U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB
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)
NEVADA 01-0802-246
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5670 Wilshire Boulevard, Suite 1690, Los Angeles, California 90036
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(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:
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None Not Applicable
Securities to be registered under Section 12(g) of the Act:
Common Stock, Par Value $.001
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(Title of Class)
Copies to:
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Geoffrey T. Chalmers,
33 Broad Street
Boston, MA 02109
(617) 523-1960
(617) 227-3709
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
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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-19
PART III
1. Index to Exhibits 22
Signatures 23
3
PART I
Item 1. Description of Business.
Special Cautionary Notice Regarding Forward-Looking Statements.
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Various matters discussed in this document and in documents
incorporated by reference herein, including matters discussed
under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations," may constitute
forward-looking statements for purposes of the Securities Act and
the Securities Exchange Act. These forward-looking statements may
involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements
of Film and Music Entertainment, Inc. (the "Company") to be
materially different from future results, performance or
achievements expressed or implied by such forward-looking
statements. The words "expect," "anticipate," "intend," "plan,"
"believe," "seek," "estimate," and similar expressions are
intended to identify such forward-looking statements. The
Company's actual results may differ materially from the results
anticipated in these forward-looking statements due to a variety
of factors, including, without limitation:
* The effects of future economic conditions;
* Governmental monetary and fiscal policies, as well as
legislative and regulatory changes;
* The risks of changes in interest rates on the level and
composition of deposits, loan demand, and the values of loan
collateral, securities and interest rate protection
agreements, as well as interest rate risks;
* The effects of competition from other film producers
operating in the Company's market area and elsewhere,
including firms operating locally, regionally, nationally and
internationally, together with such competitors offering
services by mail, telephone, and computer and the Internet; and
* The failure of assumptions underlying the establishment of
reserves for possible loan losses and estimations of values of
collateral and various financial assets and liabilities.
All written or oral forward-looking statements attributable to
the Company are expressly qualified in their entirety by these
cautionary statements.
Background of the Company. Film and Music Entertainment ("FAME"
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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 the Company re-focused on entertainment and changed its
name to Film and Music Entertainment, Inc. The Company 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 the Company 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 and all stock held in Trusts was issued based on
acceleration clauses. On completion of the transactions, the
required conversions and accelerations, and based upon the amount
of options actually exercised, the number of issued and
outstanding shares rose from 24,403,050 to approximately
98,000,000. However, over 66,000,000 of the issued shares carry
restrictions and have been placed in voting trusts to be "dripped
out" over a four year period.
4
In November, 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)
certain of the latter's current film production and
distribution projects. After the acquisition Miracle Productions
changed its name to Celebration Productions, Inc. The acquisition
price was 20,000,000 shares of our Common Stock and ongoing
royalties from the exploitation of Miracle's film assets. Mr.
Daly became Chairman, President and CEO of FAME upon completion
of the acquisition of Miracle. Miracle owed us $350,000 as part
of the acquisition agreement. A balance of $188,615.71 remained
unpaid in May, 2004 as well as an additional $14,258.12 relating
to a previous stock purchase by Miracle of FAME stock. We
settled these obligations, receiving back 1,654,000 shares of
FAME and a $50,000 note secured by 5,000,000 of the outstanding
shares of FAME which had been issued to Miracle as part of the
acquisition.
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.
Business of the Company. We intend to become a leading
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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:
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.
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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. 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. These large
companies cannot turn out enough profitable product to satisfy
world demand.
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 possible
to recover these costs on a consistent and rapid basis. 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. 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
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financing wherever possible. Our management recognizes that this
ability will allow the Company to attract higher quality
independent projects.
Our Tactics can be summarized as follows:
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* 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.
* Seek to expand the real estate portfolio in properties where
appreciation is most likely and/or where above average returns
are possible.
* Invest excess funds in targeted entertainment related
businesses which show promise for growth and cash flow to the
Company.
Real Estate Investment. Our real estate portfolio is mainly land
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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
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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.
As development financier, our commitment usually allows us to be
repaid our initial development costs on the first day of
principal photography and gives us an ongoing share of the
producer's net profits.
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:
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"Calico Jack" A modern "pirate" family action comedy
intended to appeal to the same audiences as
"Pirates of the Caribbean." Anticipated
budget $10 million. In pre-development.
Production planned for late 2005 - 2006. The
Company anticipates being co-producer and
distributor.
Film Production. We commit to producing films that can be, or are
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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. Before a film is "greenlighted"
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 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. The Company co-distributes
and owns certain distribution
rights.
"Tournament of Dreams" Principal photography completed
November, 2003. Now in post
production. Budget $1.7 million.
The Company co-distributes and
owns certain world-wide rights.
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 Producer and Distributor.
"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, 2006. Budget $12-15
million (Company is currently
Pre-Production Supervisor and
Co-Distributor).
"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.
Film Distribution. We have our own distribution system, which
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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 several
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. "Lost in
Translation" did this recently, approaching $30,000,000 in box
office receipts while never playing in more than 300 theaters at
a time.
If the Company believes a film can be a mega-hit we may have the
ability to team up with a major studio. The studio would then
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 may film markets outside the U.S.
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 typical rates:
Market Rate
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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 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,
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.
A similar release schedule occurs 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. In any case, 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
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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.
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
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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, 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
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the success of a film at the box office to gauge audience
response to a film. It is now an established industry tenet 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
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, 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
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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).
Merchandising. Selling products online and offline related to our
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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.).
Internet. Some independent filmmakers are attempting to turn the
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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. The Company owns certain video streaming
----------------------
technology developed before 2001. The Company 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. F.E.L.I.X. enables a server to send, and enables a client
to retrieve, real-time video and audio over the Internet. It uses
a highly efficient algorithm to significantly improve low-
bandwidth video transmission. We have
licensed our F.E.L.I.X. streaming video technologies to Western
Media Group Corporation for its use for all US Medical related
usages.
We have also developed the Afterburner Web Server, a high
capacity; high efficiency server owned by us which boasts maximum
performance and reliability. Afterburner can economically
increase web hosting capacity, web access speed, reduce bandwidth
requirements, and prevent server crashes during peak demand.
Risk Factors.
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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.
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. There
can be no assurance that additional or more restrictive
theatrical or television quotas will not be enacted or
that countries with existing quotas will not 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.
Financing Uncertainties. To achieve and maintain competitiveness,
-----------------------
we may be required to raise substantial funds. 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. There can be no
assurance that additional funding will 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.
Internet Competition. The Internet market is new, rapidly
--------------------
evolving and intensely competitive. 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
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. There can be no
assurance that communication or commerce over the Internet will
increase or that extensive content will continue to be provided
over the Internet. The Internet may not prove to be a viable
commercial marketplace 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. 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.
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, 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.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
--------------------------------------------------
Results of Operations. 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.
13
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.
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.
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 will 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.
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. We will continue to
expand our real estate holdings in properties where substantial
appreciation and cash flow are likely.
The table below summarizes our property ownership:
CURRENT
OWNED PROPERTY OWNERSHIP COMPANY NAME APPROX. LIENS
-------------- --------- ------------ -------------
1120 Acres land 100% fee simple Myrob Properties Inc. $337,000 1st
San Bernardino County, CA to FAME
320 acres land 100% fee simple East Mojave Corporation $20,000 1st
San Bernardino County, CA to FAME
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 (the Company's only class of stock entitled to vote on
general corporate matters) as to each person or entity who owns
more than five percent (5%) of the outstanding shares:
NAME & ADDRESS SHARES OWNED ISSUED SHARES
-------------- ------------ -------------
Michael J. Meyer 10,125,000 shares* (8.09%)
7,875,000 options*
John Daly, Chairman, 6,895,187 shares* (5.51%)
President, CEO 65,150,000 options*
1,451,358 shares** (1.16%)
Lesteron,Ltd. 50,000,000 shares* (39.93%)
Miracle Entertainment, Inc. 14,500,000 shares* (11.58%)
Lawrence S. Lotman 4,200,000 shares* (3.35%)
2,800,000 options*
* Some shares 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 83,657,000
options are held in the trusts.
** Held through Red Giants Productions, Inc., a corporation of
which John Daly is the major stockholder.
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 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, 6,895,187 shares* (5.51%)
President, CEO
1,451,358 shares** (1.16%)
Lawrence S. Lotman,
VP Finance/Secretary 4,200,000 shares (3.35%)
All Officers and Directors
As a Group (4 in number) 12,546,545 shares (10.02%)
* Held in a voting trust
** Held through Red Giant Productions, Inc., a corporation of
which John Daly is the majority stockholder.
The Board of Directors has authorized the issuance of options
expiring May 30, 2013 and October 31 2013 respectively to
purchase an aggregate of 86,600,000 shares of the Company's
Common Stock as follows:
EXERCISE
DATE NO OF SHARES PRICE PER SHARE
---- ------------ ---------------
5/21/03 28,600,000 $.005
10/31/03 58,000,000 $.01
The options are all for a 10-year period They are intended to
be "nonqualified" stock options under the Internal Revenue Code.
The options and the underlying shares of Common Stock are subject
to restrictions on transfer. To date options have been exercised
as follows:
AGGREGATE
PERIOD NO. OF SHARES EXERCISE PRICE
------ ------------- --------------
2003 3,575,000 $.005
2004 62,500 $.01
2004 4,900,000 $.005
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 September 30, 2004 are as follows:
NAME AGE POSITION TERM
---- --- -------- ----
John Daly 67 Chairman, CEO and President 2005
Lawrence Lotman 57 Secretary/Director, VP Finance 2005
Ilya Golubovich 20 Director 2005
Arkadiy Golubovich 17 Director 2005
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.
William "Randy" Slaughter, Chief Distributor Consultant since
-------------------------
2003 is one of the most accomplished veterans in Independent
Films. With over 30 years as an executive in the industry, his
clients have included Artisan Entertainment, Beyond Films,
Capella International, Capitol Films, Corolco Pictures, Miramax,
New Line Cinema, Rank Film Distributors, Ltd., Rysher
Entertainment, Summit Entertainment and Trimark Entertainment.
Through his decades in the industry and especially those in the
distribution of independent filmmakers, he has established a
large network of professional contacts which are crucial to
success in film distribution. Mr. Slaughter acts as a consultant
to the Company.
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 2004 $104,000
Lawrence Lotman, Secretary 2004 $ 52,000
All the above executives were employed on a full-time basis and
there are conflicts in the performance of their duties. It is
customary in the film industry for officers and directors of film
distribution companies to receive compensation as producers,
directors or providers of other creative services in connection
with film production in which the Company has an 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 receives compensation as
--------------------------
Producer-Director of "The Aryan Couple," a film which the Company
has invested and has an interest. He is also a major owner of Red
Giants Productions, Inc., which is co-owner of the copyrights to
the film and a participant in the profits. He is also co-writer
of "Harder They Fall." Arkadiy Golubovich is a film actor and
received compensation for his role in "The Aryan Couple."
Employment Contracts. The Company has 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. Currently 125,220,398 shares of the
Company's Common Stock are issued and outstanding
18
to over 200 shareholders plus Depository Trust Company.
Common Stock. The holders of the Company's 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 the Company's 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 Company's Common Stock. Holders of shares
of the Company's 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 shares of Common Stock of
---------------------
the Company do not have cumulative voting rights, which means
that the holders of more than 50% of the outstanding Common
Stock of the Company, 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 of the Company may not be able to
elect any of the Company's directors.
Registration Rights. Existing holders of shares of the
--------------------
Company's 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 the Company's Board of
Directors, in its discretion, and will depend upon, among other
things, the Company's earnings, the Company's capital
requirements, and the Company's financial condition, as well as
other relevant factors. The Company has 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
Company's Board of Directors from funds legally available
therefore. The Company intends 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" until the Company's Registration
Statement on Form 10-SB has cleared comments with the Securities
and Exchange Commission.
As of December 31, 2004, 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.
-----------------
The Company is not aware of any pending litigation nor does it
have any reason to believe that any such litigation exists,
except 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.
It alleged that the funds had been raised and provided to the
plaintiffs and counterclaim defendants, who had unlawfully
diverted them to their own use and failed to produce the promised
films. Both the complaint and the counter-claim demand
approximately $8 million in damages.
The Company never had a contractual relationship with any of the
cross-complainants and asserts that no facts exist to support any
cause of action asserted by cross-complainants. The Company moved
to dismiss the cross-complaint and moved to strike all references
to punitive damages. The dismissal was granted by the Court with
leave to amend. The Court also sustained the dismissal without
leave to amend as to the civil conspiracy cause of action.
On or about November 1, 2004, Filmstar, Denise Gentile and Jon
Gentile filed a second amended cross-complaint alleging the same
causes of action as before. Again the Company moved to dismiss
and filed a motion to strike punitive damages claims. The
hearing is set for January 3, 2005.
The parties are now engaged in pre-trial discovery. The Court
sent the case to mediation to be completed by March 2005. The
post-mediation conference is set for March 3, 2005. The final
status conference is set for May 13, 2005; trial-May 23, 2005.
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
20
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
Court ordered the case into mediation to be completed by February
28, 2005. The post-mediation date is March 4, 2005. The final
status conference is set for July 5, 2005; trial - July 13, 2005.
Item 3. Changes in and Disagreements with Accountants.
---------------------------------------------
There are no changes in or disagreement with accountants.
Item 4. Recent Sales of Unregistered Securities.
---------------------------------------
Since January 1, 2001 and prior 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, the Company 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 the Company 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.
(a) Index to Financial Statements. Page
----
Independent Auditors' Report:
Report of Independent Registered Public Accounting
Firm F-1
Financial Statements:
Consolidated Balance Sheet as of December 31, 2003
and September 30, 2004 (unaudited) F-2
Consolidated Statements of Operations for the years
ended December 31, 2003 and 2002 and the nine
months ended September 30, 2004 and 2003 (unaudited) F-3
Consolidated Statement of Stockholders' Equity
for the years ended December 31, 2003 and 2002 and
the nine months ended September 30, 2004 (unaudited) F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 2003 and 2002 and the nine
months ended September 30, 2004 and 2003 (unaudited) F-5
Notes to Consolidated Financial Statements F-7
Film and Music Entertainment, Inc. and Subsidiaries
Consolidated Financial Statements
Years Ended December 31, 2003 and 2002
And Nine Month Periods Ended September 30, 2004 and 2003
(unaudited)
Contents
Page
----
Independent Auditors' Report:
Report of Independent Registered Public Accounting Firm F-1
Financial Statements:
Consolidated Balance Sheet as of December 31, 2003
and September 30, 2004 (unaudited) F-2
Consolidated Statements of Operations for the years ended
December 31, 2003 and 2002 and the nine month periods
ended September 30, 2004 and 2003 (unaudited) F-3
Consolidated Statement of Stockholders' Equity for
the years ended December 31, 2003 and 2002 and the
nine month periods ended September 30, 2004 (unaudited) F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2003 and 2002 and the nine month periods
ended September 30, 2004 and 2003 (unaudited) 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,
2003, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the two year periods
then ended. 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,
2003, 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
January 12, 2005
Film and Music Entertainment, Inc. and Subsidiaries
Consolidated Balance Sheets
December September
31, 2003 30, 2004
---------- -----------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 112,079 $ 4,184,632
Restricted cash - 40,518
Loan receivable from Miracle Entertainment, Inc.,
current portion 66,347 25,000
Other current assets (including amounts due from
related party of$0 and $6,926 (unaudited)) - 23,891
---------- ----------
TOTAL CURRENT ASSETS 178,426 4,274,041
---------- ----------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $92 and $3,861 (unaudited) 3,238 41,534
LOAN RECEIVABLE FROM MIRACLE
ENTERTAINMENT, INC., net of current portion - 25,000
REAL ESTATE INVESTMENTS 720,000 1,093,011
FILM COSTS 75,000 272,476
INVESTMENT IN SMS MUSICMAKER LTD - 48,909
---------- -----------
TOTAL ASSETS $ 976,664 $ 5,754,971
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 48,665 $ 67,469
Accrued expenses (including amounts due from
related Party of $4,868 and $2,848 (unaudited)) 50,796 96,810
---------- -----------
TOTAL CURRENT LIABILITIES 99,461 164,279
---------- -----------
PROFIT PARTICIPATION OBLIGATIONS 75,000 300,000
COMMITMENT AND CONTINGENCIES (Note 7) - -
STOCKHOLDER'S EQUITY
Common stock, $0.001 par value; 250,000,000
shares authorized; 99,355,398 and
151,957,898 shares issued and outstanding 99,356 151,958
Additional paid-in capital 17,035,831 21,988,779
Accumulated deficit (16,332,984) (16,850,045)
TOTAL STOCKHOLDERS' EQUITY 802,203 5,290,692
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 976,664 $ 5,454,971
========== ===========
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
Years Ended Nine Month Periods Ended
--------------------------- -----------------------------
December December September September
31, 2003 31, 2002 30, 2004 30, 2003
------------ ------------ ------------- -------------
(unaudited) (unaudited)
REVENUE $ - $ - $ - $ -
OPERATING EXPENSES
Production costs 7,500 - 6,000 -
Advertising costs 5,360 - 8,937 -
Compensation expense 10,475,130 - 206,814 -
Consulting expense 1,860,124 - 28,920 -
General and administrative expenses 295,454 56 289,560 126,187
------------ ------------ ------------- -------------
TOTAL OPERATING EXPENSES 12,643,568 56 540,231 126,187
------------ ------------ ------------- -------------
LOSS FROM OPERATIONS (12,643,568) (56) (540,231) (126,187)
------------ ------------ ------------- -------------
OTHER INCOME (EXPENSE)
Other income 20,000 - 10,000 -
Interest income - - 13,170 -
Interest expense and financing costs (15,908) (23,072) - (15,908)
Gain on extinguishment of debt 12,541 - - 12,541
------------ ------------ ------------- -------------
TOTAL OTHER INCOME (EXPENSE) 16,633 (23,072) 23,170 (3,367)
------------ ------------ ------------- -------------
LOSS BEFORE PROVISION FOR INCOME TAXES (12,626,935) (23,128) (517,061) (129,554)
PROVISION FOR INCOME TAXES - - - -
------------ ------------ ------------- -------------
NET LOSS $(12,626,935) $ (23,128) $ (517,061) $ (129,554)
============ ============ ============= =============
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.22) $ (0.00) $ (0.00) $ (0.00)
============ ============ ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC
AND DILUTED 56,534,610 24,428,050 128,322,141 45,112,450
============ ============ ============= =============
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)
Additional Total
Common Stock Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity (Deficit)
----------- --------- ------------ -------------- -------------
Balance, December 31, 2001 24,428,050 $ 24,428 $ 333,655 $ (1,148,808) $ (790,725)
Net loss - - - (23,128) (23,128)
----------- --------- ------------ -------------- -------------
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 (unaudited) 50,000,000 50,000 4,950,000 5,000,000
Exercise of options (unaudited) 2,512,500 2,512 (662) 1,850
Services (unaudited) 90,000 90 3,610 3,700
Net loss (unaudited) - - - (517,061) (517,061)
----------- --------- ------------ ------------- -------------
Balance at September 30, 2004 151,957,898 $ 151,958 $ 21,988,779 $ (16,850,045) $ 5,290,692
(Unaudited) =========== ========= ============ ============= =============
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
Years Ended Nine Month Periods Ended
--------------------------- -----------------------------
December December September September
31, 2003 31, 2002 30, 2004 30, 2003
------------ ------------ ------------- -------------
(Unaudited) (Unaudited)
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $(12,626,935) $ (23,128) $ (517,061) (129,554)
Adjustment to reconcile net loss to net cash
used in operating activities:
Depreciation expense 92 - 3,769 -
Gain on extinguishment of debt (12,541) - - -
Common stock issued for services 116,584 - 3,700 105,393
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 - - 14,300
Changes in operating assets and liabilities:
Other current assets - (23,891) -
Accounts payable 12,394 - 18,804 (6,341)
Accrued expenses 21,070 - 47,239 16,202
Accrued interest - 23,072 - -
------------ ------------ ------------- -------------
Net cash used in operating activities (111,207) (56) (467,440) -
------------ ------------ ------------- -------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,330) - (32,065) -
Payments for film production costs - - (197,476) -
Purchase of real estate - - (373,011) -
Investment in SMS Musicmaker Ltd. -
- (48,909) -
Increase in restricted cash - - (40,518) -
------------ ------------ ------------- -------------
Net cash used in investing activities (3,330) - (691,979) -
------------ ------------ ------------- -------------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds received from Miracle Entertainment 151,616 - 6,347 -
Proceeds from sale of common stock - - 5,000,000 -
Proceeds from profit participation obligations 75,000 - 225,000 -
Proceeds from exercise of options - - 625 -
------------ ------------ ------------- -------------
Net cash provided by financing activities 226,616 - 5,231,972 -
------------ ------------ ------------- -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 112,079 (56) 4,072,553 -
CASH AND CASH EQUIVALENTS, Beginning of period - 56 112,079 -
------------ ------------ ------------- -------------
CASH AND CASH EQUIVALENTS, End of period $ 112,079 $ - $ 4,184,632 -
============ ============ ============= =============
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
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.
Unaudited During the nine months ended September 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.
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
Film and Music Entertainment and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2003 and 2002
And the Nine Months Ended September 30, 2004 and 2003
(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.
Consolidated Financial Statements
---------------------------------
The accompanying consolidated financial statements include
the accounts of the Company, Celebration Productions, Inc.,
Celebration Pictures, Inc., Celebration International
Pictures, 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.
Interim Financial Statements
----------------------------
The unaudited consolidated financial information furnished
herein 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 nine months ended September
30, 2004 are not necessarily indicative of the results for
the entire fiscal year ending December 31, 2004. The
accompanying unaudited consolidated financial statements are
presented in accordance with the requirements for Form 10-
QSB and Article 10 of Regulation S-X and Regulation S-B.
Accordingly, they do not include all the disclosures
normally required by generally accepted accounting
principles.
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
F-7
Film and Music Entertainment and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2003 and 2002
And the Nine Months Ended September 30, 2004 and 2003
(unaudited)
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 and loss per share would be reduced to the pro
forma amounts indicated below for the years ended December
31, 2003 and 2002 and the nine months ended September 30,
2004 and 2003 (unaudited):
Year Ended December 31, Nine Months Ended September 30,
---------------------------- -------------------------------
2003 2002 2004 2003
------------ ------------ ------------- --------------
(unaudited) (unaudited)
Net loss:
As reported $(12,626,935) $ (23,128) $ (517,061) $ (129,554)
Compensation recognized
under APB 25 10,475,130 - - 14,300
Compensation recognized
under SFAS 123 (11,039,994) - - (28,600)
------------ ------------ ------------- --------------
Pro forma $(13,191,799) $ (23,128) $ (517,061) $ (143,854)
============ ============ ============= ==============
Basic and diluted loss
per common share:
As reported $ (0.22) $ (0.00) $ (0.00) $ (0.00)
Pro forma $ (0.23) $ (0.00) $ (0.00) $ (0.00)
F-8
Film and Music Entertainment and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2003 and 2002
And the Nine Months Ended September 30, 2004 and 2003
(unaudited)
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.
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 December 31, 2003, 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, plus all certificates of deposit maturing within one
year.
F-9
Film and Music Entertainment and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2003 and 2002
And the Nine Months Ended September 30, 2004 and 2003
(unaudited)
Restricted Cash
---------------
Restricted cash represents an amount on deposit with a
financial institution that secures the Company's employee
credit cards. Restricted through July 2005.
Concentration of Credit Risk
----------------------------
Financial instruments, which potentially subjects 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 September 30, 2004,
the Company had balance with one bank amounting $4,116,000.
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.
Investment in SMS Musicmaker Ltd.
--------------------------------
The Company is a 50% owner of SMS Musicmaker Ltd, a newly
formed United Kingdom company. The Company accounts for
this investment on the equity method. As of September 30,
2004, SMS had not commenced operations.
F-10
Film and Music Entertainment and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2003 and 2002
And the Nine Months Ended September 30, 2004 and 2003
(unaudited)
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.
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 and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2003 and 2002
And the Nine Months Ended September 30, 2004 and 2003
(unaudited)
Profit Participation Obligations
--------------------------------
The Company has received funds from investors to finance
specific productions. Generally, the terms of the profit
participation obligations provide the investor with a return
of their investment plus a percentage of the profits on the
specific production financed by the investor. If the
production does not generate a profit, the Company is under
no obligation to repay the investor.
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, 2003 and September 30, 2004 there were
86,432,000 and 83,919,500 (unaudited) 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, 2003 and 2002, 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 FASB issued SFAS No. 151, entitled
Inventory Costs -- An Amendment of ARB No. 43, Chapter 4.
SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4,
entitled Inventory Pricing [June 1953], to clarify the
accounting for "abnormal amounts" of idle facility expense,
freight, handling costs, and wasted material [spoilage].
Before revision by SFAS No. 151, the guidance that existed
in ARB No. 43 stipulated that these type items may be "so
abnormal" that the appropriate accounting treatment would be
to expense these costs as incurred [i.e., these costs would
be current-period charges]. SFAS No. 151 requires that
these type items be recognized as current-period charges
F-12
Film and Music Entertainment and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2003 and 2002
And the Nine Months Ended September 30, 2004 and 2003
(unaudited)
without regard to whether the "so abnormal" criterion has
been met. Additionally, SFAS No. 151 requires that
allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production
facilities. The adoption of SFAS 151 did not impact the
consolidated financial statements.
In December 2004, the FASB issued SFAS No. 152, entitled
Accounting for Real Estate Time-Sharing Transactions -- An
Amendment of FASB Statements No. 66 and 67. SFAS No. 152
amends SFAS No. 66 to reference the financial accounting and
reporting guidance for real estate time-sharing transactions
that is provided in AICPA Statement of Position 04-2. SFAS
No. 152 also amends SFAS No. 67 to state that the guidance
for (a) incidental operations and (b) costs incurred to sell
real estate projects does not apply to real estate time-
sharing transactions. The accounting for those operations
and costs is subject to the guidance of SOP 04-2. This
statement is effective for financial statements for fiscal
years beginning after June 15, 2005. The adoption of SFAS
152 did not impact the consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, entitled
Exchanges of Nonmonetary Assets -- An Amendment of APB
Opinion No.29. SFAS No. 153 amends Opinion 29 to eliminate
the exception for nonmonetary exchanges of nonmonetary
assets that do not have commercial substance. A nonmonetary
exchange has commercial substance if the future cash flows
of the entity are expected to change significantly as a
result of the exchange. The adoption of SFAS 153 did not
impact the consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123 (Revised),
entitled Share-Based Payment. This revised Statement
eliminates the alternative to use APB Opinion No. 25's
intrinsic value method of accounting that was provided in
SFAS No. 123 as originally issued. Under Opinion 25,
issuing stock options to employees generally resulted in
recognition of no compensation cost. This Statement
requires entities to recognize the cost of employee services
received in exchange for awards of equity instruments based
on the grant-date fair value of those awards. For public
companies that file as a small business issuer, this
Statement is effective as of the beginning of the first
interim or annual reporting period that begins after
December 15, 2005. The adoption of SFAS 123 (Revised) will
have an impact the consolidated financial statements. If
the Statement had been in effect for the year ended December
31, 2003, the Company would have recognized an additional
expense of $564,864.
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
F-13
Film and Music Entertainment and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2003 and 2002
And the Nine Months Ended September 30, 2004 and 2003
(unaudited)
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. 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
===========
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 September 30, 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, 2003 and
September 30, 2004 (unaudited) consisted of the following:
December 31, September 30,
2003 2004
------------ -------------
(unaudited)
Computers $ 3,330 $ 3,330
Automobile - 32,065
Furniture and fixtures - 10,000
------------ -------------
3,330 45,395
Less accumulated depreciation (92) (3,861)
------------ -------------
$ 3,238 $ 41,534
============ =============
Depreciation expense for the years ended December 31, 2003
and 2002 was $92 and $0, respectively, and for the nine
months ended September 30, 2004 and 2003 was $3,769
(unaudited) and $0 (unaudited), respectively.
F-14
Film and Music Entertainment and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2003 and 2002
And the Nine Months Ended September 30, 2004 and 2003
(unaudited)
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
nine months ended September 30, 2004, the Company purchased
the un-owned percentage of a parcel previously owned for
$373,001 (unaudited).
Note 6 - 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 shares 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
* 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 nine months ended September 30, 2004, the Company
has the following transactions in its common stock
(unaudited):
* issued 50,000,000 shares of its common stock for cash in the
amount of $5,000,000;
F-15
Film and Music Entertainment and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2003 and 2002
And the Nine Months Ended September 30, 2004 and 2003
(unaudited)
* issued 2,450,000 shares of its common stock in the exercise
of stock options. The exercise price was paid by reducing
accrued expenses by $1,225;
* issued 62,500 shares of its common stock in the exercise
of stock options. The exercise price was paid in cash in
the amount of $625; and
* issued 90,000 shares of its common stock for services
rendered valued at $3,700.
Options
The following table summarizes the options outstanding:
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 (unaudited) (2,512,500) $ 0.007
-----------
Balance, September 30, 2004 (unaudited) 83,919,500 $ 0.0074
===========
Exercisable, December 31, 2003 86,432,000 $ 0.0072
===========
The weighted average remaining contractual life of options
outstanding is 3.69 years at December 31, 2003. The
exercise price for the options outstanding at
December 31, 2003 were as follows:
Number of Exercise
Options Price
---------- --------
25,025,000 $ 0.005
61,407,000 $ 0.0100
----------
86,432,000
==========
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 less 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.
F-16
Film and Music Entertainment and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2003 and 2002
And the Nine Months Ended September 30, 2004 and 2003
(unaudited)
Note 7 - Commitments and Contingencies
Litigation
----------
In the ordinary course of business, the Company is generally
subject to claims, complaints, and legal actions. At
December 31, 2003, 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.
It alleged that the funds had been raised and provided to the
plaintiffs and counterclaim defendants, who had unlawfully
diverted them to their own use and failed to produce the promised
films. Both the complaint and the counter-claim demand
approximately $8 million in damages.
The Company never had a contractual relationship with any of the
cross-complainants and asserts that no facts exist to support any
cause of action asserted by cross-complainants. The Company moved
to dismiss the cross-complaint and moved to strike all references
to punitive damages. The dismissal was granted by the Court with
leave to amend. The Court also sustained the dismissal without
leave to amend as to the civil conspiracy cause of action.
On or about November 1, 2004, Filmstar, Denise Gentile and Jon
Gentile filed a second amended cross-complaint alleging the same
causes of action as before. Again the Company moved to dismiss
and filed a motion to strike punitive damages claims. The
hearing is set for January 3, 2005.
The parties are now engaged in pre-trial discovery. The Court
sent the case to mediation to be completed by March 2005. The
post-mediation conference is set for March 3, 2005. The final
status conference is set for May 13, 2005; trial-May 23, 2005.
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
Court ordered the case into mediation to be completed by February
28, 2005. The post-mediation date is March 4, 2005. The final
status conference is set for July 5, 2005; trial - July 13, 2005.
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, 2003, are as follows:
Operating
Leases
---------
Year ending December 31,
2004 $ 75,138
2005 85,404
2006 15,569
---------
Net Minimum Lease Payments $ 176,111
=========
The Company incurred rent expense of $20,206 and $0 for the
years ended December 31, 2003 and 2002, respectively and
$52,016 (unaudited) and $0 (unaudited) for the nine months
ended September 30, 2004 and 2003, respectively.
F-17
Film and Music Entertainment and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2003 and 2002
And the Nine Months Ended September 30, 2004 and 2003
(unaudited)
Note 8 - Income Taxes
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, 2003 are as follows:
Deferred tax assets:
Federal net operating loss $ 473,000
State net operating loss 42,000
------------
Total deferred tax assets 515,000
Less valuation allowance (515,000)
------------
$ --
============
At December 31, 2003, the Company had federal and state net
operating loss ("NOL") carryforwards of approximately $1,390,000
and $700,000, respectively. Federal NOLs could, if unused,
expire in varying amounts in the years 2014 through 2018.
State NOLs, if unused, could expire in varying amounts from 2014
through 2018.
The valuation allowance increased by $100,000 and $8,000 during
2003 and 2002, respectively. The Company has provided a 100%
valuation allowance on the deferred tax assets at December 31,
2003 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, 2003
and 2002 is as follows:
2003 2002
------- -------
Federal income tax rate (34.0%) (34.0%)
State tax, net of federal benefit 6.0%) (6.0%)
Value of below market options/warrants 39.1% 0.0%
Increase in valuation allowance 0.9% 40.0%
------- ------
Effective income tax rate 0.0% 0.0%
======= ======
Note 9 - Subsequent Events (unaudited)
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 $180,000. In the fourth quarter of 2004, the
Company will remove the real estate investment of $180,000
from its books and cancel 13,500,000 shares of its common
stock. No gain or loss will be recognized as a result of
this settlement.
On February 3, 2005, the Company entered into an agreement
with a stockholder whereby the stockholder agreed to surrender
to Company 15,750,000 shares of the Company's common stock
owned by the stockholder and the Company agreed to give up
any rights it has to a hypothecated money interest relating to
certain real estate located in Cochise County, Arizona that
the Company the Company has recorded on its books at $264,000.
In the first quarter of 2005, the Company will remove the real
Estate investment of $264,000 from its books and cancel
15,750,000 Shares of its common stock. No gain or loss will be
recognized as a result of this agreement.
F-18
22
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
23
10.1.18 Agreement dated October 27, 2003 between the Company and
Michael Myers 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 ______, 200___ "At
First Dawn" (*)
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"
10.2.1 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
99.1 Correspondence from former accountants (*)
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 February
14, 2005.
Film and Music Entertainment, Inc.,
a Nevada corporation
By: /s/John Daly
--------------------------------
John Daly
Its: Chairman, President and CEO
* To be filed by amendment