Amendment to Registration of Securities of a Small-Business Issuer — Form 10-SB
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10SB12G/A Amendment to Registration of Securities of a 92± 398K
Small-Business Issuer
2: EX-10.1.28 Material Contract 9 48K
3: EX-10.1.29 Material Contract 8 45K
4: EX-10.1.30 Material Contract 17 73K
5: EX-10.1.31 Material Contract 10 35K
6: EX-10.1.32 Material Contract 10 52K
7: EX-10.1.33 Material Contract 5 23K
8: EX-10.1.34 Material Contract 7 30K
9: EX-10.1.35 Material Contract 2 12K
10SB12G/A — Amendment to Registration of Securities of a Small-Business Issuer
Document Table of Contents
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10SB-A/2
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
Under Section 12(b) or 12(g) of
The Securities Exchange Act of 1934
FILM AND MUSIC ENTERTAINMENT, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
O-51164
--------------------
(SEC File No.)
NEVADA 01-0802-246
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5670 Wilshire Boulevard, Suite 1690, Los Angeles, California 90036
------------------------------------------------------------ ----------
(Address of registrant's principal executive offices) (Zip Code)
(323) 904-5200
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(Registrant's Telephone Number, Including Area Code)
Securities to be registered under Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on which
to be so Registered: Each Class is to be Registered:
-------------------- -------------------------------
None Not Applicable
Securities to be registered under Section 12(g) of the Act:
Common Stock, Par Value $.001
-----------------------------
(Title of Class)
Copies to:
----------
Geoffrey T. Chalmers,
33 Broad Street
Boston, MA 02109
(617) 523-1960
(617) 227-3709 (fax)
Page 1 of 23
Exhibit Index is specified on Page 22
2
FILM AND MUSIC ENTERTAINMENT, INC.
a Nevada corporation
Index to Form 10-SB
Item Number and Caption Page
----------------------- ----
1. Description of Business 3
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
3. Description of Property 13
4. Security Ownership of Certain Beneficial Owners and
Management 14
5. Directors, Executive Officers, Promoters and Control
Persons 15
6. Executive Compensation - Remuneration of Directors and
Officers 17
7. Certain Relationships and Related Transactions 17
8. Description of Securities 17
PART II
1. Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters 18
2. Legal Proceedings 19
3. Changes in and Disagreements with Accountants 20
4. Recent Sales of Unregistered Securities 20
5. Indemnification of Directors and Officers 21
PART F/S
Financial Statements F-1 through F-34 Exhibits to Financial
Statements F-35 through F-38
PART III
1. Index to Exhibits 22
Signatures 23
3
PART I
Item 1. Description of Business.
Film and Music Entertainment ("FAME" or the "Company") is a
Nevada Corporation listed on the Pink Sheets (FLME:PK). The
Company was originally incorporated in Nevada on January 3, 1996
as Imporex Investment Corp. The Company changed its name to DVBS,
Inc. on March 21, 2000 and again changed its name to Pervasys,
Inc. on October 25, 2000. The Company focused on developing
streaming video technology until 2000 when it shut down
significant operations and became effectively inactive. In 2003
John Daly joined the Board and became President. Under his
direction we re-focused on entertainment and on May 21, 2003
changed the Company name to Film and Music Entertainment, Inc.
On May 4, 2004 we announced that we had concluded a $5 million
private placement of our Common Stock to Lesteron Limited, a
private investment firm located in the British Virgin Islands.
Under the terms of the agreement Lesteron received 50,000,000
shares of our restricted Common Stock and nominated two members
to the Board of Directors, the brothers Ilya and Arkady
Golubovich. See Item 4. "Recent Sales of Unregistered
Securities."
In 2004 , we developed our first feature film: "The Aryan Couple"
which began limited release in November, 2005 with wider release
planned for early 2006. The Company also has two feature films in
post-production; "Played" and "Moonpie'. See Item 1 ,
"Description of the Business - Films in Distribution."
Prior to 2004 the following major events occurred: In May, 2003
we acquired two private companies, Myrob Properties, Inc., a
California corporation, and East Mojave Corporation, a Nevada
corporation. Among the assets acquired in these transactions were
rights in real estate located in California and Arizona. See Item
3, "Description of Property" and Item 7, "Certain Relationships
and Related Transactions."
4
Also,in October, 2003 we purchased all the outstanding stock of
Miracle Productions Inc. ("Miracle"), a California corporation
newly formed to receive from Miracle Entertainment, Inc. (MEMI:PK
) ("MEI") certain of MEI's current film options, production and
distribution rights. Mr. John Daly, who is the Company's
Chairman, President and CEO was at the time also the President of
MEI. After the acquisition Miracle changed its name to
Celebration Productions, Inc. The acquisition price was
18,347,175 shares, as amended, of the Company's common stock and
ongoing royalties from the exploitation of Miracle's film assets.
The total purchase price was 18,347,175 sharers of our Common
Stock having a market price per share of $0.15 on the date of the
transaction or a total of $2,752,076.. As part of the
acquisition agreement as amended, MEI also agreed to pay the
Company, $217,963.. See Item 7, "Certain Transactions" below for
a more detailed description of these transactions..
Market Price of and Dividends on the Company's Common Equity and
----------------------------------------------------------------
Related Matters.
----------------
We have issued one class of Common Stock trading on the "pink
sheets" under the symbol FLME. As of September 31 2005 there were
206 shareholders of record plus shares held in street names. The
share price during the year 2004 traded from a low of $0.015 to a
high of $0.09 and closed the year at $0.03. The closing price of
the stock as of December 31, 2005 was $0.10 with a 150 day
average daily trading volume of approximately 81,419 shares and a
20 day average trading volume of approximately 31,419 shares. We
have adopted no rules that would preclude us from paying
dividends, however, we have not previously paid dividends and we
do not intend to pay any dividends in the foreseeable future.
The following table sets forth the range of high and low closing
sale prices for our Common Stock as reported by Pinksheets.com in
US dollars for our three most recent fiscal years and for the
first quarter of this year:
[Download Table]
High Low
Current Year First Quarter $0.11 $0.075
Year ended Dec. 31, 2005
First Quarter $0.045 $0.015
Second Quarter 0.04 0.017
Third Quarter 0.15 0.01
Fourth Quarter 0.13 0.085
Year ended Dec. 31, 2004
First Quarter $0.08 $0.05
Second Quarter 0.09 0.025
Third Quarter 0.08 0.027
Fourth Quarter 0.04 0.015
Year ended Dec. 31, 2003
First Quarter $0.015 $0.006
Second Quarter 0.02 0.001
Third Quarter 0.41 0.02
For the Quarter 0.22 0.04
These prices reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
Business of the Company.
We intend to become a leading independent film and television
production and distribution company. We believe that we are in a
fast growing part of the business (see below) with the capability
to develop a steady stream of good quality product and an
opportunity to achieve some major success. We believe that we can
increase the value of the Company's products for our shareholders
and filmmaking partners by producing and distributing high
quality, cost effective films and associated entertainment at a
reduced cost. We also intend to develop a film library for
ongoing residual revenue. We plan to list our outstanding
securities on NASDAQ or the AMEX in 2006.
Organization.
We have organized ourselves into three wholly- owned operating
subsidiaries and five wholly-owned special purpose entities, as
follows:
[Download Table]
COMPANY JURISDICTION FUNCTION
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Celebration Productions, Inc. CA Film production
Celebration Pictures, Inc. CA U.S. film distribution
Celebration International Pictures, Ltd. BVI Overseas film distribution
Myrob Properties, Inc. CA Holds interests in real estate
East Mojave Corporation NV Holds interests in real estate
Harder They Fall International, Ltd. BVI Holds rights to film
Blood and Bone Productions, Inc. CA Subsidiary of Celebration
International
Pictures to hold screenplay
Options
CIP Music Publishing, Inc. NV Holds soundtrack rights
Overview of the Entertainment Industry.
---------------------------------------
The entertainment industry is experiencing major market expansion
along with major structural and technological change. Global
revenues from traditional and new media are on the increase.
Traditional sources of revenue from cinema and network television
are now joined by a huge expansion in ancillary sales from cable,
video, DVD, pay per view, video games, publishing and
merchandising. According to the MPAA, foreign revenues from the
70+ major markets for a US produced film are often greater than
US domestic revenues. The industry is still dominated by the
majors, Warner, Universal, Paramount, Columbia/Sony, Fox/News
Corp and MGM. However, as shown by the foreign success of recent
US independent Feature films, such as "Garden State", "Phantom of
the Opera", "Sideways", and "Finding Neverland", there is still
opportunity for independent filmmakers in the foreign market.
5
According to the Motion Picture Association of America) ("MPAA")
473 films were released theatrically in the US in 2003, with a
total box office gross of $9.49 billion. This was down 3% from
2002, which in turn was up 13.2% from 2001.
MPAA data says that the average cost to produce a feature film
(the "negative cost") by a major studio is now $52 million with
the print and advertising ("P & A") costs of a major studio US
theatrical release exceeding $39 million. By contrast the
negative cost of an independent film ranges from less than $1
million to $20 million with the average P & A costs of the
independent subsidiaries of the major studios at $14 million.
Because of the lower production and distribution costs of an
independent film, revenue from ancillary markets make it more
possible to recover these costs than previously when the home
video rental and sales markets were less mature. When the films
are greatly successful, such as "My Big Fat Greek Wedding" with
its $228 million US box office gross, the profit potential can be
massive. However, most independent films do not achieve these
types of results. According to the MPAA. many are never released
theatrically, with the majority that are released receiving only
limited theatrical success. The number of screens in the USA has
increased from 17,000 (1980) to 35,000 (2003). With the World
Wide recognition of the direct and indirect benefits of film
production more and more financial incentives are being offered
by Cities, States and Governments to encourage film investment.
While the general commercial trend has been to downsize a
company's overhead and rely on subcontractors to provide key
services, the majors still have large departments and overheads
frequently causing their costs of distribution to match their
production costs. Foreign distribution, exhibition and ancillary
sales are still controlled in large part by local companies who
are in need of product. Film production technology such as the HD
camera is making the filmmaking process and effects integration
cheaper, while younger filmmakers are producing full feature
films with quality actors for a fraction of the costs incurred by
the majors. Finally it is more and more the quality of the story,
the actors, and the director linked to the entrepreneurial and
production skills of the producer that make a good product, and
less and less the size of the budget, the notoriety of the cast
or the promotion dollars spent.
Our Financing Strategy
The Company intends to use outside financing wherever possible.
Our management recognizes that this ability will allow the
Company to attract higher quality independent projects. Typically
a single purpose entity specific to the film is established to
produce and finance the film. This entity will then contract with
the financing parties. To date the three films in release or in
post-production in which the Company holds rights have been
through such single purpose entities. The Company does not
always have an ownership interest in these entities. "The Aryan
Couple" was financed under an agreement between Red Giants
Productions and Wigram Limited in the amount of $5,005,000. In
some cases the Company will advance funds under a film financing
agreement. "Played" was financed under an agreement between
Attica Films Limited and the Company with a subsequent agreement
with Simdale Ltd. in the amount of $338,000 to date. The Company
has financed $200,000 of this production from Company funds to
date and anticipates that it will require an additional $200,000
to complete the film. "Moonpie" was financed under an agreement
between Roundlake Production Limited and the Company. The Company
has contributed $200,000 of Company funds toward the production
costs of the film and does not anticipate it will need to provide
any further funds to complete this film.
We generally finance our films with equity investments by third
party investors. Although the terms of each such investment may
differ, usually the investment takes the form of an "at risk"
equity investment for which there is no recourse against the
Company. We may directly or indirectly, be responsible to ensure
and/or supervise that proper payments are made to an investor
toward the recoupment of the investment as well as payments of
any return earned by an investor from such an investment.
However, all such payments are due and payable from the earnings
of the film, and not from the assets of the Company. It is not
our policy to use our own funds in a direct investment in a film.
However we may chose to do so if the amount is insignificant,
and/or there is an insufficient amount of time to find the
appropriate third party investor. In such cases we will usually
attempt to dispose of our "at risk" amount by subsequently
bringing in third party investors. We have had discussions with
banks regarding loans for the production of films. However the
Company has not used any such loans to date and does not intend
to do so in the foreseeable future. These loans are typically
secured by presales of foreign territories or major ancillaries
(i.e. cable or free TV). We have also discussed financing our
films through funds supplied by various film funds. As to date
the Company has not financed any films with bank loans or film
fund financing. The terms and availability of each type of
funding for films vary continuously and none of the above options
may be available to fund a specific film project at the time
required. This may cause us to postpone or abandon films which we
may otherwise have chosen to produce or distribute.
Our Tactics
The Company seeks to conduct its business along the following
tactical lines:
* Hire high quality management and staff
* Provide incentive rewards based on success.
* Keep overhead low by subcontracting to others work that does
not involve creative supervision or financial control.
* Seek higher quality, scripts that have high dramatic impact and
are ready for production.
* Scripts which have or will attract strong directors, good cast
and can be produced for a reasonable budget.
* Keep production costs low by having talent share in both the
risk and the profits.
* Keep theatrical distribution costs under control by limited
test releases before rolling out across America.
* Maximize and control income and accountability by operating a
foreign sales organization.
* Encourage filmmakers to work with the Company by setting firm
pre-production and financial guidelines and giving them creative
freedom to make their project within the guidelines.
* Create a reputation for fair bookkeeping and reporting.
* Build up an active library to generate ongoing recurring income.
* Invest excess funds in targeted entertainment related businesses
which show promise for growth and cash flow to the Company.
Each of these tactics may prove difficult to achieve at any given
time due to the availability of quality staff and talent desired
on the terms that fit the budget and circumstance of any given
film project. Although the Company has been offered high quality
scripts in the past, there is no guarantee that this will be the
case going forward. Whereas the Company will usually undertake
projects with outside financing the ability to, and timing of
film production is contingent upon the successful negotiation and
receipt of such financing. Film financing availability can be
affected by a variety of factors, generally including economic
conditions, the availability of commensurate returns from
alternate investments with less risk, the then current success of
independent films and/or genre specific competitive films as well
as the then current results of recently released films of the
Company.
Real Estate Investment
Our real estate portfolio is interests in vacant land in the high
desert of San Bernardino County in California. The Company is
carrying these properties on its books at the lower of the
acquisition cost or the current market value. The current market
value has been established by a MAI appraisal based on the land's
current use, which is undeveloped vacant agricultural land.. See
below under "Description of Properties."
6
Script Development and Purchase.
We primarily seek projects that are already developed and ready
to be produced. However, we also enter into the development
business. Scripts are submitted to the Company on a daily basis
via directors, producers, actors, agents and managers. In general
a production is at the highest point of risk in this stage of
script development and preproduction finance. During the
development phase scripts are completed and, subject to financial
commitments for the cost of the film, producers and directors are
attached, the principal cast is chosen and committed, locations
chosen and initial production designs and outline budgets
completed.
We believe that our experienced management can identify and enter
into this development phase only for projects where management
believes there is a high likelihood of success (i.e. the film is
likely to be made and talent is attached or has expressed strong
interest) and where commitments for any significant development
cost are likely to be obtained from outside sources.
It is our intention to negotiate for the repayment of our initial
development costs on the first day of principal photography from
the production budget funded by the outside film financier, along
with an ongoing share of the producer's net profits. The Company
has not concluded any such agreements to date. There is no
guarantee that such film financing can be achieved, and if such
financing is not available, any Company investment in development
will be at risk.
Our Chairman Mr. John Daly is the prime decision maker as to
which projects are chosen and in working with the writers and
directors on the script. Mr. Daly, along with our in-house staff
of industry professionals, are responsible for overseeing the
development phase and bringing the films to production. See below
under "Management."
Films in Distribution
---------------------
"Petersburg - Cannes Express" Completed Spring, 2003. Budget $4
million. Released November, 2003.
We acquired certain distribution rights
indirectly through acquisition of Miracle
Productions, Inc. dated 10/27/03 subject
to the terms of the Producer Distribution
Agreement between Miracle Entertainment Inc.
and Endeavor dated 11/12/02. (See Exhibits
10.1.3 and 10.1.23)To date the Company has
licensed the Film for pay TV in one territory.
7
"The Aryan Couple" Principal photography completed June,
2004. Limited Academy consideration
release occurred in December, 2004 with
A four city theatrical release beginning
November 2005 with additional cities
beginning in January 2006. Budget $6
million. The Company, through its wholly
owned subsidiary Celebration International
Pictures, Ltd, is Presenter and Distributor
under an assignment agreement between
Celebration International Pictures, Ltd and
Aryan Couple International Ltd dated 8/23/04
and subject to the terms of the finance and
Production Agreement between Red Giants
Productions, Inc. and Wigram Ltd. dated
1/21/04 (See Exhibits 10.1.26 and 10.1.10)
Films in Development
--------------------
"The Harder They Fall" Sports action/drama/romance set against the
background of US football and European rugby,
slated for principal photography to commence
in 2006. Release planned, Spring - Summer,
2007. Budget $12-15 million. Company is
currently Pre-Production Supervisor and
Co-Distributor. (See Exhibits 10.1.11)
(Pre-production is the process prior to
commencing principle photography;
including completing the shooting script,
budgets, production schedule, and attaching
major elements to the project usually
including director and lead cast)
"Disappeared" Set during the "Dirty War" in Argentina, this
Drama captures the essence of the effect to
ordinary citizens when their government's
policies are based on lies and where torture
becomes an instrument of policy. Slated for
principle photography commencing Spring 2006.
Budget $5 million. Company is Presenter and
Co-Producer under an Option and Acquisition
Agreement dated December 20, 2004 between the
Company and Allied Capital Corporation.
Films in Production
-------------------
"Played" Gritty British style gangster/thriller
commenced principle photography in London
May 2005, with an anticipated completion
date of March 30, 2006. Company is co-
producing and holds world wide distribution
rights under the Financing, Co-Production
and Distribution Agreement dated April 15,
2005 between Attica Films Limited and
Company (See Exhibit 10.1.27)
"Moonpie" An off-beat romantic comedy between a school
principal in the throes of a mid-life crisis
and his son's bi-polar 3rd grade teacher.
Principle photography commenced August 2005
with an anticipated completion date of May 15,
2006. Company is presenter, co-producer and
holds perpetual world-wide distribution rights
under a Financing, co-production and
distribution agreement dated August 1, 2005
between Roundlake Productions Limited and the
Company. (See Exhibit 10.1.32)
Recent changes in the status of films
We have placed the development of the script "Calico Jack" on
hold and will review the films status on a quarterly basis. On
October 13, 2005 distribution rights to "Waking Up Dead" were
terminated by mutual agreement. The Company maintains a right to
recoup $5,538 from the first profits realized by the producer's
from this film. The Company has retained a lien against future
earnings of the film for all money spent in the marketing of the
film.
Prior Acquisitions and Dispositions of Film Properties
In 2003, the Company acquired options on the following scripts,
all of which have since expired: "Cheeseheads", "Fleshtrade",
"Blood and Bone", "Whiter Shade of Pale", "Experiment", and
"Dante's Descent". The Company also acquired a verbal option on
"Calico Jack", written by our Chairman, John Daly. Certain co-
production rights and negotiation rights were also acquired for
the films "Red Giants", Silent Partners" and "My First Wedding".
The Company was unable to conclude final agreements on acceptable
terms for these films. The Company also received distribution
rights to the film "The Passing of the Four", the term of which
expired prior to the Company realizing any income. The Company
also acquired the right to negotiate for distribution on the film
"Night We Called It a Day", however the Company was unable to
secure an agreement on terms acceptable to the Company. Also as
part of the MEI transaction the Company received distribution
rights to the films "Tournament of Dreams" and "Petersburg-Cannes
Express. The Company returned the rights to "Tournament of
Dreams" to the production company, CMX, for $37,000 cash and
forgiveness of a $100,000 development advance. Petersburg-Cannes
Express has been licensed to one territory to date. The Company
is not obliged to pay MEI any monies on these transactions.
Our Production Process
We commit to producing films that can be, or are fully financed.
Key to the decision making process is the quality of the script,
director, the value of the cast, the actual production cost, the
management skills of the producing team and the film's ability to
make a meaningful profit to the Company.
We also factor in the ability to structure the film to qualify
for "soft" tax and incentive investment (various governmental
entities in the US in other countries have structured incentives
to attract film production, including tax deferments, rebates and
forgiveness cash grants; loans and cost abatements). Before a
film is "greenlighted" (given the go ahead for production) the
production plans are meticulously reviewed, contingencies
prepared and detailed cost controls put in place. We believe it
is the director's right in the first instance to realize his/her
vision. However, our management reviews the dailies (the footage
shot each day during photography) and is available for guidance
if required. Our senior and experienced management and key
consultants have "hands on" producing experience in over 100
films.
Our Distribution Process
We have our own distribution subsidiary, which can make copies
of the master negative ("prints"), book theaters, place
advertising, create publicity and collect revenues. We may use
our subsidiary to distribute films which we believe will succeed
in US markets through a technique called "platforming". The
company platform released "The Aryan Couple" commencing November
18, 2005 in approximately 20 theaters in four cities. The
Company currently plans to add additional screens and cities in
January-February 2006. The exact cities, number of screens and
date will be based on the success of the initial release.
In platforming, we make a limited release in selected theaters
within one or more target markets. As positive reviews, word of
mouth, and theater results build, we add additional markets as
warranted. "My Big Fat Greek Wedding" achieved its $228,000,000
US theatrical gross this way over the course of a year as
reported in the weekly box office charts as published in
"Variety". "Lost in Translation" used this technique, approaching
$30,000,000 in box office receipts while prior to playing in more
than 300 theaters at a time. These are the exception. Other
recent results as reported in "Variety" are "The Woodsman" which
opened on 8 screens and grossed $2.5 million over 12 weeks on a
maximum of 84 screens; "The Machinest" which opened on 8 screens
and grossed $1 million over 5 months, never playing in more than
10 screens; and "Bride and Prejudice" which opened on 8 screens,
grossing $6 million while playing on a maximum of 281 screens.
If the Company believes a film can be a mega-hit we may have the
ability to team up with a major studio. The Company does not have
any current agreements in place with a major studio for the
distribution of any of its films. However, the Company hopes to
be able to strike single picture deals where the studio would
provide the costs of prints and advertising which can be $30
million or more on a nationwide release.
However, if we have concluded that a completed film will not
succeed theatrically we may release the film directly to the
ancillary market (i.e. video-DVD markets, foreign markets,
television and/or cable). We may also arrange for the film to be
sold territorially to many film markets outside the U.S.
It is management's experience that on average, exhibitors (movie
theaters) retain approximately 50% to 55% of the box office (i.e.
50%-55% of each ticket sold), with the balance going to the
distributor ("Distributor's Gross").
Although distribution agreements can vary greatly, the most
common formula for distribution is the "net proceeds
arrangement", the distributor retains a Distributor Fee (see
below), generally 12-30% of Distributor's Gross from film rentals
(these are usually 45-50% of box-office gross). The distributor
recoups the costs incurred in distributing the film from the
remaining 70 - 88% percent of Distributor's Gross. The remainder,
known as the "net proceeds," is then typically allocated to the
producer, ("Producer's Gross") from which he must repay the cost
of production, pay any amounts due to creative talent, and any
third parties providing the production financing, with the
balance representing profits.
Distributor Fees are a function of negotiated license rates. The
rates described below are rates we believe are generally paid to
distributors as a percentage of the gross income for independent
films:
Market Rate
------ ----
Domestic Theatrical 20%
Domestic Video 15%
Pay Cable 20%
Television - Syndication 20%
Video Sell-Through 15%
Foreign Theatrical 20%
8
All rates are negotiable and vary film by film. Also many
companies use different terms and definitions relating to gross
income, net income and profits. The table below illustrates a
hypothetical breakdown of $10,000,000 gross income from an
independent film. It is for illustrative purposes only and does
not purport to represent the actual results of any film:
[Enlarge/Download Table]
Theatrical Gross (Box Office) $10,000,000 received by Exhibitor (theater)
Exhibitor's share 5,500,000 retained by theater owner
-----------
Distributor's gross $ 4,500,000 amount paid to distributor by exhibitor
Distribution fee (assumed at 20%) 900,000 amount kept by distributor for its services
Recoupment of Distribution expense 1,600,000 amount spent in the promotion of the picture including P & A
-----------
Net proceeds (Producer's Gross) $ 2,000,000 amount received by the production company
From the Producer's Gross the production company would normally
first pay bank loans to the production (if any) and any guild
mandated payments. Second, the production company would normally
pay back the production costs (negative costs). The balance is
the Producers gross profits from which usually any creative
participations (i.e. participations to writers, directors,
producers and actors) are paid. The balance left over are the
producers net profits which the producer maybe required to share
with any outside financers and co-production partners.
Industry executives recognize the life cycle of a movie and seek
to generate revenues and profits at each stage. The first tier of
film distribution normally commences with domestic theatrical
release. The distributor will release a film into a particular
market based on the depth of the perceived commercial appeal.
Films with measurable broad or niche audience appeal will start
at the top of the distribution hierarchy with theatrical release
and are then followed by distribution to foreign theatrical and
to the other non-theatrical and various home television markets.
The initial theatrical distribution may last for only a single
weekend or for up to four months, sometimes six, depending on the
popularity of the film. Films are sometimes released in the major
foreign markets at about the same time as the U.S. domestic
release, but usually a time of six months should be anticipated.
Home video release, both domestic and foreign, is timed to start
after the theatrical run is essentially over in each territory.
Management has experienced this to be typically two to six months
after initial release.
A film becomes available for premium cable, pay-per-view, or
satellite television usually six months after home video release
in each territory. This is generally eight months to one year from
the initial release.
A film is usually available for broadcast television approximately
two years after home video release in each territory.
Towards the end of a movie's theatrical release the film is
usually made available for purchase to airlines and hotel pay-per-
view can usually purchase the film.
Ancillary rights, such as music, literary or merchandising, are
usually exploited during the initial theatrical run of the film.
It is management's experience that similar release schedules
occur for U.S. films in foreign markets. The time frame in the
sequential release of a film is often compressed as the industry
moves to accelerate the cash flows associated with each tier. It
is management's experience that most theatrical and ancillary
revenues are received within the first 18 months of a film's
release.
The release sequences described above are undergoing significant
change due to the advent of Internet and DVD distribution and the
entrance of major content companies such as Google and
telecommunication companies such as Verizon into the business of
distributing new films. See below under "Ancillary Sales" and
"Internet." For example, there have been recent indications that
major studios are releasing new films on DVD sooner to the
theatrical release than previously. These developments, in our
opinion, may only help the Company achieve greater market share
and profitability for its low budget films.
Prints and Advertising ("P&A").
The "Prints" element of P&A is the cost of prints, i.e. the
making and shipping of the duplicates of the master negative to
be shown in theatres. "Advertising" is the cost of advertising of
the film in all forms of media, trailers, the marketing and the
public relations campaign designed to increase the audience for
the film. P&A is the last expenditure related to a release of a
film, usually commencing 2-4 weeks prior to the theatrical
release and continuing through the exhibition run. P&A expense is
also normally recouped directly out of gross receipts prior to
any reimbursement to the providers of funds for development and
production of the film ("Negative Costs") and residuals and/or
profit participations.
According to the MPAA, in 2003 the major studios averaged $63.8
million in production costs per release and $39.05 million for
P&A. The Company estimates spending $1.5 million for a "platform"
release of a picture on 50-150 screens in 2-3 major markets. P&A
expenditures for a general release can be quite large, with costs
for a release on 1500 screens often running $10-15 million and
for 2000-2500 screens running $20-25 million.
Film Licensing (Sales).
We have our own licensing organizations: Celebration Pictures,
Inc., which handles the domestic release and Celebration
International Pictures, Ltd., which handles the international
release. Other than in the US theatrical market, we will usually
license ("sell") distribution rights to our films to distributors
in specific territories for a set number of years.
There are over 70 major foreign territories in which we look to
sell our films. Usually the foreign distributor will acquire the
ancillary rights along with the theatrical rights, paying an
advance which is recoupable from earnings. Unlike the situation
9
in the 1970's and 80's, management has found the norm today is to
sell these rights after the film is made rather than selling the
rights at a discount prior to production.
Foreign territories represent an increasingly important source of
revenue for film entertainment produced in the U.S. English
language productions continue to dominate the world market, both
theatrically, due to the rapid construction of new screens in
emerging markets, and in home video markets, due in some part to
new copyright treaties.
Ancillary Sales.
Entertainment industry professionals focus on the success of a
film at the box office to gauge audience response to a film. It
is managements experience that the success of a theatrical
release impacts the income derived from ancillary markets. The
following are the principal ancillary markets for film
entertainment.
* Home Video/DVD Rental
* Home Video/DVD "sell-through"
* Pay-per-view, airlines, military, hotel
* Subscription Television (Cable and Satellite)
* Network Broadcast Television and Syndication
* Soundtrack
* Merchandising/Publishing
* Internet/e-Commerce
Consumers are now spending more annually viewing films on
videocassettes and DVDs than they are spending in theaters.
According to a joint study by Nielson Research, Adams Media
Research, Consumer Electronics Agency, DVD Entertainment Group
and Ernst & Young estimated consumer spending on renting and
buying DVDs alone in 2003 was approximately $11.6 billion vs.
$9.36 billion spent at the box office. The video retail sales
increase reflects the growth in VCRs to 90.8% of U.S households
compared to 70.2% in 1990. DVD penetration in U.S. households
increased to 46.2 million in 2003, up 203% from the previous
year. Sales of home entertainment systems by U.S. dealers have
increased the sale and rental of DVDs to over 1 billion units in
2003, up from 729.9 million the previous year, a more than 50%
increase, vs. a 39% decline in cassette sales-rentals. According
to an article in CFO Magazine, April 2005, "Studios make 50% of
their gross profits on DVD sales and $2.5 billion annually from
DVD rentals".
Each exhibition window competes for the highest quality film
product with the greatest audience appeal to sustain and grow
their revenue bases. In this increasingly challenging and
competitive environment, management has experience that
broadcasters and distributors have given further emphasis to
specialization, meeting the programming needs of niche audiences.
These ancillary markets afford the producer of film product and
owners of film libraries an opportunity to earn revenue from
several sources as the film progresses through its life cycle.
With the introduction of new technologies as well as the
convergence of broadcast media and computing technologies, new
sources of ancillary income are expected to develop rapidly in
the near term.
Product Placement
Product placement has become an increasingly important aspect of
film production over the last few years. Although it is possible
to sometimes offset some of the costs of production by selling
the rights for a manufacturer to have its product featured in the
film, the highest and best use of product placement is in its use
for cooperative advertising and joint production (i.e. the "happy
meal" toys at McDonalds featuring movie characters). The Company
has had discussions relating to product placement in one of its
films in development, however, no contracts have been finalized.
Merchandising
Selling products online and offline related to our films, in
addition to soundtracks, home videos and DVDs, will be a thrust
for the Company. We will attempt to exploit all merchandising
opportunities, especially items that have particular appeal to
the family market. Where ever possible merchandising elements
will be written into scripts (i.e. cars, clothing, toys, video
games, novelty items, hair products and accessories, etc.). The
Company has begun a test market in this area for the sound track
and the poster for "The Aryan Couple" on its website,
www.famefilm.com. The Company has not realized merchandising
income to date.
Internet
Some independent filmmakers are attempting to turn the Internet
into the world's largest art-house theater by offering movies on
a pay-per-view basis over the Internet. MPAA reports
10
that the number of households with Internet access is now 62.2
million compared to 55.4 million in 2002. The number of
households with broadband access has increased to 21.7 million in
2003 from 15.9 million in 2002. Mobile Internet users increased
to 2.4 million from 1.5 million in 2002. According to Paul Kagan
Associates, Internet movie pay-per-view revenues are expected to
grow from $300,000 in 1999 to $243 million in 2008..Driving this
growth will be increased broadband delivery and the number of
global streaming-media-player equipped Internet users. Due to the
relatively cumbersome delivery and image quality problems
associated with data compression the medium has yet to achieve
its full potential. As these problems are resolved, utilization
should accelerate.
We intend to place the Company in areas of future growth for the
entertainment industry by identifying and establishing
relationships with strategic partners who are providers of
Internet and other innovative entertainment solutions.
Technology Development
We own certain video streaming technology developed before 2001.
We will attempt to apply this technology to derive value from it
in the context of the Company's emphasis on film and other media
productions We have developed and own all the rights to
F.E.L.I.X., a high quality video streaming system that requires
no download and no buffer. However, due to advancements in
technology since development, and the fact that management does
not anticipate devoting capital to update the technology, we do
not anticipate realizing significant revenue from its technology.
Risk Factors.
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The Film Industry is highly competitive and we are competing
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with Companies with much greater resources than we have.
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The business in which we engage is significantly competitive.
Each of our primary business operations is subject to competition
from companies which, in some instances, have greater production,
distribution and capital resources than us. We compete for
relationships with a limited supply of facilities and talented
creative personnel to produce our films. We will compete with
major motion picture studios, such as Warner Brothers and The
Walt Disney Company, for the services of writers, actors and
other creative personnel and specialized production facilities.
We also anticipate that we will compete with a large number of
United States-based and international distributors of independent
films, including divisions of The Walt Disney Company/Pixar,
Warner Brothers, Universal, Paramount/Dreamworks, Fox and
Sony/MGM in the production of films expected to appeal to
international audiences. More generally, we anticipate we will
compete with various other leisure-time activities, such as home
videos, movie theaters, personal computers and other alternative
sources of entertainment.
The production and distribution of theatrical productions,
television animation, videocassettes and video disks are
significantly competitive businesses, as they compete with each
other, in addition to other forms of entertainment and leisure
activities, including video games and on-line services, such as
the Internet. There is also active competition among all
production companies in these industries for services of
producers, directors, actors and others and for the acquisition
of literary properties. The increased number of theatrical films
released in the United States has resulted in increased
competition for theater space and audience attention. Revenues
for film entertainment products depend in part on general
economic conditions, but the competitive situation of a producer
of films is still greatly affected by the quality of, and public
response to, the entertainment product that the producer makes
available to the marketplace.
There is strong competition throughout the home video industry,
both from home video subsidiaries of several major motion picture
studios and from independent companies, as well as from new film
viewing opportunities such as pay-per-view.
(Please see "Business of the Company" above for industry data)
11
We also anticipate competing with several major film studios such
as Paramount Communications/Dreamworks SGA, MCA/Universal, Sony
Pictures Entertainment/ MGM/UA Inc, Twentieth Century Fox; Time
Warner; and Disney/Pixar, which are dominant in the motion
picture industry, in addition to numerous independent motion
picture and television production companies, television networks
and pay television systems, for the acquisition of literary
properties, the services of performing artists, directors,
producers, other creative and technical personnel, and production
financing.
Audience acceptance of our films will determine our success, and
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the prediction of such acceptance is inherently risky.
------------------------------------------------------
We believe that a production's theatrical success is dependent
upon general public acceptance, marketing, advertising and the
quality of the production. Our productions compete with numerous
independent and foreign productions, in addition to productions
produced and distributed by a number of major domestic companies,
many of which are divisions of conglomerate corporations with
assets and resources substantially greater than that of ours. Our
management believes that in recent years there has been an
increase in competition in virtually all facets of our business.
The growth of pay-per-view television and the use of home video
products may have an effect upon theater attendance and non-
theatrical motion picture distribution. As we may distribute
productions to all of these markets, it is not possible to
determine how our business will be affected by the developments,
and accordingly, the resultant impact on our financial
statements. Moreover, audience acceptance can be affected by any
number of things over which we cannot exercise control, such as a
shift in leisure time activities or audience acceptance of a
particular genre, topic or actor
The competition for booking screens may have an adverse effect to
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our theatrical revenues.
------------------------
In the distribution of motion pictures, there is very active
competition to obtain bookings of pictures in theaters and
television networks and stations throughout the world. A number
of major motion picture companies have acquired motion picture
theaters. Such acquisitions may have an adverse effect on our
distribution endeavors and our ability to book certain theaters
which, due to their prestige, size and quality of facilities, are
deemed to be especially desirable for motion picture bookings.
Governmental restrictions may adversely effect our revenues.
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In addition, our ability to compete in certain foreign
territories with either film or television product is affected by
local restrictions and quotas. In certain countries, local
governments require that a minimum percentage of locally produced
productions be broadcast, thereby further reducing available time
for exhibition of our productions. Additional or more restrictive
theatrical or television quotas may be enacted and countries with
existing quotas may more strictly enforce such quotas.
Additional or more restrictive quotas or stringent enforcement of
existing quotas could materially and adversely affect our
business by limiting our ability to fully exploit our productions
internationally. (See also the section on "Government Compliance"
below)
We have limited Financial Resources and there are Risks we may be
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unable to acquire Financing when needed.
----------------------------------------
To achieve and maintain competitiveness, we may be required to
raise substantial funds. (Please see above "Business of the
Company, Film Production" and "How We Finance Our Films"). Our
forecast for the period for which our financial resources will be
adequate to support our operations involves risks and
uncertainties and actual results could fail as a result of a
number of factors. We anticipate that we may need to raise
additional capital to develop, promote and distribute our films.
Such additional capital may be raised through public or private
financing as well as borrowings and other sources. Public or
private offerings may dilute the ownership interests of our
stockholders. Additional funding may not be available under
favorable terms, if at all. If adequate funds are not available,
we may be required to curtail Operations significantly or to
obtain funds through entering into arrangements with
collaborative partners or others that may require us to
relinquish rights to certain products and services that we would
not otherwise relinquish and thereby reduce revenues to the
company.
We are at Risk of Internet Competition which may develop and the
----------------------------------------------------------------
effects of which we cannot predict.
-----------------------------------
The Internet market is new, rapidly evolving and intensely
competitive. (Please see above "Business of the Company, Film
Distribution") We believe that the principal competitive factors
in maintaining an Internet business are selection, convenience of
download and other features, price, speed and accessibility,
customer service, quality of image and site content, and
reliability and speed of fulfillment. Many potential competitors
have longer operating histories, more customers, greater brand
recognition, and significantly greater financial, marketing and
other resources. In addition, larger, well-established and well-
financed entities may acquire, invest in, or form joint ventures
as the Internet, and e-commerce in general, become more widely
accepted. Although we believe that the diverse segments of the
Internet market will provide opportunities for more than one
supplier of productions similar to ours, it is possible that a
single supplier may dominate one or more market segments. We also
have significant competition from online websites in
international markets, including competition from US-based
competitors in addition to online companies that are already well
established in those foreign markets. Many of our existing
competitors, in addition to a number of potential new
competitors, have significantly greater financial, technical and
marketing resources than we do.
12
We are at Risk of Technological Changes to which me may be unable
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to adapt as swiftly as our competition.
---------------------------------------
We believe that our future success will be substantially affected
by continued growth in the use of the Internet. E-commerce and
the distribution of goods and services over the Internet is
relatively new, and predicting the extent of further growth, if
any, is difficult. Communication or commerce over the Internet
may not increase and extensive content may not continue to be
provided over the Internet. The Internet may not prove to be a
viable commercial marketplace for our product for a number of
reasons, including lack of acceptable security technologies,
potentially inadequate development of the necessary
infrastructure, such as a reliable network system, or timely
development and commercialization of performance improvements,
including high speed modems. (Please see above "The Business of
the Company, Technology Development") In addition, to the extent
that the Internet continues to experience significant growth in
the number of users and use, the Internet infrastructure may not
be able to support the demands placed upon it by such potential
growth. The performance and reliability of the Internet may be
adversely affected by this continued growth. The market for
Internet products and services is characterized by rapid
technological developments, evolving industry standards and
customer demands and frequent new product introductions and
enhancements. For example, to the extent that higher bandwidth
Internet access becomes more widely available using cable modems
or other technologies, we may be required to make significant
changes to the design and content of our productions in order to
compete effectively. Our failure to adapt to these or any other
technological developments effectively could adversely affect our
business, operating results, and financial condition.
We face Risks of Compliance with Government Regulation of the
-------------------------------------------------------------
Film Industry.
--------------
The following does not purport to be a summary of all present and
proposed federal, state and local regulations and legislation
relating to the production and distribution of film entertainment
and related products; rather, the following attempts to identify
those aspects that could affect our business. Also, other
existing legislation and regulations, copyright licensing, and,
in many jurisdictions, state and local franchise requirements,
are currently the subject of a variety of judicial proceedings,
legislative hearings and administrative and legislative proposals
which could affect, in various manners, the methods in which the
industries involved in film entertainment operate.
Audiovisual works such as motion pictures and television programs
are not included in the terms of the General Agreement on Tariffs
and Trade. As a result, many countries, including members of the
European Union, are able to enforce quotas that restrict the
number of United States produced feature films which may be
distributed in such countries. Although the quotas generally
apply only to television programming and not to theatrical
exhibitions of motion pictures, there can be no assurance that
additional or more restrictive theatrical or television quotas
will not be enacted or that existing quotas will not be more
strictly enforced. Additional or more restrictive quotas or more
stringent enforcement of existing quotas could materially or
adversely limit our ability to exploit our productions
completely. The Office of the United States Trade Representative
(USTR) under the Executive Office of the President cites such
restrictive trade practices in Korea, China, and The EU as a
whole with even more restrictive practices in France, Italy and
Spain.
Voluntary industry embargos or United States government trade
sanctions to combat piracy, if enacted, could impact the amount
of revenue that we realize from the international exploitation of
our productions.. The Code and Ratings Administration of the
Motion Picture Association of America assigns ratings indicating
age group suitably for the theatrical distribution for motion
pictures. United States television stations and networks, in
addition to foreign governments, could impose additional
restrictions on the content of motion pictures which may
restrict, in whole or in part, theatrical or television
exhibitions in particular territories. Congress and the Federal
Trade Commission are considering, and in the future may adopt,
new laws, regulations and policies regarding a wide variety of
matters that may affect, directly or indirectly, the operation,
ownership and profitably of our business.
The Motion Picture industry is at high risk for Piracy which may
----------------------------------------------------------------
effect our earnings.
--------------------
The Motion Picture Industry, including us, may continue to lose
an indeterminate amount of revenue as a result of motion picture
piracy both in the country to unauthorized copying from our films
at post production houses, copies of prints in circulation to
theaters, unauthorized video taping at theaters and other illegal
means of acquiring our copywritten material. The USTR has placed
Argentina, Brazil, Egypt, Indonesia, Israel, Kuwait, Lebanon,
Pakistan, The Philippines, Russia, The Ukraine and Venezuela on
the 301 Special Watch List for excessive rates of piracy of
motion pictures and optical disks. The USTR has placed
Azerbaijan, Bahamas, Belarus, Belize, Bolivia, Bulgaria,
Colombia, the Dominican Republic, Ecuador, Hungary, Italy, Korea,
Latvia, Lithuania, Mexico, Peru, Romania, Taiwan, Tajikistan,
Thailand, and Uzbekistan on the watch list for excessive piracy.
There are Risks of a "Penny Stock" Investment.
----------------------------------------------
The Commission has adopted rules that regulate broker-dealer
practices in connection with transactions in "penny stocks".
Penny stocks are generally equity securities with a price of less
than $5.00 (other than securities registered on certain national
securities exchanges or quoted on the NASDAQ system, provided
that current price and volume information with respect to
transactions in such securities is provided by the exchange or
system). The penny stock rules require a broker-dealer, prior to
a transaction in a penny stock not otherwise exempt from those
rules, to deliver a standardized risk disclosure document
prepared by the Commission, which (i) contained a description of
the nature and level of risk in the market for penny stocks in both
public offerings and secondary trading; (ii) contained a description
of the broker's or dealer's duties to the customer and of the rights
and remedies available to the customer with respect to violation to
such duties or other requirements of Securities' laws; (iii) contained
a brief, clear, narrative description of a dealer market, including
"bid" and "ask" prices for penny stocks and significance of the spread
between the "bid" and "ask" price; (iv) contains a toll-free telephone
number for inquiries on disciplinary actions; (v) defines significant
terms in the disclosure document or in the conduct of trading in penny
stocks; and (vi) contains such other information and is in such form
(including language, type, size and format), as the Commission
shall require by rule or regulation. The broker-dealer also must
provide, prior to effecting any transaction in penny stock, the
customer (i) with bid and offer quotations for the penny stock;
(ii) the compensation of the broker-dealer and its salesperson in
the transaction; (iii) the number of shares to which such bid and
ask prices apply, or other comparable information relating to the
depth and liquidity of the market for such stock; and (iv) month
account statements showing the market value of each penny stock
held in the customer's account. In addition, the penny stock
rules require that prior to a transaction in a penny stock not
otherwise exempt from those rules, the broker- dealer must make a
special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser's written
acknowledgment of the receipt of a risk disclosure statement, a
written agreement to transactions involving penny stocks, and a
signed and dated copy of a written suitably statement. These
disclosure requirements may have the effect of reducing the
trading activity in the secondary market for a stock that becomes
subject to the penny stock rules. The Company's securities are
subject to the penny stock rules, and holders of those securities
may have difficulty selling those securities.
There are Risks of Conflicts of Interest.
-----------------------------------------
It is customary in the film industry for officers and directors
of film and distribution companies to receive compensation as
producers, directors or providers of other creative services in
connection with specific film productions in which the Company
has an interest. Moreover, officers and/or directors may receive
compensation as producers, directors or providers of other
creative services in connection with film or other productions in
which the Company has no interest. The Company's policies require
that this compensation be disclosed to the Board of Directors
and, where material, disclosed in the Company's communications
with the public.
John Daly received compensation through Red Giants Productions as
Producer-Director of "The Aryan Couple," a film for which the
Company has world wide distribution rights through its
subsidiary, Celebration International Pictures Limited (BVI). To
date such compensation received by Mr. Daly has not reached the
threshold of "materiality." He is also co-writer of "Harder They
Fall", a script currently in development as well as a producer of
"Played", a film in which Company owns a portion of profits and
world wide distribution rights, and from which he may receive
income through Red Giants Productions. He is also the writer of
the script "Calico Jack and Big Mac" to which the company has a
verbal option to produce and distribute. Mr. Daly has not
received compensation from any of the films sufficient to require
disclosure. The Company anticipates Mr. Daly will be producing
and directing the motion picture "The Disappeared" (a/k/a
"Libertad") on which the company holds an option and for which
services he would be compensated through Red Giants Productions,
Inc. however Mr. Daly has received no such compensation to date.
Arkadiy Golubovich is a film actor and received nominal
compensation for his role in "The Aryan Couple." He as well as
Ilya Golubovich received executive producer credits for "The
Aryan Couple" without compensation. Caspar von Winterfeldt, a key
consultant to the company is a producer of "Played and "Moonpie"
for which service he has deferred compensation due as well as
profit participations, neither of which have been sufficient to
require disclosure. Lawrence Lotman received nominal
consideration as a finance executive on "The Aryan Couple" and is
due nominal compensation for services as a production executive
on "Played" and "Moonpie". Kevin Leydon, another company employee
is also due nominal compensation for financial services performed
on "Played" and "Moonpie". Michael Daly, the son of John Daly
received compensation as the Second Assistant Director on "The
Aryan Couple" in an amount insufficient to be disclosed.
We are dependent for our success on a few key executive officers.
Our inability to retain those officers would impede our business
plan and growth strategies, which would have a negative impact on
our business and the value of your investment.
Our success depends on the skills, experience and performance of
key members of our management team. Were we to lose one or
more of these key executive officers, we would be forced to
expend significant time and money in the pursuit of a
replacement, which would result in both a delay in the
implementation of our business plan and the diversion of limited
working capital. We can give you no assurance that we can find
satisfactory replacements for these key executive officers at
all, or on terms that are not unduly expensive or burdensome to
our company.
New rules, including those contained in and issued under the
Sarbanes-Oxley Act of 2002, may make it difficult for us to
retain or attract qualified officers and directors, which could
adversely affect the management of our business and our ability
to obtain or retain listing of our common stock.
We may be unable to attract and retain qualified officers,
directors and members of board committees required to provide for
our effective management as a result of the recent and currently
proposed changes in the rules and regulations which govern
publicly-held companies, including, but not limited to,
certifications from executive officers and requirements for
financial experts on the board of directors. The perceived
increased personal risk associated with these changes may deter
qualified individuals from accepting these roles. The enactment
of the Sarbanes-Oxley Act of 2002 has resulted in the issuance of
a series of new rules and regulations and the strengthening of
existing rules and regulations by the SEC. Further, certain of
these recent and proposed changes heighten the requirements for
board or committee membership, particularly with respect to an
individual's independence from the corporation and level of
experience in finance and accounting matters. If we are unable to
attract and retain qualified officers and directors, the
management of our business could be adversely affected.
Our internal controls over financial reporting may not be
effective, and our independent auditors may not be able to
certify as to their effectiveness, which could have a significant
and adverse effect on our business.
We are subject to various regulatory requirements, including the
Sarbanes-Oxley Act of 2002. We, like all other public companies,
are incurring additional expenses and, to a lesser extent,
diverting management's time in an effort to comply with
Section 404 of the Sarbanes-Oxley Act of 2002. We are evaluating
our internal controls over financial reporting in order to allow
management to report on, and our independent auditors to attest
to, our internal controls over financial reporting, as required
by Section 404 of the Sarbanes-Oxley Act of 2002 and the rules
and regulations of the SEC, which we collectively refer to as
"Section 404." If, in the future, management identifies one or
more material weaknesses, or our external auditors are unable to
attest that our management's report is fairly stated or to
express an opinion on the effectiveness of our internal controls,
this could result in a loss of investor confidence in our
financial reports, have an adverse effect on our stock price
and/or subject us to sanctions or investigation by regulatory
authorities.
The market price for our Common Shares is particularly volatile
given our status as a relatively unknown company with a small and
thinly traded public float, limited operating history and lack of
profits, which could lead to wide fluctuations in our share
price.
The market for our Common Stock is characterized by significant
price volatility when compared to seasoned issuers, and we expect
that our share price will continue to be more volatile than a
seasoned issuer for the indefinite future. The volatility in our
share price is attributable to a number of factors. First, as
noted above, our Common Stock are sporadically and thinly traded.
As a consequence of this lack of liquidity, the trading of
relatively small quantities of shares by our shareholders may
disproportionately influence the price of those shares in either
direction. The price for our shares could, for example, decline
precipitously in the event that a large number of our Common
Stock are sold on the market without commensurate demand, as
compared to a seasoned issuer which could better absorb those
sales without adverse impact on its share price. Secondly, we are
a speculative or "risky" investment due to our limited operating
history and lack of profits to date, and uncertainty of future
market acceptance for our potential products. As a consequence of
this enhanced risk, more risk averse investors may, under the
fear of losing all or most of their investment in the event of
negative news or lack of progress, be more inclined to sell their
shares on the market more quickly and at greater discounts than
would be the case with the stock of a seasoned issuer. Many of
these factors are beyond our control and may decrease the market
price of our common shares, regardless of our operating
performance. We cannot make any predictions or projections as to
what the prevailing market price for our Common Stock will be at
any time, including as to whether our Common Stock will sustain
their current market prices, or as to what effect that the sale
of shares or the availability of Common Stock for sale at any
time will have on the prevailing market price.
In addition, the market price of our Common Stock could be
subject to wide fluctuations in response to:
* quarterly variations in our revenues and operating expenses;
* announcements of new films by us;
* fluctuations in interest rates;
* significant sales of our Common Stock by the selling stock
holders;
* the operating and stock price performance of other companies
that investors may deem comparable to us; and
* news reports relating to trends in our markets or general
economic conditions.
The stock market in general and the market prices for penny stock
companies in particular, have experienced volatility that often
has been unrelated to the operating performance of such
companies. These broad market and industry fluctuations may
adversely affect the price of our stock, regardless of our
operating performance.
Shareholders should be aware that, according to SEC Release No.
34-29093, the market for penny stocks has suffered in recent
years from patterns of fraud and abuse. Such patterns include (1)
control of the market for the security by one or a few broker-
dealers that are often related to the promoter or issuer; (2)
manipulation of prices through prearranged matching of purchases
and sales and false and misleading press releases; (3) boiler
room practices involving high-pressure sales tactics and
unrealistic price projections by inexperienced sales persons; (4)
excessive and undisclosed bid-ask differential and markups by
selling broker-dealers; and (5) the wholesale dumping of the same
securities by promoters and broker-dealers after prices have been
manipulated to a desired level, along with the resulting
inevitable collapse of those prices and with consequent investor
losses. Our management is aware of the abuses that have occurred
historically in the penny stock market. Although we do not expect
to be in a position to dictate the behavior of the market or of
broker-dealers who participate in the market, management will
strive within the confines of practical limitations to prevent
the described patterns from being established with respect to our
securities. The occurrence of these patterns or practices could
increase the volatility of our share price.
Our operating results may fluctuate significantly, and these
fluctuations may cause the common stock price to fall.
Our quarterly operating results may fluctuate significantly in
the future due to a variety of factors that could affect our
revenues or our expenses in any particular quarter. You should
not rely on quarter-to-quarter comparisons of our results of
operations as an indication of future performance. Factors that
may affect our quarterly results include:
* mismatches between resource allocation and dealer demand due
to difficulties in predicting dealer demand in a new market;
* changes in general economic conditions that could affect
marketing efforts;
* the magnitude and timing of marketing initiatives;
* the maintenance and development of our strategic
relationships;
* the introduction, development, timing, competitive pricing
and market acceptance of our products and services and those
of our competitors;
* our ability to attract and retain key personnel; and
* our ability to manage our anticipated growth and expansion.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
General
-------
The following discussion of our financial condition and results
of operations should be read in conjunction with (1) our interim
unaudited consolidated financial statements for the nine months
ended September 30, 2005 and 2004 and their explanatory notes
included as part of this Form 10SB, and (2) our annual audited
consolidated financial statements and explanatory notes for the
years ended December 31, 2004 and 2003 also included as part of
this Form 10SB.
Overview
--------
Film and Music Entertainment, Inc. is a holding company which,
through its subsidiaries, develops, produces, sells and
distributes films and associated entertainment.
Our wholly-owned Celebration Productions, Inc. subsidiary
provides comprehensive production services for filmed
entertainment. Celebration Productions has provided in 2005
production service relating to the development of the films "The
Harder They Fall" and "The Disappeared' and production
supervisory services to the films "Played" and "Moonpie". Revenue
is recognized from productions as earned and such revenue will
usually be partially from specific contractual fees and from
contingent compensation paid as profits are earned under the
American Institute of Certified Public Accountants (AICPA)
Statement of Position (SoP) 00-2 "Accounting by Producers or
Distributors of Films" dated June 12, 2000 revenue is recognized
when persuasive evidence a sale exists, the film is complete and
has been or is deliverable, the license period has begun and
exploitation can begin, the fee is fixed or determinable and
collection is reasonably assured. Our wholly-owned Celebration
Pictures, Inc. provides sales and distribution services for North
America for our and third party productions. In 2005 Celebration
Pictures has provided these services on two films, "The Aryan
Couple" and "Waking Up Dead". Revenues are recognized as earned
under AICPA SoP 00-2. Our wholly-owned subsidiary, Celebration
International Pictures, Ltd (BVI), provides sells and
distribution services for the rest of the world excluding North
America for our and third party productions. In 2005 Celebration
Pictures has provided these services on two films, "The Aryan
Couple" and "Waking Up Dead". Revenues are recognized as earned
under AICPA SoP 00-2. The Company ceased its sales and
distribution efforts in "Waking Up Dead as of October 13, 2005
and has retained a lien against future earnings of the film for
all money spent in the marketing of the film The Company also has
two non-operating subsidiaries, East Mojave Corporation and Myrob
Properties, Inc., in which are held certain real estate assets of
the company.
Results of Operations: Nine months ended September 30, 2005
-----------------------------------------------------------
compared to September 30, 2004
------------------------------
Selected Statement of Operating Data
------------------------------------
Summarized in the table below is a statement of operating data
comparing the nine months ended September 30, 2005 with the nine
months ended September 30, 2004. Please see unaudited Financial
Statements of the Company for these periods set forth on Pages F-
22 - F-30.
[Download Table]
Nine Months Ended
---------------------------
September September
30, 2005 30, 2004
----------- -----------
(unaudited) (unaudited)
REVENUE $ 162,024 $ -
OPERATING EXPENSES
Production costs - 90,599
Advertising costs 279,845 8,937
Compensation expense 249,275 206,814
Consulting expense 39,875 28,920
General and administrative expenses 406,241 289,560
----------- -----------
TOTAL OPERATING EXPENSES 975,236 624,830
----------- -----------
LOSS FROM OPERATIONS (813,212) (624,830)
----------- -----------
OTHER INCOME (EXPENSE)
Other income 9,184 10,000
Investment income 17,125 13,170
Unrealized loss on marketable equity
securities 145,537 -
Realized loss on sale of marketable
equity securities (62,852) -
Gain on foreclosure of note receivable - - 50,000
Gain on disposition of real estate 208,500 -
----------- -----------
TOTAL OTHER INCOME (EXPENSE) 367,494 23,170
----------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES (445,718) (601,660)
PROVISION FOR INCOME TAXES - -
----------- -----------
NET LOSS $ (445,718) $ (601,660)
============ ============
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.00) $ (0.00)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING -
BASIC AND DILUTED 126,810,142 128,322,141
============ ============
We have received minimum revenue from operations to date. We
believe that the main sources of our revenue will be revenues
from domestic and foreign theatrical distribution, DVD and home
video, pay-per-view, pay cable and basic cable distribution and
free broadcast television. We have begun to receive income from
foreign sales of the movie "The Aryan Couple" under our contract
with AV Pictures Ltd. We anticipate this income will continue
through next year. The film has generated a minimal amount of
theatrical income in the US from festival showings in the first
half of 2005. Management expects income from US theatrical
revenues to increase substantially in the fourth quarter of this
year as the film moves from festival showings to a wider release.
Management also anticipates revenues to commence from "Waking Up
Dead" in the fourth quarter of 2005.
Revenues: Revenue for the nine-month interim period ended
September 30, 2005 was $162,024, as compared to $0 for the
corresponding interim period in fiscal 2004.
Our revenues for the nine-months interim period ended September
30, 2005 were principally derived from the screening of The Aryan
Couple, production services rendered by our Celebration
Productions subsidiary and the proceeds of the sale of the
distribution rights to the film "Tournament of Dreams".
We had no revenues for the nine months ended September 30, 2004
as the Company was in the process of solidifying contracts for
productions.
Operating Expenses and loss from operations: Operating Expenses
and loss from operations for the nine-month interim ended
September 30, 2005 were $975,236 and $813,212, respectively, as
compared to $624,830 and $624,830 for the corresponding interim
period in fiscal 2004.
The decrease in production costs relates to the write-off of a
production in of 2004. The increase in advertising cost relates
to the increased advertising for The Aryan Couple during the
first nine-months of 2005. The increase of in compensation
expense is mainly attributable to payments for the services of
John Daly, which were $0 for the period in 2004. The increase in
general and administrative expense relates primarily to the
increased costs relating to compliance and legal expense relating
in the court cases in which the company was involved.
Other Income(Expense): Other Income(Expense) for the nine-months
ended September 30, 2005 was $367,494 as compared with $23,170 for
the nine-months ended September 30, 2004. This increase was
entirely due to a gain of $208,500 realized on the disposition
of real estate to a stockholder in return for 15,750,000
shares of the Company's common stock and net gains (realized and
unrealized) on our marketable securities portfolio of $82,685.
Year ended December 31, 2004 compared to December 31, 2003
----------------------------------------------------------
Selected Statement of Operating Data
------------------------------------
Summarized in the table below is statement of operating data
comparing the year ended December 31, 2004 with the year ended
December 31, 2003. Please see audited Financial Statements of the
Company for these periods set forth on Pages F-1 - F-20.
[Enlarge/Download Table]
Year Ended
--------------------
December December
31, 2004 31, 2003
----------- -----------
REVENUE $ 63,993 $ -
OPERATING EXPENSES
Production costs 84,599 7,500
Advertising costs 135,503 5,360
Compensation expense 296,405 10,475,130
Consulting expense 100,920 1,860,124
General and administrative expenses 420,591 295,454
----------- -----------
TOTAL OPERATING EXPENSES 1,038,018 12,643,568
----------- -----------
LOSS FROM OPERATIONS (974,025) (12,643,568)
----------- -----------
OTHER INCOME (EXPENSE)
Other income 8,000 20,000
Investment income 77,574 -
Unrealized loss on marketable equity securities (12,171) -
Equity loss in SMS Musicmaker Ltd. (96,280) -
Gain on disposition of real estate 114,343 -
Loss on writedown of real estate (72,391)
Interest expense and financing costs - (15,908)
Gain on extinguishment of debt - 12,541
----------- -----------
TOTAL OTHER INCOME (EXPENSE) 19,075 16,633
----------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES (954,950) (12,626,935)
PROVISION FOR INCOME TAXES 4,800 -
NET LOSS $ (959,750) $(12,626,935)
=========== ============
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.01) $ (0.22)
=========== ============
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC
AND DILUTED 132,865,077 56,534,610
=========== ============
Revenues: Revenue for the year ended December 31, 2004 was
$63,993, as compared to $0 for the year ended December 31, 2003.
Our revenues for the year ended December 31, 2004 were principally
derived from production services rendered by our Celebration
Productions subsidiary.
We had no revenues for the year ended December 31, 2003 as the
Company was in the process of solidifying contracts for productions.
Our Expenses and loss of operations: Operating Expenses adn loss
from operation for the year ended December 31, 2004 were $1,038,018
and $974,025, respectively, as compared to $12,643,568 and
$12,643,568 for the corresponding year in 2003.
The increase in production costs relates to the write-ff of a
production in 2004. The increase in advertising cost relates to the
increased advertising for The Aryan Couple during the year ended
December 31, 2004. The decrease in compensation and consulting
expense is mainly attibutable to an approximate $12.2 million
charge in 2003 related to the issuance of options for compensation.
The increase in general and administrative expenses relates
primarily to the increased costs relating to compliance and
legal expense relating to the court cases in which we were involved.
Other Income (Expense): Other Income (Expense) for the year ended
December 31, 2004 was $19,075 as compared with $16,633 for the
corresponding period in 2003. The increase in other income is
not significant.
13
The Company has no plans to purchase any assets at this time.
However, the Company constantly reviews industry opportunities to
acquire income producing assets for possible acquisition.
Off-Balance Sheet Arrangements
------------------------------
There are no guarantees, commitments, lease and debt agreements
or other agreements that could trigger adverse change in our
credit rating, earnings, cash flows or stock price, including
requirements to perform under standby agreements.
Employees
---------
The Company currently employs 8 at its headquarters. We also
currently have 3 independent contractors, one of whom we are in
negotiations to convert to an employee. The Company also has a
range of 6 to 10 part time unpaid interns at any given time.
Technically all employees work for and our paid by Celebration
Productions, Inc. and lend there services as needed to the
subsidiaries. The employee breakdown by function is as follows
with a great deal of cross over as required:
Administration: 2
Production: 3 (independent contractors)
Finance & governance: 2
Distribution & Marketing: 2
Secretarial: 1
Support: 1
Critical Accounting Policies
----------------------------
Our discussion and analysis of our financial condition and
results of operations are based upon our financial statements,
which have been prepared in accordance with accounting principles
generally accepted in the United States of America.
On an ongoing basis, we evaluate our estimates, including those
related to reserves, impairment of long-lived assets, value of
our stock issued to consultants for services and estimates of
costs to complete film productions. We base our estimates on
historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these
estimates under different assumptions or conditions; however, we
believe that our estimates, including those for the above-
described items, are reasonable.
We capitalize films in development as capitalized film costs in
accordance with SoP 00-2 They are transferred to Film
inventories at the point that the film is scheduled for
production. On a quarterly basis we review each film in
development and/or production as to whether the capitalized costs
are in excess of their fair market value, and if so, we write off
the excess and reflect the write-off in costs of revenue. If
after three years in development a film has not been scheduled
for production it is written off and reflected in the costs of
revenue.
Under SoP 00-2 the costs of the film, including the capitalized
costs, contingent compensation and residual costs (if any) are
amortized and included in costs of revenue in the proportion the
revenue for that period for the film bears to the estimated total
revenue from all markets and territories under the individual-
film-forecast-computation method. We review our estimates
quarterly and they are revised if necessary. A revision will
result in an increase or decrease to the percentage of
amortization of the capitalized film costs relative to a previous
period. Should the revision result in estimated revenues proving
insufficient to cover the unamortized film costs remaining on
that film, the difference will be written down to the fair market
value based upon its then net present value.
Item 3. Description of Property.
The Company's Facilities. At this time, the Company occupies
approximately 4,200 square feet of leased office space at 5670
Wilshire Boulevard, Suite 1690, Los Angeles, California 90035.
The lease is at a rate of $7,558 per month plus utilities and
expires March 1, 2006.
We own significant real estate holdings. The Company acquired
these properties with the intent to use them as additional
collateral to investors in films to secure any short falls in
recoupment of invested capital. Subsequently, this strategy
proved not to be viable and the Company has chosen to hold these
properties for appreciation.
In May, 2003 we acquired two private companies, Myrob Properties,
Inc., a California corporation, and East Mojave Corporation, a
Nevada corporation. Among the assets acquired in these
transactions were rights in real estate located in California and
Arizona. As a result of these transactions a material change of
ownership occurred which automatically entitled all previously
granted options to be exercised immediately. No such options were
exercised. Further, all previously issued convertible notes were
retired and 100% of such notes and accrued interest was converted
to Common Stock. Also all Voting Trusts terminated and the Option
Stock covered by these Trusts was issued in accordance with their
terms. Issued in accordance with these provisions were 5,668,000
Shares of Common Stock to Michael Meyer and 560,000 shares of
Common Stock to Lawrence Lotman.
On completion of the transactions, the required conversions and
accelerations, and after Options for an additional 28,600,000
shares were also granted to Messrs. Daly, Meyers and Lotman, the
number of issued and outstanding shares and Options rose from
24,403,050 to approximately 98,000,000. Mr. Daly received
18,000,000 new Options. Mr. Meyer received 9,000,000 new Options
and Mr. Lotman received 1,600,000 new Options. All were priced at
$0.001. However, over 64,700,000 of the issued shares and Options
granted carried restrictions and were placed in new voting trusts
with the options to be released to the beneficial owners at the
rate of 12.5% of the respective aggregate every six months over a
four year period.
[Download Table]
The table below summarizes our property ownership:
CURRENT
OWNED PROPERTY OWNERSHIP APPROX. LIENS
-------------- --------- ------------------------
1120 Acres land 100% fee simple $337,000 1st Mortgage
San Bernardino County, CA
320 acres land 100% fee simple $20,000 1st Mortgage
San Bernardino County, CA
The liens listed above are owed by wholly owned subsidiaries to
Film and Music Entertainment, Inc.
On November 16, 2004 the Company settled a dispute with a
stockholder whereby the stockholder agreed to surrender to the
Company 13,500,000 shares of the Company's Common Stock owned by
the stockholder and the Company agreed to give up the rights it
had in certain real estate located in Riverside, California that
the Company had recorded on its books at $180,000.
On February 3, 2005 the Company settled a dispute with a
Stockholder whereby the stockholder agreed to surrender to the
Company 15,750,000 shares of the Company's Common Stock owned by
the shareholder and the Company agreed to give up the rights it
had in a hypothecated money interest in certain real estate in
Cochise County, Arizona that the Company had entered on its books
at $264,000.
14
Item 4. Security Ownership of Certain Beneficial Owners and
Management.
The following table sets forth the record of ownership of our
Common Stock (our only class of stock entitled to vote on general
corporate matters) the date of this filing, regarding the
ownership by: (i) each of our "executive officers" (defined as
our Chief Executive Officer, President, Secretary, any vice-
president in charge of a principal business function, such as
sales, or any other person who performs similar policy making
functions for our company); (ii) each of our directors; (iii)
each person known to us to own beneficially more than 5% of any
class of our securities; and (iv) the group comprised of our
current directors and executive officers:
[Download Table]
Number of Shares Percentage of
Beneficial Owner Owned Outstanding Shares
---------------- ---------------- ------------------
John Daly, Chairman, CEO, 40,595,817(1)(2)(5) 26.3%
President
5670 Wilshire Bl. #1690
Los Angeles, CA. 90036
Lesteron, Ltd. 50,000,000 39.95%
Akara Bldg.
24 De Castro Street
Wickhams Cay Island
Road Town, British
Virgin Islands
Red Giants Productions Inc. 8,013,158 6.4%
c/o R. Oppenheim, Esq.
2300 Sepulveda Blvd.
Los Angeles, CA 90064
Lawrence S. Lotman, Secretary, 5,600,000(2)(3)(5) 4.43%
Director, VP Finance
5670 Wilshire Bl. #1690
Los Angeles, CA. 90036
Miracle Entertainment, Inc. 9,500,000 7.59%
c/o James T. Zelloe, Esq.
11350 Random Hills Rd, #700
Fairfax, VA. 22030
Ilya Golubovich 0(4) 0%
Arkadiy Golubovich 0(4) 0%
B. Predtechensky per., 6-2
Moscow, Russia
All officers and directors 96,195,187(6) 61.91%
as a group (4 members)
(1) Includes 26,700,000 options not yet exercised but capable of
being exercised within 60 days of the date of this document.
(2) Includes options not yet exercised but capable of being
exercised within 60 days of the date of this document. Some
shares and options are held in a voting trust. The trust requires
that the individuals and entities who have contributed to the
trust deposit all securities acquired by them (other than shares
acquired before the trust was established and shares released
from the trust), including options and rights, with the trustee.
The trust requires that they agree that the trust as owner of the
shares allocable to each beneficiary shall vote them in favor of
Directors designated by that beneficiary. It also contains a
"drip out" provision allowing each beneficiary a "drip out" of
12.5% each six months of the securities held for the benefit of
that beneficiary for sale or other disposition. As of the date of
this document, 1,800,000 shares and 81,550,000 options are held
in this trust.
(3) Includes 1,400,000 options not yet exercised but capable of
being exercised within 60 days of the date of this document.
(4) Does not include the shares owned by Lesteron, Ltd. whose
beneficial owner is a family member of this director.
(5) Does not include 34,450,000 options to John Daly and
1,400,000 options to Lawrence Lotman which are not exercisable
until a date after 60 days from the date of this document.
(6) Include the shares owned by Lesteron, Ltd. whose beneficial
owner is a family member of two directors.
Changes In Control
We do not have any arrangements that may result in a change in control.
15
Item 5: Directors, Officers, Promoters and Control Persons
Set forth below is information regarding our directors and
executive officers. There are no promoters. All directors and
executive officers are elected annually and serve under the By-
laws of the Company until the next election of Directors and
until their successors are duly elected and qualify. The current
Directors and Officers as of December 31, 2005 are as follows:
[Download Table]
NAME AGE POSITION TERM
---- --- -------- ----
John Daly 68 Chairman, CEO and President 2005
Lawrence Lotman 57 Secretary/Director, VP Finance 2005
Ilya Golubovich 20 Director* 2005
Arkadiy Golubovich 18 Director* 2005
* Director's nominated by Lesteron Limited under the terms of the
Investor Agreement between Lesteron Limited and the Company dated
May 4, 2004 (See Exhibit 10.1.4). These brothers are family
members of the beneficial owner of Lesteron.
No director, person nominated to become a director, executive
officer, promoter or control person of the Company has been
involved in certain legal proceedings including:
(1) Any bankruptcy petition filed by or against any business of
which such person was a general partner or executive officer
either at the time of the bankruptcy or within two years prior to
the date hereof;
(2) any conviction in a criminal proceeding or being subject to a
pending criminal proceeding (excluding traffic violations and
minor offenses);
16
(3) being subject to any order, judgment, or decree, not
subsequently reversed, suspended or vacated, of any court of
competent jurisdiction, permanently or temporarily enjoining,
barring, suspending or otherwise limiting his involvement in any
type of business, securities or banking activities; and (4) being
found by a court of competent jurisdiction (in a civil action) ,
the Commission or the Commodity Future Trading Commission to have
violated a federal or state securities or commodities law, and
the judgment has not been reversed, suspended or vacated.
All directors hold office until the next annual meeting of the
shareholders and the election and qualification of their
successors. Officers are elected annually by the Board of
Directors and serve at the discretion of the Board of Directors.
Key Personnel
-------------
John Daly, has been President since May, 2003 and Chairman and
CEO since November, 2003. His companies have produced films that
have achieved 21 academy award nominations and received 13
Oscars, including the unprecedented back-to-back Best Picture
Oscars in 1986 and 1987 for "Platoon" and "The Last Emperor". Mr.
Daly has been involved in the Film industry since forming Hemdale
Film Corporation with actor David Hemmings in 1967. That company
rapidly became one of the leading film packagers, financiers,
distributors and producers of independent motion pictures in the
late Sixties and Seventies. He has worked with dozens of
Hollywood legends, including James Cameron, Oliver Stone,
Bernardo Bertolucci, Mick Jackson, Robert Altman and John
Schlesinger. Mr. Daly's Films have grossed in excess of $1.5
Billion.
Lawrence Lotman has been Secretary/Director since February, 2000
and VP Finance since October, 2003. He has a Masters degree and
two years post-masters studies in International Law, Economics
and Diplomacy from The Fletcher School of Law and Diplomacy
(1970) and his BA with High Honors in Political Science from The
University of the Pacific (1969). Mr. Lotman has been a senior
executive with both public and private companies including Levi
Strauss (1978-79), Interco (1979-80) and Team Equity Mortgage
(1992-97). He has also been a consultant for over fifteen years
to individuals and companies in many different industries
including both the Music and Film Industries. Most recently he
has been an advisor to a number of independent record labels and
to Rueben Cannon Productions. He previously sat on the Board of
Advisors of the non-profit Performers Skills Centre of Glendale
California.
Ilya Golubovich: Director since March, 2004, and nominee of
Lesteron, Ltd. was formerly with the Energy Department of the
London Office of Louis Dreyfus and with the Siberian Internet
Company at both their Novosibirsk and Moscow offices. He received
his International Baccalaureate Diploma from the Moscow Economic
School where he had previously earned his "Silver Medal" State
Diploma. Mr. Golubovich currently attends Stanford University
where he is following a course of study in Management Science and
Industrial Engineering.
Arcadiy Golubovich: Director since March, 2004, and nominee of
Lesteron, Ltd. He is an accomplished actor who has appeared on
Russian television and played Martin Landau's nephew in the
"Aryan Couple". He is currently pursuing his International
Baccalaureate Diploma from the Moscow Economic School.
Tim Shiner: General Administrator for Marketing since March, 2004
has worked in the entertainment industry since attending Kent
State University (1986-89) and Wright State University (1990-92)
He has extensive experience with theatre companies both on and
off stage and has spent the previous two years with Miracle
Entertainment in its Film distribution sales and marketing
department.
Caspar von Winterfeldt: a key consultant to the Company is an
American Film Institute alumnus, switched to the entertainment
industry on the heels of a successful eleven year career in
investment banking. His last tenure was with the global
investment bank J.P. Morgan where he ran the equity division in
Frankfurt, Germany. Since 2003, Mr. von Winterfeldt has been
instrumental in raising capital for the development of feature
film and television based productions. He joined Film and Music
Entertainment, Inc. in August 2004 where he has been acting as
the consulting Head of Production since January 2005. Mr.von
Winterfeldt is a producer on "Played" and "Moonpie".
Dianne Mandell: brings over 20 years of entertainment industry
experience as an independent consultant to the company for New
Business Development. Dianne was Senior Vice President of
Worldwide Merchandising and Licensing at Stephen J. Cannell
Productions and Vice President Worldwide Licensing for Paramount
Pictures prior to joining Film and Music Entertainment, Inc.
Jennifer Daly: production supervisor for the Company started her
career in television as a production supervisor and then began
working specifically on music videos & commercials. She has,
since arriving in the U.S., proved her expertise on feature films
working with Hollywood legends and Academy Award winners. She
currently has four films to her credit. She previously trained
with the Company in the area of International Marketing and her
services will be utilized in this area as well.
17
Item 6. Executive Compensation - Remuneration of Directors and
Officers.
The following table sets forth the current compensation of (i)
the Company's Chief Executive Officer, (ii) the Company's two
most highly compensated executive officers other than the CEO and
(iii) persons, if any, who would be included except that they
were not serving as of December 31, 2003:
SUMMARY COMPENSATION TABLE
--------------------------
The following table sets forth compensation received for the
fiscal years ended December 31, 2002 through 2004 by our Chief
Executive Officer and all other executive officers.
[Enlarge/Download Table]
Long Term Compensation
Annual --------------------------
Compensation Awards Payouts
---------------------------- --------------------------
Securities Long-
Named Executive Underlying Term
Officer and Principal Restricted Options Incentive All Other
Position Year Salary(1) Bonus Other Stock & SARs Plan Compensation
-----------------------------------------------------------------------------------------
John Daly,
President 2004 $104,000(2) $ - $ - $ - 15,425,000 $ - $ -
2003 -0- $ - $ - $ - 225,000 $ - $ -
2002 n/a $ - $ - $ - - $ - $ -
Lawrence Lotman,
VP Finance, Secretary 2004 $ 52,000 $ - $ - $ - 800,000 $ - $ -
2003 -0- $ - $ - $ - 1,800,000 $ - $ -
2002 -0- $ - $ - $ - 400,000 $ - $ -
(1) The remuneration described in the above table does not
include our cost of benefits furnished to the named executive
officers, including premiums for health insurance and other
personal benefits provided to such individuals that are extended
to all of our employees in connection with their employment.
(2) As of July 1, 2004, Mr. Daly receives a salary through a
loan out agreement with Red Giants Productions, Inc. Actual
salary paid for the year 2004 was $52,000.
All the above executives were employed on a non-exclusive basis
under five year employment agreements dated May 23, 2003, and
there are conflicts in the performance of their duties. It is
customary in the film industry for officers and directors of film
production and distribution companies to receive compensation as
producers, directors or providers of other creative services in
connection with specific film productions in which the Company
has an interest. Moreover, officers and/or directors may receive
compensation as producers, directors or providers of other
creative services in connection with film or other productions in
which the Company has no interest. The Company's policies require
that this compensation be disclosed to the Board of Directors
and, where material, disclosed in the Company's communications
with the public.
Stock Options And Stock Appreciation Rights Grant Table.
The following table provides certain information with respect
to individual grants during the last fiscal year to each of our
named executive officers of common share purchase options or
stock appreciation rights ("SARs") relating to our common shares:
[Download Table]
Common Shares
Underlying Grant As Percentage Exercise Or
Named Executive Of Options Of Of Grants To Base Price Expiration
Officer SARsAs All Employees (1) Date
--------------------------------------------------------------------------
John Daly
President 15,425,000 93.51% $.0074 2013-2014
Lawrence Lotman
Secretary and
VP Finance 800,000 4.85% $.0055 2013-2014
(1) Exercise price is the blended average exercise price of all
grants to the executive.
Stock Options And Stock Appreciation Rights Exercise And Valuation Table
The following table sets forth the number of common stock
options, both exercisable and unexercisable, held by each of our
Named Executive Officers and the value of any in-the-money
options at October 31, 2005, utilizing a value of $0.12 per
share, the closing price of the Company's common stock on the
Pink Sheets on October 31, 2005:
[Enlarge/Download Table]
Number of securities Value of
underlying unexercised unexercised in-the-
Named Shares options/SARs money options/SARs
Executive Acquired Value (Exercisable/ (Exercisable/
Officer On Exercise Realized Unexercisable) Unexercisable)
--------------------------------------------------------------------------------------
John Daly - - 29,200,000/34,450,000 $3,504,000/$4,134,000
Lawrence Lotman - - 1,000,000/1,400,000 $120,000/$168,000
Receipt of Compensation Regardless of Profitability.
----------------------------------------------------
The officers, directors and employees of the Company may be
entitled to receive significant compensation, payments and
reimbursements regardless of whether the Company operates at a
profit or a loss. Any compensation received by the officers,
directors and management personnel of the Company will be
determined from time to time by the Board of Directors of the
Company. Officers, directors and management personnel of the
Company will be reimbursed for any out-of-pocket expenses
incurred on behalf of the Company.
Remuneration of Directors. No compensation has been paid to any
of the directors of the Company for their services as directors.
Item 7. Certain Relationships and Related Transactions.
Transactions with Promoters. There were no transactions with promoters.
Related Party Transactions. John Daly received compensation
through Red Giants Productions as Producer-Director of "The Aryan
Couple," a film for which the Company has world wide distribution
rights through its subsidiary, Celebration International Pictures
Limited (BVI). To date such compensation received by Mr. Daly has
not reached the material threshold. He is also co-writer of
"Harder They Fall", a script currently in development as well as
a producer of "Played", a film in which Company owns a portion of
profits and world wide distribution rights, and from which he may
receive income through Red Giants Productions. He is also the
writer of the script "Calico Jack and Big Mac" to which the
company has a verbal option to produce and distribute. Mr. Daly
has not received compensation from any of the films sufficient to
require disclosure. The Company anticipates Mr. Daly will be
producing and directing the motion picture "The Disappeared"
(a/k/a "Libertad") on which the company holds an option and for
which services he would be compensated through Red Giants
Productions, Inc. however Mr. Daly has received no such
compensation to date. Wigram Limited a BVI company is the
financier of "The Aryan Couple" for which it is due a repayment
of their investment from proceeds of that film along with an
ongoing percentage of profits. Mr. Alexei Golubovich, father of
Ilya and Arkadiy Golubovich is an officer of Wigram Limited.
Arkadiy Golubovich is a film actor and received nominal
compensation for his role in "The Aryan Couple." He as well as
Ilya Golubovich received executive producer credits for "The
Aryan Couple" without compensation. Caspar von Winterfeldt, a key
consultant to the company is a producer of "Played and "Moonpie"
for which service he has deferred compensation due as well as
profit participations, neither of which have been sufficient to
require disclosure to date. Lawrence Lotman received nominal
consideration as a finance executive on "The Aryan Couple" and is
due nominal compensation for services as a production executive
on "Played" and "Moonpie". Kevin Leydon, another company employee
is also due nominal compensation for financial services performed
on "Played" and "Moonpie". Michael Daly, the son of John Daly,
received compensation as the Second Assistant Director on "The
Aryan Couple" in an amount insufficient to be disclosed.
In 2003 the Company acquired certain real estate through the
acquisition of Myrob Properties and Eact Mojave Corporation. On
completion of the transactions, the required conversions and
accelerations, and after options for an additional 28,600,000
shares were also granted to Messrs. Daly, Meyers and Lotman, the
number of issued and outstanding shares and options rose from
24,403,050 to approximately 98,000,000. Mr. Daly received
18,000,000 new Options. Mr. Meyer received 9,000,000 new options
and Mr. Lotman received 1,600,000 new Options. All were priced at
$0.001. However, over 64,700,000 of the issued shares and options
granted carried restrictions and were placed in new voting trusts
with the options to be released to the beneficial owners at the
rate of 12.5% of the respective aggregate every six months over a
four year period. As a result of these transactions a material
change of ownership occurred which automatically entitled all
previously granted options to be exercised immediately. No such
options were exercised. Further, all previously issued
convertible notes were retired and 100% of such notes and accrued
interest was converted to Common Stock. Also all Voting Trusts
terminated and the option stock covered by these Trusts was
issued in accordance with their terms. Issued in accordance with
these provisions were 5,668,000 Shares of Common Stock to Michael
Meyer and 560,000 shares of Common Stock to Lawrence Lotman.
In 2003 the Company acquired certain real estate through stock
swap transactions the result of which Mr. Criscione on behalf of
the Criscione Family Trust and Mr. Patel on behalf of the Patel
Family Trust became significant shareholders of the Company.
Neither was a related party to the Company at the time of
acquisition. On November 16, 2004, the Company settled a dispute
with Mr. Criscione and the Criscione Family Trust whereby they
agreed to surrender to the Company 13,500,000 shares of the
Company's common stock owned by the stockholder and the Company
agreed to give up any rights it has in certain real estate
located in Riverside, California that the Company has recorded on
its books at $290,657. During the fourth quarter of 2004, the
Company removed the real estate investment of $290,657 from its
books and canceled 13,500,000 shares of its common stock valued
at $0.03 per share or $405,000. The Company recognized a gain of
$114,343 as a result of this settlement. On February 3, 2005, the
Company entered into an agreement with Mr. Patel and the Patel
Family Trust whereby they agreed to surrender to Company
15,750,000 shares of the Company's common stock owned by the
stockholder and the Company agreed to give up any rights to a
hypothecated money interest relating to certain real estate
located in Cochise County, Arizona that the Company owned and had
recorded on its books at $264,000. The Company removed the real
estate investment of $264,000 from its books and canceled
15,750,000 shares of its common stock valued at $0.03 per share
or $472,500. The Company recognized a gain of $208,500 as a
result of this transaction.
In October, 2003 we purchased all the outstanding stock of
Miracle Productions Inc. ("Miracle"), a California corporation
newly formed to receive from Miracle Entertainment, Inc. (MEMI:PK
) ("MEI") certain of MEI's current film options, production and
distribution rights. Mr. John Daly, who is the Company's
Chairman, President and CEO was at the time also the President of
MEI. After the acquisition Miracle changed its name to
Celebration Productions, Inc. The acquisition price was
18,347,175 shares, as amended, of the Company's common stock and
ongoing royalties from the exploitation of Miracle's film assets.
The total purchase price was 18,347,175 sharers of our Common
Stock having a market price per share of $0.15 on the date of the
transaction or a total of $2,752,076.. As part of the
acquisition agreement as amended, MEI also agreed to pay the
Company, $217,963
In 2003 the Company acquired options on the following scripts,
all of which have since expired: "Cheeseheads", "Fleshtrade",
"Blood and Bone", "Whiter Shade of Pale", "Experiment", and
"Dante's Descent". The Company also acquired a verbal option on
"Calico Jack", written by our Chairman, John Daly, which is still
ongoing. Certain co-production rights and negotiation rights were
acquired for the films "Red Giants", Silent Partners" and "My
First Wedding". The Company was unable to conclude final
agreements on acceptable terms for these filmsThe Company also
received distribution rights to the film "The Passing of the
Four", the term of which expired prior to the Company realizing
any income. The Company also acquired the right to negotiate for
distribution on the film "Night We Called It a Day", however the
Company was unable to secure an agreement on terms acceptable to
the Company. Also as part of the Miracle acquisition the Company
received distribution rights to the films "Tournament of Dreams"
and "Petersburg-Cannes Express. The Company returned the rights
to "Tournament of Dreams" to the production company, CMX, for
$37,000 cash and forgiveness of a $100,000 development advance.
Petersburg-Cannes Express has been licensed to one territory to
date. The Company is not obliged to pay MEI any monies on these
transactions.
The value of the acquired assets was determined by Michael Meyer,
then Chairman and CEO of the Company and Peter Beale, the COO of
MEI based on their experience in the entertainment industry. John
Daly recused himself from the negotiation process as well as the
subsequent board meetings at which the acquisition was ratified
by both the companies. We believe that the value assigned to
these assets was within the range that could have been achieved
had Mr. Daly not been related to both the companies. Miracle's
historical cost basis in the film production and distribution
projects acquired by the Company through Miracle was $0. The
allocation of the purchase price was based on historical cost
basis rather than fair market value since Mr. Daly, had been
President of MEI since May of 2002 and subsequently resigned from
all duties of that company in May of 2004
Mr. Daly's only ongoing interest in MEI is as a minority
stockholder of 6.49% of MEI's common stock. The excess of the
purchase price over the historical cost basis of the net assets
acquired has been shown as a deemed dividend. The allocation of
the purchase price is as follows:
Receivable from MEI $ 217,963
Deemed dividend 2,534,113
---------------
Purchase price $ 2,752,076
===============
Employment Contracts. We have entered into 5-year employment
contracts with John Daly (May 23, 2003 and as of July 1, 2004
through Red Giant Productions, Inc. and Lawrence Lotman (May, 23,
2003). As of July 1, 2004, Mr. Daly receives a salary through a
loan out agreement with Red Giants Productions, Inc. of $104,000.
Mr. Lotman receives a salary of $52,000. Both executives are
entitled to health benefits.
Item 8. Description of Securities.
The Company is authorized to issue 250,000,000 shares of $.001
par value Common Stock. As of December 31, 2005 125,120,398
shares of our Common Stock were issued and outstanding
18
to over 200 shareholders plus Depository Trust Company.
Common Stock. The holders of our Common Stock are entitled to one
vote for each share held of record on all matters to be voted on
by those shareholders. In the event of liquidation, dissolution,
or winding up of the Company, the holders of our Common Stock are
entitled to share ratably in all assets remaining available for
distribution to them after payment of the Company's liabilities
and after provision has been made for each class of stock, if
any, having preference over the our Common Stock. Holders of
shares of our Common Stock, as such, have no conversion,
preemptive or other subscription rights, and there are no
redemption provisions applicable to the Company's Common Stock.
Non-Cumulative Voting. The holders of our shares of Common Stock
do not have cumulative voting rights, which means that the
holders of more than 50% of the outstanding Common Stock, voting
for the election of directors of the Company, may elect all of
the directors of the Company to be elected, if they so desire,
and, in such event, the holders of the remaining Common Stock may
not be able to elect any of our directors.
Registration Rights. Existing holders of shares of our Common
Stock are not entitled to rights with respect to the registration
of such shares under the Securities Act.
Dividends. The payment by the Company of dividends, if any, in
the future, shall be determined by our Board of Directors, in its
discretion, and will depend upon, among other things, our
earnings, our capital requirements, and our financial condition,
as well as other relevant factors. We have not paid or declared
any dividends to date. Holders of Common Stock are entitled to
receive dividends as declared and paid from time to time by the
our Board of Directors from funds legally available therefore. We
intend to retain any earnings for the operation and expansion of
its business and does not anticipate paying cash dividends in the
foreseeable future.
PART II
Item 1. Market Price of and Dividends on the Registrant's Common
Equity and Related Stockholder Matters.
The Company's Common Stock participates on the National Quotation
Bureau's Pink Sheets, an electronic quotation medium for
securities traded outside of the NASDAQ Stock Market, under the
trading symbol "FLME:PK" (pending registration as a 12(g) with
the Securities and Exchange Commission.)
The following table sets forth the quarterly high and low bid
prices for our common shares on the Pink Sheets for the periods
indicated. The prices set forth below represent inter-dealer
quotations, without retail markup, markdown or commission and may
not be reflective of actual transactions.
[Download Table]
Bid Price
------------------
Period High Low
--------------------------------------------
Fiscal Year 2005:
December 31, 2005 $0.13 $0.85
September 30, 2005 0.15 0.01
June 30, 2005 0.04 0.017
March 31, 2005 0.045 0.015
Fiscal Year 2004:
December 31, 2004 $ 0.04 $ 0.015
September 30, 2004 0.08 0.027
June 30, 2004 0.09 0.025
March 31, 2004 0.08 0.05
Fiscal Year 2003:
December 31, 2003 $ 0.22 $ 0.006
September 30, 2003 0.41 0.001
June 30, 2003 0.02 0.02
March 31, 2003 0.015 0.04
As of December 31, 2005, there were no warrants to purchase
Common Stock outstanding. There have been no cash dividends
declared on the Company's Common stock since the Company's
inception. The Company has not yet adopted any policy regarding
payment of dividends.
Penny Stock Regulation. The Commission has adopted rules that
regulate broker-dealer practices in connection with transactions
in "penny stocks". Penny stocks are generally equity securities
with a price of less than $5.00 (other than securities registered
on certain national securities exchanges or quoted on the NASDAQ
system, provided that current price and volume information with
respect to transactions in such securities is provided by the
exchange or system). The penny stock rules require a broker-
dealer, prior to a transaction in a penny stock not otherwise
exempt from those rules, deliver a standardized risk disclosure
document prepared by the Commission, which (i) contained a
description of the nature and level of risk in the market for
penny stocks in both public offerings and secondary trading;
(ii) contained a description of the broker's or dealer's duties
to the customer and of the rights and remedies available to the
customer with respect to violation to such duties or other
requirements of Securities' laws; (iii) contained a brief, clear,
narrative description of a dealer market, including "bid" and
"ask" prices for penny stocks and significance of the spread
between the "bid" and "ask" price; (iv) contains a toll-free
telephone number for inquiries on disciplinary actions; (v) defines
significant terms in the disclosure document or in the conduct of
trading in penny stocks; and (vi) contains such other information
and is in such form (including language, type, size and format),
as the Commission shall require by rule or regulation. The broker-dealer
19
also must provide, prior to effecting any transaction in penny
stock, the customer (i) with bid and offer quotations for the
penny stock; (ii) the compensation of the broker-dealer and its
salesperson in the transaction; (iii) the number of shares to
which such bid and ask prices apply, or other comparable
information relating to the depth and liquidity of the market for
such stock; and (iv) month account statements showing the market
value of each penny stock held in the customer's account. In
addition, the penny stock rules require that prior to a
transaction in a penny stock not otherwise exempt from those
rules, the broker- dealer must make a special written
determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written acknowledgment
of the receipt of a risk disclosure statement, a written
agreement to transactions involving penny stocks, and a signed
and dated copy of a written suitably statement. These disclosure
requirements may have the effect of reducing the trading activity
in the secondary market for a stock that becomes subject to the
penny stock rules. The Company's securities are subject to the
penny stock rules and holders of those securities may have
difficulty selling those securities.
Item 2. Legal Proceedings.
We are not aware of any pending litigation nor do we have any
reason to believe that any such litigation exists. Litigation
which has been resolved within the last six months is described
as follows:
Miracle Entertainment, Inc. et. al v. Filmstar Releasing
--------------------------------------------------------
Corporation et. al., Los Angeles Superior Court, Case No.
BC302233. This is a complaint for unlawful conversion, breach of
contract and fraud, commenced in September, 2003 by Miracle
Entertainment, Inc., a company of which John Daly was Chairman,
against a firm and several individuals who had previously
contracted to raise funds for productions sponsored by Miracle
Entertainment. A counter-claim was filed by the defendants in
March, 2004, adding the Company as a defendant.
On May 2, 2005 a confidential Settlement Agreement and Mutual
Release was executed between the Company and remaining litigants
on terms acceptable to all the parties and which did not require
the Company any money.
Carol Lefko v. Film and Music Entertainment, Inc., Celebration
--------------------------------------------------------------
Pictures,Inc., John Daly and Peter Beale, Los Angeles Superior
Court, Case No. BC318753. This is a complaint for breach of an
alleged oral agreement commenced July 20, 2004 between the
plaintiff and the defendants whereby the plaintiff would provide
services as casting director of a film to be called "Host" and
produced by Celebration Productions, Inc. which was added as a
party to this lawsuit by amendment in February 2005. On July 14,
2005 the court found on behalf of the company and the other
defendants. At this time the Company does not expect Ms. Lefko to
appeal.
20
Sunset Towers Partnership v. First Miracle Group. Los Angeles
Superior Court, Case No. SC072450. This is a motion to amend a
judgment entered against First Miracle Group by its former
landlord in the amount of $300,000 to include Celebration
Productions, Inc. and Film and Music Entertainment, Inc. Sunset
Towers is claiming that Celebration and the Company are in fact
successors in interest of Miracle Entertainment, Inc. and are
therefore liable for the judgment.
The Company and Celebration have filed an opposition to the
motion denying any theory that the Company and/or Celebration are
successors-in-interest of First Miracle Group and/or Miracle
Entertainment, Inc. inasmuch as only a portion of Miracle's
assets were acquired by the Company and fair consideration was
paid in the amount of $3,000,000 worth of the Company's stock;
that the Company and Miracle are separate, distinct publicly
traded companies with separate shareholders, boards, officers and
businesses with the single exception that Mr. Daly was at the
time of acquisition a Board member and officer of both companies;
that neither the Company or Celebration had the opportunity to
defend the litigation from which the judgment derived; and that
neither the Company nor Celebration expressly assumed obligation
under the judgment.
The motion was heard by the Court on May 17, 2005 and the Court
denied the motion, finding based on the evidence presented, that
Miracle did not transfer all of its assets to the Company and the
Company was not the successor-in-interest of Miracle
Entertainment, Inc. On July 8, 2005 Sunset Towers filed a motion
to appeal. The Company sees no reason to expect the Court's
ruling to be overturned.
Item 3. Changes in and Disagreements with Accountants.
There are no changes in or disagreement with accountants.
Item 4. Recent Sales of Unregistered Securities.
From January 1, 2001 to January 1, 2003 there have been no sales
of unregistered securities which would be required to be
disclosed pursuant to Item 701 of Regulation S-B.
In 2003 the Company issued an aggregate of 74,927,348 shares of
Common Stock at an aggregate price of $.01 per share. The
transactions underlying the issuance of these shares are
described in more detail elsewhere. All these shares were issued
in private securities transactions as "restricted shares" in
reliance upon the exemption from the registration and prospectus
delivery requirements of the Securities Act of 1933, as amended
("Act"), which exemption is specified by the provisions of
Section 4(2) of the Act and unable to be resold or transferred
unless registered with the SEC for sale or qualifying for an
exemption from registration. The issuances can be summarized as
follows:
Services 7,078,689
Conversion of Notes Payable 1,347,364
Payment of Accrued Interest and Financing Costs 544,120
Conversion of Accounts Payable 3,235,000
Acquisition of Real Estate 36,000,000
Exercise of Options 6,575,000
Acquisition of Celebration Productions, Inc. 18,347,175
Film Costs 1,800,000
On or about March 4, 2004, we issued 50,000,000 shares of its
$.001 par value Common Stock for $.001 per share. The shares were
issued as "restricted shares" in reliance upon the exemption from
the registration and prospectus delivery requirements of the
Securities Act of 1933, as amended ("Act"), which exemption is
specified by the provisions of Section 4(2) of the Act and Rule
506 of Regulation D promulgated by the Securities and Exchange
Commission. The shares are unable to be resold or transferred
unless registered with the SEC for sale or qualifying for an
exemption from registration. The shares were issued to Lesteron,
Ltd., a BVI corporation for $ 5,000,000 cash. Certificates for
the shares bear a restrictive legend prohibiting transfer without
an opinion of counsel satisfactory to the Company that
registration for public sale under the Securities Act of 1933 is
not required.
In addition, in 2004 we issued an aggregate of 5,033,000
restricted shares in the exercise of options and 90,000 shares
for services rendered at a price of $.01 per share. In 2005 we
issued an aggregate of 4,962,500 restricted shares in the
exercise of options.
21
Item 5. Indemnification of Directors and Officers.
Limitation on Liability of Officers and Directors of the Company.
Section 78.7502 of the Nevada General Corporation Law permits the
Company to eliminate or limit the personal liability of the
officers and directors of the Company to the Company and its
shareholders for damages for breach of fiduciary duty as a
director or officer. Article VII of the By-Laws of the Company
includes a provision eliminating or limiting the personal
liability of the officers and directors of the Company to the
Company and its shareholders for damages for breach of fiduciary
duty as a director or officer. Accordingly, the officers and
directors of the Company may have no liability to the
shareholders of the Company for any mistakes or errors of
judgment or for any act of omission, unless such act or omission
involves intentional misconduct, fraud, or a knowing violation of
law or results in unlawful distributions to the shareholders of
the Company.
The Company anticipates that it will enter into indemnification
agreements as part of its employment contracts similar to those
contained in its existing agreements with Messrs. Daly and
Lotman.
DISCLOSURE OF POSITION OF COMMISSION REGARDING INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES:
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE
SECURITIES ACT OF 1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR
PERSONS CONTROLLING THE COMPANY PURSUANT TO THE FOREGOING
PROVISIONS, THE COMPANY HAS BEEN INFORMED THAT IN THE OPINION OF
THE SECURITIES AND EXCHANGE COMMISSION, SUCH INDEMNIFICATION IS
AGAINST PUBLIC POLICY AS EXPRESSED IN THE SECURITIES ACT OF 1933
AND IS, THEREFORE, UNENFORCEABLE.
PART F/S
Copies of the financial statements specified in Regulation
228.310 (Item 310) are filed with this Registration Statement,
Amendment No. 2 to Form 10-SB.
Film and Music Entertainment, Inc. and Subsidiaries Consolidated
Financial Statements Years Ended December 31, 2004 and 2003
Contents Page
-------- ----
Report of Independent Registered Public Accounting Firm F-1
Financial Statements:
Consolidated Balance Sheet as of December 31, 2004 F-2
Consolidated Statements of Operations for the years ended
December 31, 2004 and 2003 F-3
Consolidated Statement of Stockholders' Equity for the years
ended December 31, 2004 and 2003 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2004 and 2003 F-5
Notes to Consolidated Financial Statements F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Film and Music Entertainment, Inc.
Los Angeles, California
We have audited the accompanying consolidated balance sheet of
Film and Music Entertainment, Inc. and subsidiaries as of
December 31, 2004, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years
ended December 31, 2004 and 2003. These financial statements are
the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Film and Music Entertainment, Inc. and subsidiaries as of
December 31, 2004, and the results of their operations and their
cash flows for each of the two year periods then ended, in
conformity with accounting principles generally accepted in the
United States of America.
/s/ Kabani & Company, Inc.
Certified Public Accountants
Huntington Beach, California
May 31, 2005
F-1
Film and Music Entertainment, Inc. and Subsidiaries
Consolidated Balance Sheet
December
31, 2004
--------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,179,658
Restricted cash 40,518
Loan receivable from Miracle Entertainment, Inc. 50,000
Other current assets (including amounts due from
related party of $2,098) 8,434
-------------
TOTAL CURRENT ASSETS 3,278,610
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $6,242 39,153
REAL ESTATE INVESTMENTS 694,000
FILM COSTS 75,000
INVESTMENT IN SMS MUSICMAKER LTD -
INVESTMENT IN EQUITY SECURITIES 659,949
-------------
TOTAL ASSETS $ 4,746,712
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 84,488
Accrued expenses (including amounts due from
related party of $2,848) 175,049
Production advances 42,322
-------------
TOTAL CURRENT LIABILITIES 301,859
-------------
COMMITMENT AND CONTINGENCIES (Note 7) -
STOCKHOLDER'S EQUITY
Common stock, $0.001 par value; 250,000,000 shares
authorized; 140,970,398 shares issued and
outstanding 140,970
Additional paid-in capital 21,596,617
Accumulated deficit (17,292,734)
-------------
TOTAL STOCKHOLDERS' EQUITY 4,444,853
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,746,712
=============
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
Film and Music Entertainment, Inc. and Subsidiaries
Consolidated Statements of Operations
[Download Table]
Years Ended
-----------------------------
December December
31, 2004 31, 2003
------------ ------------
REVENUE $ 63,993 $ -
OPERATING EXPENSES
Production costs 84,599 7,500
Advertising costs 135,503 5,360
Compensation expense 296,405 10,475,130
Consulting expense 100,920 1,860,124
General and administrative expenses 420,591 295,454
------------ ------------
TOTAL OPERATING EXPENSES 1,038,018 12,643,568
------------ ------------
LOSS FROM OPERATIONS (974,025) (12,643,568)
------------ ------------
OTHER INCOME (EXPENSE)
Other income 8,000 20,000
Investment income 77,574 -
Unrealized loss on marketable equity securities (12,171) -
Equity loss in SMS Musicmaker Ltd. (96,280) -
Gain on disposition of real estate 114,343 -
Loss on writedown of real estate (72,391) -
Interest expense and financing costs - (15,908)
Gain on extinguishment of debt - 12,541
------------ ------------
TOTAL OTHER INCOME (EXPENSE) 19,075 16,633
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (954,950) (12,626,935)
PROVISION FOR INCOME TAXES 4,800 -
------------ ------------
NET LOSS $ (959,750) $(12,626,935)
============ ============
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.01) $ (0.22)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC
AND DILUTED 132,865,077 56,534,610
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
Film and Music Entertainment, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Deficit)
[Enlarge/Download Table]
Additional Total
Common Stock Paid-in Accumulated Stockholders'
-----------------------
Shares Amount Capital Deficit Equity (Deficit)
----------- --------- ----------------------------- ---------------
Balance, December 31, 2002 24,428,050 $ 24,428 $ 333,655 $ (1,171,936) $ (813,853)
Issuance of common stock for:
Services 7,078,689 7,079 109,505 116,584
Conversion of notes payable and
convertible debentures 1,347,364 1,348 270,087 271,435
Conversion of accrued interest
and financing costs 544,120 544 72,107 72,651
Conversion of accounts payable 3,235,000 3,235 386,206 389,441
Real estate 36,000,000 36,000 684,000 720,000
Exercise of options 6,575,000 6,575 25,213 31,788
Celebration Productions, Inc.
subsidiary 18,347,175 18,347 2,733,729 (2,534,113) 217,963
Film costs 1,800,000 1,800 73,200 75,000
Fair value of options issued to
consultants 1,872,999 1,872,999
Intrinsic value of options issued
to employees 10,475,130 10,475,130
Net loss - - - (12,626,935) (12,626,935)
----------- --------- ----------------------------- --------------
Balance, December 31, 2003 99,355,398 99,356 17,035,831 (16,332,984) 802,203
Issuance of common stock for:
Cash 50,000,000 50,000 4,950,000 5,000,000
Exercise of options 5,025,000 5,024 (1,324) 3,700
Services 90,000 90 3,610 3,700
Shares canceled in connection with
transfer of real estate
investment to former owner (13,500,000) (13,500) (391,500) (405,000)
Net loss - - - (959,750) (959,750)
----------- --------- ----------------------------- --------------
Balance, December 31, 2004 140,970,398 $ 140,970 $ 21,596,617 $ (17,292,734) $ 4,444,853
=========== ========= ==============================================
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
Film and Music Entertainment, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
[Enlarge/Download Table]
Years Ended
---------------------------------
December December
31, 2004 31, 2003
------------- --------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (959,750) $ (12,626,935)
Adjustment to reconcile net loss to net cash
used in operating activities:
Depreciation expense 6,150 92
Gain on extinguishment of debt - (12,541)
Common stock issued for services 3,700 116,584
Value of consulting services used to
pay exercise price of options - 30,000
Fair value of options issued to consultants - 1,872,999
Intrinsic value of options issued to employees - 10,475,130
Unrealized loss on marketable equity securities 12,171 -
Equity loss in SMS Musicmaker Ltd. 96,280 -
Gain on disposition of real estate (114,343) -
Loss on writedown of real estate 72,391 -
Purchase of marketable equity securities (672,120) -
Changes in operating assets and liabilities:
Other current assets (8,434) -
Accounts payable 35,823 12,394
Accrued expenses 126,703 21,070
Production advances (32,678) 75,000
------------- --------------
Net cash used in operating activities (1,434,107) (36,207)
------------- --------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (32,065) (3,330)
Purchase of real estate (337,048) -
Investment in SMS Musicmaker Ltd. (96,280) -
Increase in restricted cash (40,518) -
------------- --------------
Net cash used in investing activities (505,911) (3,330)
------------- --------------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds received from Miracle Entertainment 6,347 151,616
Proceeds from sale of common stock 5,000,000 -
Proceeds from exercise of options 1,250 -
------------- --------------
Net cash provided by financing activities 5,007,597 151,616
------------- --------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 3,067,579 112,079
CASH AND CASH EQUIVALENTS, Beginning of year 112,079 -
------------- --------------
CASH AND CASH EQUIVALENTS, End of year $ 3,179,658 $ 112,079
============= ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Interest paid $ - $ -
============= ==============
Income taxes paid $ - $ -
============= ==============
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
Film and Music Entertainment, Inc. and Subsidiaries Consolidated
Statements of Cash Flows, continued
Supplemental non-cash investing and financing activities:
During the year ended December 31, 2003, the Company issued: 1)
1,347,364 shares of its common stock for the conversion of a note
payable and convertible debentures totaling $271,435; 2) 544,120
shares of its common stock for accrued interest and financing
costs totaling $72,651; 3) 3,235,000 shares of its common stock
for the conversion of accounts payable totaling $389,441; 4)
36,000,000 shares of its common stock for two private real estate
companies that contained real estate investments totaling
$720,000; 5) 3,575,000 shares of its common stock for the
exercise of options, the exercise price being paid as a reduction
in accrued expenses of $1,788; 6) 3,000,000 shares of its common
stock for the exercise of options, the exercise price being paid
for services rendered valued at $30,000; 7) 18,347,175 shares of
its common stock for all the issued and outstanding share of
Celebration Productions, Inc.; and 8) 1,800,000 shares of its
common stock for film costs.
During the year ended December 31, 2004, the Company received
furniture and equipment valued at $10,000 from Miracle
Entertainment, Inc. as partial payment on a receivable from
Miracle Entertainment, Inc.; issued 4,900,000 shares of its
common stock for the exercise of options, the exercise price
being paid as a reduction in accrued expenses of $2,450; and
issued 90,000 shares of its common stock for services valued at
$3,700. In addition, the Company exchanged $290,657 of real
estate it owned for the cancellation of 13,500,000 shares of
common stock (see Note 5).
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
Film and Music Entertainment, Inc. and Subsidiaries Notes to
Consolidated Financial Statements For the Years Ended December
31, 2004 and 2003
Note 1 - Organization and Significant Accounting Policies
Organization and Line of Business
---------------------------------
Film and Music Entertainment, Inc. ("FAME" or the "Company") is a
Nevada Corporation.. The Company was originally incorporated in
Nevada on January 3, 1996 as Imporex Investment Corp. and focused
on developing streaming video technology until 2000 when it shut
down significant operations and became effectively inactive. In
2003, John Daly joined the Board of Directors and became the
Company's President. Under his direction the Company re-focused
on entertainment and changed its name to Film and Music
Entertainment, Inc. The Company has just developed its first
feature film and intends to become a leading independent film and
television production and distribution company.
Consolidated Financial Statements
---------------------------------
The accompanying consolidated financial statements include the
accounts of the Company, Celebration Productions, Inc.,
Celebration Pictures, Inc., Celebration International Pictures,
Ltd., Blood & Bones, Ltd., Myrob Properties, Inc., East Mojave
Corporation and Harder They Fall International, Ltd. The
accompanying consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in
the United States of America. All inter-company accounts and
transactions have been eliminated.
Stock Based Compensation
------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation,"
establishes and encourages the use of the fair value based method
of accounting for stock-based compensation arrangements under
which compensation cost is determined using the fair value of
stock-based compensation determined as of the date of grant and
is recognized over the periods in which the related services are
rendered. The statement also permits companies to elect to
continue using the current intrinsic value accounting method
specified in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," to account for stock-
based compensation. The Company has elected to use the intrinsic
value based method and has disclosed the pro forma effect of
using the fair value based method to account for its stock-based
compensation issued to employees. For options granted to
employees where the exercise price is less than the fair value of
the stock at the date of grant, the Company recognizes an expense
in accordance with APB 25. For non-employee stock based
compensation the Company recognizes an expense in accordance with
SFAS No. 123 and values the equity securities based on the fair
value of the security on the date of grant. For stock-based
awards the value is based on the market value for the stock on
the date of grant and if the stock has restrictions as to
transferability a discount is provided for lack of tradability.
Stock option awards are valued using the Black-Scholes option-
pricing model.
If the Company had elected to recognize compensation expense
based upon the fair value at the grant date consistent with the
methodology prescribed by SFAS No. 123, the Company's net loss
F-7
Film and Music Entertainment, Inc. and Subsidiaries Notes to
Consolidated Financial Statements For the Years Ended December
31, 2004 and 2003
and loss per share would be reduced to the pro forma amounts
indicated below for the years ended December 31, 2004 and 2003:
[Download Table]
Year Ended December 31,
--------------------------------
2004 2003
------------ ------------
Net loss:
As reported $ (959,750) $(12,626,935)
Compensation recognized under
APB 25 -- 10,475,130
Compensation recognized under
SFAS 123 -- (11,039,994)
------------ ------------
Pro forma $ (959,750) $ (13,191,799)
============ ============
Basic and diluted loss per common
share:
As reported $ (0.01) $ (0.22)
Pro forma $ (0.01) $ (0.23)
This option valuation model requires input of highly subjective
assumptions. Because the options have characteristics
significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing
model does not necessarily provide a reliable single measure of
the fair value of its employee stock options.
The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for 2003: risk-free
interest rate of 3.5 %; dividend yields of 0%; volatility factors
of the expected market price of the Company's common stock of
468%; and a weighted average expected life of the option of 4
years. In 2003, the Company recognized an expense of $1,872,999
related to options issued to non-employees. There were no options
granted in 2004.
Use of Estimates
----------------
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and
F-8
Film and Music Entertainment, Inc. and Subsidiaries Notes to
Consolidated Financial Statements For the Years Ended December
31, 2004 and 2003
expenses during the reporting periods. As of December 31, 2004,
the Company used estimates in determining the realization of its
other receivable and valuation of real estate and other
investments. Actual results could differ from these estimates.
Risks and Uncertainties
-----------------------
The business in which the Company engages is significantly
competitive. Each of the Company's primary business operations is
subject to competition from companies which, in some instances,
have greater production, distribution and capital resources. The
Company competes for relationships with a limited supply of
facilities and talented creative personnel to produce its films.
Fair Value of Financial Instruments
-----------------------------------
For certain of the Company's financial instruments, including
cash and cash equivalents, other receivables, accounts payable
and accrued expenses, the carrying amounts approximate fair value
due to their short maturities.
Cash and Cash Equivalents
-------------------------
For purposes of the statements of cash flows, the Company defines
cash equivalents as all highly liquid debt instruments purchased
with a maturity of three months or less.
Restricted Cash
---------------
Restricted cash represents an amount on deposit with a financial
institution that secures the Company's employee credit cards. The
deposit has a maturity date of July, 2005.
Concentration of Credit Risk
----------------------------
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist of cash and cash
equivalents and accounts receivables. The Company places its cash
with high quality financial institutions which deposits exceed
the FDIC $100,000 insurance limit. The Company extends credit
based on an evaluation of the customer's financial condition,
generally without collateral. Exposure to losses on receivables
is principally dependent on each customer's financial condition.
The Company monitors its exposure for credit losses and maintains
allowances for anticipated losses, as required. As of December
31, 2004, the Company had balance with one bank amounting
$3,061,106.
F-9
Film and Music Entertainment, Inc. and Subsidiaries Notes to
Consolidated Financial Statements For the Years Ended December
31, 2004 and 2003
Property and Equipment
----------------------
Property and equipment are stated at cost and are depreciated
using the straight-line method over their estimated useful lives
as follows:
Computers 3 years
Automobile 5 years
Furniture and fixtures 5 years
Expenditures for maintenance and repairs are charged to
operations as incurred while renewals and betterments are
capitalized. Gains and losses on disposals are included in the
results of operations.
Real Estate Investments
-----------------------
Real estate investments are stated at the lower of cost or net
realizable value. During the year ended December 31, 2004, the
Company determined that the value a certain parcel of real estate
had been impaired since its carrying amount was less than its
appraised amount. The Company took a charge to earnings of
$72,391 as a result of this writedown.
Investments in Marketable Equity Securities
-------------------------------------------
The Company invests some of its excess cash in marketable equity
securities. The marketable equity securities comprise of common
stock of publicly traded companies. These investments are
classified as trading securities as they are held principally for
the purpose of selling in the near term. They are reported at
fair value with unrealized gains and losses included in earnings.
The fair value is determined by using the securities quoted
market price as obtained from stock exchanges on which each
securities trades.
Investment income, principally dividends, is recorded when
earned. Realized capital gains and losses are calculated based on
the cost of securities sold, which is determined by the
"identified cost" method.
The unrealized gains/(losses) in the Company's portfolio of
marketable equity securities as of December 31, 2004 is as
follows:
Historical costs basis $ 672,118
Unrealized gains 9,377
Unrealized losses (21,546)
-------------
Fair value $ 659,949
=============
F-10
Film and Music Entertainment, Inc. and Subsidiaries Notes to
Consolidated Financial Statements For the Years Ended December
31, 2004 and 2003
Revenue Recognition
-------------------
Revenues from the theatrical distribution of motion pictures are
recognized when motion pictures are exhibited. Revenues from
video sales are recognized on the date that video units are made
widely available for sale by retailers. Revenues from the
licensing of feature films and television programming are
recorded when the material is available for telecast by the
licensee and when any restrictions regarding the exhibition or
exploitation of the product lapse.
Film Costs
----------
We capitalize films in development as capitalized film costs in
accordance with the SoP. They are transferred to Film inventories
at the point that the film is scheduled for production. On a
quarterly basis we review each film in development and/or
production as to whether the capitalized costs are in excess of
their fair market value, and if so, we write off the excess and
reflect the write-off in costs of revenue. If after three years
in development a film has not been scheduled for production it is
written off and reflected in the costs of revenue.
Under SoP 00-2 the costs of the film, including the capitalized
costs, contingent compensation and residual costs (if any) are
amortized and included in costs of revenue in the proportion the
revenue for that period for the film bears to the estimated total
revenue from all markets and territories under the individual-
film-forecast-computation method. We review our estimates
quarterly and they are revised if necessary. A revision will
result in an increase or decrease to the percentage of
amortization of the capitalized film costs relative to a previous
period. Should the revision result in estimated revenues proving
insufficient to cover the unamortized film costs remaining on
that film, the difference will be written down to the fair market
value based upon its then net present value. Film costs at
December 31, 2004 consists principally of a script for a motion
picture.
Impairment of Long-Lived Assets
-------------------------------
SFAS No. 144 requires that long-lived assets to be disposed of by
sale, including those of discontinued operations, be measured at
the lower of carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued
operations. SFAS No. 144 broadens the reporting of discontinued
operations to include all components of an entity with operations
that can be distinguished from the rest of the entity and that
will be eliminated from the ongoing operations of the entity in a
disposal transaction. SFAS No. 144 also establishes a "primary-
asset" approach to determine the cash flow estimation period for
a group of assets and liabilities that represents the unit of
accounting for a long-lived asset to be held and used.
Income Taxes
------------
The Company accounts for income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes." Deferred taxes are provided
on the liability method whereby deferred tax assets are
recognized for deductible temporary differences, and deferred tax
liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred
tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will be realized.
Deferred tax assets and liabilities are adjusted for the effects
of changes in tax laws and rates on the date of enactment.
F-11
Film and Music Entertainment, Inc. and Subsidiaries Notes to
Consolidated Financial Statements For the Years Ended December
31, 2004 and 2003
Production Advances
-------------------
The Company has received funds to spend on specific projects that
will be owned by the investor/producers advancing the funds if
the production is successful. The Company has a fiduciary
responsibility to spend these funds on the specified project and
is entitled to receive fees for its services from these advances.
The production advances represent the amount of funds received
that have not been spent on the specific project. The Company is
under no obligation to repay the investor for the gross advances
received - only the un-spent advances.
Earnings (Loss) Per Share
-------------------------
The Company reports earnings (loss) per share in accordance with
SFAS No. 128, "Earnings per Share." Basic earnings (loss) per
share is computed by dividing income (loss) available to common
shareholders by the weighted average number of common shares
available. Diluted earnings (loss) per share is computed similar
to basic earnings (loss) per share except that the denominator is
increased to include the number of additional common shares that
would have been outstanding if the potential common shares had
been issued and if the additional common shares were dilutive.
Diluted earnings (loss) per share has not been presented since
the effect of the assumed conversion of options and warrants to
purchase common shares would have an anti-dilutive effect. At
December 31, 2004 there were 81,407,000 options outstanding that
have been excluded from the computation of diluted net loss per
share because the effect would have been anti-dilutive.
Comprehensive Income
--------------------
SFAS No. 130, "Reporting Comprehensive Income," establishes
standards for the reporting and display of comprehensive income
and its components in the financial statements. For the years
ended December 31, 2004 and 2003, the Company does not have items
that represented other comprehensive income and, accordingly, has
not included in the consolidated statement of stockholders'
equity the change in comprehensive income.
Recently Issued Accounting Pronouncements
-----------------------------------------
In November 2004, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No.
151 ("SFAS 151"), "Inventory Costs, an amendment of ARB No. 43,
Chapter 4." The amendments made by SFAS 151 clarify that abnormal
amounts of idle facility expense, freight, handling costs, and
wasted materials (spoilage) should be recognized as current-
period charges and require the allocation of fixed production
overheads to inventory based on the normal capacity of the
production facilities. The guidance is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005.
Earlier application is permitted for inventory costs incurred
during fiscal years beginning after November 23, 2004. The
Company has evaluated the impact of the adoption of SFAS 151, and
F-12
Film and Music Entertainment, Inc. and Subsidiaries Notes to
Consolidated Financial Statements For the Years Ended December
31, 2004 and 2003
does not believe the impact will be significant to the Company's
overall results of operations or financial position.
In December 2004, the FASB issued SFAS 123R, "Share-Based
Payment." SFAS 123R will provide investors and other users of
financial statements with more complete and neutral financial
information by requiring that the compensation cost relating to
share-based payment transactions be recognized in financial
statements. That cost will be measured based on the fair value of
the equity or liability instruments issued. SFAS 123R covers a
wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards,
share appreciation rights, and employee share purchase plans.
SFAS 123R replaces SFAS 123, "Accounting for Stock-Based
Compensation," and supersedes Accounting Principles Board Opinion
25 ("Opinion 25"), "Accounting for Stock Issued to Employees."
SFAS 123, as originally issued in 1995, established as preferable
a fair-value-based method of accounting for share-based payment
transactions with employees. However, SFAS 123 permitted entities
the option of continuing to apply the guidance in Opinion 25, as
long as the footnotes to financial statements disclosed proforma
net income using fair-value-based methods. Public entities are
required to apply SFAS 123R as of the first annual reporting
period that begins after June 15, 2005. The Company has not yet
determined which transition method will be adopted for the
recognition of the stock based compensatory expense and the
Company believes that expensing of stock options will not have a
material impact on its financial statements going forward due to
its limited utilization of stock options.
Note 2 - Acquisition
In October, 2003 the Company purchased all the outstanding stock
of Miracle Productions Inc. ("Miracle"), a California corporation
newly formed to receive from Miracle Entertainment, Inc. (MEMI:PK
) ("MEI") certain of MEI's current film production and
distribution projects. After the acquisition Miracle changed its
name to Celebration Productions, Inc. The acquisition price was
18,347,175 shares, as amended, of the Company's common stock and
ongoing royalties from the exploitation of Miracle's film assets.
The total purchase price was $2,752,076 which equals the
18,347,175 shares of the Company's common stock times the market
value on the date of acquisition of $0.15 per share. As part of
the acquisition agreement, MEI agreed to pay the Company,
$217,963, as amended. MEI's historical cost basis in the film
production and distribution projects acquired by the Company
through Miracle was $0. The allocation of the purchase price was
based on historical cost basis rather than fair market value
since Mr. John Daly, who is the Company's Chairman, President and
CEO was at the time also the President of MEI. Mr. Daly had been
President of MEI since May of 2002 and subsequently resigned from
all duties of that company in May of 2004. Mr. Daly's only
ongoing interest in MEI is as a minority stockholder of 6.49% of
MEI's common stock. The excess of the purchase price over the
historical cost basis of the net assets acquired has been shown
as a deemed dividend. The allocation of the purchase price is as
follows:
Receivable from MEI $ 217,963
Deemed dividend 2,534,113
---------------
Purchase price $ 2,752,076
===============
F-13
Film and Music Entertainment, Inc. and Subsidiaries Notes to
Consolidated Financial Statements For the Years Ended December
31, 2004 and 2003
Note 3 - Loan Receivable from Miracle Entertainment, Inc.
As of December 31, 2003, Miracle Entertainment, Inc. owed the
Company, $66,317. This amount was considered a short-term loan,
non-interest bearing and unsecured. During June 2004, the Company
executed a secured promissory note with Miracle Entertainment
Inc. The repayment terms call for two equal payments of $25,000.
The first payment is due April 15, 2005. The second payment is
due December 15, 2005. The promissory note is non-interest
bearing and is secured by 5,000,000 shares of the Company's
stock. On April 15, 2005, Miracle did not make the required
payment of $25,000; therefore the Company foreclosed on 2,500,000
shares of its common stock used to secure the loan. On December
15, 2005 the Company foreclosed on the security of 2,500,000
shares of Company common stock held as collateral against the
balance of the note of $25,000. As of the December 15, 2005 the
market value of the foreclosed upon shares of the Company's stock
exceeded the remaining carrying value of the note of $25,000 by
$275,000. Therefore, Company recognized a gain in this amount.
Note 4 - Property and Equipment
The cost of property and equipment at December 31, 2004 consisted
of the following:
December 31,
2004
------------
Computers $ 3,330
Automobile 32,065
Furniture and fixtures 10,000
----------
45,395
Less accumulated depreciation (6,242)
----------
$ 39,153
==========
Depreciation expense for the years ended December 31, 2004 and
2003 was $6,150 and $92, respectively.
Note 5 - Real Estate Investments
In May, 2003 the Company entered into agreements for the
acquisition of two private companies, Myrob Properties, Inc., a
California corporation, and East Mojave Corporation, a Nevada
corporation. The assets acquired with these two private companies
consisted of real estate located in California and Arizona. The
other assets and liabilities of these private companies were
insignificant. In connection with these transactions, the Company
issued a total of 36,000,000 shares of common stock to acquire
these two private companies. The Company has valued the real
estate assets acquired in these transactions at the value of the
36,000,000 shares of the Company's common stock on the
transaction date of $0.02 per share or $720,000. During the year
F-14
Film and Music Entertainment, Inc. and Subsidiaries Notes to
Consolidated Financial Statements For the Years Ended December
31, 2004 and 2003
ended December 31, 2004, the Company purchased the un-owned
percentage of a parcel previously owned for $337,048.
On November 16, 2004, the Company settled a dispute with a
stockholder whereby the stockholder agreed to surrender to the
Company 13,500,000 shares of the Company's common stock owned by
the stockholder and the Company agreed to give up any rights it
has in certain real estate located in Riverside, California that
the Company has recorded on its books at $290,657. During the
fourth quarter of 2004, the Company removed the real estate
investment of $290,657 from its books and canceled 13,500,000
shares of its common stock valued at $0.03 per share or $405,000.
The Company recognized a gain of $114,343 as a result of this
settlement. On February 3, 2005, the Company entered into an
agreement with a stockholder whereby the stockholder agreed to
surrender to Company 15,750,000 shares of the Company's common
stock owned by the stockholder and the Company agreed to give up
any rights to a hypothecated money interest relating to certain
real estate located in Cochise County, Arizona that the Company
owned and had recorded on its books at $264,000. The Company
removed the real estate investment of $264,000 from its books and
canceled 15,750,000 shares of its common stock valued at $0.03
per share or $472,500. The Company recognized a gain of $208,500
as a result of this transaction.
Note 6 - Impairment of Investment
In May 2004, the Company entered into an agreement with Nicholas
Cowan of London, who agreed to open a new company having
exclusive rights to the music download platform called "SMS
downloads". The Company will get 50% of issued share capital in
the new company. The Company loaned $96,280 to the new company
and recorded the same as an investment. On December 31, 2004, the
Company evaluated its investment according to FASB 144 and
recognized an impairment loss equal to the book value of the
asset amounting $96,280 since the recovery of the investment
appears doubtful.
Note 7 - Stockholders' Equity
Common stock
------------
During the year ended December 31, 2003, the Company has the
following transactions in its common stock:
* issued 7,078,689 share of its common stock for services valued
at $116,584. The value was determined based on the market price
of the Company's stock at the date of grant;
* issued 1,347,364 shares of its common stock for the conversion
of a note payable and convertible debentures totaling $271,435;
* issued 544,120 shares of its common stock for accrued interest
and financing costs totaling $72,651;
* issued 3,235,000 shares of its common stock for the conversion
of accounts payable totaling $389,441;
* issued 36,000,000 shares of its common stock for two private
real estate companies that contained real estate investments
totaling $720,000. The value was determined based on the market
price of the Company's stock at the date of acquisition;
* issued 3,575,000 share of its common stock for the exercise of
stock options. The exercise price was paid by reducing accrued
expenses by $1,788;
* issued 3,000,000 shares of its common stock for the exercise of
stock options. The exercise price was paid for consulting
services valued at $30,000;
* issued 18,347,175 shares of its common stock for all the issued
and outstanding share of Celebration Production, Inc. The value
of $2,752,076 was based on the market price of the Company's
stock at the transaction date; and
F-15
Film and Music Entertainment, Inc. and Subsidiaries Notes to
Consolidated Financial Statements For the Years Ended December
31, 2004 and 2003
* issued 1,800,000 shares of its common stock for film costs. The
value of $75,000 was based on the market price of the Company's
stock at the transaction date.
During the year ended December 31, 2004, the Company has the
following transactions in its common stock:
* issued 50,000,000 share of its common stock for cash in the
amount of $5,000,000;
* issued 4,900,000 share of its common stock for the exercise of
stock options. The exercise price was paid by reducing accrued
expenses by $2,450;
* issued 125,000 share of its common stock for the exercise of
stock options. The exercise price was paid in cash in the amount
of $1,250;
* issued 90,000 shares of its common stock for services rendered
valued at $3,700; and
* canceled 13,500,000 shares of its common stock valued at
$405,000 for a certain parcel of real estate.
Options
-------
The following table summarizes the options outstanding:
[Download Table]
Weighted
Average
Exercise
Options Price
---------- -----------
Balance, December 31, 2002 - $ -
Granted 93,007,000 $ 0.0071
Exercised (6,575,000) $ 0.0048
Balance, December 31, 2003 86,432,000 $ 0.0072
Exercised (5,025,000) $ 0.0007
Balance, December 31, 2004 81,407,000 $ 0.0077
Exercisable, December 31, 2004 38,407,000 $ 0.0077
The weighted average remaining contractual life of options
outstanding is 2.71 years at December 31, 2004. The exercise
price for the options outstanding at December 31, 2004 were as
follows:
F-16
Film and Music Entertainment, Inc. and Subsidiaries Notes to
Consolidated Financial Statements For the Years Ended December
31, 2004 and 2003
Number of Exercise
Options Price
---------- ---------
20,125,000 $ 0.0005
61,282,000 $ 0.0100
----------
81,407,000
==========
Compensation expense was recognized as a result of the issuance
of stock options issued to employees of the Company of
$10,475,130 for the year ended December 31, 2003.
For options granted during the year ended December 31, 2003 where
the exercise price was less than the stock price at the date of
the grant, the weighted-average fair value of such options was
$0.1388 and the weighted-average exercise price of such options
was $0.0071. No options were granted during the year ended
December 31, 2003, where the exercise price was greater than the
stock price at the date of the grant or the exercise price was
equal to the stock price at the date of grant. There were no
options issued during the year ended December 31, 2004.
Note 8 - Commitments and Contingencies
Litigation
----------
In the ordinary course of business, the Company is generally
subject to claims, complaints, and legal actions. At December 31,
2004, management believes that the Company is not a party to any
action which would have a material impact on its financial
condition, operations, or cash flows.
Miracle Entertainment, Inc. et. al v. Filmstar Releasing
Corporation et. al., Los Angeles Superior Court, Case No.
BC302233:
This is a complaint for unlawful conversion, breach of contract
and fraud, commenced in September, 2003 by Miracle Entertainment,
Inc., a company of which John Daly was Chairman, against a firm
and several individuals who had previously contracted to raise
funds for productions sponsored by Miracle Entertainment. A
counter-claim was filed by the defendants in March, 2004, adding
the Company as a defendant.
On May 2, 2005 a confidential Settlement Agreement and Mutual
Release was executed between the Company and remaining litigants
on terms acceptable to all the parties resulting in no liability
and complete release of claims against the company.
Carol Lefko v. Film and Music Entertainment, Inc., Celebration
Pictures, Inc., John Daly and Peter Beale, Los Angeles Superior
Court, Case No. BC318753.
F-17
Film and Music Entertainment, Inc. and Subsidiaries Notes to
Consolidated Financial Statements For the Years Ended December
31, 2004 and 2003
This is a complaint for breach of an alleged oral agreement
commenced July 20, 2004 between the plaintiff and the defendants
whereby the plaintiff would provide services as casting director
of a film to be called "Host" and produced by Celebration
Productions, Inc. which was added as a party to this lawsuit by
amendment in February 2005. The plaintiff alleges that she
performed the services but was not paid and is owed $12,000 for
breach of contract plus $60,000 for "waiting time." The
defendants have answered denying any liability, that no contract
existed and that no services could have been rendered to the
Company since the film never went into pre-production. The
Company is informed and believes that Kevin Lewis and Peter
Beale, in their individual capacity, were to be co-producers of
the film "Host." Mr. Lewis was also to be the director of the
film and that any agreement with plaintiff is between plaintiff
and Mr. Lewis. The Company maintains that no contract exists
between Ms. Lefko and either FAME or Celebration or both. The
Company maintains that Ms. Lefko has never been employed by any
of these entities, as indicated by Company records and that
neither the Company nor Celebration Pictures, Inc. ever hired any
casting director.
All the Defendants except Beale filed their general denial with
affirmative defenses on September 1, 2004. Film And Music
responded to plaintiff's first set of written discovery. The
trial took place on July 13 and 14, 2005 and the court denied any
liability on the part of the defendants to the plaintiff. The
Company does not expect Ms. Lefko to appeal.
Sunset Towers Partnership v. First Miracle Group. Los Angeles
Superior Court, Case No. SC072450.
This is a motion to amend a judgment entered against First
Miracle Group by its former landlord in the amount of $300,000 to
include Celebration Productions, Inc. and Film and Music
Entertainment, Inc. Sunset Towers is claiming that Celebration
and the Company are in fact successors in interest of Miracle
Entertainment, Inc. and are therefore liable for the judgment.
The Company and Celebration have filed an opposition to the
motion denying any theory that the Company and/or Celebration are
successors-in-interest of First Miracle Group and/or Miracle
Entertainment, Inc. in as much as only a portion of Miracle's
assets were acquired by the Company and fair consideration in the
amount of $3,000,000 worth of the Company's stock; that the
Company and Miracle are separate, distinct publicly traded
companies, with separate shareholders, boards, officers and
businesses with the single exception that Mr. Daly was at the
time of acquisition a Board member and officer of both companies;
that neither the Company or Celebration had the opportunity to
defend the litigation from which the judgment derived; and that
neither the Company nor Celebration expressly assumed the
liability of Miracles obligation under the judgment.
The motion was heard on May 17, 2005 and the Court denied the
plaintiff's motion, finding on the evidence presented that
Miracle Entertainment did not transfer all of its assets to the
Company and that the Company was not the successor-in-interest of
Miracle. On July 8, 2005 Sunset Towers filed a motion to appeal.
The Company has no reason to believe an appeal will overturn the
earlier findings in its favor.
F-18
Film and Music Entertainment, Inc. and Subsidiaries Notes to
Consolidated Financial Statements For the Years Ended December
31, 2004 and 2003
Leases
------
The Company leases its corporate office under a non-cancelable
operating lease that expires the end of February 2006.
Future minimum lease payments applicable to non-cancelable
operating leases as of December 31, 2004, are as follows:
Operating
Leases
----------
Year ending December 31,
2005 85,404
2006 15,569
----------
Net Minimum Lease Payments $ 100,973
==========
The Company incurred rent expense of $76,129 and $20,206 for the
years ended December 31, 2004 and 2003, respectively.
Note 9 - Income Taxes
No provision was made for federal income tax since the Company
has significant net operating loss. Through December 31, 2004,
the Company incurred net operating losses for tax purposes of
approximately $2,200,000. The net operating loss carry forwards
may be used to reduce taxable income through the year 2024. The
availability of the Company's net operating loss carryforwards
are subject to limitation if there is a 50% or more positive
change in the ownership of the Company's stock. The provision for
income taxes consists of the state minimum tax imposed on
corporations.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial statement purposes and the amounts used
for income tax purposes. Significant components of the Company's
deferred tax liabilities and assets as of December 31, 2004 are
as follows:
Deferred tax assets:
Federal net operating loss $ 815,313
State net operating loss 73,144
---------------
Total deferred tax assets 888,457
Less valuation allowance (888,457)
---------------
$ --
===============
The valuation allowance increased by $373,457 and $100,000 during
2004 and 2003, respectively. The Company has provided a 100%
valuation allowance on the deferred tax assets at December 31,
F-19
Film and Music Entertainment, Inc. and Subsidiaries Notes to
Consolidated Financial Statements For the Years Ended December
31, 2004 and 2003
2004 to reduce such asset to zero, since there is no assurance
that the Company will generate future taxable income to utilize
such asset. Management will review this valuation allowance
requirement periodically and make adjustments as warranted.
The reconciliation of the effective income tax rate to the
federal statutory rate for the years ended December 31, 2004 and
2003 is as follows:
[Download Table]
2004 2003
--------- ---------
Federal income tax rate (34.0%) (34.0%)
State tax, net of federal benefit (6.0%) (6.0%)
Value of below market options/warrants 0.0% 39.1%
Increase in valuation allowance 40.0% 0.09%
--------- ---------
Effective income tax rate 0.0% 0.0%
========= =========
Note 10 - Subsequent Events
On April 15, 2005, Miracle Entertainment, Inc. did not make the
required $25,000 payment on a loan receivable so the Company
canceled 2,500,000 shares of its common stock that were owned by
Miracle and used to secure the loan. Since the value of the
2,500,000 shares was greater than the $25,000 payment, the
Company recognized a gain of $50,000 on this transaction. On
December 15, 2005 the Company foreclosed on the security of
2,500,000 shares of Company common stock held as collateral
against the balance of the note of $25,000. As of the December
15, 2005 the market value of the foreclosed upon shares of the
Company's stock exceeded the remaining carrying value of the note
of $25,000 by $275,000. Therefore, Company recognized a gain in
this amount.
On February 3, 2005, the Company entered into an agreement with a
stockholder whereby the stockholder agreed to surrender to
Company 15,750,000 shares of the Company's common stock owned by
the stockholder and the Company agreed to give up any rights to a
hypothecated money interest relating to certain real estate
located in Cochise County, Arizona that the Company owned and had
recorded on its books at $264,000. The Company removed the real
estate investment of $264,000 from its books and canceled
15,750,000 shares of its common stock valued at $0.03 per share
or $472,500. The Company recognized a gain of $208,500 as a
result of this transaction.
F-20
Film and Music Entertainment, Inc. and Subsidiaries Consolidated
Financial Statements Nine Months Ended September 30, 2005 and 2004
(Unaudited)
Contents Page
Consolidated Balance Sheet as of September 30, 2005
(unaudited) F-22
Consolidated Statements of Operations for the three
and nine months ended September 30, 2005 and 2004
(unaudited) F-23
Consolidated Statement of Stockholders' Equity for
the nine months ended September 30, 2005 (unaudited) F-24
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2005 and 2004 (unaudited) F-25
Notes to Consolidated Financial Statements (unaudited) F-26
Film and Music Entertainment, Inc. and Subsidiaries
Consolidated Balance Sheet
September
30, 2005
---------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 502,474
Restricted cash 40,518
Loan receivable from Miracle Entertainment, Inc. 25,000
Other current assets (including amounts due from
related party of $17,797) 190,067
Investment in equity securities 1,840,710
------------
TOTAL CURRENT ASSETS 2,598,769
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $15,307 82,768
REAL ESTATE INVESTMENTS 430,000
FILM COSTS 476,146
------------
TOTAL ASSETS $ 3,587,683
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 59,859
Accrued expenses (including amounts due from related
party of $2,848) 68,040
Production advances 6,924
------------
TOTAL CURRENT LIABILITIES 134,823
------------
COMMITMENT AND CONTINGENCIES (Note 8) -
STOCKHOLDER'S EQUITY
Common stock, $0.001 par value; 250,000,000 shares
authorized; 125,170,398 shares issued and outstanding 125,170
Additional paid-in capital 21,066,142
Accumulated deficit (17,738,452)
------------
TOTAL STOCKHOLDERS' EQUITY 3,452,860
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,587,683
============
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
F-22
Film and Music Entertainment, Inc. and Subsidiaries
Consolidated Statements of Operations
[Enlarge/Download Table]
Three Months Ended Nine Months Ended
---------------------------- ---------------------------
September September September September
30, 2005 30, 2004 30, 2005 30, 2004
------------ ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
REVENUE $ - $ - $ 162,024 $ -
OPERATING EXPENSES
Production costs - 26,417 - 90,599
Advertising costs 108,366 - 279,845 8,937
Compensation expense 92,672 130,982 249,275 206,814
Consulting expense 16,241 2,000 39,875 28,920
General and administrative expenses 137,087 85,769 406,241 289,560
------------ ----------- ------------- -------------
TOTAL OPERATING EXPENSES 354,366 245,168 975,236 624,830
------------ ----------- ------------- -------------
LOSS FROM OPERATIONS (354,366) (245,168) (813,212) (624,830)
------------ ----------- ------------- -------------
OTHER INCOME (EXPENSE)
Other income 8,999 5,000 9,184 10,000
Investment income 6,921 11,079 17,125 13,170
Unrealized loss on marketable equity
securities 166,942 - 145,537 -
Realized loss on sale of marketable
equity securities (33,636) - (62,852) -
Gain on foreclosure of note receivable - - - 50,000
Gain on disposition of real estate - - 208,500 -
------------ ----------- ------------- -------------
TOTAL OTHER INCOME (EXPENSE) 149,226 16,079 367,494 23,170
------------ ----------- ------------- -------------
LOSS BEFORE PROVISION FOR INCOME TAXES (205,140) (229,089) (445,718) (601,660)
PROVISION FOR INCOME TAXES - - - -
------------ ----------- ------------ ------------
NET LOSS $ (205,140) $ (229,089) $ (445,718) $ (601,660)
============ =========== ============ ============
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.00) $ (0.00) $ (0.00) $ (0.00)
============ =========== ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING -
BASIC AND DILUTED 125,170,398 151,957,898 126,810,142 128,322,141
============ =========== ============ ============
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
F-23
Film and Music Entertainment, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
(unaudited)
[Enlarge/Download Table]
Additional Total
Common Stock Paid- in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
----------- --------- ----------- ---------- ----------
Balance, December 31, 2004 140,970,398 140,970 21,596,617 (17,292,734) 4,444,853
Issuance of common stock for exercise of options 2,450,000 2,450 (1,225) 1,225
Shares canceled in connection with non-payment on
note receivable (2,500,000) (2,500) (72,500) (75,000)
Shares canceled in connection with transfer of
real estate investment to former owner (15,750,000) (15,750) (456,750) (472,500)
Net loss - - - (445,718) (445,718)
----------- --------- ----------- ---------- ----------
Balance, June 30, 2005 125,170,398 $ 125,170 $ 21,066,142 $(17,738,452) $ 3,452,860
=========== ========= ============ ============ ===========
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
F-24
Film and Music Entertainment, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
[Download Table]
Nine Months Ended
---------------------------
September September
30, 2005 30, 2004
----------- -----------
(unaudited) (unaudited)
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (445,718) $ (601,660)
Adjustment to reconcile net loss to net cash
used in operating activities:
Depreciation expense 9,065 3,769
Common stock issued for services - 3,700
Unrealized loss on marketable equity securities (145,537) -
Gain on disposition of real estate (208,500) -
Gain on foreclosure of note receivable (50,000) -
Purchase of marketable equity securities (2,895,862) -
Sale of marketable securities 1,860,638 -
Changes in operating assets and liabilities:
Other current assets (181,633) (23,891)
Film costs (401,146) -
Accounts payable (24,629) 18,804
Accrued expenses (105,784) 147,239
Production advances (35,398) 12,123
----------- -----------
Net cash used in operating activities (2,624,504) (439,916)
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (52,680) (32,065)
Increase in restricted cash - (40,518)
Investment in SMS Musicmaker Ltd. - (48,909)
Purchase of real estate - (373,001)
----------- -----------
Net cash used in investing activities (52,680) (494,493)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds received from Miracle Entertainment - 6,347
Proceeds from sale of common stock - 5,000,000
Proceeds from exercise of options - 625
----------- -----------
Net cash provided by financing activities - 5,006,972
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (2,677,184) 4,072,563
CASH AND CASH EQUIVALENTS, Beginning of period 3,179,658 112,079
----------- -----------
CASH AND CASH EQUIVALENTS, End of period $ 502,474 $ 4,184,642
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Interest paid $ 2,217 $ -
=========== ===========
Income taxes paid $ - $ -
=========== ===========
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
F-25
FILM AND MUSIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Basis of Presentation
The unaudited consolidated financial statements have been
prepared by Film and Music Entertainment, Inc. (the "Company"),
pursuant to the rules and regulations of the Securities and
Exchange Commission. The information furnished herein reflects
all adjustments (consisting of normal recurring accruals and
adjustments) which are, in the opinion of management, necessary
to fairly present the operating results for the respective
periods. Certain information and footnote disclosures normally
present in annual consolidated financial statements prepared in
accordance with accounting principles generally accepted in the
United States of America have been omitted pursuant to such rules
and regulations. These consolidated financial statements should
be read in conjunction with the audited consolidated financial
statements and footnotes for the year ended December 31, 2004
included in the Company's Annual Report on Form 10SB. The
results of the nine months ended September 30, 2005 are not
necessarily indicative of the results to be expected for the full
year ending December 31, 2005.
Stock Options
-------------
SFAS No. 123, "Accounting for Stock-Based Compensation,"
establishes and encourages the use of the fair value based method
of accounting for stock-based compensation arrangements under
which compensation cost is determined using the fair value of
stock-based compensation determined as of the date of grant and
is recognized over the periods in which the related services are
rendered. The statement also permits companies to elect to
continue using the current intrinsic value accounting method
specified in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," to account for stock-
based compensation. The Company has elected to use the intrinsic
value based method and has disclosed the pro forma effect of
using the fair value based method to account for its stock-based
compensation issued to employees. For options granted to
employees where the exercise price is less than the fair value of
the stock at the date of grant, the Company recognizes an expense
in accordance with APB 25. For non-employee stock based
compensation the Company recognizes an expense in accordance with
SFAS No. 123 and values the equity securities based on the fair
value of the security on the date of grant. For stock-based
awards the value is based on the market value for the stock on
the date of grant and if the stock has restrictions as to
transferability a discount is provided for lack of tradability.
Stock option awards are valued using the Black-Scholes option-
pricing model.
The pro forma information regarding the effects on operations
that is required by SFAS 123 and SFAS 148 are not presented since
there is no pro forma expense to be shown for the three and nine
months ended September 30, 2005 and 2004.
Note 2 - Loss Per Share
The Company reports earnings (loss) per share in accordance with
SFAS No. 128, "Earnings per Share." Basic earnings (loss) per
share is computed by dividing income (loss) available to common
shareholders by the weighted average number of common shares
available. Diluted earnings (loss) per share is computed similar
to basic earnings (loss) per share except that the denominator is
increased to include the number of additional common shares that
would have been outstanding if the potential common shares had
been issued and if the additional common shares were dilutive.
Diluted earnings (loss) per share has not been presented since
the effect of the assumed conversion of options and warrants to
purchase common shares would have an anti-dilutive effect. At
September 30, 2005 there were 79,957,000 options outstanding that
have been excluded from the computation of diluted net loss per
share because the effect would have been anti-dilutive.
F-26
FILM AND MUSIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 3 - Investments in Marketable Equity Securities
The Company invests some of its excess cash in marketable equity
securities. The marketable equity securities comprise of common
stock of publicly traded companies. These investments are
classified as trading securities as they are held principally for
the purpose of selling in the near term. They are reported at
fair value with unrealized gains and losses included in earnings.
The fair value is determined by using the securities quoted
market price as obtained from stock exchanges on which each
securities trades.
Investment income, principally dividends, is recorded when
earned. Realized capital gains and losses are calculated based on
the cost of securities sold, which is determined by the
"identified cost" method.
The unrealized gains/(losses) in the Company's portfolio of
marketable equity securities as of September 30, 2005 is as
follows:
Historical costs basis $ 1,707,343
Unrealized gains 303,747
Unrealized losses (170,380)
-------------
Fair value $ 1,840,710
=============
Note 4 - Loan Receivable from Miracle Entertainment, Inc.
As of December 31, 2003, Miracle Entertainment, Inc. owed the
Company, $66,317. This amount was considered a short-term
loan, non-interest bearing and unsecured. During June 2004, the
Company executed a secured promissory note with Miracle
Entertainment Inc. The repayment terms call for two equal
payments of $25,000. The first payment is due April 15, 2005.
The second payment is due December 15, 2005. The promissory note
is non-interest bearing and is secured by 5,000,000 shares of the
Company's stock. On April 15, 2005, Miracle did not make the
required payment of $25,000; therefore the Company foreclosed on
2,500,000 shares of its common stock used to secure the loan. As
a result of this foreclosure, the Company recognized a gain of
$50,000 since the value of the 2,500,000 shares exceeded the
required payment by $50,000. As of the September 30, 2005 the
market value of the remaining shares of the Company's stock
exceeded the remaining carrying value of the note of $25,000.
Therefore, no write down of the note was deemed necessary.
Note 5 - Property and Equipment
The cost of property and equipment at September 30, 2005
consisted of the following:
September 30,
2005
Computers $ 3,330
Automobile 61,197
Furniture and fixtures 33,548
----------
98,075
Less accumulated depreciation (15,307)
----------
$ 82,768
==========
F-27
FILM AND MUSIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Depreciation expense for the nine months ended September 30, 2005
and 2004 was $9,065 and $3,769, respectively.
Note 6 - Real Estate Investments
On February 3, 2005, the Company entered into an agreement with a
stockholder whereby the stockholder agreed to surrender to
Company 15,750,000 shares of the Company's common stock owned by
the stockholder and the Company agreed to give up any rights to a
hypothecated money interest relating to certain real estate
located in Cochise County, Arizona that the Company has recorded
on its books at $264,000. The Company removed the real estate
investment of $264,000 from its books and canceled 15,750,000
shares of its common stock valued at $0.03 per share or $472,500.
The Company recognized a gain of $208,500 as a result of this
transaction.
Note 7 - Stockholders' Equity
Common stock
------------
During the nine months ended September 30, 2005, the Company has
the following transactions in its common stock:
* canceled 15,750,000 shares of its common stock valued at
$472,500 for a certain parcel of real estate;
* issued 2,450,000 share of its common stock for the
exercise
of stock options. The exercise price was paid by reducing
accrued expenses by $1,225; and
* canceled 2,500,000 shares of common stock valued at
$75,000
that was used to secure a loan receivable.
Note 8 - Commitments and Contingencies
Litigation
----------
In the ordinary course of business, the Company is generally
subject to claims, complaints, and legal actions. At September
30, 2005, management believes that the Company is not a party to
any action which would have a material impact on its financial
condition, operations, or cash flows.
Miracle Entertainment, Inc. et. al v. Filmstar Releasing
Corporation et. al., Los Angeles Superior Court, Case No.
BC302233:
This is a complaint for unlawful conversion, breach of contract
and fraud, commenced in September, 2003 by Miracle Entertainment,
Inc., a company of which John Daly was Chairman, against a firm
and several individuals who had previously contracted to raise
funds for productions sponsored by Miracle Entertainment. A
counter-claim was filed by the defendants in March, 2004, adding
the Company as a defendant.
On May 2, 2005 a confidential Settlement Agreement and Mutual
Release was executed between the Company and remaining litigants
on terms acceptable to all the parties resulting in no liability
and complete release of claims against the company.
Carol Lefko v. Film and Music Entertainment, Inc., Celebration
Pictures, Inc., John Daly and Peter Beale, Los Angeles Superior
Court, Case No. BC318753.
F-28
FILM AND MUSIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
This is a complaint for breach of an alleged oral agreement
commenced July 20, 2004 between the plaintiff and the defendants
whereby the plaintiff would provide services as casting director
of a film to be called "Host" and produced by Celebration
Productions, Inc. which was added as a party to this lawsuit by
amendment in February 2005. The plaintiff alleges that she
performed the services but was not paid and is owed $12,000 for
breach of contract plus $60,000 for "waiting time." The
defendants have answered denying any liability, that no contract
existed and that no services could have been rendered to the
Company since the film never went into pre-production. The
Company is informed and believes that Kevin Lewis and Peter
Beale, in their individual capacity, were to be co-producers of
the film "Host." Mr. Lewis was also to be the director of the
film and that any agreement with plaintiff is between plaintiff
and Mr. Lewis. The Company maintains that no contract exists
between Ms. Lefko and either FAME or Celebration or both. The
Company maintains that Ms. Lefko has never been employed by any
of these entities, as indicated by Company records and that
neither the Company nor Celebration Pictures, Inc. ever hired any
casting director.
All the Defendants except Beale filed their general denial with
affirmative defenses on September 1, 2004. Film And Music
responded to plaintiff's first set of written discovery. The
trial took place on July 13 and 14, 2005 and the court denied any
liability on the part of the defendants to the plaintiff. The
Company does not expect Ms. Lefko to appeal.
Sunset Towers Partnership v. First Miracle Group. Los Angeles
Superior Court, Case No. SC072450.
This is a motion to amend a judgment entered against First
Miracle Group by its former landlord in the amount of $300,000 to
include Celebration Productions, Inc. and Film and Music
Entertainment, Inc. Sunset Towers is claiming that Celebration
and the Company are in fact successors in interest of Miracle
Entertainment, Inc. and are therefore liable for the judgment.
The Company and Celebration have filed an opposition to the
motion denying any theory that the Company and/or Celebration are
successors-in-interest of First Miracle Group and/or Miracle
Entertainment, Inc. in as much as only a portion of Miracle's
assets were acquired by the Company and fair consideration in the
amount of $3,000,000 worth of the Company's stock; that the
Company and Miracle are separate, distinct publicly traded
companies, with separate shareholders, boards, officers and
businesses with the single exception that Mr. Daly was at the
time of acquisition a Board member and officer of both companies;
that neither the Company or Celebration had the opportunity to
defend the litigation from which the judgment derived; and that
neither the Company nor Celebration expressly assumed the
liability of Miracles obligation under the judgment.
The motion was heard on May 17, 2005 and the Court denied the
plaintiff's motion, finding on the evidence presented that
Miracle Entertainment did not transfer all of its assets to the
Company and that the Company was not the successor-in-interest of
Miracle. On July 8, 2005 Sunset Towers filed a motion to appeal.
The Company has no reason to believe an appeal will overturn the
earlier findings in its favor.
Note 8 - Subsequent Events
--------------------------
The Company executed a Letter of Intent in January 2006 with 100%
Entertainment and Red Hot Entertainment to produce low budget
Science Fiction films in High Definition. The Letter calls for
the Company to arrange 50% of the budget of the features for
which the Company shall receive distribution fees world-wide
along with 50% of the profits. The Company shall have mutual
script and cast approval and in addition to the first feature,
the Company has the option to co-produce an additional 10 films
over four years.
F-29
FILM AND MUSIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On December 15, 2005 the Company foreclosed on the security of
2,500,000 shares of the Company's common stock held as collateral
against the balance of the note of $25,000. As of the December
15, 2005 the market value of the foreclosed upon shares of the
Company's stock exceeded the remaining carrying value of the note
of $25,000 by $275,000. Therefore, Company recognized a gain in
this amount.
On November 23, 2005, the Company issued 2,450,000 share of its
common stock for the exercise of stock options. The exercise
price was paid by reducing accrued expenses by $1,225.
F-30
Exhibit F-1.1
Certification
-------------
I, John Daly, Chief Executive Officer of Film and Music
Entertainment, Inc. certify that:
1. I have reviewed this filing on Form 10SB-A/2 of Film and
Music Entertainment, Inc.
2. Based on my knowledge, this filing does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this filing;
3. Based on my knowledge, the financial statements, and other
financial information included in this filing, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this filing;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reports (as
defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the
registrant and we have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this filing is being prepared; and
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this filing our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
filing based on such evaluation; and
c) disclosed in this filing any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual filing) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting.
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and filing financial
information; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls over financial reporting.
Date: January 31, 2006
/S/ John Daly
------------------------
Chief Executive Officer
F-35
Exhibit F.1.2
Certification
-------------
I, Lawrence S. Lotman, acting Chief Financial Officer of Film and
Music Entertainment, Inc., certify that:
1. I have reviewed this filing on Form 10SB-A/2 of Film and
Music Entertainment., Inc.;
2. Based on my knowledge, this filing does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this filing;
3. Based on my knowledge, the financial statements, and other
financial information included in this filing, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this filing;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this filing is being prepared; and
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this filing our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
filing based on such evaluation; and
c) disclosed in this filing any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual filing) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting.
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and filing financial
information; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls over financial reporting.
Date: January 31, 2006
/S/ Lawrence S. Lotman
--------------------------
Chief Financial Officer
F-36
Exhibit F-2.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
this filing on Form 10SB-A/2 for the period ended September 30, 2005
fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, as amended, and the
information contained in such filing fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
This 31st day of January, 2006.
/S/ John Daly
--------------------------------------
President and Chief Executive Officer
F-37
Exhibit F.2.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that this
filing on Form 10SB-A/2 for the period ended September, 30, 2005 fully
complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, and the information
contained in such filing fairly presents, in all material
respects, the financial condition and results of operations of
the Company.
This 31st day of January, 2006.
/S/Lawrence S. Lotman
-------------------------------
Chief Financial Officer
F-38
PART III
Item 1. Index to Exhibits
Copies of the following documents are filed with this
Registration Statement, Form 10-SB, as exhibits:
3.1 Articles of Incorporation*
3.2 Certificate of Amendment of Articles of Incorporation of
Imporex Investments, Corp.*
3.3 Certificate of Amendment of Articles of Incorporation of
DVBS, Inc.*
3.4 Certificate of Amendment of Articles of Incorporation of
Pervasys, Inc.*
3.5 Bylaws*
10.1 Contracts*
10.1.1 Stock Swap Agreement dated May 21, 2003 for acquisition of
Myrob Properties, Inc.*
10.1.2 Stock Swap Agreement dated May 21, 2003 for acquisition of
East Mojave Corporation.*
10.1.3 Stock Purchase Agreement dated October 27, 2003 for
acquisition of Miracle Productions, Inc.*
10.1.4 Stock Purchase Agreement dated May 4, 2004 for issuance
of shares to Lesteron, Ltd.*
10.1.5 John Daly Voting Trust dated May 23, 2003 for
18,000,000 options.*
10.1.6 Real Estate Purchase Agreement dated September 22, 2003
for Purchase of 1120 Acres of land, San Bernadino County
by Myrob Properties, Inc.*
10.1.7 License Agreement dated October 27, 2003 between The
Company and Western Media Group Corporation for F.E.L.I.X
technology.*
10.1.8 Voting Trust dated October 21, 2003, covering options on
18,000,000 shares of Common Stock issued to John Daly.*
10.1.9 Voting Trust dated October 21, 2003, covering options on
25,000,000 shares of Common Stock issued to John Daly.*
10.1.10 Assignment Agreement to Celebration International
Pictures, Ltd. dated August 23, 2004 of rights to "The
Aryan Couple."**
10.1.11 Literary Purchase Agreement dated December 23, 2003 for
"The Harder they Fall."*
10.1.12 Voting Trust dated May 21, 2003 covering 18,000,000
shares of Common Stock issued to Satish Patel.*
10.1.13 Voting Trust dated May 21, 2003 covering 9,000,000 shares
of Common Stock issued to Michel Meyer.*
10.1.14 Voting Trust dated May 21, 2003 covering 18,000,000
shares of Common Stock issued to Criscione family trust.*
10.1.15 Voting Trust dated May 23, 2003 covering 1,600,000
shares of Common Stock issued to Lawrence Lotman.*
10.1.16 Voting Trust dated October 31, 2003 covering 10,000,000
shares of Common Stock issued to John Daly.*
10.1.17 Sublease of space, 5670 Wilshire Blvd, Los Angeles, CA
dated October 28, 2003.*
22
10.1.18 Agreement dated October 27, 2003 between the Company and
Michael Meyers and Michael Criscione to produce pictures.*
10.1.19 Settlement Agreement dated May 12, 2004 with Miracle
Entertainment.*
10.1.20 Settlement Agreement dated November 16, 2004 between the
Company and Michael Criscione.*
10.1.21 Producer/Distributor Agreement dated June 26, 2003 "At
First Dawn" (aka "The Garrison").**
10.1.22 Producer/Distributor Agreement dated July 25, 2003
"Tournament of Dreams".*
10.1.23 Producer/Distributor Agreement dated November 12, 2002
"Petersburg-Cannes Express".*
10.1.24 Foreign Sales Agreement dated January 25, 2005 "The
Aryan Couple".**
10.1.25 Distribution Agreement dated January 13, 2005 "Waking
Up Dead".**
10.1.26 Production and Distribution Agreement dated April 15,
2005 "Played".**
10.1.27 Settlement Agreement dated February 2, 2005 between the
Company and Satish Patel.**
10.1.28 Option and Distribution Agreement for "Libertad" dated
December 20, 2004 between Company and Allied Capital Corp.
10.1.29 Finder's Agreement dated August 8, 2005 between Company
and the Shemano Group.
10.1.30 Property Option and Acquisition Agreement dated September
22, 2005 between Celebration Productions and Molto
Crescendo Ltd and Beryl Jane Hawking for film rights to
"Music To Move The Stars"
10.1.31 Option Letter doe "Cheeseheads" between dated August 15, 2005
between Blood and Bones Productions and Kenwood Youmans.
10.1.32 Finance, Co-Production and Distribution Agreement for "The
Principal and the Third Grade Teacher" (a/k/a "Moonpie") dated
August 1, 2005 between Company and Roundlake Productions Ltd.
10.1.33 Assignment and Assumption Agreement for "Tournament of
Dreams" dated January 29, 2004 between Company, TOD-1, Inc.
and CMX Productions, Inc.
10.1.34 Option and Acquisition Agreement for "Emily" dated
December 12, 2005 between Company and Mark Clausen and
Gina Davidson.
10.1.35 C0-production Letter of Intent dated January 13, 2006
between Company and Red Hot Entertainment and 100%
Entertainment, Inc.
10.2.1 Employment Agreement dated May 23, 2003 with John Daly.*
10.2.2 Stock Option Agreement dated May 23, 2003 with John Daly.*
10.2.3 Employment Agreement dated May 23, 2003 with Lawrence Lotman.*
10.2.4 Stock Option agreement dated May 23, 2003 with Lawrence Lotman.*
10.2.5 Employment Agreement dated May 23, 2003 with Satish Patel.*
10.2.6 Stock Option agreement dated May 23, 2003 with Michael Meyer.*
10.2.7 Employment Agreement dated May 23, 2003 with Michael Meyer.*
10.2.8 Employment Loanout Agreement dated July 1, 2004 between
Film & Music Entertainment, Inc. and Red Giants
Productions, Inc.*
10.2.9 Employment Agreement dated May 23, 2003 with Michael Criscione.*
10.2.10 Code of Ethics, adopted December 15, 2004.**
(*) Previously filed as an exhibit to our Registration Statement
on Form 10SB filed on February 14, 2005.
(**) Previously filed as an exhibit to our Registration Statement
on Form 10SB/A filed on August 4, 2005.
23
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SIGNATURES
In accordance with the provisions of Section 12 of the Securities
Exchange Act of 1934, Film and Music Entertainment, Inc., has
duly caused this Registration Statement On Form 10SB-A/2 to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Los Angeles, California, on January 31,
2006.
Film and Music Entertainment, Inc., a Nevada corporation
By: /s/John Daly
--------------------------------
John Daly
Its: Chairman, President and CEO
Dates Referenced Herein and Documents Incorporated by Reference
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