1. NATURE OF BUSINESS
Fuego Entertainment, Inc. (the "Company") is primarily engaged in the directing,
production, marketing, and distribution of entertainment products, including
feature and short films, documentaries, television shows, music, and tour
productions. The Company also provides management, marketing, and public
relations services to the entertainment industry.
2. Significant Accounting Policies
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of the Company formed
in the State of Nevada on December 30, 2004. The Company was originally formed
as Durango Entertainment, but changed its name to Fuego Entertainment in March
2005. These financial statements reflect the use of significant accounting
policies, as described below and elsewhere in the notes to the financial
statements, and are prepared in accordance with accounting principles generally
accepted in the United States of America. The fiscal year end of the Company is
May 31.
REVENUE RECOGNITION
Revenue from the sale of film and television programming rights and license
arrangements is recognized only when persuasive evidence of a sale or
arrangement with a customer exists, the project is complete, the contractual
delivery arrangements have been satisfied, the license period has commenced if
applicable, the arrangement fee is fixed or determinable, collection of the
arrangement fee is reasonably assured, and other conditions as specified in the
respective agreements have been met.
Revenue from production services for third parties is recognized when the
production is completed and delivered. All associated production costs are
deferred and charged against income when the film is delivered and the related
revenue is recognized.
Fees for other services provided to third parties are recognized as revenues
when the services are performed and there is reasonable assurance over the
collection of the fees.
Cash received in advance of meeting the revenue recognition criteria described
above is recorded as deferred revenue.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company uses the allowance method for bad debts. Based on historical
collection activity, no allowance is deemed necessary.
ADVERTISING EXPENSES
Advertising costs are expensed as incurred, except for costs related to the
development of a property and/or live-action television program commercial or
media campaign which are expensed in the period in which the commercial or
campaign is first presented. Advertising expenses are included in advertising
and marketing expenses in the accompanying statement of operations.
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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 disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ materially from those
estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of all liquid investments with original
maturities of three months or less are classified as cash and cash equivalents.
The fair value of cash and cash equivalents approximate the amounts shown on the
financial statements. Cash and cash equivalents consist of unrestricted cash and
short-term investments.
INCOME PER COMMON SHARE
Basic income per common share is calculated on the average number of common
shares outstanding during each period. Diluted income per common share is based
on the average number of common shares outstanding during each period, adjusted
for the effect of outstanding stock subscriptions.
FILM AND TELEVISION COSTS
The Company accounts for its film and television costs pursuant to AICPA
Statement of Position ("SOP") No. 00-2, Accounting by Producers or Distributors
of Films. The cost of production for film and television production costs,
including direct costs, production overhead and interest are capitalized and
amortized using the individual-film-forecast method under which such costs are
amortized for each program in the ratio that revenue earned in the current
period for such program bears to management's estimate of the ultimate revenues
to be realized from all media and markets for such program. Management regularly
reviews, and revises when necessary, its ultimate revenue estimates on a
title-by-title basis, which may result in a change in the rate of amortization
applicable to such title and/or a write-down of the value of such title to
estimated fair value. These revisions can result in significant
quarter-to-quarter and year-to-year fluctuations in film write-downs and rates
of amortization. If a total net loss is projected for a particular title, the
associated film and television costs are written down to estimated fair value.
All exploitation costs, including advertising and marketing costs are expensed
as incurred. Television adaptation and production costs that are adapted and/or
produced are stated at the lower of cost, less accumulated amortization, or fair
value.
INVESTMENT
The Company invested a total of $57,400 in a series of shows to be presented in
5 cities in the United States, from which it was to receive the return of its
investment based on a percentage of ticket sales from all shows performed, and
then participate in the net income of all of the shows after their completion
which is anticipated to occur at the end of the summer of 2006.
The three shows performed as of May 31, 2005, exhausted the budgeted funds
available by the producer/promoter since the promoter/promoter decided to incur
additional costs for high definition filming, production costs for a live
recording of a compact disc, and a substantial payment to secure the services of
an Oscar Winner Film Director. In the opinion of the president/CEO, whose
background includes substantial tour production, the majority of shows on tour
typically incur front-end costs of this type and magnitude, prior to realizing
the financial benefits from subsequent shows during the tour.
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As a result of these increased show costs, the initial royalty agreement with
the Company was renegotiated to allow deferral of the initial payment to the
Company of its investment until the December 31, 2005 show is performed. The
Company does not consider this deferral as a basis for amortization of its
investment or impairment thereof,
In addition to expecting full recovery of the investment in December 2005, the
Company believes additional shows may be added to the tour depending on the
success achieved during the remaining shows.
The tour being presented is a more expanded version of the same show being
presented semi-weekly at the Stardust hotel in Las Vegas, Nevada, which has
enjoyed near sell-out performances.
EQUIPMENT
Equipment is carried at cost, net of accumulated depreciation. Depreciation is
provided on the straight-line method based on the estimated useful lives of the
assets, which range from 2.5 years to 5 years.
INTANGIBLE ASSETS
The company has capitalized the cost of the creation of its logo. Amortization
of logo costs is being amortized ratably over a 5 year useful life, commencing
with April 1, 2005, the date by which such costs were incurred.
INCOME TAXES
Deferred income taxes will be recorded for the temporary differences between the
financial statement and tax bases of assets and liabilities using current tax
rates. Valuation allowances will be established against deferred tax assets
whenever circumstances indicate that it is more likely than not that such assets
will not be realized in future periods.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
investments, prepaid expenses and other current assets, unearned revenue,
accounts payable and accrued expenses, and other liabilities approximate their
fair values principally because of the short-term maturities of these
instruments.
NEW ACCOUNTING PRONOUNCEMENTS
Consolidation of Variable Interest Entities -- On January 2003, the Financial
Accounting Standards Board ("FASB") issued FASB Interpretation ("FIN") No. 46,
Consolidation of Variable Interest Entities. In December 2003, the FASB issued
FIN No. 46 (Revised) ("FIN No. 46-R") to address certain FIN implementation
issues. This interpretation clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements for companies that have
interests in entities that are Variable Interest Entities ("VIE") as defined
under FIN No. 46. According to this interpretation, if a company has an interest
in a VIE and is at risk for a majority of the VIE's losses or receives a
majority of the VIE's expected gains it shall consolidate the VIE. FIN No. 46-R
also requires additional disclosures by primary beneficiaries and other
significant variable interest holders. For entities acquired or created before
February 1, 2003, this interpretation was effective no later than the end of the
first interim or reporting period ended March 31, 2004, except for those VIE's
that are considered to be special purpose entities, for which the effective date
is no later than the end of the first interim period or reporting period ended
after December 15, 2003. As of May 31, 2005, the Company did not have an
interest in any VIE's, and accordingly, the adoption of the provisions of this
interpretation by the Company did not have a material effect on its financial
position or results of operations.
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In December 2004, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 123 (revised 2004), Share-Based Payment ("SFAS No. 123-R"). SFAS
No.123-R is a revision of SFAS No. 123, as amended, Accounting for Stock-Based
Compensation, and supersedes Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. SFAS No.123-R eliminates the
alternative to use the intrinsic value method of accounting that was provided in
SFAS No. 123, which generally resulted in no compensation expense recorded in
the financial statements related to the issuance of equity awards to employees.
SFAS No. 123-R requires that the cost resulting from all share-based payment
transactions be recognized in the financial statements. SFAS No. 123-R
establishes fair value as the measurement objective in accounting for
share-based payment arrangements and requires all companies to apply a
fair-value-based measurement method in accounting for generally all share-based
payment transactions with employees.
3. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentration of
credit risk, consist primarily of temporary cash investments and accounts
receivable. The majority of the cash and cash equivalents are maintained with
major financial institutions in the United States of America. Credit risk on
accounts receivable is minimized by the Company by performing ongoing credit
evaluations of its customers' financial condition and monitoring its exposure
for credit losses and maintaining allowances for anticipated losses. One
customer for which a corporate video was produced accounted for 60% of total
operating revenues from inception to May 31, 2005, and for the three months
ended August 31, 2005 one customer accounted for 55% of total operating
revenues.
CAPITALIZED PRODUCTION COSTS
Capitalized production costs represent development costs incurred on projects in
process. A summary of these costs as of May 31, 2005, and August 31, 2005
follows:
August 31 May 31
2005 2005
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The Trader Show is a reality television show based on the $ 38,852 $ 27,842
real life activities of amateur and professional stock
traders. The Trader Show places an emphasis on the
activities of day traders.
Gold in Ecuador is the story of a small mining town of 15,148 15,148
Portobello. In 1916 Mellick Tweedy traveled on a mule
thought the jungle of a small mining tow in Ecuador, this
small town became one of the biggest gold exporters in South
America. Fifty years ago American company SADCO, abandoned
the American shaft, one of the oldest gold mines in the
world, leaving the town of Portobello and its people in
ruins. Today, the people of Portobello have a new hope, or
do they? The Americans are back in Portobello searching for
Gold.
One Million Millionaires, This is a documentary that will 6,800 6,800
capture the life of a controversial individual, Mr. Urban
Casavant and his dream of making 1 million millionaires. For
some he is the hope of their life, for others he is a
dreamer, however, thousands follow him and wait patiently.
The film will cover his life from the time he was a
low-income earning prison guard to multimillion-dollar
businessman.
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Counterfeit Conspiracy is a documentary on stock market 2,879 642
scandals: Still in production filming several more ------- -------
interviews. Wall Street insider trading scandals from the
1980's to present, covers the various scandals, reportage of
court documents, testimony, and interviews with some
participants to fashion an authoritative account of what
happened. For example, Milliken, the Drexel Burnham Lambert
junk bond king who convinced many savings institutions and
insurance companies to buy these bonds in large quantities.
It will also document the illegal practice of Naked Short
Selling perpetrated by some offshore organizations and
self-inflicted by some companies.
Total capitalized production costs $ 63,679 $ 50,432
========= ========
All of the above films are in production and none have been acquired from other
parties. None have been released into the market or are generating revenues
except for incidental advance sales of DVD's for Counterfeit Conspiracy totaling
$4,691 as of May 31, 2005 and $xxxxx as of August 31, 2005. Advance sales have
been classified as deferred revenue in the accompanying balance sheets. No
amortization has commenced on any film products in production, and there are no
other films owned by the Company.
Amortization of all of the above costs is estimated to commence within the next
fiscal year, based upon their anticipated completion dates, with the possible
exception of the costs incurred in the Trader Show, which the Company will not
be able to begin marketing to television companies until completion thereof,
expected in xxxxxxxx. The Trader Show costs represent the only costs in
production to be considered a direct-to-television product.
5. Commitments:
The Company leases office and equipment from a related party for $700 a month.
Total rent expense from inception to May 31, 2005 was $3,500 and for the three
months ended August 31, 2005 was $2,100.
6. Related Party Transactions
Ciocan Entertainment and Music Group, LLC, "Ciocan" is an entertainment company
owned by the principal shareholder of the Company. Ciocan creates products for
the Latino Market in and out of the United States borders and will use the
Company to market, promote and commercialize some its products (music, films,
documentaries, artist, etc) for the Anglo and international markets. During the
five month period ended May 31, 2005, Ciocan advanced to the Company a total of
$31,552 of which, $29,850 was applied towards the purchase, by Ciocan, of 5.5
million shares of the Company's common stock, and $1,400 was charged as rent,
leaving a balance advanced of $302 as of May 31, 2005.
An additional $206 was advanced by Ciocan during the 3 months ended August 31,
2005, $2,100 was charged back to Ciocan for rent for 3 months, leaving a balance
owing by Ciocan to the Company of $1,592 as of August 31, 2005.
Need disclosure for ADVANCES to Hugo
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7. INCOME TAXES
The Company uses the liability method of accounting for income taxes pursuant to
Statement of Financial Accounting Standards Board Opinion No. 109. Under this
method, deferred income taxes are recorded to reflect the tax consequences in
future periods of temporary differences between the tax basis of assets and
liabilities and their financial amounts at year-end.
The provision for current income taxes is as follows as of May 31, 2005:
For the three For the five
months ended months ended
August 31, 2005 May 31, 2005
Current tax expense:
Federal tax at statutory rates $ (4,112) $ 19,116
State income taxes less federal tax benefit 0 2,645
Benefit of surtax exemptions 125 (11,382)
Permanent differences 3,640 6,355
-------- --------
Income tax expense $ (347) $ 16,734
======== ========
The analysis of income tax expense for the three months ended at August 31, 2005
and the five months ended May 31, 2005 are as follows:
For the three For the five
months ended months ended
August 31, 2005 May 31, 2005
Current $ 1,162 $ 20,109
Deferred (1,509) (3,375)
-------- --------
Income tax expense $ (347) $ 16,734
======== ========
A deferred tax asset was recognized of $3,375 for the approximate $10,400 of
temporary timing differences during the period from inception to May 31, 2005.
These differences resulted from the filing of income tax returns on the cash
basis, wherein certain expenses totaling $22,542 were not deductible until paid,
deferred revenue of $4,691 was taxable when received, and income related to
accounts receivable of $16, 833 was not taxable until collected.
Lou needs to disclose same details as above for the quarter
8. CONTRIBUTED CAPITAL
The President of the Company contributed the value of his services from
inception to May 31, 2005, at $15,000, and the value of other expenses totaling
$6,708, which consisted of office rent of $2,100, the prorata share of auto
expenses of $3,958, and legal services of $650. For the three months ended
August 31, 2005, the president of the Company contributed only the value of his
services at $9,000.
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