PARADISE MUSIC & ENTERTAINMENT INC
10QSB, 2000-08-14
AMUSEMENT & RECREATION SERVICES
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                       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.


                                       14
<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



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