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 June 30, 2000
--------------------------------------------------
|_| 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 July 31, 2000, the Issuer had 9,640,841 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
JUNE 30, 2000
FORM 10-QSB
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
PART I FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheet as of
June 30, 2000 (Unaudited) 4
Consolidated Statements of Operations for the Six and
Three Months Ended June 30, 2000 and 1999 (Unaudited) 5
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2000 and 1999 (Unaudited) 6-7
Notes to Consolidated Financial Statements (Unaudited) 8-13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14-17
PART II OTHER INFORMATION
Item 1 Legal Proceedings 18
Item 2 Changes in Securities and Use of Proceeds 18
Item 4 Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
3
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 2000
(unaudited)
ASSETS
<TABLE>
CURRENT ASSETS:
<S> <C> <C>
Cash $ 2,788,924
Accounts receivable 3,878,455
Prepaid expenses and other current assets 677,562
------------
Total current asse $ 7,344,941
PROPERTY AND EQUIPMENT, net 2,032,990
OTHER ASSETS:
Goodwill, net 8,086,404
Investment, at cost 1,000,000
Security deposits and other 256,731
------------
9,343,135
------------
$ 18,721,066
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued payroll and related expenses $ 310,417
Accounts payable and accrued expenses 4,248,239
------------
Total current liabilities $ 4,558,656
Long Term Convertible Debt 2,021,928
COMMITMENTS --
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
authorized 5,000,000 shares, none issued --
Common stock, $.01 par value,
authorized 75,000,000 shares,
issued and outstanding 9,640,841 shares 96,408
Capital in excess of par value 23,887,949
Note receivable, stockholder (64,082)
Accumulated deficit (11,779,793)
------------
Total stockholders' equity 12,140,482
------------
$ 18,721,066
============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES $ 6,343,663 $ 1,920,663 $ 15,266,783 $ 3,881,905
------------ ------------ ------------ ------------
OPERATING EXPENSES
Cost of sales 4,950,712 1,121,911 11,477,204 2,379,522
Marketing, selling, general and administrative 3,290,505 2,296,225 6,423,701 3,880,607
------------ ------------ ------------ ------------
Total operating expenses 8,241,217 3,418,136 17,900,905 6,260,129
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (1,897,554) (1,497,473) (2,634,122) (2,378,224)
INTEREST EXPENSE (INCOME), NET 150,104 (5,289) 190,416 (12,032)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (2,047,658) (1,492,184) (2,824,538) (2,366,192)
INCOME TAXES -- 3,000 9,000 3,000
------------ ------------ ------------ ------------
NET LOSS $ (2,047,658) $ (1,495,184) $ (2,833,538) $ (2,369,192)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.25) $ (0.28) $ (0.35) $ (0.46)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
USED IN COMPUTING BASIC AND DILUTED
LOSS PER COMMON SHARE 8,168,567 5,330,332 8,018,612 5,145,987
============ ============ ============ ============
</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 June 30,
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,833,538) $(2,369,192)
Adjustments to reconcile to net loss to net cash
used in operating activities:
Depreciation and amortization 320,574 184,864
Amortization of goodwill 204,484 --
Loss on disposal of branch operations -- 89,646
Non-cash consulting expense in connection with warrants 42,908 (4,968)
Common stock issued and warrants granted to outside
directors, consultants, vendors and employees 39,189 752,509
Changes in operating Assets and Liabilities:
Accounts receivable 909,883 (22,157)
Prepaid expenses and other current assets 137,423 177,248
Security deposits and other 303,001 156,095
Deferred revenues -- (131,112)
Accrued payroll and related expenses (27,077) 473,466
Accounts payable and accrued expenses (992,056) (204,436)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,895,209) (898,037)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for property and equipment (237,241) (126,077)
Acquisition costs, net of cash acquired (1,178,922) (95,000)
Note receivable, officer -- 1,200
----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES (1,416,163) (219,877)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net of expenses 1,567,022 1,487,458
Proceeds from long term convertible debt, net of expenses 1,923,907 --
Proceeds from warrants issued with long term debt 978,060 --
Proceeds from note payable -- (48,020)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,468,989 1,439,438
----------- -----------
NET INCREASE IN CASH 1,157,617 321,524
CASH, beginning of period 1,631,307 609,118
----------- -----------
CASH, end of period $ 2,788,924 $ 930,642
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
Six months ended June 30,
-------------------------
2000 1999
---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION,
Cash paid during the year for income taxes $ 22,653 $ 6,000
========== ==========
Cash paid during the year for interest $ 238,799 $ --
========== ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Stock issued in exchange for services $ 36,000 $ 254,947
========== ==========
Conversion of liabilities into common stock $ 3,159 $ 481,750
========== ==========
Warrants granted for services $ -- $2,256,764
========== ==========
See accompanying notes to consolidated financial statements
7
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION:
The consolidated financial statements included herein have been
prepared by Paradise Music & Entertainment, Inc. and subsidiaries
(the "Company") pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC") and reflect all
adjustments, consisting of normal recurring adjustments, which are,
in the opinion of management, necessary for a fair presentation of
results of operations for interim periods. Certain information and
footnote disclosures have been omitted pursuant to such rules and
regulations. It is suggested that these financial statements be read
in conjunction with the consolidated financial statements and the
notes thereto included in the Company's Report for the transition
period ended December 31, 1999 on Form 10-KSB.
The consolidated results of operations for the three and six months
ended June 30, 2000 are not necessarily indicative of the results to
be expected for the full fiscal year.
NOTE 2 - ORGANIZATION AND NATURE OF OPERATIONS:
Paradise Music & Entertainment, Inc. ("Paradise") was formed in July
1996. We are a music and entertainment company focused on supplying
traditional and web-centric entertainment businesses with
state-of-the art film, video, digital and music-related products,
services and content. Our products, services and content are offered
through three principal business units, namely:
PDSE Film and Television includes Straw Dogs, Inc. ("Straw Dogs") a
video production company incorporated in April 1999 in Delaware,
Picture Vision, Inc. ("Picture Vision") a video production company
incorporated in Tennessee, and Offshore Pictures, Inc. d/b/a Shelter
Films, a video production company that was acquired in June of 2000
by Paradise. Straw Dogs was acquired in late December 1999, and is
included in operations as of January 1, 2000.
PDSE Music includes Push Records, Inc. ("Push"), a record label
which was incorporated in Delaware; 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, incorporated in New York; All Access Entertainment Management
Group, Inc. ("All Access"), a musical artist management company
incorporated in New York; Label M, a jazz record label and artist
support company launched in May of 2000; Mesa, a world beat record
label; Bluemoon, a contemporary jazz label; Indie 5000 (experimental
hip-hop); and agreements with Kinetic Records (electronic and dance
music), Trippin' N' Rhythm (adult urban contemporary and smooth
jazz), and Jazzica (Brazillian jazz).
PDSE Digital includes Paradise Digital Productions, Inc. ("PDP"),
which is incorporated in Delaware. PDP has production and strategic
relationships with Eruptor Entertainment, Inc., an entertainment and
leisure Internet destination site targeted at "Generation Y" males,
and WireBreak.com, a digital entertainment destination site
utilizing a unique, highly-stylized synchronization of streaming,
"made-for-the-web" video and interactive animation. PDP has also
entered into an alliance with Computer Associates International
Inc., a leading provider of Internet software solutions, to combine
their expertise in back-end software support with our content
designed for the digital entertainment market.
8
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation - The consolidated financial statements
include the accounts of Paradise and its wholly owned subsidiaries.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
Revenue Recognition - Commercial music production revenues and the
related production costs are recognized upon acceptance of the music
production by the client. Royalty, residual, and licensing income is
recognized when earned if the amount can be reasonable estimated,
and when received if it cannot be reasonably estimated. For projects
that 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 that recognizes income as work
on the project progresses. In accordance with industry custom, the
Company currently operates its music artist management business
based on oral agreements with certain artists and customers.
Pursuant to these arrangements, the Company receives up to 20% of
the gross revenues received in connection with artist entertainment
related earnings less certain standard industry costs. Record label
revenues are recognized in accordance with the provisions of the
distribution agreements. Certain record costs are capitalized as
recoverable from future revenues and amortized over the expected
life of the records, to the extent there is reasonable assurance
that these costs will be recoverable from future sales. The Company
is accounting for these costs in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 50 "Financial Reporting
in the Record and Music Industry."
In June 2000, the Securities and Exchange Commission issued an
amendment to Staff Accounting Bulletin No. 101, Revenue Recognition
in Financial Statements ("SAB 101") which delayed the effective date
for adoption of SAB 101 to the fourth quarter of 2000. SAB 101
provides guidance on revenue recognition criteria for certain types
of transactions. SAB 101 also provides guidance on the disclosures
that companies should make about their revenue recognition policies
and the impact of events and trends on revenue. The Company is
currently evaluating the impact of SAB 101.
Cash and Cash Equivalents - The Company considers all highly liquid
investments with maturities of three months or less when purchased
to be cash equivalents. The Company maintains its cash in bank
deposit accounts that, at times, may exceed federally insured
limits. The Company has not incurred any losses in such accounts and
believes it is not exposed to any significant credit risk on cash.
Property and Equipment - Property and equipment is stated at cost
less accumulated depreciation and amortization. Depreciation and
amortization is computed as follows:
<TABLE>
<CAPTION>
Estimated
Asset Useful Lives Principal Method
----- ------------ ----------------
<S> <C> <C>
Furniture, fixtures and equipment 5-7 Years Straight-line
Leasehold improvements Term of Lease Straight-line
or 10 years
whichever is shorter
</TABLE>
Impairment of Long Lived Assets - Impairment losses on long-lived
assets (including goodwill) are recognized when events and
circumstances indicate that the undiscounted cash flows estimated to
be generated by these assets are less than the carrying amounts of
those assets.
Investment - Investments in nonmarketable equity securities in which
the Company owns less than a 20% interest and where it cannot
exercise significant influence over the operations of the investee,
are accounted for using the cost method. The Company periodically
evaluates the recoverability of investments recorded under the cost
method and recognizes loss if a decline in value is determined to be
other than temporary.
9
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Stock Warrants - Stock warrants issued for goods and services are
accounted for in accordance with Emerging Issues Task Force (EITF)
96-18, Accounting for Warrants that are Issued to other than
Employees for Acquisition, or in Conjunction with Selling Goods and
Services. Accordingly, warrants subject to vesting based on
performance will be valued each reporting period until vested. The
portion of the value related to the completed term of the related
agreement is expensed, and the remaining non-cash deferred
consulting expense is amortized over the remaining term of the
agreement. The value of such related warrants may be subject to
adjustment until such time that the warrant is nonforfeitable, fully
vested and exercisable.
Income Taxes - Deferred income tax assets and liabilities are
computed for differences between the financial statement and tax
bases of assets and liabilities that will result in taxable or
deductible amounts in the future, based on enacted tax laws and
rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce the deferred income tax
assets to the amount expected to be realized.
Loss Per Common Share - Basic earnings per share excludes dilution
and is computed by dividing net loss by the weighted average number
of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. Diluted loss per common
share is the same as basic loss per common share for the three and
six months ended June 30, 2000 and 1999. Unexercised stock options
and outstanding stock warrants were not included in the computations
of diluted earnings per common share because their effect would have
been antidilutive as a result of the Company's losses.
Fair Value of Financial Instruments - The fair value of the
Company's assets and liabilities which qualify as financial
instruments under SFAS No. 107 "Disclosures About Fair Value of
Financial Instruments," approximate the carrying amounts presented
in the consolidated balance sheet.
Use of Estimates - The preparation of consolidated financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
10
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - ACQUISITIONS:
The Straw Dogs acquisition was completed on December 16, 1999. The
following unaudited pro forma condensed consolidated financial
information for the three and six months ended June 30, 1999 is
presented to show the results of the Company as if the Straw Dogs
acquisition had occurred at the beginning of the period presented.
The pro forma results include certain adjustments, including
increased amortization related to goodwill, and are not necessarily
indicative of what the results would have been had the transactions
actually occurred on the aforementioned date.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, 1999 June 30, 1999
------------------ ----------------
<S> <C> <C>
Net revenues $ 6,516,339 $ 13,347,803
------------ ------------
Net loss $ (1,591,721) $ (2,340,241)
------------ ------------
Basic and diluted earnings (loss) per common share $ (.30) $ (.45)
------------ ------------
</TABLE>
On June 15, 2000, the Company entered into an agreement to acquire
all of the assets of Offshore Pictures, Inc. d/b/a Shelter Films, a
television commercial production company based in New York, New York
in return for (i) the assumption of certain liabilities of Shelter
Films and (ii) issuance of an aggregate of 150,000 shares of the
Company's restricted common stock to Steven Shore, the previous
owner of Shelter Films, who remains as the President of Shelter
Films. Net assets acquired total $102,515. Total acquisition costs,
which include some incidental costs, equal $215,791. The acquired
company has become part of PDSE's Film and Television Group.
NOTE 5 - COMMITMENTS:
The Company has employment agreements with seven of its executives,
which provide for various compensation and bonus arrangements. For
the three months ended June 30, 2000 and 1999, approximately
$500,000 and $528,500, respectively, has been expensed under the
bonus plans and employment agreements. For the six months ended June
30, 2000 and 1999, approximately $1,350,000 and $802,500,
respectively, has been expensed under the bonus plans and employment
agreements. These costs are included in marketing, selling, general
and administrative expenses.
NOTE 6 - ECONOMIC DEPENDENCY:
Approximately $445,287 and $1,352,000 of television and film
production revenues for the three months ended June 30, 2000 and
1999, respectively, were derived from 3 customers. Approximately
$2,003,952 and $2,133,000 of television and film production revenues
for the three months ended June 30, 2000 and 1999 were derived from
4 and 3 customers, respectively. For the period ended June 30, 2000
and 1999, approximately $226,955 and $122,000, respectively, was
owed in the aggregate to the Company related to these revenues.
11
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - STOCKHOLDERS' EQUITY
During Fiscal Year 1999, the Company entered into consulting
agreements with various consultants for professional and financial
services. The consultants will be compensated for their services
through the issuance of an aggregate of 245,000 warrants to purchase
the Company's common stock. The warrants typically vest after one
year and have exercise prices ranging from $4.00 to $8.00 per share.
The warrants are valued at approximately $71,000 as of June 30,
2000, and approximately $71,000 has been expensed under these
agreements.
In April 1999, the Company entered into agreements for financial
consulting services related to proposed acquisitions and other
special projects with its outside Board members. The agreements
expire in June 2000 and require the Company to issue an aggregate of
300,000 warrants to purchase the Company's common stock at exercise
prices ranging from $5.00 to $5.25 per share. The warrants vest
after one year and expire three years from the date of issuance. The
warrants are valued at approximately $182,000 as of June 30, 2000,
and approximately $182,000 has been expensed under these agreements.
During Fiscal Year 2000, the Company entered into consulting
agreements with various consultants for professional and financial
services. The consultants will be compensated for their services
through the issuance of an aggregate of 75,000 warrants to purchase
the Company's common stock. The warrants typically vest immediately
and have exercise prices ranging from $2.50 to $5.00 per share. The
warrants are valued at approximately $41,000 as of June 30, 2000,
and approximately $41,000 has been expensed under these agreements.
NOTE 8 - INFORMATION CONCERNING BUSINESS SEGMENTS
Segment information listed below reflects the three principal
business units of the Company for the three and six months ended
June 30, 2000 and 1999. Each segment is managed according to the
products or services provided to the respective customers and
segment information is reported on the basis of reporting to the
Company's Chief Operating Decision Maker (CODM).
For the three months ended June 30, 2000:
<TABLE>
<CAPTION>
PDSE PDSE PDSE
Film Music Digital Corporate Consolidated
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 4,479,997 $ 1,807,855 $ 55,811 $ -- $ 6,343,663
Net Income $ (547,595) $ (33,234) $ (239,921) $(1,226,908) $(2,047,658)
</TABLE>
For the three months ended June 30, 1999:
<TABLE>
<CAPTION>
PDSE PDSE PDSE
Film Music Digital Corporate Consolidated
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 1,140,000 $ 780,663 $ -- $ -- $ 1,920,663
Net Income $ 105,000 $ (108,326) $ -- $(1,491,858) $(1,495,184)
</TABLE>
12
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For the six months ended June 30, 2000:
<TABLE>
<CAPTION>
PDSE PDSE PDSE
Film Music Digital Corporate Consolidated
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 12,068,626 $ 2,982,356 $ 215,801 $ -- $ 15,266,783
Net Income $ 25,451 $ 15,897 $ (561,289) $ (2,313,597) $ (2,833,538)
</TABLE>
For the six months ended June 30, 1999:
<TABLE>
<CAPTION>
PDSE PDSE PDSE
Film Music Digital Corporate Consolidated
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 2,499,076 $ 1,382,829 $ -- $ -- $ 3,881,905
Net Income $ 329,000 $ (483,326) $ -- $ (2,214,866) $ (2,369,192)
</TABLE>
NOTE 9 - RECENT AND SUBSEQUENT EVENTS:
On March 28, 2000, Jason Paige (the "plaintiff") brought an action
in the Supreme Court of New York County in the State of New York
against the Company and seven other co-defendants. The plaintiff
sought substantial monetary damages based upon his assertion that
inclusion of music performed by him in a record and other uses of
that recording were unauthorized. A settlement has been reached in
this case, and it has no material impact on our financial
statements.
On June 28, 2000, the Company entered into a $1,620,472 private
equity financing with Renessence Ventures bv io (the "Subscriber"),
a Netherlands-based investment group. The financing involved the
sale of 1,605,422 shares of Paradise common stock at a price of
$1.009375 per share. The price represented a 15% discount to the
closing bid price on June 22, 2000, the date on which the binding
purchase commitment was made. The Subscriber also acquired two year
warrants with the right to purchase an additional 240,813 shares of
common stock at a price of $1.75 per share. In connection with this
financing transaction, the parties executed a Subscription Agreement
and a Warrant Agreement. The net proceeds received by the Company
from the financing have been used and will be used for general
corporate purposes.
The Company is in the process of renegotiating employment agreements
with certain key executives. It is anticipated that all such
agreements will be amended and effective as of July 1, 2000;
however, there is no assurance that new agreements will be reached.
The Company and Jesse Dylan are in the final stages of restructuring
his compensation package. The package reduces his base salary. Other
portions of his compensation package, including profit participation
for television commercials he directs, are currently under
negotiation. The Company and M. Jay Walkingshaw are in the final
stages of reaching an agreement under which Mr. Walkingshaw's
services would be returned to that of a consultant or equivalent
basis.
13
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
General
Paradise Music & Entertainment, Inc. ("Paradise" or the "Company") is engaged in
several aspects of the music and entertainment industry. Our strategic goal is
to create an artist-centric company capable of producing quality content for any
entertainment medium. We intend to increase our presence in the music and
entertainment industry by concentrating our efforts on developing our core
businesses, by acquiring other viable companies which enhance our core
businesses and by acquiring companies engaged in collateral lines of business.
The Company currently derives most of its revenues from: the production of
television commercials; the production of music videos used to promote music
artists, music specials, and programs for television networks; the production of
original music scores and advertising themes for television, radio, film, 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.
On May 1, 2000, members of the Screen Actors Guild and the American Federation
of Television and Radio Artists commenced a strike, asking members to refuse
to perform in radio and television commercials. These unions represent about
135,000 actors. This strike has had a negative impact on the timing of revenues,
and potentially total revenues for the year. At this point in time it is
impossible to predict the length of the strike, or its long-term effects on the
Company's revenues. As of Agusut 10, 2000 the strike was still in effect. The
strike has had a negative impact on operations and may continue to negatively
impact PDSE Film and TV Group operations and revenues for the remainder of the
fiscal year.
However, as part of a general ongoing restructuring, and specifically to address
reduction in revenues due to the strike, the Company has initiated personnel and
overhead cost reductions. These reductions will have an impact on expenses
throughout the remainder of the fiscal year.
During the remainder of fiscal 2000, the Company expects to expand through
acquisitions and joint venture arrangements in the music and entertainment
industry. Our acquisition program is designed to identify, qualify and integrate
similar businesses of appropriate scale, which compliment our existing
businesses. It is anticipated that acquisitions may be financed through the
issuance of the Company's stock as well as with funds provided from financing
sources, if available.
Forward-Looking Statements
Except for the historical information contained herein, this quarterly report on
Form 10-QSB may contain forward-looking statements as defined in the Private
Securities Litigation Reform Act of 1995. These statements relate to future
events and to our future financial performance. These statements are only
predictions and may differ from actual future events or results. We disclaim any
intention or obligation to revise any forward-looking statements whether as a
result of new information, future developments or otherwise. Please refer to our
filings with the Securities and Exchange Commission, which identify important
risk factors that could cause actual results to differ from those contained in
the forward-looking statements, including but not limited to risks associated
with changes in general economic and business conditions (including in the
online business and financial information industry), actions of our competitors,
the extent to which we are able to develop new services and markets for our
services, the time and expense involved in such development activities, the
level of demand and market acceptance of our services and changes in business
strategies.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended June 30, 2000 Compared to
Three Months Ended June 30, 1999.
In aggregate, revenues for the three months ending June 30, 2000 increased
$4,423,000 or 230% compared to the three-month period ending June 30,1999. The
net loss was $2,047,658 for the three months ending June 30, 2000 compared to
$1,495,184 for the three months ending June 30, 1999. A significant portion of
the loss during the three months ending June 30, 2000, is $471,249 associated
with commercial production as a result of the current SAG strike, $318,251
associated with the development of new record labels, $239,921 associated with
the development of our digital initiative (PDSE Digital), and increased
depreciation and amortization expenses associated with the Straw Dogs
acquisition.
While Music Group revenues are higher, Film and TV Group revenues, principally
from commercial production, have been negatively impacted due to the strike. As
part of general ongoing restructuring, and specifically to address reduction in
revenues due to the strike, the Company has initiated personnel and overhead
cost reductions. In the event that the strike continues for an extended period
of time, the Company may be forced to institute significant additional changes
and restructuring in order to maintain its overall operations.
PDSE Film and TV Group revenues increased to $4,479,997 for the three months
ended June 30, 2000 from $1,140,000 for the three months ended June 30, 1999, an
increase of $3,339,997, or 293%. The increase in revenues is primarily due to
the acquisition of Straw Dogs and Shelter Films, somewhat offset by the impact
of the strike.
PDSE Film and TV Group cost of sales increased to $3,888,011 for three months
ended June 30, 2000 from $821,835 for the three months ended June 30, 1999, an
increase of $3,066,176 or 373%. Gross profit as a percentage of PDSE Film
revenues decreased to 13% for the three months ended June 30, 2000, compared to
28% for the three months ended June 30, 1999. The change in cost of sales and
gross profit margin is primarily due to the consolidation of Straw Dogs and the
reduction in revenues due to the strike.
PDSE Music revenues increased to $1,807,855 for the three months ended June 30,
2000, from $780,663 for the three months ended June 30, 1999, an increase of
$1,027,192, or 132%. The increase in revenues is primarily due to the increased
sales generated from the release of Tranceport III, LTJ Bukem, and Sasha and
Digweed recordings through the Company's agreement with Kinetic Records. In
addition there was an increase in royalty and residual revenues from original
music scores made for television programs such as Pokemon.
PDSE Music cost of sales increased to $1,011,317 for the three months ended June
30, 2000 from $300,076 for three months ended June 30, 1999, an increase of
$711,241 or 237%. The increase is due to greater overall album sales and new
releases. Gross profit, as a percentage of recorded music and artist management
revenues, was 44% for the three months ended June 30, 2000, compared to 62% for
the three months ended June 30, 1999. The decreased margin is due to the
increase in sales of recorded music product compared to higher margin artist
management commissions in the prior year.
PDSE Digital revenue was $55,811 for the three months ended June 30, 2000. This
is the second quarter of operation for this business, so there are no comparable
numbers for the same period last year. Revenues were primarily the result of the
production work on several Internet shows. The net loss for this division was
$239,921.
Paradise's marketing, selling, general and administrative expenses increased to
$3,290,505 for the three months ended June 30, 2000 from $2,296,225 for the
three months ended June 30, 1999, an increase of $994,280 or 43%. The increase
is primarily attributable to marketing, selling, general and administrative
expenses associated with the Straw Dogs operations. The Straw Dogs acquisition
also increased depreciation and amortization expenses which totaled $260,300 for
the three months ending June 30, 2000, compared to $116,506 for the three month
period ending June 30, 1999. Some of these increases have been offset by
personnel and overhead cost reductions initiated by the Company towards the end
of the second quarter.
Net interest expense increased to $150,104 for the three months ended June 30,
2000, compared to net interest income of $5,289 for the three months ended June
30, 2000, an increase of $155,393. The increase is the result of interest due on
the debt financing completed in March. The interest due included $166,974 in
non-cash interest expense.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company's loss before income taxes increased to $2,047,658 for the three
months ended June 30, 2000, from $1,492,184 for the three months ended June 30,
1999, an increase of $555,474 or 37%. The increase was primarily due to reduced
revenues and gross profit due to the impact of the strike, increased marketing,
selling, general and administrative expenses partially offset by personnel and
expense reductions as mentioned above, increased interest expenses, and the
development of the PDSE Digital operations.
The Company's net loss increased to $2,047,658 for the three months ended June
30, 2000, from $1,495,184 for the three months ended June 30, 1999, an increase
of $552,474 or 37%. The increase was primarily due to reduced revenues and gross
profit due to the impact of the strike, increased marketing, selling, general
and administrative expenses partially offset by personnel and expense reductions
as mentioned above, increased interest expenses, and the development of the PDSE
Digital operations.
Six Months Ended June 30, 2000 Compared to
Six Months Ended June 30, 1999.
In aggregate, revenues for the six months ending June 30, 2000 increased
$11,384,878 or 293% compared to the six-month period ending June 30,1999. The
net loss was $2,833,528 for the six months ending June 30, 2000 compared to
$2,369,192 for the six months ending June 30, 1999. A significant portion of the
loss during the six months ending June 30, 2000, is $561,289 associated with the
development of our digital initiative (PDSE Digital), $318,251 associated with
the development of new record labels, and increased depreciation and
amortization expenses associated with the Straw Dogs acquisition.
While Music Group revenues are higher, Film and TV Group revenues, principally
from commercial production, have been negatively impacted due to the strike. As
part of general ongoing restructuring, and specifically to address reduction in
revenues due to the strike, the Company has initiated personnel and overhead
cost reductions. In the event that the strike continues for an extended period
of time, the Company may be forced to institute significant additional changes
and restructuring in order to maintain its overall operations.
PDSE Film and TV Group revenues increased to $12,068,626 for the six months
ended June 30, 2000 from $2,499,076 for the six months ended June 30, 1999, an
increase of $9,569,550, or 383%. The increase in revenues is primarily due to
the acquisition of Straw Dogs and Shelter Films, somewhat offset by the impact
of the strike.
PDSE Film and TV Group cost of sales increased to $9,596,879 for six months
ended June 30, 2000 from $1,799,335 for the six months ended June 30, 1999, an
increase of $7,797,544 or 433%. Gross profit as a percentage of PDSE Film
revenues decreased to 21% for the six months ended June 30, 2000, compared to
28% for the six months ended June 30, 1999. The change in cost of sales and
gross profit margin is primarily due to the consolidation of Straw Dogs and the
reduction in revenues due to the strike.
PDSE Music revenues increased to $2,982,356 for the six months ended June 30,
2000, from $1,382,829 for the six months ended June 30, 1999, an increase of
$1,599,527, or 116%. The increase in revenues is primarily due to the increased
sales generated from the release of the Tranceport II, Tranceport III, LTJ
Bukem, and Sasha and Digweed recordings through the company's agreement with
Kinetic Records, and the Paul Hardcastle and JazzMasters III releases through
the company's agreement with the adult contemporary jazz label, Trippin' 'N'
Rhythm Records. In addition there was an increase in royalty and residual
revenues from original music scores made for television programs such as
Pokemon.
PDSE Music cost of sales increased to $1,658,349 for the six months ended June
30, 2000 from $580,187 for six months ended June 30, 1999, an increase of
$1,078,162 or 186%. The increase is due to greater overall album sales and new
releases. Gross profit, as a percentage of recorded music and artist management
revenues, was 44% for the six months ended June 30, 2000, compared to 58% for
the six months ended June 30, 1999. The decreased margin is due to the increase
in sales of recorded music product compared to higher margin artist management
commissions in the prior year.
PDSE Digital revenue was $215,801 for the six months ended June 30, 2000. This
is the second quarter of operation for this business, so there are no comparable
numbers for the same period last year. Revenues were primarily the result of
production for the Yahoo! Internet Film Festival, and production work for
several internet shows. The net loss for this division was $561,289.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Paradise's marketing, selling, general and administrative expenses increased to
$6,423,701 for the six months ended June 30, 2000 from $3,880,607 for the six
months ended June 30, 1999, an increase of $2,543,094 or 66%. The increase is
primarily attributable to marketing, selling, general and administrative
expenses associated with the Straw Dogs operations. The Straw Dogs acquisition
also increased depreciation and amortization expenses that totaled $510,600 for
the six months ending June 30, 2000, compared to $132.361 for the six month
period ending June 30, 1999. Some of these increases have been offset by
personnel and overhead cost reductions initiated by the Company towards the end
of the second quarter.
Net interest expense increased to $190,416 for the six months ended June 30,
2000, compared to net interest income of $12,032 for the six months ended June
30, 2000, an increase of $202,448. The increase is the result of interest due on
the debt financing completed in March. The interest due included $17,250 in cash
payments, and $191,890 in non-cash interest expense.
The Company's loss before income taxes increased to $2,824,538 for the six
months ended June 30, 2000, from $2,366,192 for the six months ended June 30,
1999, an increase of $458,346 or 19%. The increase was primarily due to reduced
revenues and gross profit due to the impact of the strike, increased marketing,
selling, general and administrative expenses partially offset by personnel and
expense reductions as mentioned above, increased interest expenses, and the
development of the PDSE Digital operations.
The Company's net loss increased to $2,833,538 for the six months ended June 30,
2000, from $2,369,192 for the six months ended June 30, 1999, an increase of
$464,346 or 20%. The increase was primarily due to reduced revenues and gross
profit due to the impact of the strike, increased marketing, selling, general
and administrative expenses partially offset by personnel and expense reductions
as mentioned above, increased interest expenses, and the development of the PDSE
Digital operations.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the six months ended June 30, 2000 was
$1,895,209. The operating loss for the six months was partially offset by
non-cash expenses such as depreciation and amortization.
Net cash used in investing activities for the six months ended June 30, 2000 was
$1,416,163. This was principally due to payments of acquisition costs in
addition to amounts used to acquire property and equipment.
Net cash provided by financing activities for the six months ended June 30, 2000
was $4,468,989 which is substantially represented by the net proceeds from the
issuance of subordinated convertible debt and warrants to BayStar Capital, and
the net proceeds of the private equity financing with Renessence Ventures.
The Company had working capital of $2,786,285 and stockholders' equity of
$12,140,482 at June 30, 2000. The Company believes that its cash, operating cash
flows and its access to capital markets, taken together, provide adequate
resources to fund ongoing operating requirements and future capital expenditures
related to the expansion of existing businesses, future acquisitions and
development of new projects for the next twelve month period.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 28, 2000, Jason Paige (the "plaintiff") brought an action
in the Supreme Court of New York County in the State of New York
against the Company and seven other co-defendants. The plaintiff
sought substantial monetary damages based upon his assertion that
inclusion of music performed by him in a record and other uses of
that recording were unauthorized. A settlement has been reached in
this case, and it has no material impact on our financial
statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 28, 2000, Paradise entered into a $1,620,472.80 private
equity financing with Renessence Ventures bv io (the "Subscriber"),
a Netherlands-based investment group. The financing involved the
sale of 1,605,422 shares of Paradise common stock at a price of
$1.009375 per share. The price represented a 15% discount to the
closing bid price on June 22, 2000, the date on which the binding
purchase commitment was made. The Subscriber also acquired two year
warrants with the right to purchase an additional 240,813 shares of
common stock at a price of $1.75 per share. In connection with this
financing transaction, the parties executed a Subscription Agreement
and a Warrant Agreement. The net proceeds received by Paradise from
the financing have been used and will be used for general corporate
purposes.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held at the Company's offices
at 53 West 23rd Street, 11th Floor, New York, NY 10010, at 10:00
a.m., Eastern time, on June 29, 2000 pursuant to required notice. At
the meeting the following persons were elected directors to hold
office until the next annual meeting of shareholders and until their
respective successors are duly elected and qualified and such
persons received the number of votes indicated below opposite their
respective names:
Name Number of Votes For Number of Votes Withheld
---- ------------------- ------------------------
Jesse Dylan 6,810,940 29,315
Richard J. Flynn 6,798,480 41,775
Robert A. Buziak 6,811,780 28,475
Thomas J. Edelman 6,811,280 28,975
Jeffrey Rosen 6,811,480 28,775
In addition, at the meeting Ernst & Young LLP was ratified as the
independent public accountants for the 2000 fiscal year. The voting
results were as follows:
<TABLE>
<CAPTION>
Number of Votes For Number of Votes Against Number of Votes Abstained
------------------- ----------------------- -------------------------
<S> <C> <C>
6,812,540 4,700 23,015
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
28 - Financial Data Schedule
(b) Reports on Form 8-K
There were no Reports on Form 8-K filed during the three months
ended June 30, 2000
18
<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 J. Flynn
-----------------------------------------
Richard J. Flynn, CHIEF FINANCIAL OFFICER
Date: August 10, 2000
19