSEQUENT EVENT (CONTINUED):
In December 1998, the Company's landlord for its New York offices
agreed to accept certain rental payments out of the Company's
security deposit. As a penalty, the Company was required to repay
prior rental concessions in the amount of $90,000. The Company is
currently negotiating final terms for the renewal of a letter of
credit at the lower level to serve as security.
The following summarized unaudited pro forma condensed consolidated
balance sheet assumes that Common Stock irrevocably subscribed for
as of December 31, 1998 was issued and all proceeds were received on
December 31, 1998:
Pro Forma
Historical Adjustment Pro Forma
---------- ---------- ---------
Current assets $2,070,480 $ 1,500,000(1) $3,570,480
Property and equipment 1,273,749 1,273,749
Other assets 279,953 279,953
---------- ----------- ----------
$3,624,182 $ 1,500,000 $5,124,182
========== =========== ==========
Current liabilities $2,113,569 $ (528,175)(2) $1,585,394
Stockholders' equity 1,510,613 2,028,175(3) 3,538,788
---------- ----------- ----------
$3,624,182 $ 1,500,000 $5,124,182
========== =========== ==========
(1) Cash received and available for working capital.
(2) Reduction of current liabilities to reflect stock issued to
vendors and employees for payment of services.
(3) To reflect issuance of shares for cash and payment for
services.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND PLAN OF OPERATIONS
General
The Company currently derives most of its revenues from: the production of
original music scores and advertising themes for television, radio, and film;
the production of music videos used to promote music artists and televised music
specials and programs for television networks and other video broadcasters; the
management of music artists and the record business.
The Company believes the results of operations of its operating subsidiaries are
subject to seasonal variations. As such, the Company's results of operations
from period to period may be materially affected. The timing of new record
releases, for example, could materially impact the Company's operating results.
Additionally, due to the success of particular artists, artists' touring
schedules and the timing of music television specials, it is possible that the
Company could also experience material fluctuations in revenue from year to
year.
During fiscal 1999, the Company expects to expand its four wholly-owned
subsidiaries (Rave, Picture Vision, All Access and Push), and implement its
acquisition program. The Company expects to initially target acquisitions and
joint venture arrangements with small complementary businesses in the music and
entertainment industry. The Company's failure to expand its business in an
efficient manner could have a material adverse effect on its business, operating
results and financial condition.
Forward-Looking Statements
Except for the historical information contained herein, this quarterly report on
Form 10-QSB may contain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Investors are cautioned that forward-looking
statements are inherently uncertain. Actual performance and results of
operations may differ materially from those projected or suggested in the
forward-looking statements due to certain risks and uncertainties, including,
without limitation, risks associated with the Company being a recently
consolidated entity, dependence on senior management, risks inherent in the
recorded music industry such as the possibility of losses by the record label
and popularity of recording artists, the Company's ability to contract with
recording artists, the Company's ability to manage growth and the success of the
Company's music and entertainment acquisition program. The forward-looking
statements contained herein represent the Company's judgement as of the date of
this release hereof, and the Company cautions readers not to place undue
reliance on such statements.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND PLAN OF OPERATIONS (CONTINUED)
Six Months Ended December 31, 1998 Compared to
Six Months Ended December 31, 1997
Commercial music production revenues increased to $939,101 for the six months
ended December 31, 1998 from $608,988 for the six months ended December 31,
1997, an increase of $330,113 or 54.2% while commercial music production costs
of sales increased to $349,092 for the six months ended December 31, 1998 from
$239,611 for the six months ended December 31, 1997, an increase of $109,481 or
45.7%. The increase in revenues was due to an increase of residual and royalty
income and the addition of revenue from Rave's new Los Angeles operation. The
increase in costs was primarily due to costs incurred in connection with a
television series which had no related revenues. The level of residual and
royalty income varies from period to period based upon the number of
compositions airing at any one time, the medium on which such compositions are
aired and the frequency of such airings. As a result of the foregoing, gross
profit as a percentage of commercial music production revenues increased to
approximately 62.8% for the six months ended December 31, 1998 from 60.7% for
the six months ended December 31, 1997.
Video production revenues increased to $4,040,483 for the six months ended
December 31, 1998 from $3,906,831 for the six months ended December 31, 1997, an
increase of $133,652 or 3.4%, while video production costs of sales increased to
$3,369,309 for the six months ended December 31, 1998 from $3,358,805 for the
six months ended December 31, 1997, an increase of $10,504 or 0.31%.
Gross profit from video production revenues increased to $671,174 for the six
months ended December 31, 1998 from $548,026 for the six months ended December
31, 1997 an increase of $123,148 or 22.5%. Gross profit as a percentage of video
production revenues increased to 16.6% for the six months ended December 31,
1998 as compared to 14% for the comparable prior period. The prior period's
gross profit includes the Garth Brooks HBO Special which was a very significant
and profitable project that was completed in August; however, the gross profit
percentage on this project was lower than the Company's historical gross profit
percentage on its smaller projects.
Music artist management revenues decreased to $319,223 for the six months ended
December 31, 1998 from $464,362 for the six months ended December 31, 1997, a
decrease of $145,139 or 31.3%. The decrease was attributable primarily to a
decrease in the number of concerts performed by one artist. The Company's music
artist management operations have no cost of sales associated with it since no
products are produced.
Record label revenues for the six months ended December 31, 1998 decreased to
$416,882 from $1,510,851 for the six months ended December 31, 1997, a decrease
of $1,093,969 or 72.4%. The decrease reflects lower record sales in fiscal 1999
compared to the prior period when Daryl Hall & John Oates' album "Marigold Sky"
was released in September of 1997 and to the release of the album "trickster" by
the band kidneythieves, a sound recording which generated less initial sales
than did "Marigold Sky". This decrease was offset in part by the recognition of
foreign licensing income relating to "Marigold Sky" of approximately $203,000 in
fiscal 1999. Gross profit as a percentage of revenues amounted to 50.2% for the
six months ended December 31, 1998 compared with 45.2% for the comparable period
last year. The increase in the margin percentage results from recognition of the
aforementioned licensing income.
The Company's marketing, selling, general and administrative expenses increased
to $3,223,416 for the six months ended December 31, 1998 from $2,940,606 for the
six months ended December 31, 1997, an increase of $282,810 or 9.6%. The
increase is principally attributable to an increase in infrastructure costs at
Push, an increase in costs at corporate resulting from retaining an interim
Chief Operating Officer and efforts to obtain short-term financing and increased
costs related to the commercial music production operation in Los Angeles which
was not operational in the first quarter of fiscal 1998.
The Company's loss before income taxes resulted in a loss of $1,344,737 for the
six months ended December 31, 1998 compared with a loss of $782,825 for the six
months ended December 31, 1997, an increase of $561,912 or 71.8%. The increase
was primarily due to the increase in selling, general and administrative
expenses described above.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND PLAN OF OPERATIONS (CONTINUED)
Three Months Ended December 31, 1998 Compared to
Three Months Ended December 31, 1997
Commercial music production revenues increased to $484,455 for the three months
ended December 31, 1998 from $435,130 for the three months ended December 31,
1997, an increase of $49,325 or 11.3% while commercial music production costs of
sales increased to $223,569 for the three months ended December 31, 1998 from
$148,150 for the three months ended December 31, 1997, an increase of $75,419 or
50.9%. The increase in revenues was primarily due to an increase of residual and
royalty income and the addition of revenue from Rave's new Los Angeles
operation. The increase in costs was primarily due to costs incurred in
connection with a television series which had no related revenues and an overall
increase in volume.
As a result of the foregoing, gross profit as a percentage of commercial music
revenues decreased to 53.9% for the three months ended December 31, 1998 from
65.9% for the comparable prior period.
Video production revenues increased to $3,280,590 for the three months ended
December 31, 1998 from $619,455 for the three months ended December 31, 1997, an
increase of $2,661,135 or 429.6%. Video production revenues were greater in 1998
than in 1997 primarily due to an increase in both the number of videos produced
and the size of such productions.
Cost of sales for video productions increased to $2,954,227 for the three months
ended December 31, 1998 from $461,755 for the three months ended December 31,
1997, an increase of $2,492,472 or 539.8%. The increase was primarily
attributable to the size of the video productions produced in the current
period.
Gross profit as a percentage of video production revenues decreased to 9.9% for
the three months ended December 31, 1998 from 25.5% for the three months ended
December 31, 1997, as the 1998 jobs were far larger in size and generated fees
representing a smaller percentage of the overall production budget.
Music artist management revenues decreased to $71,760 for the three months ended
December 31, 1998 from $123,994 for the three months ended December 31, 1997, a
decrease of $52,234 or 42.1%. The Company's music artist management operations
has no cost of sales associated with it.
Record label revenues for the three months ended December 31, 1998 were $34,358.
Gross margin amounted to a loss of $58,832 due to the volume of returns on prior
releases and the lack of any current releases.
The Company's marketing, selling, general and administrative expenses decreased
to $1,253,250 for the three months ended December 31, 1998 from $1,657,803 for
the three months ended December 31, 1997, a decrease of $404,553 or 24.4%. The
decrease is primarily attributable to the cost cutting measures instituted in
the current period.
The Company's loss before income taxes resulted in a loss of $580,600 for the
three months ended December 31, 1998 compared with a loss of $566,937 for the
three months ended December 31, 1997. The increase was primarily attributable to
a decrease in the volume of record sales.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND PLAN OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources
During the six months ended December 31, 1998, the Company had used cash in
operating activities in the amount of $1,279,238 as compared to cash used in
operating activities of $1,789,706 for the six months ended December 31, 1997.
During the six months ended December 31, 1998, the Company had net cash provided
by investing activities in the amount of $188,571 as compared to cash used for
investing activities of $1,186,987 for the six months ended December 31, 1997.
The cash was used for the construction of the Company's newly leased facility,
the purchase of property and equipment and cash which collateralizes a letter of
credit in connection with the leased facility offset by payments to the landlord
for a security deposit.
During the six months ended December 31, 1998, the Company had net cash provided
by financing activities of $835,925 compared to net cash used in financing
activities of $1,667 for the six months ended December 31, 1997. In the 1998
period the Company received net proceeds of approximately $188,000 from the sale
of 62,249 shares of common stock, $600,000 for common stock subscribed and a
$48,020 loan from individuals.
The Company's tangible net asset value as of September 30, 1998 was below the
threshold required by NASDAQ for continued listing of the Company's securities.
The Company presented an overall plan for meeting this requirement. However,
NASDAQ initially determined this plan to be inadequate and called for
termination of listing as of November 10, 1998. This initial determination was
successfully appealed by the Company at a hearing held by NASDAQ. NASDAQ
conditioned its favorable decision on the Company filing a pro forma balance
sheet in this report indicating net tangible assets of at least 3.5 million.
This condition has been met.
During the current fiscal year, the Company expects to invest approximately
$200,000 in expanding its core businesses through increased marketing and
promotion efforts. This amount includes increasing the size of the Company's
marketing staff and certain equipment and computer purchases.
The Company believes that cash generated from the proceeds of its secondary
offering, cash from operations and current cash balances will be sufficient to
meet the Company's operating capital requirements for at least the next six
months. However, an increase or decrease in the scheduled rate at which the
Company anticipates producing sound recordings could dramatically shorter or
lengthen such time frame. As such, there can be no assurance that the Company
will not require additional financing before the end of such period. A
significant factor which will affect the Company's need for additional financing
is the Company's acquisition program. The establishment of additional business
in the future could also require the Company to obtain additional capital. If
the Company were required to obtain additional capital in the future, there can
be no assurance that sources of capital will be available on terms acceptable to
the Company.
Inflation
The impact of inflation on the Company's operating results has been
insignificant in recent years, reflecting generally lower rates of inflation in
the economy. While inflation has not had a material impact on operating results,
there is no assurance that the Company's business will not be affected by
inflation in the future.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND PLAN OF OPERATIONS (CONTINUED)
Year 2000
The Company has conducted a review of its computer systems to identify any
systems that could be affected by the "Year 2000" issue. The year 2000 problem
is the result of computer programs being written using two digits rather than
four to define the applicable year. Any programs that have time-sensitive
software may recognize a date using "OO" as the year 1900 rather than the year
2000. This could result in a major systems failure or miscalculations. The
Company believes that its computer systems and software products are fully year
2000 compatible. However, it is possible that certain computer systems or
software products of the Company's suppliers or customers may not accept input
of, store, manipulate and output dates in the year 2000 or thereafter without
error or interruption. The Company has retained a consultant to evaluate the
implications of year 2000 issues on the Company and its suppliers and customers.
There can be no assurance that the Company will not be required to make
significant expenditures to identify, address or remedy any potential year 2000
problems, or to satisfy liabilities to which the Company may become subject as a
result of such problem.
17
<PAGE>
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
PART II
On December 11, 1998, investors represented by Cassandra purchased 500,000
shares of Common Stock at a price of $1 per share or $500,000 in the aggregate
and on December 15, 1998 additional investors represented by Cassandra purchased
an aggregate of 1,500,000 shares of Common Stock at a purchase price of $1 per
share or $1,500,000 in the aggregate. The Company received the first payment of
$500,000 on December 11, 1998. The payment for the remaining 1,500,000 shares
was made in January 1999. The purchase price was higher than both the market
price on NASDAQ and the book value on the date of payment or date of irrevocable
commitment.
The Company also raised $100,000 on or about December 23, 1998 through the sale
of 100,000 shares to an unaffiliated investor, at $1 per share. In addition,
certain employees, directors, trade vendors and professionals agreed to convert
$528,175 owed to them for 528,175 shares, the same price paid by the other
investors.
There shares were issued in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended.
18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.50 - Letter Agreement dated December 1, 1998 between the Company
and Joe Gallo.
10.51 - Letter Agreement dated as of December 2, 1998 between the
Company and Messrs Doyle, Loeffler and Flynn.
10.52 - Letter Agreement dated as of January 28, 1999 between the
Company and Philip G. Nappo III.
27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1998.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized
PARADISE MUSIC & ENTERTAINMENT, INC.
By: /s/ John Loeffler
-----------------------------------
John Loeffler, Chairman of the
Board, and President
Date: February 15, 1999
By: /s/ Philip G. Nappo III
-----------------------------------
Philip G. Nappo III, Chief Financial
Officer
20
Paradise Music & Entertainment, Inc.
53 West 23rd Street
New York, NY 10010
December 1, 1998
Mr. Joseph Gallo
c/o Paradise Music & Entertainment, Inc.
53 West 23rd Street
New York, NY 10010
Re: Employment Agreement
Dear Joe:
The purpose of this letter is to set forth our mutual understanding
as to the extension of the Employment Agreement dated December 1, 1997 (the
"Employment Agreement") through December 15, 1998 and the termination of the
Employment Agreement effective as of December 15, 1998. The understanding is as
follows:
1. You shall continue to serve as Senior Vice President and Chief
Financial Officer of the Company under the Employment Agreement through December
15, 1998, with your last date at work being December 11, 1998. You will be
compensated for your services from the period of December 1, 1998 through
December 15, 1998 at the rate of $125,000 per annum. Payment of salary for this
period shall be made on December 15, 1998.
2. On the date hereof, you have been paid all accrued salary due to
you through November 30, 1998, receipt of which is hereby acknowledged.
3. It has been agreed that upon payment of the compensation
described in items 1 and 2 of this letter, that all compensation obligations
owed to you under the Employment Agreement will have been satisfied. You agree
that upon termination of the Employment Agreement and when items 1 and 2 are
satisfied that you shall not be entitled to payment of any further benefits by
the Company and in this regard you specifically waive any rights to accrued
vacation and/or severance.
<PAGE>
Mr. Joseph Gallo
December 1, 1998
Page 2
4. Through December 15, 1998, you shall be treated as an employee of
the Company for purposes of the vesting of your outstanding stock options as
well as entitlement to health benefits. The parties acknowledge and agree that
pursuant to an award under the Non-qualified Stock Option Agreement entered into
the parties hereto as of December 1, 1997 that the following options have
vested:
Number of Share Exercise Price
--------------- --------------
(i) 8334 $3.3125
(ii) 8334 $4.3125
5. The provisions of Section 5(d) of the Employment Agreement with
respect to indemnification shall remain in full force and effect through
December 15, 1998 and shall remain in effect thereafter with respect to any
matters based on the period through December 15, 1998.
6. You will be removed as an authorized signatory on the bank
accounts of the Company and all its subsidiaries effective December 15, 1998.
If the foregoing fully reflects your understanding, will you please
sign and return a copy of this letter to me whereupon it shall become binding
upon you and the Company.
Sincerely,
Paradise Music & Entertainment, Inc.
By: /s/ John Loeffler
---------------------------------------
John Loeffler, President
Accepted and Agreed:
By: /s/ Joseph Gallo
---------------------
Joseph Gallo
[Letterhead of Paradise Music & Entertainment, Inc.]
December 2, 1998
Messrs. John Loeffler, Jon Small,
Brian Doyle and Richard Flynn
C/o Paradise Music & Entertainment, Inc.
53 West 23rd Street - 11th Floor
New York, NY 10010
Gentlemen:
This letter will memorialize our agreement with respect to the terms on which
amended and restated employment agreements (the "Agreements") for each of you (
the "Executives") will be prepared, negotiated and executed at the earliest
practicable opportunity. This Agreement shall be a binding agreement between the
Company and each Executive who executes a counterpart hereof.
1. Form of Agreement. Except as set forth below with respect to (i) the term of
the Agreements, (ii) certain provisions relating to compensation, and (iii)
certain provisions relating to non-competition, the form of Agreement will
reflect (without amendment, modification or supplementation) all of the
operative terms, benefits and conditions now contained in the employment
agreements covering the Executives as of the date hereof .
2. Term. The term of the Agreements (the "Term") will be deemed effective as of
October 1, 1998 and expire on June 30, 2001. All parties agree to use their best
efforts to negotiate in good faith and to execute such Agreements as soon as
practicable after the date hereof.
3. Non-Compete.
A. Non-compete. The non-competition section of the existing
employment agreements will be amended in the new Agreements to provide
that if any Executive leaves the employ of the Company voluntarily (other
than for "Good Reason" as defined below), or is terminated for cause (but
only for cause), that such Executive will (i) surrender for cancellation
all securities of the Company owned by such Executive equal to the amount
of stock that such Executive received pursuant to that certain Exchange
Agreement dated as of October 9, 1996, (ii) forfeit all accrued, but
unpaid, compensation through the date of such Executive's departure, and
(iii) pay to the Company 25% of the gross client profit (defined as
revenues minus cost of goods sold) for any Clients or Artists (as defined
in the existing employment agreements) originated, or developed since
October 9, 1996 by the Executive or the subsidiary employing Executive
(the "Termination Payments"). Termination Payments will be paid to the
Company on all gross client profit earned by the Executive or the
subsidiary employing Executive for remainder of the Term. A list of
Clients and Artists affected by the 25% gross client profit allocation
will be provided to the Board and appended to each Employment Agreement.
The terms, conditions and payments described in subsections (i) through
(iii) above are hereafter referred to as the "Non-compete Consideration".
The definition of cause contained in Section 7(b) of the existing
employment agreements shall be amended and restated in its entirety to
read as follows:
"(b) Commission of a willful or intentional act which has
materially injured the reputation, business or business
relationships of the Employer, including the violation of the
<PAGE>
Messrs. Loeffler, Small, Flynn and Doyle
Paradise Music & Entertainment, Inc.
December 2, 1998
Page 2
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."
B. Good Reason. For purposes of this Agreement, "Good Reason" shall
mean (i) any breach of this Agreement by the Company, (ii) a material
diminution of an Executive's responsibilities, loss of title or position
with the Company or the subsidiary employing the Executive, or the failure
to reelect the Executive to the Board of Directors of the Company, (iii) a
material reduction in any Executive's base salary from that stated in this
Agreement or other benefits as in effect at the time in question, or (iv)
the failure by a successor to the Company to assume this Agreement.
4. Compensation.
A. Base Salaries. The base salaries ("Base Salaries") for Messrs.
Loeffler, Small, Doyle and Flynn will be $200,000 per annum, payable in
accordance with the Company's existing payroll practices. In recognition
of his performance for fiscal year 1998, Mr. Small's Base Salary will be
$320,000 per annum for fiscal year 1999 and for so long as Mr. Small earns
during any subsequent fiscal year of the Term an amount of Base Salary and
compensation from his Tier 3 Bonus (as described below) in an amount
greater than $320,000 per annum, Mr. Small shall be entitled to draw his
compensation at the rate of $320,000 per annum. In the event that Picture
Vision earns less than $320,000 (a "Picture Vision Shortfall")in Net
Profit (as hereafter defined) in any fiscal year, then Mr. Small's Base
Salary for the next fiscal year shall be reduced (but not below $200,000
per annum) by the amount of such Picture Vision Shortfall. For the term of
these Agreements, Mr. Loeffler shall serve as the Chairman and President,
Mr. Doyle shall serve as the Chief Executive Officer, and Mr. Flynn shall
serve as the Chief Operating Officer. The Chairman/President, Chief
Executive Officer and Chief operating Officer of the Company shall each be
entitled to receive a fee of $25,000 per annum, payable in accordance with
the Company's existing payroll practices in addition to Base Salary or the
compensation from any Bonus. Their respective duties shall be as set forth
in the proposed new By-laws, a copy of which is annexed hereto.
B. Tier 1, Tier 2 and Tier 3 Bonuses. For purposes hereof, the term
"Net Profit" shall mean pretax income as determined by the Company's
auditors in accordance with generally accepted accounting principles
consistently applied ("GAAP") (without any chargeback of corporate
overhead but after accounting for the payment of the Base Salary actually
received by such Executive in such year. A Tier 1 Net Profit threshold
will be established for each Executive as follows:
Name: Tier 1 Net Profit Threshold:
John Loeffler $200,000 in Net Profit from Rave.
Jon Small $0 from Picture Vision for any fiscal year
that Mr. Small's Base Salary is $320,000, otherwise
up to $200,000 in Net Profits from Picture Vision.
Brian Doyle An aggregate of $400,000 in Net Profits
and Richard Flynn from the operations of All Access
Entertainment, Inc. ("All Access") and
PUSH Records, Inc. ("PUSH").
For purposes hereof, the losses of one subsidiary, if any, will not be
offset against the Net Profits generated by the other subsidiary other
than as set forth in subsection D below.
<PAGE>
Messrs. Loeffler, Small, Flynn and Doyle
Paradise Music & Entertainment, Inc.
December 2, 1998
Page 3
(i) An Executive will be entitled to receive (the "Tier 1
Bonus") 50% of each dollar of Net Profit earned by the operating
subsidiary that pays his Base Salary up to the Net Profit Threshold.
(ii) Messrs. Loeffler, Doyle and Flynn will be entitled to
receive (the "Tier 2 Bonus") equal to 15% of each dollar of Net
Profit earned by the operating subsidiary that pays his Base Salary
above the Net Profit Threshold. Mr. Small shall have no Tier 2 Bonus
for so long as his Base Salary is $320,000. In such event, the first
$200,000 in Net Profit shall be allocated 100% to the Company until
the Company has earned $200,000 and thereafter (the "Tier 3 Bonus"),
Net Profit from Picture Vision shall be allocated 75% to the Company
and 25% to Mr. Small. In the event that Mr. Small's Base Salary has
been reduced by any Picture Vision Shortfall, then the next $X in
Net Profit (where "X" equals the Picture Vision Shortfall for the
previous year) shall be allocated to Mr. Small (in lieu of a Tier 2
Bonus) such that Mr. Small shall have received compensation in such
year up to $320,000, then the next $200,000 in Net Profits shall be
allocated to the Company. Thereafter, Net Profits shall be allocated
75% to the Company and 25% to Mr. Small.
C. Messrs. Doyle and Flynn shall prepare (prior to the execution of
the Agreements) a realistic projection of the anticipated results of
operations for PUSH for fiscal year 1998 (the "PUSH Budget"). The PUSH
Budget shall be reviewed and approved by the Board of Directors of the
Company. If PUSH amends the PUSH Budget to produce, license, market or
distribute records which are not reflected on the PUSH Budget as approved
(as was the case with the signing of Blessid Union of Souls in fiscal year
1998), such amendments must be approved by the Board of Directors and the
results of operations projected in such amended budget shall be deemed the
new PUSH Budget. Prior to June 1 of each fiscal year, PUSH shall prepare a
PUSH Budget for the next fiscal year which budget shall be submitted to
the Board for its approval. Once approved by the Board, such PUSH Budget
will establish the operating budget, subject to amendment as provided
above, for the ensuing fiscal year.
D. Net Profit for each operating subsidiary shall be computed on a
quarterly basis prior to the date on which the Company files its
consolidated results of operation with the SEC for the period covered. To
the extent that the results of operations for a subsidiary indicate that
they have earned Net Profit, then a Tier 1 Bonus (but not a Tier 2 or Tier
3 Bonus) shall be paid to the appropriate Executive on such Net Profit.
The maximum Tier 1 Bonus that will be paid for any quarter is 25% of the
maximum Tier 1 Bonus that an Executive could earn over the course of a
full year. If the results of operation for such quarter indicate that the
operating subsidiary has an operating loss, then such loss shall be
carried forward (as would any earned but unpaid Tier 1 Bonus amounts from
the previous quarter) and aggregated into the results for the next
succeeding quarter; provided, however, that any cumulative losses for any
fiscal year up to $200,000 shall not be carried forward into the next
succeeding fiscal year. Losses in excess of $200,000 for any operating
subsidiary (and, in the case of PUSH, $200,000 worse than the PUSH Budget,
as amended, for the year at issue) ("Excess Losses"), shall be carried
forward into the next fiscal year and these losses must be recouped before
any Tier 1, Tier 2 and Tier 3 Bonuses are paid to the Executive affiliated
with such operating subsidiary. In the case of PUSH and All Access
Entertainment Management Group, Inc. ("All Access"), Excess Losses for
either PUSH or All Access shall offset, on a dollar-for-dollar basis, Net
Profit from the other entity before any Bonus is paid to either Messrs.
Flynn and Doyle.
E. Tier 2 and Tier 3 Bonuses shall only be paid on Net Profit earned
above the Tier 1 Net Bonus Threshold on a subsidiary's operating results
for any fiscal year after such results have been (i) audited by the
Company's auditors and (ii) reported to the SEC on Form 10-K or any
successor form.
F. It is understood and agreed that Tier 1 and Tier 2 Bonuses earned
on the results of operations for PUSH and/or All Access can be allocated
to Messrs. Flynn and Doyle 50%/50% or in such other manner as mutually
determined in their sole discretion.
<PAGE>
Messrs. Loeffler, Small, Flynn and Doyle
Paradise Music & Entertainment, Inc.
December 2, 1998
Page 4
G. Tier 1, Tier 2 and Tier 3 Bonuses earned for any fiscal year can
be taken in cash or stock, at the option of the Executive, and paid
currently, or paid into the Company's deferred compensation plan to be
established prior to the Offering. If paid into the deferred compensation
plan in cash, the trustee of the plan will invest them in the same manner
as if they were pension funds contributions (e.g., in mutual funds, etc.).
If paid into the deferred compensation plan in the form of stock, the
Company will promptly issue to the plan for the benefit of the
contributing Executive an amount of stock equal to (i) the amount of the
deferred bonus contributed by the Executive, (ii) divided by the market
price of the Company's common stock (as determined under the plan). For
the first $30,000 contributed in stock, the Company shall contribute an
additional $30,000 in stock.
H. If a subsidiary earns over $500,000 in Net Profit in any year
(after deducting Tier 1, Tier 2 and Tier 3 Bonuses paid), the Executive
will earn one restricted share of stock for each $5.00 in Net Profit over
the $500,000 threshold up to an aggregate of 25,000 shares.
I. It is the understanding of the Executives that they are to
achieve and maintain ownership parity in the Company, subject to Board and
shareholder approval, if any. Once such parity has been achieved, if
interests in the Company's securities, whether in the form of options,
warrants, restricted stock awards, or the like are issued to any of the
Executives other than through a performance-based compensation plan, then
each of the Executives shall be automatically entitled to receive the same
interest.
5. Prior Advances; 144 Stock Sales. In exchange for the Non-compete
Consideration, any amounts deemed advances relating to the existing employment
agreements in place for fiscal year 1998 are forgiven. The proceeds from Mr.
Loeffler's Rule 144 stock sales will be applied towards repayment of $63,000 of
the currently outstanding $129,000 loan which has previously been advanced to
Mr. Loeffler by the Company. The proceeds from the sale of stock pursuant to SEC
Rule 144 for Messrs. Small, Flynn, and Doyle are to be converted into stock at
the rate of $2 7/8ths per share.
6. Client Accounts and Funds. "Client Funds", which shall be defined herein to
mean monies advanced by a third party to any subsidiary of the Company for use
by that subsidiary in connection with the production of a particular project,
shall not be available to or used by the Company for any other purpose
whatsoever including, without limitation, for capital expenditures unrelated to
such production or as collateral for any pledge or security interest granted by
the Company, it being understood that, at all times the subsidiary in receipt of
such Client Funds shall have the sole right to deposit and maintain such Client
Funds within a bank account or accounts maintained and managed by such
subsidiary and the Company shall have no right to access any such account(s).
Should the Company violate the terms and conditions of the preceding sentence
and attempt, in any way, to access or utilize such Client Funds for any purpose,
the parties hereto agree that such attempt shall subject the applicable
subsidiary to irreparable injury, for which money damages are insufficient as a
remedy, and, therefore, in addition to such legal remedies to which the
subsidiary and its principal(s) may be entitled, the subsidiary and its
principal(s) shall be entitled to enjoin the Company from accessing or utilizing
such Client Funds in any manner. Notwithstanding the foregoing, the Company
shall have the right to require each subsidiary to remit to the Company only
those amounts from available cash flow (after payment of production
expenditures, SG&A and a reasonable reserve) which constitute net profits of
such subsidiary not previously distributed. The Company agrees to cause its
Board of Directors to adopt a proper resolution approving the terms and
conditions of this provision and to take all other corporate action necessary to
ensure that this provision is enforceable, including without limitation, making
any required amendments to the Company's Certificate of Incorporation and
Bylaws. This provision is the essence of this Agreement and shall survive the
termination this Agreement for any reason.
7. Termination of This Agreement. In the event that the Company has not closed
on the first $500,000 in financing from investors introduced to the Company by
The Cassandra Group, Inc. or any other investor group, on or before December 31,
1998 (and such date has not been extended in writing by all of the parties
hereto), then this
<PAGE>
Messrs. Loeffler, Small, Flynn and Doyle
Paradise Music & Entertainment, Inc.
December 2, 1998
Page 5
letter agreement and the terms and conditions set forth herein, including,
without limitation, Section 3 hereof, shall immediately terminate and be deemed
of no force and effect.
8. Miscellaneous. This letter may be amended, modified, superseded, canceled,
renewed or extended, and the terms and conditions hereof may be waived, only by
a written instrument signed by each of the parties hereto, or in the case of a
waiver, signed by the party waiving compliance. No delay on the part of any
party in exercising any right, power or privilege hereunder shall operate as a
waiver thereof, nor shall any waiver on the part of any party of any right,
power or privilege hereunder, nor any single or partial exercise of any right,
power or privilege hereunder, preclude any other or further exercise thereof or
the exercise of any other right, power or privilege hereunder. The rights and
remedies herein provided are cumulative and are not exclusive of any rights or
remedies that any party may otherwise have at law or in equity. This letter
shall be governed by and construed in accordance with the laws of the State of
New York, without giving effect to principles of conflicts of law. All of the
parties hereto, for themselves and their respective officers and directors
individually, jointly and severally, hereby consent to the jurisdiction of the
courts in and for the State of New York with respect to any disputes or other
matters arising over this letter and the transactions contemplated hereby. This
letter is not assignable except by operation of law or as specifically set forth
herein. All pronouns and any variations thereof refer to the masculine, feminine
or neuter, singular or plural, as the identity of the person or persons may
required. This letter may be executed in two or more counterparts, each of which
shall be deemed an original but all of which together shall constitute one and
the same instrument.
If the above is satisfactory to you and adequately reflects our understanding,
please acknowledge by executing in the space below provided.
PARADISE MUSIC & ENTERTAINMENT, INC.
By: /s/ John Loeffler
-----------------------
John Loeffler, Chairman
/s/ John Loeffler
- ------------------------------ ---------------------------
John Loeffler, an Executive Jon Small, an Executive
/s/ Brian Doyle /s/ Richard Flynn
- ------------------------------ ---------------------------
Brian Doyle, an Executive Richard Flynn, an Executive
Philip G. Nappo III
25 Broad Street - Suite 7T
New York, NY 10004
212-943-1921x41
February 12, 1999
Brian Doyle, CEO
John Loeffler, Chairman and President
Richard Flynn, COO
Paradise Music & Entertainment, Inc.
53 West 23rd Street - 11th Floor
New York, NY 10010
Gentlemen:
This letter will memorialize our agreement with respect to my ongoing work for
Paradise Music & Entertainment, Inc. (the "Company") as its interim Chief
Financial Officer ("CFO").
1. The appointment will be effective upon the execution of a counterpart of this
letter (the "Effective Date").
2. The term of this interim appointment (the "Term") will be from the Effective
Date through the sooner of (i) the date on which we enter into a mutually
acceptable formal agreement to extend the scope of my work for the Company,
whether as CFO or otherwise, or (ii) the date on which the Company's 10-Q for
the period ending December 31, 1998 is filed with the SEC.
3. My compensation for rendering services to the Company for the Term shall be
as follows:
(a) $5,166.67 on January 30, and $5,166.67 on February 15, 1999.
(b) In the event that we have not, for any reason, entered into a mutually
acceptable consulting agreement on or before the date on which the Company's
10-Q for the period ending December 31, 1998 is filed with the SEC, then you
agree to pay me a one-time severance payment in the amount of $31,250.00 (i.e.,
3 months severance at the rate of $125,000 per annum) and we agree to exchange
mutual releases on the date such severance is paid. We agree to work in good
faith to negotiate a mutually acceptable going-forward consulting arrangement.
(c) The Company also agrees to pay all of my ordinary and reasonable
out-of-pocket expenses in furtherance of my performance of services hereunder,
as and when the same are presented with reasonably sufficient detail and
supporting documentation as may be required by the CEO from time to timer.
5. In rendering services to the Company, the Company agrees to indemnify and
hold me harmless in the performance of such duties to the same extent as it has
indemnified each of the Company's Executive Vice Presidents or other corporate
officers. The Company shall also take all steps reasonably necessary and
appropriate, if any, to cover such services under the Company's existing
insurance policies, and to keep the same in effect throughout the Term.
6. Other than as set forth above, I shall be entitled to no other benefits or
perquisites, and I shall provide my own office furniture and computer or other
equipment required for me to render the services required; provided, however,
that the Company agrees to pay for the cost of moving such furniture and
equipment to and from the Company's premises and to insure the same while they
are located at the Company's premises.
<PAGE>
Paradise Music & Entertainment, Inc.
February 12, 1999
Page 2 of 2
If the above accurately reflects our understanding, please execute a counterpart
of this letter in the space provided below.
Very truly yours,
/s/ Philip G. Nappo
- ----------------------------
Philip G. Nappo III
AGREED TO AND ACCEPTED BY:
PARADISE MUSIC & ENTERTAINMENT, INC.
By: /s/ John Loeffler
---------------------------------
John Loeffler,
Chairman and President
By: /s/ Brian Doyle
- ------------------------------------
Brian Doyle,
Director and CEO
/s/ Richard Flynn
- ------------------------------------
Richard Flynn,
Director and COO
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 609,118
<SECURITIES> 0
<RECEIVABLES> 865,178
<ALLOWANCES> 76,414
<INVENTORY> 44,359
<CURRENT-ASSETS> 2,070,480
<PP&E> 1,612,043
<DEPRECIATION> 338,294
<TOTAL-ASSETS> 3,624,182
<CURRENT-LIABILITIES> 2,113,569
<BONDS> 0
0
0
<COMMON> 24,072
<OTHER-SE> 1,486,541
<TOTAL-LIABILITY-AND-EQUITY> 3,624,182
<SALES> 5,779,131
<TOTAL-REVENUES> 5,779,131
<CGS> 3,925,989
<TOTAL-COSTS> 3,925,989
<OTHER-EXPENSES> 3,223,416
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,344,737)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,370,274)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,344,737)
<EPS-PRIMARY> (0.57)
<EPS-DILUTED> (0.57)
</TABLE>
