Paradise Music & Entertainment, Inc. Business Information, Profile, and History

Company Perspectives:

As a vertically integrated entertainment company, PDSE is positioned to provide unique content and exclusive access to cutting-edge entertainment.

History of Paradise Music & Entertainment, Inc.

In its brief history, Paradise Music & Entertainment, Inc. is better known for its connection with notorious characters than for any notable accomplishments. The company has undergone a series of changes in top management and in the course of five years has moved its headquarters from New York to Los Angeles and back again. Its stock, once held by a host of Hollywood celebrities and heavyweights, collapsed within several months, to the point where it traded around 20 cents per share and was delisted by the NASDAQ. Paradise is comprised of three operating groups. The Music Group manages three independent record labels: Push Records for pop and rock, Label M for jazz and indigedisc (African) music, and MVP records for jazz. The Music Group also runs an event production business. The Commercial Group creates television commercials, employing a roster of directors through its Straw Dogs and Shelter Films production subsidiaries. The Film & TV Group creates music videos and through its Picture Vision subsidiary produces televised music concerts. The group's Rave subsidiary provides original music for film and television.

Creation of Paradise: 1996

Paradise was incorporated in July 1996 by cofounders John Loeffler and Jon Small, who then merged their wholly owned companies in October of that year. A musician and composer, Loeffler created Rave Music in 1979, primarily to provide advertising themes and jingles. He also worked as a composer and producer for Sherman and Cahan, a New York commercial production house, in addition to serving as a consulting music director to Grey Advertising. Small founded Picture Vision in 1984, creating hundreds of music videos for many acclaimed recording artists. In addition, Picture Vision produced a number of television concerts as well as commercials. Loeffler became president, chief executive officer, and chairman of the board of Paradise. Small became an executive vice-president and board member. A music management business, All Access, was also added to the Paradise banner in October 1996, and its co-owners, Brian Doyle and entertainment lawyer Richard Flynn, were named executive vice-presidents and elected to the board. Doyle had managed a number of well-known clients—including Mariah Carey, John Mellencamp, and Daryl Hall and John Oates—while running Horizon Entertainment and Management Group.

The men who created Paradise hoped to bank on their individual successes to create a midsize, multifaceted entertainment company. The plan was to have a wide enough range of different but related businesses so that a downturn in one could be compensated by the cash flow of the others. Paradise, at least in the beginning, was looking to acquire small entertainment companies costing up to $5 million. On January 22, 1997, Paradise made an initial public offering of stock, priced at $6 a share, raising some $6 million, a third of which was intended for acquisitions. The company's first major move was to create the Push record label in February 1997. Although it was intended to feature newcomers, the label's first release, Marigold Sky, was from longtime pop songsters Hall & Oates, whose popularity peaked in the 1980s and who had not released an album since 1990. "Marigold Sky" had modest success, but Push would eventually become a drain on Paradise's limited resources.

For fiscal 1997, Paradise lost almost $1 million, in large part as the result of becoming a public company and funding the start-up of Push. The next year, the losses continued to mount, approaching $3 million. Nevertheless, management remained optimistic, buoyed by growth in revenues. In June 1998 Paradise hired attorney and investment banker Philip G. Nappo to serve as the chief operating officer with the continued intent of growing the company through acquisitions. Although Paradise created a commercial scoring subsidiary for Rave Music called Alchemy, it was not in a position to grow externally. It certainly could use its stock to fund an acquisition, because by the fall of 1998 Paradise was trading below 50 cents a share and the NASDAQ was threatening to delist it. In the company's SEC filing independent auditors expressed reservations about the prospect of the company's ability to stay in business. It had enough trouble paying its New York landlord on time. Clearly, Paradise needed an infusion of new capital, and given the grave state of the young company it would have welcomed help from almost any quarter. In December 1998, not only did help arrive, it came with assets potentially even more important than cash: connections to some of the most talented and influential people in the entertainment industry. Paradise suddenly found itself anointed by Dana Giacchetto, "the money manager of the stars," who began to invest his clients' money in the company and agreed to serve as a consultant.

Giacchetto and the Launch of Cassandra: 1987

Giacchetto, in his mid-30s, was almost as famous as many of his clients. He became a fixture in the gossip columns, well known as a clubbing buddy of movie actor Leonardo DiCaprio, who was enjoying white hot fame after the worldwide popularity of Titanic. The press loved to tell the Giacchetto story: how he dropped out of Harvard Business School a couple credits short of earning his M.B.A., then cut his teeth at Shearson American Express in Boston while at night playing keyboards with rock bands, how he bailed out of the stock market before the 1987 crash, then while vacationing in the Caribbean was inspired to become an investment manager for the creative set. These "facts" became the accepted creation myth for his company, The Cassandra Group. He moved to New York in 1991 and approached art galleries, cold calling in an attempt to connect with potential clients. He managed to ingratiate himself with the Pace Gallery and began to represent such artists as George Condo and David Salle. Because Hollywood stars bought his client's artwork, Giacchetto was able to network his way into Hollywood circles. He then played one coast off against the other, in Los Angeles acting like the rising New York financier, and in New York dropping the names of his Hollywood connections.

Perhaps the most significant break for Giacchetto came in the early 1990s when he met Hollywood agent Jay Moloney, again through his connections to the Pace Gallery. Moloney, the quintessential Hollywood wonder boy who achieved a tremendous amount of power at an early age, would eventually figure in with Paradise, but for the moment was Giacchetto's chance to reach an entirely new level in attracting famous and powerful clients. Many of Moloney's friends either belonged to or represented a young Hollywood set that was just beginning to achieve success and make significant amounts of money. Through Moloney, Giacchetto met talent manager Rick Yorn and Moloney's old boss at Creative Artists Agency, Michael Ovitz, widely considered the most powerful man in Hollywood in the 1980s. Not only would Giacchetto take on both men as clients, he was generally regarded as the matchmaker who brought Yorn and Ovitz together and resulted in the creation of Artists Management Group. It was through Yorn that Giacchetto met and became friends with DiCaprio, whom he began to represent in addition to other Yorn clients, such as Cameron Diaz, Minnie Driver, Jennifer Lopez, and Edward Burns. Thus, Giacchetto became the money manager of the stars, and for many it was now a matter of status to have at least some money invested with Cassandra, which Giacchetto ran out of his trendy SoHo loft. Giacchetto vowed to put clients' money in blue chip companies and other safe investments, maintaining that artists did not need the worry associated with risky ventures. Although the fund was clearly growing, Giacchetto would sometimes tell the press he controlled $300 million, or $400 million, or even $1 billion, but no one seriously questioned a man who was on a first name basis with "Leo" and "Michael."

Giacchetto also caught the eye of Chase Manhattan Bank, especially after he negotiated the $20 million sale of a Seattle independent rock label, Sub Pop Records. In December 1998 they teamed up to create a $100 million fund called Cassandra Chase Entertainment Partners. The Chase partners believed that Giacchetto had his thumb on the pulse of up-and-coming entertainment businesses, but they were quickly concerned about the quality of the projects he presented and his loose management style. It was bad enough that he lost millions of his clients' money on Iradium, a satellite phone venture that went bust, but he then involved Cassandra Chase with new media company Digital Entertainment Network, the stock of which collapsed after allegations surfaced that the company's chairman had sexually molested a 13-year-old boy.

The Giacchetto Connection: 1999

One of the investment opportunities Giacchetto presented to the Chase partners was near-bankrupt Paradise. They refused to get involved. For Giacchetto, Paradise was a ready vessel for grander entertainment ambitions. He turned to Cassandra, investing $2 million of his clients' money in Paradise stock, priced at $1, which attracted a number of other celebrity investors. Cassandra gained three seats on the Paradise board, and Giacchetto became a consultant, compensated by 200,000 shares and warrants to buy 800,000 more. Giacchetto used his influence to install a new chief executive officer, respected television commercial director Jesse Dylan, son of famous musician Bob Dylan. The younger Dylan also agreed to merge his company, Straw Dogs, with Paradise. Paradise agreed to move its headquarters to Los Angeles, to work out of Dylan's building. Giacchetto was then instrumental in the naming of Moloney as the company's president. It was his first job in several years, following a number of rehab stints for cocaine addiction.

Moloney rose quickly in Hollywood and fell even quicker. His father was a Hollywood actor, scriptwriter, and agent. Following the divorce of his parents, Moloney moved to Oregon with his mother, then returned to Los Angeles to attend the University of Southern California. In 1983 he became a summer intern at Creative Artists Agency, which was in its ascendancy. He quit school to work at CAA, soon becoming the assistant and protégé of Ovitz. By the age of 21 the extremely personable Moloney was recognized as a rising power broker, fitting neatly into the perennial Hollywood persona of the boy wonder, a role perfected by Irving Thalberg as early as the silent picture era. When Ovitz left to work for Disney, Moloney was one of the "Young Turks" that took over the agency in 1995. It was also around this time that he began taking cocaine, which would quickly lead to a debilitating addiction and his leaving CAA in 1996. Over the next few years he would check in and out of rehabilitation centers, and despite a number of interventions by friends, he was unable to overcome his problem. Giacchetto maintained that he brought Moloney to Paradise to help his friend, but some, such as Ovitz, worried about the stress involved in running a cash-strapped start-up.

The price of Paradise stock reflected a changing attitude towards the company, rising to the $5 range. Giacchetto then embarked on a campaign to raise $8 million for Paradise and went back to his Chase partners, who again shied away. Once more, Giacchetto relied on his clients and their friends, but even trading on DiCaprio's name only helped to raise just $4 million by July. A number of Cassandra clients were surprised to find Paradise stock in their portfolios, in some cases against their expressed wishes. Moloney, in the meantime, was simply unable to function. He was forced to take a leave of absence in July, then was fired in September. In November, two days after turning 35, he committed suicide, hanging himself from a shower nozzle with a noose of belts.

Shortly after Moloney's death, Giacchetto lost his partnership with Chase, and his celebrity partners began to leave. Rumors soon circulated that his business was under investigation and the press finally began to look into his background. The New York Observer in December 1999 revealed that Giacchetto never attended Harvard Business School; rather, he took some extension courses at the school. It also learned that he failed the only securities test he took, a Series 2 license to make interstate deals. Moreover, it was reported that Cassandra, according to SEC filings, controlled only $100.2 million in funds. In April, while he was out of the country, Giacchetto was charged with securities violations by federal prosecutors in U.S. District Court in Manhattan. Upon his return to the United States, he was arrested and then released on bail. When he tried to tap frozen funds, authorities feared he was trying to run. They tracked him down to the Newark International airport where he had a doctored passport, $44,000 in first class airline coupons, and $4,000 of $5 and $10 bills in a bag. Prosecutors accused him of using the funds of his clients to support his lavish lifestyle. He was, in effect, running a pyramid scheme, taking the money of new clients to cover the losses of the old clients. In all, he looted accounts of some $10 million. In August 2000 Giacchetto pleaded guilty to fraud charges but it would take several months to sort through his tangled accounting system before he was sentenced. Finally in February 2001 he received 57 months in federal prison.

At one time, people and companies on both coasts wanted to be associated with Giacchetto; now any party close to him was tainted by association. While Chase was certainly embarrassed by its failure to not properly vet Giacchetto, Paradise was all but devastated by its connection to him. An unnamed company official told the Los Angeles Times, "It's like we were hit by a drunk driver and got thrown into jail for it." The price of Paradise stock collapsed, as the company continued to post losses: $3.6 million for 1999, and $5.1 million for 2000. In August 2000 the company slashed its workforce by a third, or about 30 employees, while reducing salaries companywide. Despite its difficulties in finding even minimal financing, Paradise continued to try to add new ventures to its mix. It created Paradise Digital Productions to produce and deliver Internet-related content, then created Matter, an Internet design company. Paradise also purchased the Mesa/Bluemoon Recordings label.

In February 2001 Paradise merged with iball Media Inc., whose chairman, Kelly Hickel, was an experienced executive with a record for turning around troubled businesses. In 1989 he became president of MiniScribe and restructured its operations. He was also instrumental in boosting the performance of Maxwell Technologies' Information Systems Group. Hickel became president and chairman of Paradise, instituting changes in management, as well as reorganizing the company into three main groups. The company continued to boast a number of talented directors, musicians, and designers. What remained to be seen was if a seasoned management team would finally be able to transform those assets into a profitable business.

Principal Subsidiaries: All Access Entertainment Management Group, Inc.; John Loeffler Music, Inc.; Picture Vision, Inc.; Push Records, Inc.; PDSE Records, Inc.; PDSE Digital, Inc.; Shelter Films, Inc.; Straw Dogs, Inc.

Principal Operating Units: Music Group; Commercial Group; Film & TV Group.

Principal Competitors: Harmony Holdings; iNTELEFILM; Interscope Music Group.

Chronology

• Key Dates:
• 1996: Company is incorporated.
• 1997: Push Records is established.
• 1999: Jesse Dylan is named CEO.
• 2001: Kelly Hickel is named CEO following iball Media merger.