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 64 354K
Small-Business Issuer
2: EX-10.1.10 Material Contract 2 12K
3: EX-10.1.21 Material Contract 3 11K
4: EX-10.1.24 Material Contract 54 197K
5: EX-10.1.25 Material Contract 7 30K
6: EX-10.1.26 Material Contract 12 54K
7: EX-10.1.27 Material Contract 23 93K
8: EX-10.2.10 Material Contract 6 24K
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/1
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.
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(Exact name of registrant as specified in its charter)
O-51164
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(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:
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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.
Background of the Company. 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. 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 and became President. Under his
direction we re-focused on entertainment and changed the Company
name to Film and Music Entertainment, Inc. We also
acquired real estate and has developed its first feature film:
"The Aryan Couple" which was released in December, 2004 in two
theaters for Academy consideration for the Oscar awards. Four
additional features are in various stages of development.
In May, 2003 we announced stock swap agreements for the
acquisition of 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.
In connection with these transactions all previously granted
options were extinguished unless exercised immediately and all
previously issued convertible notes were converted to Common
Stock. 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 Mr.'s 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 million new Options and Mr. Lotman received
1,600,000 new Options. All were priced at $0.01. However, over
64,700,000 of the issued shares and Options granted carry
restrictions and have been placed in new voting trusts 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.
4
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 production and distribution projects. Mr. John Daly,
who is the Company's Chairman, President and CEO was at the time also
the President of MEI. After the acquisition MEI 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 MEI's film assets. The total purchase
price was $2,752,076 which equals the 18,347,175 shares of our 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. The value of the 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 as assigned
was within the range that could have been achieved had Mr. Daly
not been related to both the companies. 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. 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
===============
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.
Market Price of and Dividends on the Company's Common Equity
-------------------------------------------------------------
and Related Matters. We have issued one class of
------------------- common equity trading on the Pink sheets
under the symbol FLME. As of June 30 2005 there were 202
shareholders of record plus shares held in street names. The
share price during the year 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 June 30,2005 was $0.027 with a 150 day average
trading volume of approximately 78,000 shares and a 20 day
average trading volume of approximately 50,000 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.
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 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 2005.
Organization. We have organized ourselves into three wholly-
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owned operating subsidiaries and three 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
New Developments in the Entertainment Industry Favor Our Business.
-----------------------------------------------------------------
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 of a feature film by a major
studio is now $52 million. The generally accepted cost of a US
theatrical release exceeds $30 million. By contrast the average
cost of an independent film is $1.5 million to $4 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
type 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 have
increased from 17,000 (1980) to 35,000 (2002). 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 HD
cameras is making the film making 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 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.
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.
Our Tactics: The Company seeks to conduct its business along the
-----------
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 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 give 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 only 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 vacant land
----------------------
that is situated in areas subject to development and which we
believe will appreciate significantly over the coming years. 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 there is a
greater than 50% 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.
We attempt 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. 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."
Projects in development include:
-------------------------------
"Calico Jack" A modern "pirate" family action comedy
intended to appeal to the same audiences as
"Pirates of the Caribbean." Anticipated
budget $10 million. This is a completed script
by our Chairman, John Daly, with whom the Company
has a verbal agreement for co-production and
distribution. It is in the early stages of
pre-development. Production planned for 2006.
The Company anticipates being co-producer and
distributor.
Film Production. 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 forgivenesses;
cash grants; loans and cost abetments). 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.
Films completed/in production/or being prepared for production
"Petersburg - Cannes Express" Completed Spring, 2003. Budget $4
million. Released November, 2003.
We acquired certain distribution rights
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)
"Tournament of Dreams" Principal photography completed November
2003. We acquired distribution
rights under the acquisition of Miracle
Productions, Inc. dated 10/27/03 subject to
the terms of the Production and Distribution
Agreement between Miracle Entertainment Inc.
and CMX dated 7/25/03(See Exhibit 10.1.3 and
10.1.22.) We returned the distribution
rights to CMX as part of a settlement of
disputes between the companies and have
received $37,000 in exchange.
7
"The Aryan Couple" Principal photography completed June,
2004. Limited Academy consideration
release occurred in December, 2004 with
further release continuing in 2005.
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)
"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 2005. Release planned, Spring - Summer,
2006. 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 principal photography;
including completing the shooting script,
budgets, production schedule, and attaching
major elements to the project usually
including director and lead cast)
"Waking Up Dead" Documentary of a rock and roll drummer and
the human toll of sex drugs and Rock & Roll.
Completed January 2005. Subsidiary,
Celebration Pictures, Inc. has world wide
distribution rights under the Distribution
Agreement dated January 13, 2005 between
Eris Productions and Company (See Exhibit
10.1.25).
"Played" Gritty British style gangster/thriller
commenced principle photography in London
May 2005, with an anticipated completion
date of October 1, 2005. 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)
Film Distribution. We have our own distribution system, which
-----------------
can make copies of the master negative ("prints"), book theaters,
place advertising, create publicity and collect revenues.
We will use our system to distribute films which we believe
will succeed in US markets through a technique called
"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 $285,000,000
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" did this recently, approaching $30,000,000 in box
office receipts while prior to playing in more than 300 theaters at
a time. These are the exception. More typical 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 Predjudice" 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:
below are rates management has found typical 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
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 lasts may last from a single
weekend 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 revenues are received within the first 18 months
of a film's release with the vast majority of income received within
the first five years of release.
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 MPAA total P&A costs for 2003
were $39 billion.
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 typical
costs for a release on 1500 screens running $10-15 million and for
2000-2500 screens running $20-25 million.
Film Sales. We have our own sales 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
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 major 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 every script (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.
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 new 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.
How We Finance Our Films. 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 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 his investment as well as
payments of any return earned by 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 brining in third party investors. We have had
discussions with major Banks regarding loans for the production of
films. 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 varies 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.
Risk Factors.
------------
There are Risks of Competition in the Film Industry.
---------------------------------------------------
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, Warner Brothers, Fox and Sony 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, MCA/Universal, Sony Pictures
Entertainment, Twentieth Century Fox; Time Warner; and MGM/UA
Inc., 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.
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.
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. 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.
There are Risks of Financing Uncertainties.
------------------------------------------
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. 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.
There are Risks of Internet Competition.
---------------------------------------
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
There are Risks of Technological Changes.
----------------------------------------
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.
There are 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.
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 Motion Picture Industry,
including us, may continue to lose an indeterminate amount of
revenue as a result of motion picture piracy. 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.
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, 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. If
any of the Company's securities become subject to the penny stock
rules, 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). 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. Arkadiy Golubovich is a film actor and
received compensation for his role in "The Aryan Couple."
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 six months
ended June 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 the first six months of 2005
production service relating to the development of the film "The
Harder They Fall". 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.
Our wholly-owned Celebration Pictures, Inc. provides sells and
distribution services for North America for our and third party
productions. In the first six months of 2005 Celebration Pictures
has been providing these services on two films, "The Aryan Couple"
and "Waking Up Dead". Revenues are recognized as earned. 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 the first six months of 2005 Celebration Pictures
has been providing these services on two films, "The Aryan Couple"
and "Waking Up Dead". Revenues are recognized as earned. 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: Six months ended June 30, 2005 compared to
-----------------------------------------------------------------
June 30, 2004
--------------
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
quarter. 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 this year.
Selected Statement of Operating Data
-------------------------------------
Summarized in the table below is a statement of operating data
comparing the six months ended June 30, 2005 with the six months
ended June 30, 2004. Please see unaudited Financial Statements of
the Company for these periods set forth on Pages F-21 - F-34.
[Download Table]
Six Months Ended
----------------
June June
30, 2005 30, 2004
(unaudited) (unaudited)
----------- -----------
REVENUE $ 162,024 $ -
OPERATING EXPENSES
Production costs 178,566 64,182
Advertising costs 4,702 8,937
Compensation expense 156,603 124,625
Consulting expense 24,134 26,920
General and administrative expenses 252,950 155,396
----------- -----------
TOTAL OPERATING EXPENSES 616,955 380,060
----------- -----------
LOSS FROM OPERATIONS (454,931) (380,060)
----------- -----------
OTHER INCOME (EXPENSE)
Other income 500 5,000
Investment income 10,204 2,091
Unrealized loss on marketable equity securities (21,405) -
Realized loss on sale of marketable equity
securities (29,216) -
Gain on disposition of real estate 208,500 -
----------- -----------
TOTAL OTHER INCOME (EXPENSE) 168,583 7,091
----------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES (286,348) (372,969)
----------- -----------
PROVISION FOR INCOME TAXES - -
----------- -----------
NET LOSS $ (286,348) $ (372,969)
=========== ===========
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.00) $ (0.00)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC
AND DILUTED 127,643,602 116,374,395
=========== ===========
Revenues and Gross Profits
--------------------------
Revenue for the six-month interim period ended June 30, 2005 was $162,024,
as compared to $0 for the corresponding interim period in fiscal 2004.
Our revenues for the six-months interim period ended June 30, 2005 were
principally derived from 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 six months ended June 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 six-months interim
ended June 30, 2005 and June 30, 2004 were $616,955, and $454,931
respectively, as compared to $380,060 and $380,060 for the corresponding
interim period in fiscal 2004.
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 and Expense and Net Loss
-------------------------------------
Other Income and Expense for the six-months ending June 30, 2005 was
$168,583 as compared with $7,091 for the six-months ending June 30, 2004.
This increase was entirely due to a gain of $208,500 realized on the
disposition of real estate to a stock holder in return for 15,750,000
shares of the Company's common stock.
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 and Gross Profits
--------------------------
Revenue for the six-month interim period ended June 30, 2005 was
$162,024, as compared to $0 for the corresponding interim period
in fiscal 2004.
Our revenues for the six-months interim period ended June 30, 2005
were principally derived from 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 six months ended June 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 six-months
interim ended June 30, 2005 and June 30, 2004 were $616,955,
and $454,931 respectively, as compared to $380,060 and $380,060
for the corresponding interim period in fiscal 2004.
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 and Expense and Net Loss
-------------------------------------
Other Income and Expense for the six-months ending June 30, 2005
was $168,583 as compared with $7,091 for the six-months ending
June 30, 2004. This increase was entirely due to a gain of
$208,500 realized on the disposition of real estate to a stock
holder in return for 15,750,000 shares of the Company's common stock.
Historical Sources of Cash
--------------------------
For the period January 1, 2005 through June 30, 2005 we principally
financed our operations through cash on hand derived from the sale
in April 2004 of the sale of common shares for cash ($5,000,000).
Additional cash was derived from income from operations, primarily
from the sale of the distribution right of "Tournament of Dreams"
and from production fees.
Cash Position and Sources and Uses Of Cash
------------------------------------------
Our cash and cash equivalents position as of June 30, 2005 was
$1,529,124 as compared to $3,179,658 as of December 31, 2004.
The decrease in our cash and cash equivalents for the six-month
interim period ended June 30, 2005 was attributable to an increase
in equity securities of $817,121, an increase of $163,652 of film
costs, and operating expenses
Our operating activities used cash in the amount of $616,955 for
the six-month interim period ended June 30, 2005, as compared to
$380,060 for the corresponding interim period in fiscal 2004. The
$616,955 in cash used in operating activities for the six-month
interim period ended June 30, 2005 reflected our net loss of $286,348
for that period, as decreased for non-cash deductions, such as
depreciation, realized and unrealized gains and losses on equity
securities, investment income and disposal of real estate. The
$380,060 of cash used in operating activities for the six-month
interim period ended June 30, 2004 reflected our net loss of
$372,969 for that period, as decreased for other income. The
decrease in our net loss for the six-month interim period ended
June 30, 2005 over the corresponding period in fiscal 2004 is
attributable to the gain on the disposition of real estate.
Capital Resources Going Forward
-------------------------------
We have approximately $1,529,000 of cash on hand as of June 30, 2005
to fund our operations going forward. The Company also has on hand
approximately $1,477,000 of marketable equity securities as of the
date of this date which the Company is holding as reserves for future
operations. Our plan of operation for the twelve month period
following the date of this quarterly report is for the Company and
its subsidiaries to continue to develop, produce, sell and distribute
motion pictures. The Company primarily uses third party investor
funds for such activities; however the Company may provide limited
funds for such activities where Management deems it prudent. We
currently have budgeted approximately $1,500,000 in costs for the
twelve month period following the date of this quarterly report,
including approximately $650,000, in costs relating to the
development, production, sales and distribution of films and
$850,000 in general, sales and marketing expenses.
The Company attempts to cash flow most costs relating to film
production and distribution from third party direct investments.
Occasionally, the Company may front certain costs to expedite a
project to achieve certain goals. The Company attempts to structure
any such expenditure so that they are recouped from any further
funding in the specific project. If no such further finding occurs
the Company may not be able to recoup these expenditures. To date,
the Company has limited such expenditures as to be non-material.
Our assets are reasonably liquid with a substantial majority
consisting of cash and cash equivalents, and investment
securities. Both our total assets as well as the individual
components as a percentage of total assets may vary significantly
from period to period because of changes relating to production
and distribution schedules, sales revenues, customer demand,
seasonal, economic and market conditions. Our total net assets at
September 30, 2004 were $5,754,971 compared to $976,664 at
December 31, 2003. The Company has no plans to increase the number
of employees at this time or to substantial change its overhead
structure. The only current plans affecting overhead would be the
costs associated with the addition of independent directors to the
Board and D & O Insurance. With these additional expenses, the
Company would still have sufficient cash, cash equivalents and
liquidateable investment securities to cover operating expenses
for the next 36 months.
We believe that cash generated by operations in conjunction with our
available working capital will be sufficient to continue our business
for the next twelve months. We believe that our capital structure
is adequate for our current operations. We continually review
our overall capital and funding needs to ensure that our capital
base can support the estimated needs of the business. These reviews
take into account current business needs as well as the Company's future
capital requirements. Based upon these reviews, to take advantage of
strong market conditions and to fully implement our expansion
strategy, we believe that we may continue to increase our net
capital by the proceeds of private sales of our securities.
For more information on the cash flows of the Company, please see
the statement of cash flows included in the Company's financial
statements appearing elsewhere herein.
Should our costs and expenses prove to be greater than we currently
anticipate, or should we change our current business plan in a manner
that will increase or accelerate our anticipated costs and expenses,
such as through an acquisition of new products, the depletion of our
working capital would be accelerated. To the extent it become
necessary to raise additional cash in the future as our current
cash and working capital resources are depleted, we will seek to
raise it through the sell of the equity securities owned by the
Company, public or private sale of debt or equity securities, the
procurement of advances on contracts or licenses, funding from
joint-venture or strategic partners, debt financing or short-term
loans, or a combination of the foregoing. We may also seek to
satisfy indebtedness without any cash outlay through the private
issuance of debt or equity securities. We currently do not have
any binding commitments for, or readily available sources of,
additional financing. We cannot give you any assurance that we
will be able to secure the additional cash or working capital we
may require to continue our operations in such circumstances.
Our anticipated costs described above are estimates based upon
our current business plan. Our actual costs could vary
materially from those estimated. Further, we could also change
our current business plan resulting in a change in our anticipated
costs. See the discussion concerning forward-looking statements.
To date we have financed our operations through the private
placement of equity securities. On May 4, 2004 we completed a
private placement of 50,000,000 shares of our Common Stock for
a total consideration of $5,000,000. We have not employed any
significant leverage or debt.
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.
Critical Accounting Policies
----------------------------
Our discussion and analysis of our financial condition and results
of operations are based upon our financials 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.
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.
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
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 ownership of our Common
Stock (our only class of stock entitled to vote on
general corporate matters) as of June 30, 2005 as to each person or
entity who owns more than five percent (5%) of the outstanding shares:
NAME & ADDRESS SHARES OWNED ISSUED SHARES
-------------- ------------ -------------
John Daly, Chairman, 25,795,187 shares* (18.214%)
President, CEO 46,250,000 options*
5670 Wilshire Bl. #1690
Los Angeles, CA. 90036
Lesteron,Ltd. 50,000,000 shares* (40.743%)
Akara Bldg.
24 De Castro Street
Wickhams Cay Island
Road Town, British Virgin Islands
Miracle Entertainment, Inc. 12,000,000 shares** (9.774%)
c/o James T. Zelloe, Esq.
11350 Random Hills Rd, #700
Fairfax, VA. 22030
Red Giants Productions, Inc 8,013,158 shares (6.4%)
c/o R. Oppenheim, Esq.
2300 Sepulveda Blvd.
Los Angeles, CA 90064
Lawrence S. Lotman 5,000,000 shares* (4.048%)
Secretary, VP Finance 2,000,000 options*
5670 Wilshire Blvd. #1690
Los Angeles, CA. 90036
* 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. Several trusts were established in 2003 and
2004 with Lance Bogart, CPA of Los Angeles, CA as trustee. It 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. It 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 6 months of the securities held for the benefit of that
beneficiary for sale or other disposition. Currently 1,800,000 shares
and 81,207,000 options are held in the trusts.
** Of which 2,500,000 are held by the Company as security for a
$12,500 note owed by MEI to the Company which is due and payable
December 15, 2004.
The following table sets forth the record ownership of our Common
Stock (the Company's only class of stock entitled to vote on
general corporate matters) as of June 30, 2005 as to (i) each
director, (ii) each officer and (iii) all directors and
officers as a group.
15
NAME & TITLE SHARES OWNED PERCENT OF CLASS
------------ ------------ ----------------
John Daly, Chairman, 25,795,187 shares* (18.214%)
President, CEO
Lawrence S. Lotman,
VP Finance/Secretary 5,000,000 shares* (4.04%)
All Officers and Directors
As a Group (2 in number) 30,795,187 shares* (21.472%)
* Includes options not yet exercised but capable of being exercised
within 60 days of the date of this document.
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 June 30, 2005 are as follows:
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 17 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 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 last two years with Miracle Entertainment in its Film
distribution sales and marketing department.
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
--------------------------
NAME AND TITLE YEAR SALARY
-------------- ---- ------
John Daly, President 2005 $ 104,000
Lawrence Lotman, Secretary 2005 $ 52,000
All the above executives were employed on a full-time basis under five
year employment agreements dated May 23, 2003, (see 10.2.1 and 10.2.4)
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.
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). He is also co-writer of "Harder They Fall", a script currently in
development. Arkadiy Golubovich is a film actor and
received compensation for his role in "The Aryan Couple."
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 June 30, 2005 125,170,398 shares of
our Common Stock weree 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.)
As of June 30, 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. If
any of the Company's securities become subject to the penny stock
rules, 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.
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
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 (761,987) (36,207)
------------- --------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (32,065) (3,330)
Purchase of marketable equity securities (672,120) -
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 (1,178,031) (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
----------
Film costs related to theatrical and television product (which
includes direct production costs, production overhead and
acquisition costs) are stated at the lower of unamortized cost or
estimated fair value and classified as non-current assets. Film
costs are amortized, and the estimated liabilities for residuals
and participations are accrued, for an individual product based
on the proportion that current period actual revenues bear to the
estimated remaining total lifetime revenues. These estimates are
reviewed on a periodic basis. 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. As of the December 31, 2004 the market value of
the Company's stock exceeded the carrying value of the note.
Therefore, no write down of the note was deemed necessary
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.
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 81,407,000 $ 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 in 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, no write
down of this receivable is necessary at December 31, 2004.
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.
F-20
Film and Music Entertainment, Inc. and Subsidiaries
Consolidated Financial Statements
Six Months Ended June 30, 2005 and 2004
(Unaudited)
Contents
Page
----
Financial Statements:
Consolidated Balance Sheet as of June 30, 2005 (unaudited) F-21
Consolidated Statements of Operations for the six months ended
June 30, 2005 and 2004 (unaudited) F-22
Consolidated Statement of Stockholders' Equity for the six
months ended June 30, 2005 (unaudited) F-23
Consolidated Statements of Cash Flows for the six months ended
June 30, 2005 and 2004 (unaudited) F-24
Notes to Consolidated Financial Statements (unaudited) F-26
Film and Music Entertainment, Inc. and Subsidiaries
Consolidated Balance Sheets
June
30, 2005
(unaudited)
-------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,529,124
Restricted cash 40,518
Loan receivable from Miracle Entertainment, Inc. 25,000
Other current assets (including amounts due from
related party of $12,010) 90,846
-------------
TOTAL CURRENT ASSETS 1,685,488
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $11,439 47,014
REAL ESTATE INVESTMENTS 430,000
FILM COSTS 238,652
INVESTMENT IN EQUITY SECURITIES 1,477,070
-------------
TOTAL ASSETS $ 3,878,224
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 56,736
Accrued expenses (including amounts due from related
party of $2,848) 150,070
Production advances 9,188
-------------
TOTAL CURRENT LIABILITIES 215,994
-------------
COMMITMENT AND CONTINGENCIES (Note 6) -
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 21,116,142
Accumulated deficit (17,579,082)
-------------
TOTAL STOCKHOLDERS' EQUITY 3,662,230
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,878,224
=============
The accompanying notes are an integral part of
these consolidated financial statements
F-21
Film and Music Entertainment, Inc. and Subsidiaries
Consolidated Statements of Operations
[Enlarge/Download Table]
Six Months Ended
---------------------------------
June June
30, 2005 30, 2004
----------- -----------
(unaudited) (unaudited)
REVENUE $ 162,024 $ -
OPERATING EXPENSES
Production costs 178,566 64,182
Advertising costs 4,702 8,937
Compensation expense 156,603 124,625
Consulting expense 24,134 26,920
General and administrative expenses 252,950 155,396
------------- -------------
TOTAL OPERATING EXPENSES 616,955 380,060
------------- -------------
LOSS FROM OPERATIONS (454,931) (380,060)
------------- -------------
OTHER INCOME (EXPENSE)
Other income 500 5,000
Investment income 10,204 2,091
Unrealized loss on marketable equity securities (21,405) -
Realized loss on sale of marketable equity securities (29,216) -
Gain on disposition of real estate 208,500 -
------------- -------------
TOTAL OTHER INCOME (EXPENSE) 168,583 7,091
------------- -------------
LOSS BEFORE PROVISION FOR INCOME TAXES (286,348) (372,969)
PROVISION FOR INCOME TAXES - -
------------- -------------
NET LOSS $ (286,348) $ (372,969)
============= =============
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.00) $ (0.00)
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC
AND DILUTED 127,643,602 116,374,395
============= =============
The accompanying notes are an integral part of
these consolidated financial statements
F-22
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) (22,500) (25,000)
Shares canceled in connection with transfer of
real estate investment to former owner (15,750,000) (15,750) (456,750) (472,500)
Net loss - - - (286,348) (286,348)
------------- --------- ------------- -------------- -------------
Balance, June 30, 2005 125,170,398 $ 125,170 $ 21,116,142 $ (17,579,082) $ 3,662,230
============= ========= ============= ============== =============
The accompanying notes are an integral part of
these consolidated financial statements
F-23
Film and Music Entertainment, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
[Download Table]
Six Months Ended
----------------------------
June June
30, 2005 30, 2004
----------- -----------
(unaudited) (unaudited)
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (286,348) $ (372,969)
Adjustment to reconcile net loss to net cash
used in operating activities:
Depreciation expense 5,197 1,444
Common stock issued for services - 3,700
Unrealized loss on marketable equity securities 21,405 -
Gain on disposition of real estate (208,500)
Changes in operating assets and liabilities:
Other current assets (82,412) (30,155)
Film costs (163,652) -
Accounts payable (27,752) 29,044
Accrued expenses (23,754) 97,980
Production advances (33,134) 31,563
----------- -----------
Net cash used in operating activities (798,950) (239,393)
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (13,058) -
Purchase of marketable equity securities (1,539,151) -
Sale of marketable securities 700,625 -
Purchase of real estate - (337,048)
----------- -----------
Net cash used in investing activities (851,584) (337,048)
----------- -----------
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 (1,650,534) 4,430,531
CASH AND CASH EQUIVALENTS, Beginning of period 3,179,658 112,079
----------- -----------
CASH AND CASH EQUIVALENTS, End of period $ 1,529,124 $ 4,542,610
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Interest paid $ - $ -
=========== ===========
Income taxes paid $ - $ -
=========== ===========
The accompanying notes are an integral part of
these consolidated financial statements
F-24
Film and Music Entertainment, Inc. and Subsidiaries
Consolidated Statements of Cash Flows, continued
Supplemental non-cash investing and financing activities:
Unaudited - During the six months ended June 30, 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 2,450,000 shares of its
common stock for the exercise of options, the exercise price
being paid as a reduction in accrued expenses of $1,225; and
issued 90,000 shares of its common stock for services valued at
$3,700.
Unaudited - During the six months ended June 30, 2005, the
Company canceled 2,500,000 shares of common stock valued at
$25,000 that was used to secure a loan receivable from Miracle
Entertainment, Inc.; and issued 2,450,000 shares of its common
stock for the exercise of options, the exercise price being paid
as a reduction in accrued expenses of $1,225. In addition, the
Company exchanged $264,000 of real estate it owned for the
cancellation of 15,750,000 shares of common stock valued at
$472,500.
The accompanying notes are an integral part of
these consolidated financial statements
F-25
Film and Music Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2005 and 2004
(Unaudited)
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.
Interim Financial Statements
----------------------------
These unaudited interim financial statements furnished
reflects all adjustments, consisting only of normal
recurring adjustments, which in the opinion of management,
are necessary to fairly state the Company's consolidated
financial position, the consolidated results of their
operations, and cash flows for the periods presented. The
results of operations for the six months ended June 30, 2005
are not necessarily indicative of the results for the entire
fiscal year ending December 31, 2005. The accompanying
unaudited financial statements not include all the
disclosures normally required by generally accepted
accounting principles.
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.
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 expenses during the
reporting periods. As of June 30, 2005, 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.
F-26
Film and Music Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2005 and 2004
(Unaudited)
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.
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
F-27
Film and Music Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2005 and 2004
(Unaudited)
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.
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 June 30, 2005 is as
follows:
Historical costs basis $1,510,646
Unrealized gains 116,923
Unrealized losses (150,499)
----------
Fair value $1,477,070
==========
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.
F-28
Film and Music Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2005 and 2004
(Unaudited)
Film Costs
----------
Film costs related to theatrical and television product
(which includes direct production costs, production overhead
and acquisition costs) are stated at the lower of
unamortized cost or estimated fair value and classified as
non-current assets. Film costs are amortized, and the
estimated liabilities for residuals and participations are
accrued, for an individual product based on the proportion
that current period actual revenues bear to the estimated
remaining total lifetime revenues. These estimates are
reviewed on a periodic basis.
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.
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.
F-29
Film and Music Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2005 and 2004
(Unaudited)
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 June 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.
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 six months ended June 30, 2005 and 2004, 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
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-
F-30
Film and Music Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2005 and 2004
(Unaudited)
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 - 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 of
the June 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 3 - Property and Equipment
The cost of property and equipment at June 30, 2005
consisted of the following:
December 31,
2004
------------
Computers $ 3,330
Automobile 32,065
Furniture and fixtures 23,058
----------
58,453
Less accumulated depreciation (11,439)
----------
$ 47,014
==========
Depreciation expense for the six months ended June 30, 2005
and 2004 was $5,197 and $1,444, respectively.
F-31
Film and Music Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2005 and 2004
(Unaudited)
Note 4 - 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 5 - Stockholders' Equity
Common stock
------------
During the six months ended June 30, 2005, the Company has
the following transactions in its common stock:
* 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;
* canceled 15,750,000 shares of its common stock valued at
$472,500 for a certain parcel of real estate; and
* canceled 2,500,000 shares of common stock valued at $25,000
that was used to secure a loan receivable.
Options
-------
The following table summarizes the options outstanding:
[Download Table]
Weighted
Average
Exercise
Options Price
---------- -----------
Balance, December 31, 2004 81,407,000 $ 0.0077
Exercised (2,450,000) $ 0.0005
----------
Balance, June 30, 2005 78,957,000 $ 0.0079
==========
Exercisable, June 30, 2005 78,957,000 $ 0.0079
==========
F-32
Film and Music Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2005 and 2004
(Unaudited)
Note 6 - Commitments and Contingencies
Litigation
----------
In the ordinary course of business, the Company is generally
subject to claims, complaints, and legal actions. At June
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.
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.
F-33
Film and Music Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2005 and 2004
(Unaudited)
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-34
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 10-SB-A/1 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: August 1, 2005
/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 10-SB-A/1 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: August 1, 2005
/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 10-SB-A/1 for the period ended June 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 1st day of August, 2005.
/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
10-SB-A/1 for the period ended June 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 1st day of August, 2005.
/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.
10.2.1 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.
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23
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 10-SB
to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Los Angeles, California, on July
26, 2005.
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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