10QSB 1 raven033104.txt PERIOD ENDED 03-31-04 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM 10-QSB [X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2004 [ ] Transition report under Section 13 Or 15(d) of the Securities Exchange Act of 1934 For the transition period from to -------------- -------------- Commission file number 000-24727 Raven Moon Entertainment, Inc. ---------------------------------------------------- (Exact name of registrant as specified in its charter) Florida 59-348779 ---------------------- ---------------------------------- (State of incorporation) (I.R.S. Employer Identification No.) 120 International Parkway, Suite 220 Heathrow, Florida 32746 -------------------------------------- -------- (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code: (407) 304-4764 -------------- Securities registered pursuant to Section 12(g) of the Act: Title of Class: Name of each exchange on which registered: Common Stock, par value $.0001 None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 |_| Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]. The number of shares outstanding of the Registrant's Common Stock as of May 17, 2004 was 141,251,084. Transitional Small Business Disclosure Format: Yes |__| No | X | TABLE OF CONTENTS Part I FINANCIAL INFORMATION Page Item 1 Financial Statements............................................. 2 Consolidated Balance Sheets March 31, 2004 (Unaudited)........... 2 Consolidated Statements of Operations (Unaudited)................ 3 Consolidated Statements of Change in Deficit in Stockholders' Equity......................................................... 4 Consolidated Statements of Cash Flows............................ 5 Notes to Consolidated Financial Statements....................... 6 Item 2 Management Discussion and Analysis of Financial Condition and Results of Operations............................................ 23 Item 3 Controls and Procedures.......................................... 24 Part II OTHER INFORMATION Item 1 Legal Proceedings................................................ 26 Item 6 Exhibits and Reports on Form 8-K................................. 26 SIGNATURE................................................................. 27 (i)
Part I. Item 1. Financial Statements RAVEN MOON ENTERTAINMENT, INC. Consolidated Balance Sheets March 31, 2004 (unaudited) ASSETS Cash and cash equivalents $ 197,259 Other receivables 23,200 ------------ $ 220,459 ============ LIABILITIES AND DEFICIT IN STOCKHOLDERS' EQUITY Accrued salaries and wages payable to officers (Note 7) $ 147,038 Accrued interest payable to third parties 25,500 Notes payable third parties (Note 6) 60,000 Loans from shareholders (Note 6) 62,000 Advance from Class B Members of LLC (Note 6) 5,000 ------------ Total liabilities 299,538 COMMITMENTS AND CONTINGENCIES (Note 8) DEFICIT IN STOCKHOLDERS' EQUITY Preferred stock, $.0001 par value, authorized 800,000,000 shares; issued and outstanding 10,134 1 Common stock, $.0001 par value, authorized 200,000,000 shares; issued and outstanding 114,058,397 11,406 Additional paid-in capital 19,705,644 Accumulated deficit (19,796,130) ------------ Total deficit in stockholders' equity (79,079) ------------ $ 220,459 ============ See accompanying notes 2
RAVEN MOON ENTERTAINMENT, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Three months ended March 31, March 31, 2004 2003 ----------- ----------- REVENUES: Sales of plush toys $ 70 $ 204,275 Sale of rights to related party to manufacture, market and sell video, CD, and DVD products -- 810,018 ----------- ----------- 70 1,014,293 COST OF GOOD SOLD -- 129,667 ----------- ----------- GROSS PROFIT 70 884,626 EXPENSES: Consulting fees 533,277 422,960 Production expense 1,651,544 248,994 Interest 1,500 1,800 General and administrative expense 258,592 167,639 ----------- ----------- Total expenses 2,444,913 841,393 ----------- ----------- Net loss before proportionate share Clubhouse Videos, Inc.'s loss and discontinued operations (2,444,843) 43,233 Proportionate share of Clubhouse Videos, Inc.'s loss (29,933) (179,000) ----------- ----------- Net loss before discontinued operations (2,474,776) (135,767) Discontinued operations -- (563,281) Net loss $(2,474,776) $ (699,048) =========== =========== Net (loss) per share from continuing operations $ (0.02717) $ 0.00176 =========== =========== Proportionate share of Clubhouse Videos, Inc.'s loss $ (0.00033) $ (0.00730) =========== =========== Net income (loss) per share discontinued operations $ -- $ (0.02297) =========== =========== Net loss per share $ (0.02750) $ (0.02851) =========== =========== See accompanying notes 3
RAVEN MOON ENTERTAINMENT, INC. CONSOLIDATED STATEMENTS OF CHANGES IN DEFICIT IN STOCKHOLDERS' EQUITY For the three months ended March 31, 2004 and 2003 (unaudited) Preferred Stock Common Stock ---------------------------- --------------------------- Shares Amount Shares Amount ------------ ------------ ------------ ------------ Balance December 31, 2002 120,495 $ 12 21,189,278 $ 2,119 Common stock options granted for expenses -- -- -- -- Common stock options granted to related party -- -- -- -- Shares issued to related parties for expenses -- -- 600,000 60 Shares issued for expenses -- -- 1,000,000 100 Exercise of options -- -- 5,557,460 556 Net loss for the period -- -- -- -- ------------ ------------ ------------ ------------ Balance March 31, 2003 120,495 $ 12 28,346,738 $ 2,835 ============ ============ ============ ============ Balance December 31, 2003 119,695 $ 12 62,287,523 $ 6,229 Preferred stock cancelled (109,561) (11) -- -- Common stock options granted for expenses -- -- -- -- Common stock options granted to related party -- -- -- -- Shares issued for accounts payable -- -- 1,816,138 182 Shares issued for expenses -- -- 250,000 25 Exercise of options -- -- 30,480,603 3,048 Exercise of options by related party -- -- 19,224,133 1,922 Net loss for the period -- -- -- -- ------------ ------------ ------------ ------------ Balance March 31, 2004 10,134 $ 1 114,058,397 $ 11,406 ============ ============ ============ ============ 4
RAVEN MOON ENTERTAINMENT, INC. CONSOLIDATED STATEMENTS OF CHANGES IN DEFICIT IN STOCKHOLDERS' EQUITY For the three months ended March 31, 2004 and 2003 (unaudited) (Continued) Additional paid-in Accumulated capital deficit Total ------------ ------------ ------------ Balance December 31, 2002 $ 12,115,256 $(14,417,864) $ (2,300,477) Common stock options granted for expenses 28,800 -- 28,800 Common stock options granted to related party 409,500 -- 409,500 Shares issued to related parties for expenses 34,065 -- 34,125 Shares issued for expenses 60,672 -- 60,772 Exercise of options 241,784 -- 242,340 Net loss for the period -- (699,048) (699,048) ------------ ------------ ------------ Balance March 31, 2003 $ 12,890,077 $(15,116,912) $ (2,223,988) ============ ============ ============ Balance December 31, 2003 $ 16,901,874 $(17,321,354) $ (413,239) Preferred stock cancelled 11 -- -- Common stock options granted for expenses 872,494 -- 872,494 Common stock options granted to related party 573,008 -- 573,008 Shares issued for accounts payable 82,022 -- 82,204 Shares issued for expenses 6,475 -- 6,500 Exercise of options 813,612 -- 816,660 Exercise of options by related party 456,148 -- 458,070 Net loss for the period -- (2,474,776) (2,474,776) ------------ ------------ ------------ Balance March 31, 2004 $ 19,705,644 $(19,796,130) $ (79,078) ============ ============ ============ See accompanying notes 4(Con't)
RAVEN MOON ENTERTAINMENT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Three months ended March 31, March 31, 2004 2003 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) $(2,474,776) $ (699,048) Discontinued operations -- 563,281 Adjustments to reconcile net loss to net cash used by operating activities: Decrease in deposit on inventory -- 28,300 Amortization -- 977 (Increase) in prepaid expenses -- (6,000) (Decrease) increase in accounts payable to third parties (29,500) 57,213 (Decrease) increase in accrued wages and salaries to officers (104,659) 100,463 Increase in accrued interest to third parties 1,500 1,800 (Decrease) in unearned sales rights -- (588,277) Common stock options granted for expenses 1,445,503 438,300 Shares issued for expenses 6,500 94,897 ----------- ----------- Net cash (used) by operations (1,155,432) (8,094) ----------- ----------- CASH FLOW TO INVESTMENT ACTIVITIES Increase in investment in Clubhouse Video, Inc. -- (39,000) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Payments to Class B Members -- (91,000) Proceeds from exercise of options 1,274,730 242,340 Notes payable officers -- (18,000) ----------- ----------- Net cash provided by financing activities 1,274,730 133,340 Net increase in cash 119,298 86,246 Cash at beginning of period 77,961 12,727 Cash at end of period $ 197,259 $ 98,973 =========== =========== See accompanying notes 5
RAVEN MOON ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2004 and 2003 (unaudited) Note 1 -- DESCRIPTION OF THE COMPANY Raven Moon Entertainment, Inc. and its wholly owned subsidiaries are primarily engaged in the production and development of Family Values and Christian-oriented video entertainment products. The market for these products is worldwide, although the company will devote most of its efforts within the continental United States. NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION -- The accompanying consolidated financial statements include the accounts of Raven Moon Entertainment, Inc. and its wholly owned subsidiaries JB Toys, LLC and Raven Animation, Inc. (the Company). JB Toys, LLC will cease to exist on December 5, 2012. Inter-company transactions and balances have been eliminated in consolidation. REVENUE RECOGNITION -- Revenue from distribution of plush toys are recognized upon receipt of payment or delivery of product, which does not vary significantly from the time the products are shipped. Revenue from the distribution of videos is recognized as earned under the criteria established by SOP 00-2. The Company's revenue cycle is generally one to three years, with the expectation that substantially all revenue will be recognized in the first two years of individual videos. In accordance with SOP 00-2, the Company considers revenue earned when all of the following have occurred: o The Company has a valid sale or licensing agreement in place. o The video is complete and in accordance with the agreement with the customer. o The video has been delivered or is deliverable. o The license period has begun. o The revenue is fixed or determinable and collection is reasonably assured. Revenue from Clubhouse Videos, Inc, formerly Raven Moon Home Video Products, LLC, a wholly owned subsidiary of the Company not consolidated in these financial statements (see note 4), accounted for all the revenue from sales of plush toys and the rights to manufacture, market and sell videos, CDs and DVDs for the three-month period ended March 31, 2003. 6 RAVEN MOON ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2004 and 2003 (unaudited) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) PRODUCTION COSTS -- Production costs includes costs to develop and produce video entertainment products. These costs were paid primarily to companies and individuals hired to perform a specific task. The Company out-sources these activities in order to reduce overhead costs. Production costs are amortized by the ratio of current year's revenue bear to management's estimated ultimate revenue. Because the Company cannot demonstrate through its' experience the ultimate revenue from the video entertainment products it has elected to expense all production costs. STOCK FOR COMPENSATION -- The Company accounts for the issuance of common or preferred stock for goods and services at the fair market value of the goods or services provided or the fair market value of the common or preferred stock issued, whichever is more reliably determined. UNCLASSIFIED BALANCE SHEET -- In accordance with the provisions of SOP 00-2, the Company has elected to present an unclassified balance sheet. INTELLECTUAL PROPERTY -- Intellectual property is recorded at the lower of cost or net realizable value. The Company performs an impairment test of intellectual property quarterly. SFAS 142 requires the Company to compare the fair value of the intellectual property to its carrying amount to determine if there is potential impairment. If the carrying amount of the intellectual property exceeds its fair value, an impairment loss is recognized. Fair values for intellectual property are determined based on discounted cash flows, market multiples or appraised values as appropriate. Because the Company cannot demonstrate through its' experience the ultimate revenue from intellectual property it has elected to expense all costs associated with intellectual property. MANAGEMENT ESTIMATES -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from those estimates. STOCK-BASED COMPENSATION -- The Company accounts for stock options issued to employees under Statement of Financial Accounting Standards 123, wherein such options are valued based upon the Black-Scholes option pricing model. 7 RAVEN MOON ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2004 and 2003 (unaudited) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) NET INCOME (LOSS) PER SHARE -- Primary earnings-per-share computations are based on the weighted average number of shares outstanding during the period. The weighted average number of shares outstanding was 89,968,902 and 24,522,603 for the three months ended March 31, 2004 and 2003, respectively. Common stock equivalents were not considered in the calculation of net earnings per share because their effect would be antidilutive. INCOME TAXES -- The Company has incurred approximately $19,800,000 of net operating losses which may be carried forward and used to reduce taxable income in future years. Deferred tax assets created by the net operating losses are offset by an equal valuation allowance. STOCK SPLITS -- The Company adopted a 50 to 1 reverse stock split on June 30, 2003 for common and preferred stock and the Company adopted a 2 for 1 common stock split for shareholders of record on September 19, 2003. All applicable share and per-share data in these consolidated financial statements have been restated to give effect to these stock splits. INVESTMENTS IN COMMON STOCK -- The investment in Clubhouse Videos, Inc. is more that 20% of the outstanding common stock, and because the Company can significantly influence the operating and financial policies of Clubhouse Videos, Inc. the Company accounts for their investment under the equity method. RECLASSIFICATIONS -- Certain amounts reported in previous years have been reclassified to the 2003 financial statement presentation. CREDIT RISKS -- Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of cash and cash equivalents. The Company maintains its cash in bank deposit accounts, which, at times, may exceed federally insured limits. It has not experienced any losses in such accounts. The Company believes that it is not exposed to any significant credit risk on cash and cash equivalents. NEW ACCOUNTING PRONOUNCEMENTS In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, except as specified and for hedging relationships designated after June 30, 2003. Adoption of this statement did not have any material impact on the balance sheet or statement of operations. 8 RAVEN MOON ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2004 and 2003 (unaudited) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatory redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003. Otherwise, it was effective at the beginning of the first interim period beginning after June 15, 2003. Adoption of this statement did not have any material impact on the balance sheet or statement of operations. The Company adopted Financial Interpretation No. ("FIN") 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" for guarantees issued or modified after December 31, 2002. This Interpretation specifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The Interpretation also modified the disclosure requirements about a guarantor's obligations under agreements. The financial effect of adopting FIN 45 did not materially affect the consolidated financial statements. In December 2003, the FASB revised FIN 46, "Consolidation of Variable Interest Entities." FIN 46 requires the Company to consolidate a variable interest entity if the Company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after December 15, 2004 for small issuers. The Company does not currently have any variable interest entities and, accordingly, the adoption of FIN 46 did not have a significant impact on the Company's consolidated financial position or results of operations. In November 2003, during discussions on EITF Issue No. 03-01, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," the EITF reached a consensus which requires certain quantitative and qualitative disclosures for debt and marketable equity securities classified as available-for-sale or held-to-maturity under SFAS 115 and SFAS 124 that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. The consensus on quantitative and 9 RAVEN MOON ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2004 and 2003 (unaudited) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) qualitative disclosures is effective for fiscal years ending after December 15, 2003 and comparative information for earlier periods presented is not required. The Company currently does not have any impaired investments and thus the adoption of this consensus did not have a material impact on the financial statements. Note 3 -- BUSINESS AND OPERATIONS The Company is currently working to establish the following lines of business: Home Video and Television Productions Internet Retail Sales Music CDs Plush Toys These financial statements are prepared on a going concern basis that assumes that the Company will be able to realize assets and discharge liabilities in the normal course of business. Accordingly, it does not give effect to adjustments, if any, that would be necessary should the Company be unable to continue as a going concern and therefore be required to realize assets and liquidate its liabilities, contingent obligations and commitments in other than the normal course of business and the amounts which may be different from those shown in these financial statements. The ability to continue as a going concern is dependent on its ability to: Obtain additional debt and equity financing. Generate profitable operations in the future. The Company has initiated several actions to generate working capital; and improve operating performances, including equity and debt financing and cost reduction measures. There can be no assurance that the company will be able to successfully implement its plan, or if successfully implemented the Company will achieve its goals. Furthermore, if the Company is unable to raise additional funds it may be required to reduce its workforce, reduce compensation levels, reduce dependency on outside consultants, modify its growth and operating plans, and even be forced to terminate operations completely. 10
RAVEN MOON ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2004 and 2003 (unaudited) Note 4 -- DISCONTINUED OPERATIONS On January 14, 2003, the Company announced its intention to split into two independent publicly traded companies by spinning off Raven Moon Home Video Products, LLC as a dividend to shareholders. On April 25, 2003 the Company completed the spin-off of Raven Moon Home Video Products, LLC. The spinoff was accomplished by the Company's contribution of Raven Moon Home Video Products, LLC to Clubhouse Video, Inc. All of the common stock was then distributed to the Class B Members of the LLC on a basis of 152,362 per unit of the LLC and the shareholders of the Company received one share of Clubhouse Video, Inc. for every 100 shares of common stock held in the Company. As a result of the spin-off, the Company's March 31, 2003 financial statements have been prepared with Raven Moon Home Video Products, LLC results of operations and cash flows shown as "discontinued operations". All historical financial statements presented have been restated to conform to this presentation, with the historical assets and liabilities of Raven Moon Home Video Products, LLC presented on the balance sheet as "Net liabilities from discontinued operations". Summarized financial information for discontinued operations at March 31, 2004 and 2003 is as follows: 2004 2003 ---- ---- Revenue $ - $ 5,468 =========== =========== Expenses $ - $ 568,749 =========== =========== Net income (loss) $ - ($ 563,281) =========== =========== Assets $ - $ 855,002 =========== =========== Liabilities $ - $ 2,832,235 =========== =========== Net liabilities from discontinued operations $ - $ 1,977,233 =========== =========== 11
RAVEN MOON ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2004 and 2003 (unaudited) Note 5 -- INVESTMENT IN CLUBHOUSE VIDEOS, INC. During the three-month period ended March 31, 2003 the Company purchased 21.8 units of the LLC for $218,000. At March 31, 2003 the Company had purchased a total of 36.8 units of Raven Moon Home Video Products, LLC for $368,000. These purchases were converted into common stock of Clubhouse Video, Inc. as a result of the spin-off of the former wholly owned subsidiary. (See Note 4) Following is a schedule of ownership and related party ownership for the three months ended March 31, 2004 and 2003: 2004 2003 ---- ---- Percent of Ownership 27.5% 27.5% Proportionate share of Clubhouse Videos, Inc.'s loss ($13,036) ($ 154,000) Carrying value of Investment In Clubhouse Videos, Inc. $ - $ 39,000 Underlying equity in net assets of Clubhouse Videos, Inc. $ - $ 39,000 At March 31, 2004 the Company has available loss of $47,459, which will be offset against future proportionate earnings of Clubhouse Videos, Inc. Following is summarized information about Clubhouse Videos, Inc. assets, liabilities and results of operations as of March 31, 2004 and 2003: 2004 2003 ---- ---- Assets $ 143,567 $ 266,725 Liabilities $ 974,503 $ 125,000 Results of operations (loss) $ (47,384) $ (563,281) 12 RAVEN MOON ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2004 and 2003 (unaudited) Note 5 -- INVESTMENT IN CLUBHOUSE VIDEOS, INC. (continued) At March 31, 2004 Clubhouse Videos, Inc. has 115,000 shares of Preferred Stock Series A outstanding. The conversion premium for these share is 125%. Conversion is based upon the amount invested ($115,000) divided by the average close price for the first 29 days of trading, then adjusted by the premium. Conversion is automatic on the thirtieth day of trading. The effect of this conversion cannot be determined at this time. Note 6 -- DEBT Debt for the company consists of the following: Notes payable to third parties bear interest at 10% annually. These are demand notes, and are unsecured. Loans from shareholders are non-interest bearing, but the shareholders received additional shares of preferred stock and common stock in 2000 and are also entitled to gross revenue royalty fees of the gross revenue of the Company for ten years. The royalties range from .0125% to .5% of gross revenues. No royalties were earned in 2004 and 2003. There are two types of Class B units: 1) The cash investments for Class B members of LLC are non-interest bearing loans. The members are entitled to receive all distributions from gross profits of the LLC until the members have received an amount equal to their initial cash investment. Once the Class B members, who invested cash have been repaid, the Class B members are entitled to annually receive 85% of all gross profits of the LLC derived from the sale of products. The Company has received $45,000 of cash investments from Class B members and has repaid $40,000 as of March 31, 2004. Subsequent to March 31, 2004 the Company has received an additional $135,000 of cash investments. 2) The members who exchange services or rights to intellectual property for Class B units are not entitled to receive any distributions from gross profits of the LLC unit the members who invested cash have received their investment. Once the Class B members, who invested cash have been repaid, the Class B members are entitled to annually receive 85% of all gross profits of the LLC derived from the sale of products. The Company has exchanged 100 units to WEE-OOO, LTD, a related party, for the rights to Gina D, 50 units to Mike Gibilisco for the rights to the BoBo Blocks and 200 units to Bernadette DiFrancesco, a related party, for the rights to the Cuddle Bugs as of March 31, 2004. (See note 7) Subsequent to March 31, 2004 the Company has exchanged 30 units with the directors for the prior three years services. 13 RAVEN MOON ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2004 and 2003 (unaudited) Note 6 -- DEBT (continued) The Class B members have no voting rights. The cash advances from Class B members have been recorded as a liability because all advances must be repaid prior to any distributions to the parent company. Note 7 -- RELATED PARTY TRANSACTIONS The Company is affiliated through ownership of shares of the Company's common stock by the following companies: J. & B. DiFrancesco, Inc. WEE-OOO, LTD. Beyond the Kingdom, Inc. T.V. Toys, Inc. 2221 Music Clubhouse Videos, Inc. The Company has incurred aggregate consulting, production, marketing and management fees with officers, directors and other related parties for the months ended March 31, 2004 and 2003: 2004 2003 ---- ---- $897,365 $568,041 ======== ======== The Company paid Gina Mouery, who is the hostess for the "Gina D's Kids Club Show" and the daughter of Joey DiFrancesco, President and Chief Executive Officer of the Company, $6,000 for the three months ended March 31, 2004 and 2003, respectively. The advance on future royalties - related party was charged to production expense because the Company cannot demonstrate through its experience the ultimate revenue from the video entertainment products. The Company agreed to pay or reimburse Ms. Mouery $752 a month for a leased car. The Company paid approximately $2,256 for the three months ended March 31, 2004 which is included in the general and administrative expenses. 14 RAVEN MOON ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2004 and 2003 (unaudited) Note 7 -- RELATED PARTY TRANSACTIONS (continued) On May 1, 2004 Gina Mouery entered into a ten month consulting agreement with JB Toys, LLC and Raven Animation, Inc. Ms. Mouery is to assist the Company as a Co-executive Producers and Promotional Celebrity Talent for promotion and production of the Company's products and services. Ms. Mouery will be paid $1,000,000 of S-8 free trading shares in ten equal installments of common Stock @ a 50% discount from the closing bid price for the preceding ten days. During the three months ended March 31, 2004 and 2003 Gina Mouery was granted options for 19,224,133 and 1,800,000 shares of common stock for talent fees, respectively. The fair value of these options at March 31, 2004 and 2003 was $573,008 and $94,500, respectively, and was charged to production expense because the Company cannot demonstrate through its experience the ultimate revenue from the video entertainment products. During the three months ended March 31, 2004 and 2003 Gina Mouery exercised 19,224,113 options for $458,070 and 1,519,365 options for shares of common stock for $59,000, respectively. On April 11, 2001, the Company entered into an agreement with Joseph and Bernadette DiFrancesco in exchange for a one year exclusive option to the program, certain cartoon characters and music publishing rights related to songs written and used in "Gina Ds Kids Club Show", which have been created by Joseph and Bernadette DiFrancesco. The Company was not able to meet its requirements under the option agreement, and the option expired April 11, 2002. On May 17, 2002 the Company made an addendum to the Option Agreement, in exchange for $100,000 note payable to Joseph and Bernadette DiFrancesco and a non-refundable grant of 800,000 shares of common stock, valued at $390,000, and provided that the terms, conditions and payment due in the Agreement dated April 11, 2001 are met and fulfilled by April 11, 2003 the option agreement granted to the Company on April 11, 2001 shall be in force for a period of twenty (20) years. Because the Company cannot demonstrate through its experience the ultimate revenue from the video entertainment products it has elected to charge option rights to intellectual properties $490,000 during 2002. On March 4, 2004 the Board of Directors approved extending the agreement with Joey and Bernadette DiFrancesco, which expires April 11, 2004, in regards to the rights to the Gina D's Kids Club. The extension as for a ten-year period without restrictions or requirements, except for bankruptcy, insolvency or takeover of the Company by a person or entity not approved by the CEO, under the following terms: 15 RAVEN MOON ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2004 and 2003 (unaudited) Note 7 -- RELATED PARTY TRANSACTIONS (continued) o Joey and Bernadette DiFrancesco received 100 units of JB Toys, o Joey and Bernadette DiFrancesco received 10,000,000 share of common restricted Raven Moon Entertainment, Inc stock on April 10, 2004, and Joey and Bernadette DiFrancesco shall receive a fee of $750,000 per year for ten years beginning in January 2004 for a production royalty or 10% of all gross revenues from worldwide licensing and merchandising revenues received by Raven Moon Entertainment, Inc. or JB Toys, LLC, whichever is greater. On March 4, 2004 the Company, through its subsidiary JB Toys, LLC, granted to WEE-OOO, LTD, a limited partnership owned by Joseph and Bernadette DiFrancesco, a nonrefundable grant of 100 units of Class B memberships for the rights to reproduce characters of Gina D for sale. (See Note 6.) On August 13, 2003 the Company, through its subsidiary JB Toys, LLC, granted Bernadette DiFrancesco 200 units for the rights to the "Cuddle Bugs." In addition Bernadette DiFrancesco is to receive 15% of the revenues of JB Toys, LLC for a ten-year period On October 10, 2003 the Board of directors granted to WEE-OOO, LTD 400,000 shares of common stock for consulting services rendered. The shares were valued at $31,200 and charged to consulting fees because the Company cannot demonstrate through its experience the ultimate revenue from the video entertainment products. On August 14, 2002 the Company entered into a Consulting and Marketing Agreement with David Mouery, the son-in-law of Joey DiFrancesco, President and Chief Executive Officer of the Company. The Company issued 600,000 shares of common stock and options for 3,600,000 shares common stock to David Mouery. The option exercise price of the common stock is a 50% discount from the closing bid price for the ten trading days immediately preceding the date of exercise. The stock was valued at $195,000 and the options were valued at $369,000 and charged to consulting expense. On May 1, 2004 David Mouery entered into a twelve month consulting agreement with JB Toys, LLC and Raven Animation, Inc. Mr. Mouery is to assist the Company as entertainment attorney for legal matters and contracts for the Company's products and services. Mr. Mouery will be paid $120,000 of S-8 free trading shares in twelve equal installments of common Stock @ a 50% discount from the closing bid price for the preceding ten days. 16 RAVEN MOON ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2004 and 2003 (unaudited) Note 7 -- RELATED PARTY TRANSACTIONS (continued) During the three months ended March 31, 2004 David Mouery was not granted any options. During the three months ended March 31, 2003 David Mouery was granted options for 5,400,000 shares of common stock for production services. The fair value of these options was $315,000 and was charged to production expense because the Company cannot demonstrate through its experience the ultimate revenue from the video entertainment products. During the three months ended March 31, 2004 David Mouery did not exercise any options. During the three months ended March 31, 2003 David Mouery exercised 3,666,666 options for common stock for $170,340. The officers' and directors' were granted the following common stock warrants for a three-year term: Date Common Stock Warrants Exercise Price per Share April 5, 2000 300,000 $1.10 September 1, 2001 600,000 $ .08 The directors' were granted the following common stock options for a ten-year term: Date Common Stock Options Exercise Price per Share November 29, 2002 2,000,000 $ .13 These options were valued at $170,000 and charged to general and administrative expense. On September 16, 2003 the Board of directors issued $25,000 worth of common stock for each of the last three years (150,000 shares which were eligible for the 2 for 1 stock split) in exchange for surrendering any previously issued options and warrants. These shares were valued at a total of $268,125 and charged to consulting expense. 17 RAVEN MOON ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2004 and 2003 (unaudited) Note 7 -- RELATED PARTY TRANSACTIONS (continued) During the three-month period ended March 31, 2004 and 2003 loans from officers, directors, senior management and related parties are summarized as follows: 2004 2003 ---- ---- Balance at beginning of year $ - $ 18,000 Increase in loans - - Payments on loans - (18,000) --------- --------- Balance at end of period $ - $ - ========= ========= In February of 2003 $40,000 of Class B Member Investment loan was repaid to WEE-OOO, LTD from gross profits of JB Toys, LLC. In March an additional $51,000 of Class B Member Investment loan was paid to WEE-OOO, LTD from gross profits of JB Toys, LLC. Raven Moon Home Video Products, LLC issued a one-time bonus to its four songwriters, valued at $20,000 per songwriter. Two of the songwriters are Joseph and Bernadette DiFrancesco, officers of the Company. Following is a schedule which summarizes the activity in accruals and payments related to Joey and Bernadette DiFrancesco, the officers of Raven Moon, for the three months ended March 31, 2004 and 2003: 2004 2003 ---- ---- Beginning at December 31, 2003 $ 251,697 $ 186,383 Accrued for administrative salary 136,858 124,416 Accrued production fee 187,500 - Payments to Officers (429,017) (23,957) --------- --------- Balance at December 31, 2003 $ 147,038 $ 286,842 ========= ========= Through the spinoff of Raven Moon Home Video Products, LLC and the subsequent reclassification of net liabilities to discontinued operations (see Note 4) the Company retired its debt of $1,958,800 to the Raven Moon Home Video Products, LLC Class B Members on December 31, 2002. In addition, debt of the Company to Clubhouse Videos, Inc. for $810,018 was retired in exchange for the rights to manufacture, market and sell the first nine video, CD and DVD products produced by the Company. The rights to future products purchased by the Clubhouse Videos, Inc. from the Company will approximate $300,000 per product plus 10% of the gross sales of the product. 18 RAVEN MOON ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2004 and 2003 (unaudited) Note 8 - COMMITMENTS AND CONTINGENCIES a) The Company has entered into an employment contract with the officers, Joey and Bernadette DiFrancesco. Under the terms of the agreement, the Company is obligated to make the following annual payments through November 15, 2005: 2004 $612,000 2005 $627,000 In addition, the officers are to receive a "Founders" royalty of 10% for any entertainment revenue received by the company for any entertainment project developed and or produced by the company during the term of this agreement. This royalty will be paid between November 16th and December 31st in perpetuity. b) The Company has entered into various month to month verbal agreements with unrelated third parties to provide production, marketing and administrative services. Payments are made based on invoices rendered for specific services provided. c) On March 11, 2003, counsel for a preferred stockholder contacted the Company with a demand related to 8,000 convertible preferred shares of the Company that he owns. The shares are redeemable by the Company after February 2003. The Company is currently negotiating the terms and conditions of the redemption of those shares by the Company. In the opinion of management the resolution of this matter will have no material effect on the operation of the Company. d) On May 1, 2004 the Company entered into a two consulting agreements. These agreements required the individuals to provide executive assistants advice and production services to the Company for ten months. The individuals are to be paid $500,000 each. The payments will be S-8 free trading shares issued in ten equal installments of common Stock @ a 50% discount from the closing bid price for the preceding ten days, commencing on May 1, 2004 and every month thereafter for nine months. Note 9 - STOCK OPTION PLAN The Company established a stock option plan for its executives, consultants, key employees, directors and its affiliates. (The "2001 Stock Option Plan".) The 2001 Stock Option Plan allows for incentive stock options to be granted to future participants at a price not less than 100% of the market value per share on the date of the grant. No options have been granted to employees under this plan. 19 RAVEN MOON ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2004 and 2003 (unaudited) Note 9 - STOCK OPTION PLAN (continued) Non-statutory options are granted at prices and terms determined by the board of directors. The following is a summary of options, granted, exercised, cancelled and outstanding: Weighted Average Shares Exercise Price ------ -------------- Outstanding at December 31, 2002 4,123,891 $ .0975 Granted 31,882,873 $ .1210 Cancelled (2,937,862) $ .1589 Exercised (31,068,905) $ .0548 ----------- Outstanding at December 31, 2003 2,000,000 $ .1250 Granted 49,704,736 $ .0291 Cancelled - $ .0000 Exercised 49,704,736 $ .0255 ----------- Outstanding at March 31, 2004 2,000,000 $ .1250 =========== The exercise price and the market value for common stock options granted in 2004 and 2003 is as follows: Options granted Exercise Price Fair Market Value --------------- -------------- ----------------- 2004 ---- 7,383,838 1/2 of previous 10 days average price $ .04 12,479,799 1/2 of previous 10 days average price $ .05 19,893,997 1/2 of previous 10 days average price $ .06 8,044,026 1/2 of previous 10 days average price $ .07 1,903,076 1/2 of previous 10 days average price $ .08 20 RAVEN MOON ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2004 and 2003 (unaudited) Note 9 - STOCK OPTION PLAN (continued) 2003 1,800,000 1/2 of previous 10 days average price $ .12 4,299,999 1/2 of previous 10 days average price $ .10 3,343,529 1/2 of previous 10 days average price $ .07 2,727,197 1/2 of previous 10 days average price $ .09 1,800,000 1/2 of previous 10 days average price $ .03 4,422,706 1/2 of previous 10 days average price $ .28 88,956 1/2 of previous 10 days average price $ .26 69,780 1/2 of previous 10 days average price $ .19 983,666 1/2 of previous 10 days average price $ .16 1,050,877 1/2 of previous 10 days average price $ .17 4,071,856 1/2 of previous 10 days average price $ .14 1,000,000 1/2 of previous 10 days average price $ .13 1,052,630 1/2 of previous 10 days average price $ .08 3,780,821 1/2 of previous 10 days average price $ .06 1,328,957 1/2 of previous 10 days average price $ .04 The weighted average fair value of options granted during 2004 and 2003 is $.0291 and $.1210, respectively. The weighted average remaining life of options granted is 8.67 and 9.67 years at March 31, 2004 and 2003, respectively. The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 2004 and 2003: Risk free interest rate of 3.0%, a dividend yield of zero and a volatility factor of .50, respectively. On September 16, 2003 the Board of Directors approved the voluntary option incentive program to compensate employees, officers, directors and outside consultants for services they provide to the Company. The Company has allocated the following shares of common stock to this plan, and registered these shares in an S-8 filings. The exercise price of the options is 50% of the 10 day moving average closing bid price. September 17, 2003 10,000,000 Shares of common stock November 28, 2003 10,000,000 Shares of common stock January 6, 2004 10,000,000 Shares of common stock January 16, 2004 10,000,000 Shares of common stock February 5, 2004 10,000,000 Shares of common stock February 26, 2004 10,000,000 Shares of common stock 21 RAVEN MOON ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2004 and 2003 (unaudited) Note 9 - STOCK OPTION PLAN (continued) April 22, 2004 20,000,000 Shares of common stock On March 4, 2004 the Board of Directors authorized the issuance of 80,000,000 shares of common stock to the "Option Compensation Program" to compensate consultants to the Company. These shares shall have a fixed exercise discount rate of 50% of the average ten day closing bid price. NOTE 10 - COMMON STOCK WARRANTS Weighted Average Shares Exercise Price ------ -------------- Outstanding at December 31, 2002 590,442 $1.2600 Warrants expired (540,442) $1.1550 --------- Outstanding at March 31, 2004 And December 31, 2003, respectively 50,000 $ .1500 ========= The weighted-average remaining life of warrants granted were .50 and 1.50 years at March 31, 2004 and 2003, respectively. The fair value of these warrants was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 2004 and 2003: Risk free interest rate of 3.0%, a dividend yield of zero and a volatility factor of .50, respectively. NOTE 11 - SUBSEQUENT EVENTS In the month of April 2004 JB Toys, LLC raised $155,000 through the sale of 15.5 class B units, $95,000 was paid by Beyond the Kingdom, a related party. In the month of April 2004 the directors received 30 units of JB Toys, LLC for services they have performed for the past three years. 22 Item 2. Management's Discussion and Analysis of Financial Condition and Results Operations Cautionary statement identifying important factors that could cause our actual results to differ from those projected in forward looking statements. Pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, readers of this report are advised that this document contains both statements of historical facts and forward looking statements. Forward looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those indicated by the forward looking statements. Examples of forward looking statements include, but are not limited to (i) projections of revenues, income or loss, earnings per share, capital expenditures, dividends, capital structure and other financial items, (ii) statements of our plans and objectives with respect to business transactions and enhancement of shareholder value, (iii) statements of future economic performance, and (iv) statements of assumptions underlying other statements and statements about our business prospects. This report also identifies important factors, which could cause actual results to differ materially from those indicated by the forward looking statements. The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our financial statements and the notes thereto appearing elsewhere in this report. Overview In the past year, Raven Moon Entertainment or its subsidiaries have produced sixteen products including "Gina D's Kids Club" Volume 1, ("Join The Club"), "Gina D's Kids Club" Volume 2, ("Good News"), "Gina D's Kids Club" Volume 3, ("Smile-A-bility"), the "Gina D's Kids Club" Three Episode DVD, the "Gina D's Kids Club" Music CD Volume 1, the "Gina D's Kids Club" Music CD Volume 2, the "Young America" Limited Edition CD single, the "Sing A Long With Gina" VHS, the "Sing A Long With Gina" DVD, and the "Cuddle Bug" plush toy. Raven Moon has also established a policy not to place product into retail stores prematurely, before the "Gina D's Kids Club" program airs on TV. 23 As part of our business plan, the completion of these episodes creates multiple revenue streams which includes worldwide licensing and merchandising opportunities for the videos, CD's, and toys that have been inspired by the show, as well as future advertising revenue. Parents told us that they wanted better programming for their children, and we are committed to our goal of providing the very best in family values children's entertainment. ITEM 3. CONTROLS AND PROCEDURES (a) Under the supervision and with the participation of our principal executive officer and principal financial officer, we conducted an evaluation of the design and operation of our disclosure controls and procedures, as such term is defined under Rules 13a-14(c) and 15d-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), within 90 days of the filing date of this report. Based on that evaluation, our principal executive officer and our principal financial officer concluded that the design and 24 operation of our disclosure controls and procedures were effective to ensure that information required to be included in our Securities and Exchange Commission reports is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms. (b) In addition, there were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the Evaluation Date, including any corrective actions with regard to significant deficiencies and material weaknesses. 25 Part II. Item 1. Legal Proceedings In April, 2004, the Company has settled the dispute with Randolph S. Shaw, in exchange for certain shares of Clubhouse Videos, Inc., owned by the Company. Item 2. Changes in securities None. Item 3. Defaults on Senior Securities None. Item 4. Submission of Matters to Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits and Index of Exhibits 31. Rule 13a-14(a)/15d-14(a) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32. Section 1350 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K. No reports were filed on Form 8-K for the period ended March 31, 2004. 26 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RAVEN MOON INTERNATIONAL, INC. (Registrant) By: /s/ Date: May 15, 2004 ---------------------------------------- Joseph DiFrancesco, President 27