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 March 31, 1999
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________________ to _______________________
Commission file number 1-12635
PARADISE MUSIC & ENTERTAINMENT, INC.
- --------------------------------------------------------------------------------
(Name of small business issuer as specified in its charter)
Delaware 13-3906452
- ----------------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
53 West 23rd Street, New York, New York 10010
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(Issuer's telephone number) (212) 590-2100
________________________________________________________________________________
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
At May 12, 1999, the Issuer had 5,101,825 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
March 31, 1999 (Unaudited) and June 30, 1998 3
Consolidated Statements of Operations for the
Nine and Three Months Ended March 31, 1999
and 1998 (Unaudited) 4
Consolidated Statements of Stockholders' Equity
for the Nine Months Ended March 31, 1999 (Unaudited) 5
Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 1999 and 1998 (Unaudited) 6-7
Notes to Consolidated Financial Statements (Unaudited) 8-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-17
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 18
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
March 31, June 30,
1999 1998
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,244,545 $ 863,860
Restricted cash -- 464,603
Accounts receivable, less reserve for
returns of nil at March 31, 1999
and $271,188 at June 30, 1998 725,183 806,586
Prepaid video production costs 5,674 52,882
Prepaid record master costs 374,750 93,750
Other current assets 74,131 129,985
----------- -----------
Total current assets 2,424,283 2,411,666
PROPERTY AND EQUIPMENT, less accumulated
depreciation and amortization 1,217,840 1,262,465
----------- -----------
OTHER:
Note receivable, officer 71,478 70,878
Restricted cash -- 350,000
Other 208,475 26,826
----------- -----------
279,953 447,704
----------- -----------
$ 3,922,076 $ 4,121,835
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Deferred revenues $ -- $ 266,636
Accrued expenses and other current
liabilities 1,162,897 1,907,332
----------- -----------
Total current liabilities 1,162,897 2,173,968
----------- -----------
COMMITMENTS
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 5,101,875
shares and 2,245,143 shares,
respectively 51,019 22,451
Capital in excess of par value 8,862,989 5,861,499
Accumulated deficit (6,154,829) (3,936,083)
----------- -----------
Total stockholders' equity 2,759,179 1,947,867
----------- -----------
$ 3,922,076 $ 4,121,835
=========== ===========
See accompanying notes to condolidated financial statements.
3
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
March 31, March 31,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES $ 7,740,373 $ 8,459,367 $ 1,961,242 $ 1,968,335
------------ ------------ ------------ ------------
OPERATING EXPENSES
Cost of sales 5,183,600 5,917,935 1,257,611 1,491,354
Selling, general and
administrative 4,807,799 4,921,645 1,584,382 1,981,039
------------ ------------ ------------ ------------
Total operating expenses 9,991,399 10,839,580 2,841,993 3,472,393
------------ ------------ ------------ ------------
OPERATING LOSS (2,251,026) (2,380,213) (880,751) (1,504,058)
INTEREST INCOME 32,280 121,454 6,743 28,124
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME
TAXES (2,218,746) (2,258,759) (874,008) (1,475,934)
INCOME TAX PROVISION (BENEFIT) 7,000 (2,000)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (2,218,746) $ (2,265,759) $ (874,008) $ (1,473,934)
============ ============ ============ ============
BASIC AND DILUTED INCOME (LOSS)
PER COMMON SHARE $ (0.69) $ (1.02) $ (0.18) $ (0.66)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 3,220,349 2,229,378 4,886,550 2,230,574
============ ============ ============ ============
</TABLE>
See accompanying notes to condolidated financial statements.
4
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Nine Months Ended March 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Capital in
-------------------------- Excess of Accumulated
Shares Amount Par Value Deficit
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCES, June 30, 1998 2,245,143 $ 22,451 $ 5,861,499 $(3,936,083)
SALES OF COMMON STOCK 2,176,249 21,763 2,253,600
COMMON STOCK, issued to outside
directors, consultants, vendors and
employees 680,483 6,805 729,892
WARRANTS GRANTED FOR SERVICES 17,998
NET LOSS (2,218,746)
----------- ----------- ----------- -----------
BALANCES, March 31, 1999 5,101,875 $ 51,019 $ 8,862,989 $(6,154,829)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condolidated financial statements.
5
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31,
---------------------------
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,218,746) $(2,265,759)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 83,221 458,062
Expenses recorded in connection
with warrants granted 17,998 60,456
Provision for returns 500,000
Common stock issued to outside
directors, consultants,
vendors and employees 254,947 13,500
Increase (decrease) in cash attributable
to changes in assets and liabilities:
Accounts receivable 81,403 (1,272,278)
Prepaid video production costs 47,208 (165,031)
Prepaid record master costs (281,000) (109,546)
Other current assets 55,854
Other assets (181,649) (195,798)
Deferred revenues (266,636) 762,704
Accrued expenses and other current
liabilities (262,685) 547,255
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (2,670,085) (1,666,435)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property and equipment (38,596) (1,083,337)
Note receivable, officer (600)
Restricted cash 814,603 (350,000)
----------- -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 775,407 (1,433,337)
----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES,
Proceeds from sale of common stock 2,275,363 (1,667)
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 380,685 (3,101,439)
CASH AND CASH EQUIVALENTS, beginning
of period 863,860 5,086,118
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,244,545 $ 1,984,679
=========== ===========
See accompanying notes to condolidated financial statements.
6
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
Nine Months Ended
March 31,
---------------------
1999 1998
--------- ---------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Stock issued in exchange for services $ 254,947 $ 13,500
========= =========
Stock issued for settlement of accrued
expenses and other current liabilities $ 481,750 $ --
========= =========
Warrants granted $ 17,998 $ 60,456
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION,
cash paid during the period for income taxes $ -- $ 14,610
========= =========
See accompanying notes to condolidated 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 reports for the
periods ending September 30, 1998 and December 31, 1998 on Form 10-QSB.
The consolidated results of operations for the three and nine months ended
March 31, 1999 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 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 the Company and its wholly-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated in
consolidation.
Cash and Cash Equivalents - Cash and cash 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.
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 related
production costs are recognized upon acceptance 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 customs, the Company frequently operates its
management business based on oral agreements and purchase orders with
certain artists and customers. Pursuant to these arrangements the Company
receives up to 20% of the gross revenues received in connection with
artist entertainment related earnings less certain standard industry
costs. Record label revenues are recognized when records are shipped and a
reserve for returns is established against gross revenues. Costs which are
directly related to the production of recordings are capitalized and
amortized over the expected life of the record, to the extent there is
reasonable assurance these costs will be recoverable. 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".
Income (Loss) Per Common Share - Effective March 31, 1998, 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. Diluted loss per common share was the same as basic loss
per common share for the nine and three month periods ended March 31, 1999
and 1998, respectively.
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 consolidated financial statements have been prepared on the basis that
the Company is a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business. The Company incurred a net loss of approximately $2,219,000 for
the nine months ended March 31, 1999 and had an accumulated deficit of
$6,154,829 as of March 31, 1999, and believes it will require additional
capital to support its business plan. The Company is in the process of
raising approximately $8,000,000 of which $4,000,000 is anticipated in May
1999, with the balance to be received at a later date. The additional
financings require the Company to file required documents with the SEC
within a specified time period, and obtain shareholder approval, if
required. Continuation of the Company as a going concern remains dependent
on its ability to raise additional capital and attain future profitable
operations.
9
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 - COMMITMENTS:
The Company has employment agreements with five of its executives, which
provide for various compensation and bonus arrangements. For the nine and
three months ended March 31, 1999 and 1998 approximately $862,500 and
$973,000 and $273,500 and $300,000, respectively, has been expensed under
the bonus plans and employment agreements. These costs are included in
selling, general and administrative expenses.
NOTE 6 - STOCKHOLDERS' EQUITY:
In December 1998, investors represented by The 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 received $500,000 in December 1998, the remaining $1,500,000
was received in January 1999. The purchase price was higher than both the
market price and the book value of the sales on the date of payment or
irrevocable commitment. The Company also raised $100,000 in December 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 $622,087 owed to them for 584,675 shares.
In February, 1999, the Company sold 10,000 shares to a partner of the
Company's outside legal counsel for a price of $3 per share. In addition,
in February 1999, the Company issued an aggregate of 600,000 options to
two of its executive officers to purchase Common Stock under the Company's
option plan, at an exercise price of $5 per share expiring in three years.
NOTE 7 - ECONOMIC DEPENDENCY:
Approximately $397,000 and $337,000 of commercial production revenues for
the nine months ended March 31, 1999 and 1998, respectively, were derived
from one advertising agency. For the three months ended March 31, 1999 and
1998 approximately $33,000 and $78,000 of commercial production revenues
were derived from the same advertising agency, respectively. Approximately
$342,000 and $370,000 of musical talent management revenues for the nine
months ended March 31, 1999 and 1998, respectively, were derived from
three musical artists. For the three months ended March 31, 1999 and 1998
approximately $30,000 and $7,000 of musical talent management revenues
were derived from one musical artist. For the nine months ended March 31,
1999 and 1998, approximately $3,988,000 and $3,542,000, respectively, of
video production revenues were derived from three and one artists. For the
three months ended March 31, 1999 and 1998 approximately $781,000 and
$825,000 of video production revenues were derived from three and one
artists, respectively. For the nine months ended March 31, 1999 and 1998,
approximately $521,000 and $1,852,000 of record label revenues were
derived from two and one customers, respectively. For the three months
ended March 31, 1999 and 1998, approximately $84,000 and $342,000 of
record label revenues were derived from one customer. At March 31, 1999,
approximately $164,000 was owed in the aggregate to the Company from these
artists and customers.
10
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8 - RECENT AND SUBSEQUENT EVENTS:
On January 21, 1999, the Board of Directors was expanded from six to nine
members and Ms. Soledad Bastiancich, Mr. Jesse Dylan and Mr. Jeffrey Rosen
were appointed to the Board. Ms. Bastiancich serves on the Board as a
Cassandra designee.
In March 1999, the Company entered into a joint venture agreement with a
record label/distributor whereby the Company will sell a 50% interest in a
certain record master for $500,000. Payment to the Company will be through
the satisfaction of certain existing liabilities to unaffiliated third
parties, and a certain percentage of subsequent cash flows from sales of
records related to this master.
In April 1999, the Company entered into a letter of intent to acquire 100%
of the assets of Straw Dogs, and 100% of the equity interest in Wonderous
Strange, television commercial production companies, for an aggregate of
1,441,000 shares of the Company's common stock.
In April 1999, Jesse Dylan became the Chairman and Chief Executive Officer
of the Company and John Loeffler became Chairman Emeritus.
In May 1999, Jay Moloney was appointed President of the Company and
entered into a three year employment contract. In connection with his
employment, Mr. Moloney was granted 100,000 fully vested five year
non-qualified stock options exercisable at a price of $3 per share and
1,100,000 additional five year non-qualified stock options at $4.50 per
share. With respect to the 1,100,000 options, 250,000 vest on July 1, 1999
and the balance vest at a rate of 34,000 options per month commencing
October 1999. The employment agreement provides for an annual salary of
$500,000 per year through April 2002 plus a signing bonus of $41,500.
In April 1999, the Company issued an aggregate of 1.1 million warrants to
purchase the Company's common stock and 200,000 shares of Common Stock to
consultants (including two outside directors) for services to be provided
to the Company expiring through April 2001. Such services will relate to
financial analysis and general consulting for future acquisitions, in
addition to identifying acquisition targets. Consulting expense will be
recorded based upon the service provided. The warrants will vest after one
year, have exercise prices ranging from $4.94 to $10.00 per share and
expire in April 2002, and certain issuances are subject to stockholder
approval.
11
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS 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 results of operations of the Company's operating subsidiaries are subject to
seasonal variations. Consequently, the Company's results of operations from
period to period may be materially affected. The timing of new record releases,
for example, could materially impact the Company's operating results.
Additionally, due to the success of particular artists, artists' touring
schedules and the timing of music television specials, it is possible that the
Company could also experience material fluctuations in revenue from year to
year.
During the remainder of fiscal 1999 and in the next fiscal year, the Company
expects to expand significantly through acquisitions and joint venture
arrangements in the music and entertainment industry. It is anticipated that
acquisitions may be financed through the issuance of the Company's stock as well
as with funds provided from financing sources, if available. The Company has
executed several letters of intent with respect to prospective acquisitions (see
Note 8 to the consolidated financial statements).
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.
12
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 Compared to
Three Months Ended March 31, 1998
Commercial music production revenues increased to $460,347 for the three months
ended March 31, 1999 from $376,474 for the three months ended March 31, 1998, an
increase of $83,873 or 22.3% while commercial music production costs of sales
decreased to $98,211 for the three months ended March 31, 1999 from $169,775 for
the three months ended March 31, 1998, a decrease of $71,564 or 42.2%. 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
decrease in costs were primarily attributable to the increase in royalty and
residual income which has no costs related to such income. Gross profit as a
percentage of commercial music revenues increased to 78.7% for the three months
ended March 31, 1999 from 54.9% for the comparable prior period. The increase
was primarily attributable to the increase in royalty and residual income.
Video production revenues increased to $1,359,076 for the three months ended
March 31, 1999 from $1,126,599 for the three months ended March 31, 1998, an
increase of $232,477 or 20.6%. Video production revenues were greater in 1999
than in 1998 primarily due to an increase in both the number of videos produced
and the size of such productions. Cost of sales for video productions decreased
to $977,500 for the three months ended March 31, 1999 from $1,010,645 for the
three months ended March 31, 1998, a decrease of $33,145 or 3.3%. The decrease
was primarily attributable to the size of the video productions produced in the
current period. Gross profit as a percentage of video production revenues
increased to 28.1% for the three months ended March 31, 1999 from 10.3% for the
three months ended March 31, 1998, 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 increased to $34,029 for the three months ended
March 31, 1999 from $7,885 for the three months ended March 31, 1998, an
increase of $26,144 or 331.6%. The Company's music artist management operations
has no cost of sales associated with it.
Record label revenues decreased to $104,317 for the three months ended March 31,
1999 from $470,235 for the three months ended March 31, 1998, a decrease of
$365,918 or 77.8%. Gross margin amounted to a loss of $77,583 due to the volume
of returns on prior releases and the lack of any current releases.
The Company's revenues decreased to $1,961,242 for the three months ended March
31, 1999 from $1,968,335 for the three months ended March 31, 1998, a decrease
of $7,093 or 0.4%. Cost of sales decreased to $1,257,611 for the three months
ended March 31, 1999 from $1,491,354 for the three months ended March 31, 1998,
a decrease of $233,743 or 15.7%. Gross profit as a percentage of revenues
increased to 35.9% for the three months ended March 31, 1999 as compared to
24.2% for the three months ended March 31, 1998.
The Company's selling, general and administrative expenses decreased to
$1,583,590 for the three months ended March 31, 1999 from $1,981,039 for the
three months ended March 31, 1998, a decrease of $397,449 or 20.1%. The decrease
is primarily attributable to the cost cutting measures instituted in the current
fiscal year.
The Company's loss before income taxes resulted in a loss of $874,008 for the
three months ended March 31, 1999 compared with a loss of $1,475,934 for the
three months ended March 31, 1998. The decrease was primarily attributable to
the factors discussed above.
13
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Nine Months Ended March 31, 1999 Compared to
Nine Months Ended March 31, 1998
Commercial music production revenues increased to $1,399,448 for the nine months
ended March 31, 1999 from $985,462 for the nine months ended March 31, 1998, an
increase of $413,986 or 42.0% while commercial music production costs of sales
increased to $447,303 for the nine months ended March 31, 1999 from $409,386 for
the nine months ended March 31, 1998, an increase of $37,917 or 9.3%. 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 68% for the nine
months ended March 31, 1999 from 58.5% for the nine months ended March 31, 1998.
Video production revenues increased to $5,399,559 for the nine months ended
March 31, 1999 from $5,033,430 for the nine months ended March 31, 1998, an
increase of $366,129 or 7.3%, while video production costs of sales decreased to
$4,346,809 for the nine months ended March 31, 1999 from $4,369,540 for the nine
months ended March 31, 1998, an decrease of $22,731 or 0.5% . The increase in
revenues is attributable to an increase in the number of videos produced in the
current year. Gross profit from video production revenues increased to
$1,052,750 for the nine months ended March 31, 1999 from $663,980 for the nine
months ended March 31, 1998 an increase of $388,770 or 58.6%. Gross profit as a
percentage of video production revenues increased to 19.5% for the nine months
ended March 31, 1999 as compared to 13.2% 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 $353,252 for the nine months ended
March 31, 1999 from $472,247 for the nine months ended March 31, 1998, a
decrease of $118,995 or 25.2%. 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 nine months ended March 31, 1999 decreased to
$521,139 from $1,981,086 for the nine months ended March 31, 1998, a decrease of
$1,459,947 or 73.7%. 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 compared to the release of the album
"trickster" by the band Kidneythieves in the 1999 fiscal period, 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 $230,000 in fiscal 1999. Gross profit as a percentage of revenues
amounted to 25.3% for the nine months ended March 31, 1999 compared with 42.2%
for the comparable period last year. The decrease in the margin percentage
results from recognition of additional reserves and promotional costs associated
with "trickster".
The Company's revenues decreased to $7,740,373 for the nine months ended March
31, 1999 from $8,459,367 for the nine months ended March 31, 1998, a decrease of
$718,994 or 8.5%. Cost of sales decreased to $5,183,600 for the nine months
ended March 31, 1999 from $5,917,935 for the nine months ended March 31, 1998, a
decrease of $734,335 or 12.4%. Gross profit as a percentage of revenues
increased to 33.0% for the nine months ended March 31, 1999 as compared to 30.0%
for the nine months ended March 31, 1998.
14
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Nine Months Ended March 31, 1999 Compared to
Nine Months Ended March 31, 1998
(Continued)
The Company's selling, general and administrative expenses decreased to
$4,807,799 for the nine months ended March 31, 1999 from $4,921,645 for the nine
months ended March 31, 1998, a decrease of $113,846 or 2.3%. The decrease is
principally attributable to a decrease in costs at Push, partially offset by 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 $2,218,746 for the
nine months ended March 31, 1999 compared with a loss of $2,258,759 for the nine
months ended March 31, 1998, an decrease of $40,013 or 1.8%. The decrease was
primarily due to the decrease in selling, general and administrative expenses
described above.
15
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
During the nine months ended March 31, 1999, the Company had used cash in
operating activities in the amount of $2,670,085 as compared to cash used in
operating activities of $1,666,435 for the nine months ended March 31, 1998.
During the nine months ended March 31, 1999, the Company had net cash provided
by investing activities in the amount of $775,407 as compared to cash used for
investing activities of $1,433,337 for the nine months ended March 31, 1998. The
cash was used for the construction of the Company's New York Headquarters, the
purchase of property and equipment offset by the return of cash which
collateralized a letter of credit in connection with the leased facility and the
use of restricted cash to satisfy certain liabilities.
During the nine months ended March 31, 1999, the Company had net cash provided
by financing activities of $2,275,363 compared to net cash used in financing
activities of $1,667 for the nine months ended March 31, 1998. In the 1999
period the Company received net proceeds of approximately $2,275,000 from the
sale of shares of common stock.
The Company is in the process of raising approximately $8,000,000 in capital of
which $4,000,000 is anticipated at the end of May based on the projected closing
of a private placement of 942,000 shares at $4.25 per share. The offering
requires the Company to register the shares on an effective Form S-3 within 120
days following closing. If the S-3 is not then effective, investors will have
the right to have their shares repurchased by the Company. The balance is
represented by an offering of 572,000 shares at $7.00 per share. Upon receipt of
irrevocable subscriptions, the Company will seek stockholder approval, if
required, and register the shares on Form S-3. Payment will be made upon the S-3
becoming effective. 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. The Company believes that upon completion of
the initial $4,000,000 offering that it will have sufficient capital to maintain
operations. Expansion of operations will require completion of the second
$4,000,000 offering.
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>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 zero's 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>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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 $622,087 owed to them for 584,675 shares.
In February, 1999, the Company sold and issued 10,000 shares to a partner
of the Company's outside legal counsel at $3 per share.
These shares were issued in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 1999.
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/ Richard Flynn
---------------------------------------------
Richard Flynn, Chief Financial Officer, Chief
Operating Officer, Treasurer and Secretary
Date: May 17, 1999
20
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<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,244,545
<SECURITIES> 0
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