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, 2000
-------------------------------------------------
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
----------------------- ----------------------
Commission file number 1-12635
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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
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- --------------------------------------------------------------------------------
(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 2, 2000, the Issuer had 7,874,112 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 Sheet as of
March 31, 2000 (Unaudited) 4
Consolidated Statements of Operations for the
Three Months Ended March 31, 2000
and 1999 (Unaudited) 5
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2000 and 1999
(Unaudited) 6-7
Notes to Consolidated Financial Statements
(Unaudited) 8-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-16
PART II OTHER INFORMATION
Item 1 Legal Proceedings 17
Item 2 Changes in Securities and Use of Proceeds 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 2000
(Unaudited)
<TABLE>
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 3,512,413
Accounts receivable 3,949,342
Prepaid expenses and other current assets 1,110,838
------------
Total current assets $ 8,572,593
PROPERTY AND EQUIPMENT, net 1,994,555
OTHER ASSETS:
Goodwill 7,828,909
Investment, at cost 1,000,000
Security deposits and other 293,125
-----------
9,122,034
-------------
$ 19,689,182
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued payroll and related expenses $ 218,748
Accounts payable and accrued expenses 5,091,230
------------
Total current liabilities $ 5,309,978
COMMITMENTS
Long term convertible debt 1,854,954
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 7,874,112 shares 78,741
Capital in excess of par value 22,241,726
Note receivable, stockholder (64,082)
Accumulated deficit (9,732,135)
------------
Total stockholders' equity 12,524,250
-------------
$ 19,689,182
=============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31
----------------------------
2000 1999
----------- -----------
(Unaudited) (Unaudited)
REVENUES $ 8,923,120 $ 1,961,242
----------- -----------
OPERATING EXPENSES
Cost of sales 6,526,492 1,257,611
Marketing, selling, general and
administrative 3,133,196 1,584,382
----------- -----------
Total operating expenses 9,659,688 2,841,993
----------- -----------
LOSS FROM OPERATIONS (736,568) (880,751)
INTEREST EXPENSE (INCOME), NET 40,312 (6,743)
----------- -----------
LOSS BEFORE INCOME TAXES (776,880) (874,008)
INCOME TAXES 9,000 --
----------- -----------
NET LOSS $ (785,880) $ (874,008)
=========== ===========
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.10) $ (0.18)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
USED IN COMPUTING BASIC AND DILUTED
LOSS PER COMMON SHARE 7,868,657 4,886,550
=========== ===========
See accompanying notes to consolidated financial statements.
5
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended March 31,
-----------------------------------
2000 1999
------------ ----------
<S> <C> <C>
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (785,880) $ (874,008)
Adjustments to reconcile to net loss to net cash
used in operating activities:
Depreciation and amortization 151,220 68,358
Amortization of Goodwill 99,100 --
Non-cash consulting expense in connection with warrants 1,293 13,030
Common stock issued and warrants granted to outside 140,337
directors, consultants, vendors and employees 22,500 --
Decrease in restricted cash -- (359,113)
Decrease in accounts receivable 835,240 63,581
(Increase) decrease in prepaid expenses and other current assets (388,887) 140,838
Decrease in security deposits and other 250,135 --
Decrease in Inventory -- 29,642
Decrease in other assets -- (192,609)
Decrease in deferred revenues -- (131,112)
Increase (decrease) in accrued payroll and related expenses (118,746) 135,064
Decrease in accounts payable and accrued expenses (67,455) (424,855)
------------ ----------
NET CASH USED IN OPERATING ACTIVITIES (1,480) (1,390,847)
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for property and equipment (90,675) (12,449)
Restricted cash -- 464,603
Acquisition costs, net of cash acquired (859,753) --
Payment for security deposits -- 192,804
Note receivable, officer -- (58,122
------------ ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (950,428) 586,836
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net of expenses -- 2,087,458
Proceeds from common stock to be issued -- (600,000)
Proceeds from warrants issued with long term debt 978,060 --
Proceeds from long term convertible debt, net of expenses 1,854,954 --
Proceeds from note payable -- (48,020)
------------ ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,833,014 1,439,438
------------ ----------
NET INCREASE (DECREASE) IN CASH 1,881,106 635,427
CASH, beginning of period 1,631,307 609,118
------------ ----------
CASH, end of period $ 3,512,413 $ 1,244,545
============ ==========
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Three months ended March 31,
-------------------------------
2000 1999
-------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION,
Cash paid during the year for income taxes $ 22,653 $ 5,430
========== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION,
Cash paid during the year for interest $ 67,998 $--
========== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Stock issued in exchange for services $ 22,500 $254,947
========== ========
Conversion of liabilities into common stock $ -- $481,750
========== ========
Warrants granted for services $ -- $ 17,998
========== ========
</TABLE>
7
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION:
The consolidated financial statements included herein have been
prepared by Paradise Music & Entertainment, Inc. and subsidiaries
(the "Company") pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC") and reflect all
adjustments, consisting of normal recurring adjustments, which are,
in the opinion of management, necessary for a fair presentation of
results of operations for interim periods. Certain information and
footnote disclosures have been omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. It is
suggested that these financial statements be read in conjunction
with the consolidated financial statements and the notes thereto
included in the Company's Report for the transition period ended
December 31, 1999 on Form 10-KSB.
The consolidated results of operations for the three months ended
March 31, 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, content and services are offered
through three operating groups, namely:
Paradise Film includes Straw Dogs, Inc. ("Straw Dogs") a video
production company incorporated in April 1999 in Delaware and
Picture Vision, Inc. ("Picture Vision") a video production company
incorporated in Tennessee). Straw Dogs was acquired in late December
1999, and is included in operations as of January 1, 2000.
Paradise 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, and All Access Entertainment
Management Group, Inc. ("All Access"), a musical artist management
company incorporated in New York).
Paradise Digital Entertainment includes Paradise Digital
Productions, Inc., which is incorporated in Delaware. Paradise
Digital Productions 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. Paradise Digital 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.
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.
8
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Revenue Recognition - Commercial music production revenues and the
related production costs are recognized upon acceptance of the music
production by the client. Royalty and residual income, which relates
to musical compositions used in television series, are recognized
when earned and the amount can be reasonably estimated. All other
royalty and residual income is recognized when received, as it
cannot be reasonably estimated. For projects which are short in
duration (primarily less than one month), video production revenues
and related production costs are recorded upon completion of the
video. For projects that have a longer term, video production
revenues and related production costs are recorded using the
percentage-of-completion method which recognizes income as work on
the project progresses. In accordance with industry custom, the
Company currently operates its music artist management business
based on oral agreements with certain artists and customers.
Pursuant to these arrangements, the Company receives up to 20% of
the gross revenues received in connection with artist entertainment
related earnings less certain standard industry costs. Record label
revenues are recognized in accordance with the provisions of the
distribution agreements. Certain record costs are capitalized as
recoverable from future revenues and amortized over the expected
life of the records, to the extent there is reasonable assurance
that these costs will be recoverable from future sales. The Company
is accounting for these costs in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 50 "Financial Reporting
in the Record and Music Industry."
Cash 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 which, at times, may exceed federally insured
limits. The Company has not incurred any losses in such accounts and
believes it is not exposed to any significant credit risk on cash.
Deferred financing costs - The Company has deferred certain
professional and other fees incurred in connection with proposed
equity financing. If financing is successful all costs will be
charged against paid-in-capital, otherwise all costs will be
expensed.
Property and Equipment - Property and equipment is stated at cost
less accumulated depreciation and amortization. Depreciation and
amortization is computed as follows:
Estimated
Asset Useful Lives Principal Method
------ ------------- -----------------
Furniture, fixtures and equipment 5-7 Years Straight-line
Leasehold improvements Term of Lease Straight-line
or 10 years
whichever is shorter
Impairment of Long Lived Assets - Impairment losses on long-lived
assets (including goodwill) is 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 - The Company complies with statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share", which requires dual presentation of basic and diluted
earnings per share for all periods presented. Basic earnings per
share excludes dilution and is computed by dividing loss available
to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. Diluted loss per common
share is the same as basic loss per common share for the three
months ended 1999March 31, 2000 and 1999. Unexercised stock options
to purchase 2,707,500 and 1,062,500 shares of the Company's common
stock at March 31, 2000 and March 31, 1999, respectively, were not
included in the computations of diluted earnings per common share
because their effect would have been antidilutive as a result of the
Company's losses.
Fair Value of Financial Instruments - The fair value of the
Company's assets and liabilities which qualify as financial
instruments under SFAS No. 107 "Disclosures about fair value of
financial instruments," approximate the carrying amounts presented
in the consolidated balance sheet.
Use of Estimates - The preparation of consolidated financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
10
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - STRAW DOGS ACQUISITION:
The Straw Dogs acquisition was completed on December 16, 1999. The
following unaudited pro format condensed consolidated financial
information for the three months ended March 31, 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.
Three months ended
March 31, 1999
-------------------
Net revenues $ 6,831,464
Net loss (748,700)
Basic and diluted earnings (loss)
per common share $ (0.12)
-----------
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 March 31, 2000 and 1999, approximately
$850,000 and $273,500, respectively, has been expensed under the
bonus plans and employment agreements. These costs are included in
marketing, selling, general and administrative expenses.
The Company has agreed to pay each of its outside directors $18,000
per year, payable quarterly in the Company's common stock valued on
the last day of the applicable quarter. During the three months
ended March 31, 2000 and 1999, the Company charged to operations
$1322,500 and $13,500, respectively, pursuant to this agreement.
NOTE 6 - ECONOMIC DEPENDENCY:
Approximately $1,407,777 and $781,000 of television and film
production revenues for the three months ended March 31, 2000 and
1999, respectively, were derived from 3 customers. For the three
months ended March 31, 2000 and 1999, approximately $152,000 and
$164,000, respectively, was owed in the aggregate to the Company
related to these revenues.
NOTE 7 - STOCKHOLDERS' EQUITY
During the Fiscal Year 1999, the Company entered into consulting
agreements with various consultants for professional and financial
services. The consultants will be compensated for their services
through the issuance of an aggregate of 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 March 31,
2000, and approximately $71,000 has been expensed under these
agreements.
11
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In April 1999, the Company entered into agreements for financial
consulting services related to proposed acquisitions and other
special projects with its outside Board members. The agreements
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 $230,000 as of March 31, 2000,
and approximately $182,000 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 months ended
March 31, 2000 and 1999. Each segment is managed according to the
products or services provided to the respectivecustomers and segment
information is reported on the basis of reporting to the Company's
Chief Operating Decision Maker (CODM).
For the three months ended March 31, 2000:
<TABLE>
<CAPTION>
Paradise Paradise Paradise
Film Music Digital Corporate Consolidated
----------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $ 7,588,629 $ 1,174,501 $ 159,990 $ -- $ 8,923,120
Net Income $ 573,131 $ 49,131 $ (321,368) $(1,086,689) $ (785,880)
</TABLE>
For the three months ended March 31, 1999:
<TABLE>
<CAPTION>
Paradise Paradise Paradise
Film Music Digital Corporate Consolidated
----------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $ 1,359,076 $ 602,166 $ -- $ -- $ 1,961,242
Net Income $ 224,000 $ (375,000) $ -- $ (723,008) $ (874,008)
</TABLE>
NOTE 9 - RECENT AND SUBSEQUENT EVENTS:
On March 7, 2000, we entered into a $3,000,000 private convertible
subordinated note financing with BayStar Capital, L.P. and BayStar
International, Ltd. (individually the "Buyer" and collectively the
"Buyers"). The financing was made in the form of Paradise Senior
Subordinated Convertible Notes, convertible at $2.375 per share,
subject to adjustment, plus five year warrants to purchase an
additional 631,579 shares at an initial price of $2.6125 per share,
subject to adjustment. The Buyers are private equity investment
funds that invest primarily in privately placed and/or individually
negotiated securities of publicly traded and late stage private
companies. The Buyer's investment portfolios include technology
companies in the broadband media, Internet and wireless industries.
In connection with this financing transaction, we executed a
Securities Purchase Agreement, a Registration Rights Agreement, and
a Note and a Warrant Agreement with each Buyer.
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. Like all
commercial production companies, management anticipates this strike
will have an 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.
12
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 is
seeking 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. The Company intends to vigorously
defend against the plaintiff's claims, and does not believe that it
will incur significant damages in connection with this action. It
should be noted that the lawsuit is in an early stage and that the
outcome of any litigation cannot be predicted with certainty.
13
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
Paradise Music & Entertainment, Inc. ("Paradise" or the "Company") is engaged in
several aspects of the music and entertainment industry. Our strategic goal is
to create an artist-centric company capable of producing quality content for any
entertainment medium. We intend to increase our presence in the music and
entertainment industry by concentrating our efforts on developing our core
businesses, by acquiring other viable companies which enhance our core
businesses and by acquiring companies engaged in collateral lines of business.
The Company currently derives most of its revenues from: the production of
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. Finally, a recently initiated strike by actors who appear in television
commercials may impact Paradise Film revenues.
During fiscal 2000, the Company expects to expand significantly through
acquisitions and joint venture arrangements in the music and entertainment
industry. Our acquisition program is designed to identify, qualify and integrate
similar businesses of appropriate scale, which compliment our existing
businesses. It is anticipated that acquisitions may be financed through the
issuance of the Company's stock as well as with funds provided from financing
sources, if available. The Company has executed several letters of intent with
respect to prospective acquisitions.
Forward-Looking Statements
Except for the historical information contained herein, this quarterly report on
Form 10-QSB may contain forward-looking statements 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.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Results of Operations
Three Months Ended March 31, 2000 Compared to
Three Months Ended March 31, 1999.
In aggregate revenues for the three months ending March 31, 2000 increased
$8,923,120 or 355% compared to the three-month period ending March 31,1999. The
net loss was $785,880 for the three months ending March 31, 2000 compared to
$874,008 for the three months ending March 31, 1999. A significant portion of
the loss during the three months ending March 31, 2000, is $321,368 associated
with the development of our digital initiative (Paradise Digital) and increased
depreciation and amortization expenses associated with the Straw Dogs
acquisition. Excluding Paradise Digital, earnings before interest, taxes
depreciation and amortization and non-cash consulting expense for the three
months ended March 31, 2000, was a loss of $489,295 compared to a loss of
$864,896 for the three months ended March 31, 1999.
Paradise Film revenues increased to $7,588,629 for the three months ended March
31, 2000 from $1,359,076 for the three months ended March 31, 1999 an increase
of $6,229,553 or 458%. The increase in revenues is primarily due to the
acquisition of Straw Dogs. Excluding Straw Dogs, Paradise Film revenues showed
an increase of 5% compared to the three month period ending March 31, 1999. This
was due to an increase in the number of television music specials and music
videos produced during the three months ended March 31, 2000.
Paradise Film cost of sales increased to $5,708,868 for three months ended March
31, 2000 from $977,500 for the three months ended March 31, 1999, an increase of
$4,731,368 or 484%. Gross profit as a percentage of Paradise Film revenues
decreased to 25% for the three months ended March 31, 2000, compared to 28% for
the three months ended March 31, 1999. The change in cost of sales and gross
profit margin is primarily due to the inclusion of Straw Dogs this quarter.
Paradise Music revenues increased to $1,174,501 for the three months ended March
31, 2000 from $602,166 for the three months ended March 31, 1999 an increase of
$572,335 or 95%. The increase in revenues is primarily due to the increased
sales generated from the Paul Hardcastle and JazzMasters III releases through
the company's venture with the adult contemporary jazz label, Trippin' `N Rhythm
Records, and the release of Tranceport II through the company's joint venture
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.
Paradise Music cost of sales increased to $647,032 for three months ended March
31, 2000 from $280,111 for three months ended March 31, 1999, an increase of
$366,922 or 131% The increase is due to greater overall album sales when
compared to the three months ended March 31, 1999. Gross profit as a percentage
of recorded music and artist management revenues was 45% for the three months
ended March 31, 2000 compared to 54% for the three months ended March 31, 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.
Paradise Digital revenue was $159,990 for the three months ended March 31, 2000.
This is the first 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 Yahoo! Film Festival, and production work for Wwirebreak.com. The
net loss for this division was $321,368.
Paradise's marketing, selling, general and administrative expenses increased to
$3,133,196 for the three months ended March 31, 2000 from 1,584,382 for the
three months ended March 31, 1999, an increase of $1,548,814 or 98%. 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 $241,574 for the three months ending March 31, 2000 , compared to
$15,000 for the three month period ending March 31, 1999.
Net interest expense increased to $40,312 for the three months ended March 31,
2000 compared to net interest income of $6,743 for the three months ended March
31, 2000, an increase of $47,055. 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 $24,916 in non-cash interest expense.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The Company's loss before income taxes decreased to $776,880 for the three
months ended March 31, 2000, from $874,008 for the three months ended March 31,
1999, a decrease of $97,128 or 11%. The decrease was primarily due to increased
profitability from Paradise Music and Paradise Films as mentioned above. These
increases were partially offset by increased marketing, selling, general and
administrative expenses for Straw Dogs and the development of the Paradise
Digital operations.
The company's net loss decreased to $785,880 for the three months ended March
31, 2000 from $874,008 for the three months ended March 31, 1999, a decrease of
$88,128 or 10%. The decrease in loss was primarily due to the increase in gross
profits , which reflects the efforts to restructure the Company's core
businesses.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the three months ended March 31, 2000
was $1,480. The operating loss for the quarter was principally offset by a
reduction in accounts receivable.
Net cash used in investing activities for the three months ended March 31, 2000
was $950,428. 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 three months ended March 31,
2000 was $2,833,014 which is represented substantially by the net proceeds from
the issuance of subordinated convertible debt and warrants to BayStar Capital.
The Company has working capital of $3,262,615 and stockholders' equity of
$12,524,250 at March 31, 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.
YEAR 2000 COMPLIANCE:
The Company has experienced no significant Y2K issues. We do not anticipate, nor
have we incurred, significant Y2K costs. The Company will continue to monitor
the situation.
16
<PAGE>
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 is
seeking 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. The Company intends to vigorously
defend against the plaintiff's claims, and does not believe that it
will incur significant damages in connection with this action. It
should be noted that the lawsuit is in an early stage and that the
outcome of any litigation cannot be predicted with certainty.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 7, 2000, the Company issued $3,000,000 worth of 9% Paradise
Senior Subordinated Convertible Notes (the "Notes") to BayStar
Capital, L.P. and BayStar International, Ltd. (individually the
"Buyer" and collectively the "Buyers"). The Notes will become due on
March 7, 2003. At the option of a holder of a Note, the amounts of
principal and interest due under such Note are convertible, in whole
or in part, into shares of the Company's common stock, at a
conversion price of $2.375 per share, subject to adjustment. In
connection with the sale of the Notes, the Company issued warrants
(the "Warrants") to the Buyer to purchase an additional 631,579
shares of Common Stock at an initial price of $2.6125 per share,
with such number of shares and exercise price subject to adjustment.
The Warrants may be exercised by the Buyers in whole or in part at
any time during a five-year period. The Notes and Warrants were sold
to the Buyers pursuant to Section 4(2) of the Securities Act of
1933. The Company received $3,000,000 in gross proceeds from the
transaction, of which $150,000 was spent on commissions. The net
proceeds received by the Company from the sale of the Notes and the
Warrants have been used and will be used for general corporate
purposes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
28 - Financial Data Schedule
(b) Reports on Form 8-K
8-K filed on 2/10/00 set forth pro-forma financial statements
with regard to Straw Dogs acquisition.
8-K filed on 2/14/00 regarding change in principal accountants
and change in fiscal year end.
17
<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: May 12, 2000
18
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