UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____________ to ____________
0-51164
----------------------
(Commission file number)
FILM AND MUSIC ENTERTAINMENT, INC.
---------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 01-0802246
--------------------------- ------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
5670 Wilshire Blvd., Suite 1690, Los Angeles, California 90036
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(Address of principal executive offices)
(323) 904-5200
-------------------------
(Issuer's telephone number)
N/A
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(Former name, former address and former fiscal year, if changed
since last report)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No []
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date: As
of November 1, 2005 - 125,170,398 shares of common stock
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Film and Music Entertainment, Inc. and Subsidiaries
Consolidated Balance Sheet
June
30, 2005
-----------
(unaudited)
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 1,449,292
Restricted cash 40,518
Loan receivable from Miracle Entertainment, Inc. 25,000
Other current assets (including amounts due from
related party of $12,600) 91,603
Investment in equity securities 1,477,070
------------
TOTAL CURRENT ASSETS 3,083,483
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $11,439 47,014
REAL ESTATE INVESTMENTS 430,000
FILM COSTS 248,652
------------
TOTAL ASSETS $ 3,809,149
============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 56,891
Accrued expenses (including amounts due from
related party of $2,848) 85,070
Production advances 9,188
------------
TOTAL CURRENT LIABILITIES 151,149
------------
COMMITMENT AND CONTINGENCIES (Note 8) -
STOCKHOLDER'S EQUITY
Common stock, $0.001 par value; 250,000,000
shares authorized; 125,170,398 shares issued
and outstanding 125,170
Additional paid-in capital 21,066,142
Accumulated deficit (17,533,312)
------------
TOTAL STOCKHOLDERS' EQUITY 3,658,000
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,809,149
============
The accompanying notes are an integral part of these
unaudited consolidated financial statements
F-2
Film and Music Entertainment, Inc. and Subsidiaries
Consolidated Statements of Operations
Three Months Ended Six Months Ended
-------------------------- --------------------------
June June June June
30, 2005 30, 2004 30, 2005 30, 2004
----------- ----------- ------------ -----------
(unaudited) (unaudited) (unaudited) (unaudited)
REVENUE $ 157,099 $ - $ 162,024 $ -
OPERATING EXPENSES
Production costs - 2,875 - 64,182
Advertising costs 144,087 2,500 171,479 8,937
Compensation expense 109,257 36,038 156,603 75,832
Consulting expense 16,884 25,000 23,634 26,920
General and administrative expenses 120,101 165,448 269,154 203,791
----------- ----------- ------------ -----------
TOTAL OPERATING EXPENSES 390,329 231,861 620,870 379,662
----------- ----------- ------------ -----------
LOSS FROM OPERATIONS (233,230) (231,861) (458,846) (379,662)
----------- ----------- ------------ -----------
OTHER INCOME (EXPENSE)
Other income 185 5,000 185 5,000
Investment income 5,790 2,091 10,204 2,091
Unrealized loss on marketable equity securities 88,956 - (21,405) -
Realized loss on sale of marketable equity securities (29,216) - (29,216) -
Gain on foreclosure of note receivable 50,000 - 50,000 -
Gain on disposition of real estate - - 208,500 -
----------- ----------- ------------ -----------
TOTAL OTHER INCOME (EXPENSE) 115,715 7,091 218,268 7,091
----------- ----------- ------------ -----------
LOSS BEFORE PROVISION FOR INCOME TAXES (117,515) (224,770) (240,578) (372,571)
PROVISION FOR INCOME TAXES - - - -
----------- ----------- ------------ -----------
NET LOSS $ (117,515) $ (224,770) $ (240,578) $ (372,571)
=========== =========== =========== ===========
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.00) $ (0.00) $ (0.00) $ (0.00)
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC
AND DILUTED 124,155,563 133,393,393 127,643,602 116,374,395
=========== =========== =========== ===========
The accompanying notes are an integral part of these
unaudited consolidated financial statements
F-3
Film and Music Entertainment, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
(unaudited)
Additional Total
Common Stock Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2004 140,970,398 140,970 21,596,617 (17,292,734) 4,444,853
Issuance of common stock for exercise of options 2,450,000 2,450 (1,225) 1,225
Shares canceled in connection with non-payment on
note receivable (2,500,000) (2,500) (72,500) (75,000)
Shares canceled in connection with transfer of
real estate investment to former owner (15,750,000) (15,750) (456,750) (472,500)
Net loss - - - (240,578) (240,578)
------------ ------------ ------------- ------------- -------------
Balance, June 30, 2005 125,170,398 $ 125,170 $ 21,066,142 $(17,533,312) $ 3,658,000
============ ============ ============= ============= =============
The accompanying notes are an integral part of these
unaudited consolidated financial statements
F-4
Film and Music Entertainment, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Six Months Ended
----------------------------
June June
30, 2005 30, 2004
------------ ------------
(unaudited) (unaudited)
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (240,578) $ (372,571)
Adjustment to reconcile net loss to net cash
used in operating activities:
Depreciation expense 5,197 1,444
Common stock issued for services - 3,700
Unrealized loss on marketable equity securities 21,405 -
Gain on disposition of real estate (208,500) -
Gain on foreclosure of note receivable (50,000) -
Purchase of marketable equity securities (1,539,151) -
Sale of marketable securities 700,625 -
Changes in operating assets and liabilities:
Other current assets (83,169) (30,155)
Film costs (173,652) -
Accounts payable (27,597) 29,044
Accrued expenses (88,754) 97,981
Production advances (33,134) 31,563
----------- -----------
Net cash used in operating activities (1,717,308) (238,994)
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (13,058) -
Purchase of real estate - (337,048)
----------- -----------
Net cash used in investing activities (13,058) (337,048)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds received from Miracle Entertainment - 6,347
Proceeds from sale of common stock - 5,000,000
Proceeds from exercise of options - 625
----------- -----------
Net cash provided by financing activities - 5,006,972
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,730,366) 4,430,930
CASH AND CASH EQUIVALENTS, Beginning of period 3,179,658 112,079
----------- -----------
CASH AND CASH EQUIVALENTS, End of period $ 1,449,292 $ 4,543,009
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Interest paid $ 50 $ -
=========== ===========
Income taxes paid $ - $ -
=========== ===========
The accompanying notes are an integral part of these
unaudited consolidated financial statements
F-5
FILM AND MUSIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Basis of Presentation
The unaudited consolidated financial statements have been
prepared by Film and Music Entertainment, Inc. (the "Company"),
pursuant to the rules and regulations of the Securities and
Exchange Commission. The information furnished herein reflects
all adjustments (consisting of normal recurring accruals and
adjustments) which are, in the opinion of management, necessary
to fairly present the operating results for the respective
periods. Certain information and footnote disclosures normally
present in annual consolidated financial statements prepared in
accordance with accounting principles generally accepted in the
United States of America have been omitted pursuant to such rules
and regulations. These consolidated financial statements should
be read in conjunction with the audited consolidated financial
statements and footnotes for the year ended December 31, 2004
included in the Company's Annual Report on Form 10SB. The
results of the six months ended June 30, 2005 are not necessarily
indicative of the results to be expected for the full year ending
December 31, 2005.
Stock Options
-------------
SFAS No. 123, "Accounting for Stock-Based Compensation,"
establishes and encourages the use of the fair value based method
of accounting for stock-based compensation arrangements under
which compensation cost is determined using the fair value of
stock-based compensation determined as of the date of grant and
is recognized over the periods in which the related services are
rendered. The statement also permits companies to elect to
continue using the current intrinsic value accounting method
specified in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," to account for stock-
based compensation. The Company has elected to use the intrinsic
value based method and has disclosed the pro forma effect of
using the fair value based method to account for its stock-based
compensation issued to employees. For options granted to
employees where the exercise price is less than the fair value of
the stock at the date of grant, the Company recognizes an expense
in accordance with APB 25. For non-employee stock based
compensation the Company recognizes an expense in accordance with
SFAS No. 123 and values the equity securities based on the fair
value of the security on the date of grant. For stock-based
awards the value is based on the market value for the stock on
the date of grant and if the stock has restrictions as to
transferability a discount is provided for lack of tradability.
Stock option awards are valued using the Black-Scholes option-
pricing model.
The pro forma information regarding the effects on operations
that is required by SFAS 123 and SFAS 148 are not presented since
there is no pro forma expense to be shown for the three and six
months ended June 30, 2005 and 2004.
Note 2 - Loss Per Share
The Company reports earnings (loss) per share in accordance with
SFAS No. 128, "Earnings per Share." Basic earnings (loss) per
share is computed by dividing income (loss) available to common
shareholders by the weighted average number of common shares
available. Diluted earnings (loss) per share is computed similar
to basic earnings (loss) per share except that the denominator is
increased to include the number of additional common shares that
would have been outstanding if the potential common shares had
been issued and if the additional common shares were dilutive.
Diluted earnings (loss) per share has not been presented since
the effect of the assumed conversion of options and warrants to
purchase common shares would have an anti-dilutive effect. At
June 30, 2005 there were 78,957,000 options outstanding that have
been excluded from the computation of diluted net loss per share
because the effect would have been anti-dilutive.
F-6
FILM AND MUSIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 3 - Investments in Marketable Equity Securities
The Company invests some of its excess cash in marketable equity
securities. The marketable equity securities comprise of common
stock of publicly traded companies. These investments are
classified as trading securities as they are held principally for
the purpose of selling in the near term. They are reported at
fair value with unrealized gains and losses included in earnings.
The fair value is determined by using the securities quoted
market price as obtained from stock exchanges on which each
securities trades.
Investment income, principally dividends, is recorded when
earned. Realized capital gains and losses are calculated based on
the cost of securities sold, which is determined by the
"identified cost" method.
The unrealized gains/(losses) in the Company's portfolio of
marketable equity securities as of June 30, 2005 is as follows:
Historical costs basis $1,510,646
Unrealized gains 116,923
Unrealized losses (150,499)
----------
Fair value $1,477,070
==========
Note 4 - Loan Receivable from Miracle Entertainment, Inc.
As of December 31, 2003, Miracle Entertainment, Inc. owed the
Company, $66,317. This amount was considered a short-term
loan, non-interest bearing and unsecured. During June 2004, the
Company executed a secured promissory note with Miracle
Entertainment Inc. The repayment terms call for two equal
payments of $25,000. The first payment is due April 15, 2005.
The second payment is due December 15, 2005. The promissory note
is non-interest bearing and is secured by 5,000,000 shares of the
Company's stock. On April 15, 2005, Miracle did not make the
required payment of $25,000; therefore the Company foreclosed on
2,500,000 shares of its common stock used to secure the loan. As
a result of this foreclosure, the Company recognized a gain of
$50,000 since the value of the 2,500,000 shares exceeded the
required payment by $50,000. As of the June 30, 2005 the market
value of the remaining shares of the Company's stock exceeded the
remaining carrying value of the note of $25,000. Therefore, no
write down of the note was deemed necessary.
Note 5 - Property and Equipment
The cost of property and equipment at June 30, 2005 consisted of
the following:
June 30,
2005
----------
Computers $ 3,330
Automobile 32,065
Furniture and fixtures 23,058
----------
58,453
Less accumulated depreciation (11,439)
----------
$ 47,014
==========
F-7
FILM AND MUSIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Depreciation expense for the six months ended June 30, 2005 and
2004 was $5,197 and $1,444, respectively.
Note 6 - Real Estate Investments
On February 3, 2005, the Company entered into an agreement with a
stockholder whereby the stockholder agreed to surrender to
Company 15,750,000 shares of the Company's common stock owned by
the stockholder and the Company agreed to give up any rights to a
hypothecated money interest relating to certain real estate
located in Cochise County, Arizona that the Company has recorded
on its books at $264,000. The Company removed the real estate
investment of $264,000 from its books and canceled 15,750,000
shares of its common stock valued at $0.03 per share or $472,500.
The Company recognized a gain of $208,500 as a result of this
transaction.
Note 7 - Stockholders' Equity
Common stock
------------
During the six months ended June 30, 2005, the Company has the
following transactions in its common stock:
* canceled 15,750,000 shares of its common stock valued at
$472,500 for a certain parcel of real estate;
* issued 2,450,000 share of its common stock for the exercise
of stock options. The exercise price was paid by reducing
accrued expenses by $1,225; and
* canceled 2,500,000 shares of common stock valued at $75,000
that was used to secure a loan receivable.
Note 8 - Commitments and Contingencies
Litigation
----------
In the ordinary course of business, the Company is generally
subject to claims, complaints, and legal actions. At June 30,
2005, management believes that the Company is not a party to any
action which would have a material impact on its financial
condition, operations, or cash flows.
Miracle Entertainment, Inc. et. al v. Filmstar Releasing
Corporation et. al., Los Angeles Superior Court, Case No.
BC302233:
This is a complaint for unlawful conversion, breach of contract
and fraud, commenced in September, 2003 by Miracle Entertainment,
Inc., a company of which John Daly was Chairman, against a firm
and several individuals who had previously contracted to raise
funds for productions sponsored by Miracle Entertainment. A
counter-claim was filed by the defendants in March, 2004, adding
the Company as a defendant.
On May 2, 2005 a confidential Settlement Agreement and Mutual
Release was executed between the Company and remaining litigants
on terms acceptable to all the parties resulting in no liability
and complete release of claims against the company.
Carol Lefko v. Film and Music Entertainment, Inc., Celebration
Pictures, Inc., John Daly and Peter Beale, Los Angeles Superior
Court, Case No. BC318753.
F-8
FILM AND MUSIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
This is a complaint for breach of an alleged oral agreement
commenced July 20, 2004 between the plaintiff and the defendants
whereby the plaintiff would provide services as casting director
of a film to be called "Host" and produced by Celebration
Productions, Inc. which was added as a party to this lawsuit by
amendment in February 2005. The plaintiff alleges that she
performed the services but was not paid and is owed $12,000 for
breach of contract plus $60,000 for "waiting time." The
defendants have answered denying any liability, that no contract
existed and that no services could have been rendered to the
Company since the film never went into pre-production. The
Company is informed and believes that Kevin Lewis and Peter
Beale, in their individual capacity, were to be co-producers of
the film "Host." Mr. Lewis was also to be the director of the
film and that any agreement with plaintiff is between plaintiff
and Mr. Lewis. The Company maintains that no contract exists
between Ms. Lefko and either FAME or Celebration or both. The
Company maintains that Ms. Lefko has never been employed by any
of these entities, as indicated by Company records and that
neither the Company nor Celebration Pictures, Inc. ever hired any
casting director.
All the Defendants except Beale filed their general denial with
affirmative defenses on September 1, 2004. Film And Music
responded to plaintiff's first set of written discovery. The
trial took place on July 13 and 14, 2005 and the court denied any
liability on the part of the defendants to the plaintiff. The
Company does not expect Ms. Lefko to appeal.
Sunset Towers Partnership v. First Miracle Group. Los Angeles
Superior Court, Case No. SC072450.
This is a motion to amend a judgment entered against First
Miracle Group by its former landlord in the amount of $300,000 to
include Celebration Productions, Inc. and Film and Music
Entertainment, Inc. Sunset Towers is claiming that Celebration
and the Company are in fact successors in interest of Miracle
Entertainment, Inc. and are therefore liable for the judgment.
The Company and Celebration have filed an opposition to the
motion denying any theory that the Company and/or Celebration are
successors-in-interest of First Miracle Group and/or Miracle
Entertainment, Inc. in as much as only a portion of Miracle's
assets were acquired by the Company and fair consideration in the
amount of $3,000,000 worth of the Company's stock; that the
Company and Miracle are separate, distinct publicly traded
companies, with separate shareholders, boards, officers and
businesses with the single exception that Mr. Daly was at the
time of acquisition a Board member and officer of both companies;
that neither the Company or Celebration had the opportunity to
defend the litigation from which the judgment derived; and that
neither the Company nor Celebration expressly assumed the
liability of Miracles obligation under the judgment.
The motion was heard on May 17, 2005 and the Court denied the
plaintiff's motion, finding on the evidence presented that
Miracle Entertainment did not transfer all of its assets to the
Company and that the Company was not the successor-in-interest of
Miracle. On July 8, 2005 Sunset Towers filed a motion to appeal.
The Company has no reason to believe an appeal will overturn the
earlier findings in its favor.
Note 9 - Subsequent Events
The Company executed a Letter of Intent in January 2006 with 100%
Entertainment and Red Hot Entertainment to produce low budget
Science Fiction films in High Definition. The Letter calls for
the Company to arrange 50% of the budget of the features for
which the Company shall receive distribution fees world-wide
F-9
FILM AND MUSIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
along with 50% of the profits. The Company shall have mutual
script and cast approval and in addition to the first feature,
the Company has the option to co-produce an additional 10 films
over four years.
On December 15, 2005 the Company foreclosed on the security of
2,500,000 shares of the Company's common stock held as collateral
against the balance of the note of $25,000. As of the December
15, 2005 the market value of the foreclosed upon shares of the
Company's stock exceeded the remaining carrying value of the note
of $25,000 by $275,000. Therefore, Company recognized a gain in
this amount.
On November 23, 2005, the Company issued 2,450,000 share of its
common stock for the exercise of stock options. The exercise
price was paid by reducing accrued expenses by $1,225.
F-10
Item 2. Management's Discussion and Analysis or Plan of Operations
General
The following discussion of our financial condition and results
of operations should be read in conjunction with (1) our interim
unaudited consolidated financial statements for the six months
ended June 30, 2005 and 2004 and their explanatory notes included
as part of this Form 10-QSB, and (2) our annual audited
consolidated financial statements and explanatory notes for the
years ended
December 31, 2004 and 2003 included on Form 10-SB filed with the
Securities and Exchange Commission on August 4, 2005.
Overview
Film and Music Entertainment, Inc. is a holding company which,
through its subsidiaries, develops, produces, sells and
distributes films and associated entertainment.
Our wholly-owned Celebration Productions, Inc. subsidiary,
provides comprehensive production services for filmed
entertainment. Celebration Productions has provided production
service relating to the development of the film "The Harder They
Fall" and "The Disappeared" and production supervisory services
to the films "Played" and "Moonpie". Revenue is recognized from
productions as earned and such revenue will usually be partially
from specific contractual fees and from contingent compensation
paid as profits are earned. Our wholly-owned Celebration
Pictures, Inc. provides sales and distribution services for North
America for our and third party productions. In 2005, Celebration
Pictures has been provided these services on two films, "The
Aryan Couple" and "Waking Up Dead". Revenues are recognized in
accordance with AICPA SOP 00-2. Our wholly-owned subsidiary,
Celebration International Pictures, Ltd (BVI), provides sales and
distribution services for the rest of the world excluding North
America for our and third party productions. The Company ceased
its sales and distribution efforts in "Waking Up Dead as of
October 13, 2005 and has retained a lien against future earnings
of the film for all money spent in the marketing of the film.
The Company also has two non-operating subsidiaries, East Mojave
Corporation and Myrob Properties, Inc., in which are held certain
real estate assets of the company.
11
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and
results of operations are based upon our condensed consolidated
financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America. The preparation of these consolidated financial
statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosures of contingent assets and
liabilities.
On an ongoing basis, we evaluate our estimates, including those
related to impairment of production costs, estimates of film
revenue, any potential losses from pending litigation. We base
our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that
are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions; however, we believe that our estimates, including
those for the above-described items, are reasonable.
We capitalize films in development as capitalized film costs in
accordance with AICPA SOP 00-2. These costs are transferred to
film inventories at the point that the film is scheduled for
production. On a quarterly basis we review each film in
development and/or production as to whether the capitalized costs
are in excess of their fair market value, and if so, we write off
the excess and reflect the write-off in costs of revenue. If
after three years in development a film has not been scheduled
for production it is written off and reflected in the costs of
revenue.
Under SOP 00-2 the costs of the film, including the capitalized
costs, contingent compensation and residual costs (if any) are
amortized and included in costs of revenue in the proportion the
revenue for that period for the film bears to the estimated total
revenue from all markets and territories under the individual-
film-forecast-computation method. We review are estimates
quarterly and they are revised if necessary. A revision will
result in an increase or decrease to the percentage of
amortization of the capitalized film costs relative to a previous
period. Should the revision result in estimated revenues proving
insufficient to cover the unamortized film costs remaining on
that film, the difference will be written down to the fair market
value based upon its then net present value.
Results of Operations
Six Months Ended June 30, 2005 Compared to June 30, 2004.
We have received minimum revenue from operations to date. We
believe that the main sources of our revenue will be revenues
from domestic and foreign theatrical distribution, DVD and home
video, pay-per-view, pay cable and basic cable distribution and
free broadcast television. We have begun to receive income from
foreign sales of the movie "The Aryan Couple" under our contract
with AV Pictures Ltd. We anticipate this income will continue
through next year. The film has generated a minimal amount of
theatrical income in the US from festival showings in the first
half of 2005. Management expects income from US theatrical
revenues to increase substantially in the fourth quarter of this
year as the film moves from festival showings to a wider release.
Management also anticipates revenues to commence from "Waking Up
Dead" in the fourth quarter of 2005.
Revenues: Revenue for the six-month interim period ended June
30, 2005 was $162,024, as compared to $0 for the corresponding
interim period in fiscal 2004.
Our revenues for the six-months interim period ended June 30,
2005 were principally derived from the screening of The Aryan
Couple, production services rendered by our Celebration
Productions subsidiary and the proceeds of the sale of the
distribution rights to the film "Tournament of Dreams".
12
We had no revenues for the six months ended June 30, 2004 as the
Company was in the process of solidifying contracts for
productions.
Operating Expenses and loss from operations: Operating Expenses
and loss from operations for the six-month interim ended June 30,
2005 were $620,870 and $458,846, respectively, as compared to
$379,662 and $379,662 for the corresponding interim period in
fiscal 2004.
The decrease in production costs relates to the write-off of a
production in 2004. The increase in advertising cost relates to
the increased advertising for The Aryan Couple during the first
half of 2005. The increase of in compensation expense is mainly
attributable to payments for the services of John Daly, which
were $0 for the period in 2004. The increase in general and
administrative expense relates primarily to the increased costs
relating to compliance and legal expense relating in the court
cases in which the company was involved.
Other Income(Expense): Other Income(Expense) for the six-months
ended June 30, 2005 was $218,268 as compared with $7,091 for the
six-months ended June 30, 2004. This increase was entirely due to
a gain of $208,500 realized on the disposition of real estate to
a stockholder in return for 15,750,000 shares of the Company's
common stock.
Three Months Ended June 30, 2005 Compared to June 30, 2004.
Revenues: Revenue for the three-month interim period ended June
30, 2005 was $157,099, as compared to $0 for the corresponding
interim period in fiscal 2004.
Our revenues for the three-months interim period ended June 30,
2005 were principally derived from the screening of The Aryan
Couple, production services rendered by our Celebration
Productions subsidiary and the proceeds of the sale of the
distribution rights to the film "Tournament of Dreams".
We had no revenues for the three months ended June 30, 2004
as the Company was in the process of solidifying contracts for
productions.
Operating Expenses and loss from operations: Operating Expenses
and loss from operations for the three-month interim ended June 30,
2005 were $390,329 and $233,230, respectively, as compared to
$231,861 and $231,861 for the corresponding interim period in
fiscal 2004.
The decrease in production costs relates to the write-off of a
production in 2004. The increase in advertising cost relates to
the increased advertising for The Aryan Couple during the quarter
ended June 30, 2005. The increase of in compensation expense is
mainly attributable to payments for the services of John Daly,
which were $0 for the period in 2004. The decrease in general
and administrative expense relates primarily to the decreased
costs relating to professional fees.
Other Income(Expense): Other Income(Expense) for the three-months
ended June 30, 2005 was $115,715 as compared with $7,091 for the
three-months ended June 30, 2004. This increase was entirely due
to a gain of $50,000 realized on the foreclosure of a note
receivable and the cancellation of shares securing the note and
a gain of $59,740 (realized and unrealized)on our portfolio or
marketable securities.
Liquidity and Capital Resources
Historical Sources of Cash: For the period January 1, 2005
through June 30, 2005 we principally financed our operations
through cash on hand derived from the sale of common shares for
cash amounting $5,000,000 in April 2004.
Cash Position and Sources and Uses Of Cash: Our cash and cash
equivalents position as of June 30, 2005 was $1,449,292 as
compared to $3,179,658 as of December 31, 2004. The decrease in
our cash and cash equivalents for the six-month interim period
ended June 30, 2005 was attributable to the net increase in
equity securities of $838,526 resulting from the purchase and
sale of $1,539,151 and $700,625, respectively.
Our operating activities used cash in the amount of $1,717,308
for the six-month interim period ended June 30, 2005, as compared
to $238,994 for the corresponding interim period in fiscal 2004.
The $1,717,308 in cash used in operating activities for the six-
month interim period ended June 30, 2005 reflected our net loss
of $240,578 for that period, adjustments for non-cash deductions,
such as depreciation, unrealized gains and losses on equity
securities and gain on the disposal of real estate and
foreclosure of a note receivable. In addition, we purchased
(net) $838,526 in equity securities which is a use of cash from
operations and changes in other operating assets and liabilities
resulted in use of cash of $406,306. The $238,994 of cash used
in operating activities for the six-month interim period ended
June 30, 2004 reflected our net loss of $372,571 for that period
and increased by changes in other operating assets and
liabilities.
Capital Resources Going Forward: We have approximately
$1,450,000 of cash on hand as of June 30, 2005 to fund our
operations going forward. The Company also has on hand
approximately $1,477,000 of marketable equity securities as of
this date which the Company is holding as reserves for future
operations. Our plan of operation for the twelve month period
following the date of this quarterly report is for the Company
and its subsidiaries to continue to develop, produce, sell and
distribute motion pictures. The Company primarily uses third
party investor funds for such activities; however the Company may
provide limited funds for such activities where Management deems
it prudent. We currently have budgeted approximately $1,100,000
in costs for the twelve month period following the date of this
quarterly report, including approximately $200,000, in costs
13
relating to the development, production, sales and distribution
of films and $900,000 in general, sales and marketing expenses.
The Company attempts to cash flow most costs relating to film
production and distribution from third party direct investments.
Occasionally, the Company may front certain costs to expedite a
project to achieve certain goals. The Company attempts to
structure any such expenditure so that they are recouped from any
further funding in the specific project. If no such further
finding occurs the Company may not be able to recoup these
expenditures. To date, the Company has limited such expenditures
as to be non-material.
Our assets are reasonably liquid with a substantial majority
consisting of cash and cash equivalents, and investment
securities. Both our total assets as well as the individual
components as a percentage of total assets may vary significantly
from period to period because of changes relating to production
and distribution schedules, sales revenues, customer demand,
seasonal, economic and market conditions. Our total net assets at
June 30, 2005 were $3,809,149 compared to $4,746,712 at December
31, 2004. The Company intends to increase employees by two in the
first quarter of 2006; however, these additions should not
substantially change its overhead structure. The only other
current plans affecting overhead would be the costs associated
with the addition of independent directors to the Board and D & O
Insurance and an anticipated reduction in headquarters' lease
expense as we intend to lease smaller premises at a lower rate
when the current lease ends on March 1, 2006. With these
additional expenses, the Company would still have sufficient
cash, cash equivalents and liquidateable investment securities to
cover operating expenses for the next 24 months.
We believe that cash generated by operations in conjunction with
our available working capital will be sufficient to continue our
business for the next twelve months. We believe that our capital
structure is adequate for our current operations. We continually
review our overall capital and funding needs to ensure that our
capital base can support the estimated needs of the business.
These reviews take into account current business needs as well as
the Company's future capital requirements. Based upon these
reviews, to take advantage of strong market conditions and to
fully implement our expansion strategy, we believe that we may
continue to increase our net capital by the proceeds of private
sales of our securities. For more information on the cash flows
of the Company, please see the statement of cash flows included
in the Company's financial statements appearing elsewhere herein.
Should our costs and expenses prove to be greater than we
currently anticipate, or should we change our current business
plan in a manner that will increase or accelerate our anticipated
costs and expenses, such as through an acquisition of new
products, the depletion of our working capital would be
accelerated. To the extent it become necessary to raise
additional cash in the future as our current cash and working
capital resources are depleted, we will seek to raise it through
the sale of the equity securities owned by the Company, public or
private sale of debt or equity securities, the procurement of
advances on contracts or licenses, funding from joint-venture or
strategic partners, debt financing or short-term loans, or a
combination of the foregoing. We may also seek to satisfy
indebtedness without any cash outlay through the private issuance
of debt or equity securities. We currently do not have any
binding commitments for, or readily available sources of,
additional financing. We cannot give you any assurance that we
will be able to secure the additional cash or working capital we
may require to continue our operations in such circumstances.
Our anticipated costs described above are estimates based upon
our current business plan. Our actual costs could vary
materially from those estimated. Further, we could also change
our current business plan resulting in a change in our
anticipated costs. See the discussion concerning forward-looking
statements.
14
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.
The Company has no plans to purchase any assets at this time.
However, the Company constantly reviews industry opportunities to
acquire income producing assets for possible acquisition.
Off-Balance Sheet Arrangements
There are no guarantees, commitments, lease and debt agreements
or other agreements that could trigger adverse change in our
credit rating, earnings, cash flows or stock price, including
requirements to perform under standby agreements.
Subsequent Events
We executed a Letter of Intent in January 2006 with 100%
Entertainment and Red Hot Entertainment to produce low budget
Science Fiction films in High Definition. The Letter calls for us
to arrange 50% of the budget of the features for which the
Company shall receive distribution fees world-wide along with 50%
of the profits. We shall have mutual script and cast approval and
in addition to the first feature, we have the option to co-
produce an additional 10 films over four years.
On December 15, 2005 we foreclosed on the security of 2,500,000
shares of our common stock held as collateral against the balance
of the note of $25,000. As of the December 15, 2005 the market
value of the foreclosed upon shares of our stock exceeded the
remaining carrying value of the note of $25,000 by $275,000.
Therefore, we recognized a gain in this amount.
On November 23, 2005, the we issued 2,450,000 share of our common
stock for the exercise of stock options. The exercise price was
paid by reducing accrued expenses by $1,225.
FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-QSB, as
well as statements made by the company in periodic press
releases, oral statements made by the company's officials to
analysts and shareholders in the course of presentations about
the company, constitute "forward-looking statements." All
statements other than statements of historical facts included or
incorporated by reference in this report, including, without
limitation, statements regarding our future financial position,
business strategy, budgets, projected costs and plans and
objectives of management for future operations, are forward-
looking statements. In addition, forward-looking statements
generally can be identified by the use of forward-looking
terminology such as "may," "will," "expect," "intend," "project,"
"estimate," "anticipate," "believe," or "continue" or the
negative thereof or variations thereon or similar terminology.
Although we believe that the expectations reflected in such
forward-looking statements are reasonable, we cannot give any
assurance that such expectations will prove to have been correct.
Important factors that could cause actual results to differ
materially from our expectations. All subsequent written and oral
forward-looking statements attributable to us, or persons acting
on our behalf, are expressly qualified in their entirety by the
cautionary statements. We assume no duty to update or revise our
forward-looking statements based on changes in internal estimates
or expectations or otherwise.
15
Item 3. Controls and Procedures
As required by SEC rules, we have evaluated the effectiveness of
the design and operation of our disclosure controls and
procedures at the end of the period covered by this report. This
evaluation was carried out under the supervision and with the
participation of our management, including our principal
executive officer and principal financial officer. Based on this
evaluation, these officers have concluded that the design and
operation of our disclosure controls and procedures are
effective. There were no changes in our internal control over
financial reporting or in other factors that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Disclosure controls and procedures are our controls and other
procedures that are designed to ensure that information required
to be disclosed by us in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information
required to be disclosed by us in the reports that we file under
the Exchange Act is accumulated and communicated to our
management, including principal executive officer and principal
financial officer, as appropriate, to allow timely decisions
regarding required disclosure.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Miracle Entertainment, Inc. et. al v. Filmstar Releasing
Corporation et. al., Los Angeles Superior Court, Case No.
BC302233:
This is a complaint for unlawful conversion, breach of contract
and fraud, commenced in September, 2003 by Miracle Entertainment,
Inc., a company of which John Daly was Chairman, against a firm
and several individuals who had previously contracted to raise
funds for productions sponsored by Miracle Entertainment. A
counter-claim was filed by the defendants in March, 2004, adding
the Company as a defendant.
On May 2, 2005 a confidential Settlement Agreement and Mutual
Release was executed between the Company and remaining litigants
on terms acceptable to all the parties resulting in no liability
and complete release of claims against the company.
Carol Lefko v. Film and Music Entertainment, Inc., Celebration
Pictures, Inc., John Daly and Peter Beale, Los Angeles Superior
Court, Case No. BC318753.
This is a complaint for breach of an alleged oral agreement
commenced July 20, 2004 between the plaintiff and the defendants
whereby the plaintiff would provide services as casting director
of a film to be called "Host" and produced by Celebration
Productions, Inc. which was added as a party to this lawsuit by
amendment in February 2005. The plaintiff alleges that she
performed the services but was not paid and is owed $12,000 for
breach of contract plus $60,000 for "waiting time." The
defendants have answered denying any liability, that no contract
existed and that no services could have been rendered to the
Company since the film never went into pre-production. The
Company is informed and believes that Kevin Lewis and Peter
Beale, in their individual capacity, were to be co-producers of
the film "Host." Mr. Lewis was also to be the director of the
film and that any agreement with plaintiff is between plaintiff
16
and Mr. Lewis. The Company maintains that no contract exists
between Ms. Lefko and either FAME or Celebration or both. The
Company maintains that Ms. Lefko has never been employed by any
of these entities, as indicated by Company records and that
neither the Company nor Celebration Pictures, Inc. ever hired any
casting director.
All the Defendants except Beale filed their general denial with
affirmative defenses on September 1, 2004. Film And Music
responded to plaintiff's first set of written discovery. The
trial took place on July 13 and 14, 2005 and the court denied any
liability on the part of the defendants to the plaintiff. The
Company does not expect Ms. Lefko to appeal.
Sunset Towers Partnership v. First Miracle Group. Los Angeles
Superior Court, Case No. SC072450.
This is a motion to amend a judgment entered against First
Miracle Group by its former landlord in the amount of $300,000 to
include Celebration Productions, Inc. and Film and Music
Entertainment, Inc. Sunset Towers is claiming that Celebration
and the Company are in fact successors in interest of Miracle
Entertainment, Inc. and are therefore liable for the judgment.
The Company and Celebration have filed an opposition to the
motion denying any theory that the Company and/or Celebration are
successors-in-interest of First Miracle Group and/or Miracle
Entertainment, Inc. in as much as only a portion of Miracle's
assets were acquired by the Company and fair consideration in the
amount of $3,000,000 worth of the Company's stock; that the
Company and Miracle are separate, distinct publicly traded
companies, with separate shareholders, boards, officers and
businesses with the single exception that Mr. Daly was at the
time of acquisition a Board member and officer of both companies;
that neither the Company or Celebration had the opportunity to
defend the litigation from which the judgment derived; and that
neither the Company nor Celebration expressly assumed the
liability of Miracles obligation under the judgment.
The motion was heard on May 17, 2005 and the Court denied the
plaintiff's motion, finding on the evidence presented that
Miracle Entertainment did not transfer all of its assets to the
Company and that the Company was not the successor-in-interest of
Miracle. On July 8, 2005 Sunset Towers filed a motion to appeal.
The Company has no reason to believe an appeal will overturn the
earlier findings in its favor.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
17
Item 6. Exhibits
(a) Exhibits
Regulation
SB Number Exhibit
-------------------------------------------------------------------
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
18
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FILM AND MUSIC ENTERTAINMENT, INC.
January 23, 2006 By: /s/ John Daly
---------------------------
John Daly
Chairman, President and CEO
January 23, 2006 By: /s/ Lawrence S. Lotman
---------------------------
Lawrence S. Lotman
Chief Financial Officer
19