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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
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MODERN RECORDS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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CALIFORNIA 95-3404374
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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468 NORTH CAMDEN DRIVE
THIRD FLOOR
BEVERLY HILLS, CALIFORNIA 90210
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE, INCLUDING ZIP CODE)
(310) 285-5370
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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Indicate by check mark whether the issuer (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 [ ] No [X]
The number of shares outstanding of the issuer's Common Stock, no par
value, as of July 31, 1998 was 22,183,171.
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MODERN RECORDS, INC. QUARTERLY REPORT ON FORM 10-QSB
INDEX
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of July 31, 1998 and October 1997.... 3
Statements of Operations for the three and nine months
ended July 31, 1998 and 1997.......................... 4
Statements of Cash Flow for the three and nine months
ended July 31, 1998 and 1997.......................... 5
Notes to Financial Statements.......................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results
of Operations................................... 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................. 8
Item 2. Changes in Securities and Use of Proceeds......... 8
Item 4. Submission of Matters to a Vote of Security
Holders................................................ 8
Item 6. Exhibits and Reports on Form 8-K.................. 9
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PART I.
ITEM 1. FINANCIAL INFORMATION
MODERN RECORDS, INC.
BALANCE SHEET
JULY 31, 1998 AND OCTOBER 31, 1997
(EXPRESSED IN U.S. DOLLARS)
(UNAUDITED -- PREPARED BY MANAGEMENT)
ASSETS
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<CAPTION>
JULY 31, OCTOBER 31,
1998 1997
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CURRENT
Cash...................................................... $ 1,653 $ 15,417
Receivables............................................... 94,838 --
Other current assets...................................... 10,654
----------- -----------
Total current assets.............................. 107,145 15,417
----------- -----------
Deferred record master cost, net............................ 175,478 225,478
----------- -----------
$ 282,623 $ 240,895
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Bank overdraft............................................ $ 9,477 $ --
Accounts payable and accrued liabilities.................. 195,942 347,454
Loans payable............................................. 64,546 18,393
Deferred compensation..................................... 250,000 100,000
----------- -----------
Total current liabilities......................... 519,965 465,847
----------- -----------
Loans from related parties, non-interest bearing with no
stated terms of repayment................................. 34,045 525,012
Recoupable advances......................................... 50,000 50,000
Deferred revenue............................................ -- 141,574
----------- -----------
Total liabilities................................. 604,010 1,182,433
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SHAREHOLDERS' DEFICIENCY
Preferred stock, authorized 20,000,000 shares, none issued
Common stock, authorized: 40,000,000 shares, no par value
Issued: 22,183,171 shares (1998) (1997 -- 14,657,770
shares)................................................ 2,234,324 1,351,342
Accumulated deficit....................................... (2,555,711) (2,292,880)
----------- -----------
Total shareholders' deficiency.................... (321,387) (941,538)
----------- -----------
$ 282,623 $ 240,895
=========== ===========
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MODERN RECORDS, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED JULY 31, 1998 AND 1997
(EXPRESSED IN U.S. DOLLARS)
(UNAUDITED -- PREPARED BY MANAGEMENT)
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THREE MONTHS ENDED JULY 31, NINE MONTHS ENDED JULY 31,
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1998 1997 1998 1997
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REVENUE
Modern/Atlantic agreement........... $ 124,463 $ 118,657 $ 236,412 $ 185,424
Modern/Platinum agreement........... -- -- 65,345 --
Other............................... -- -- 300 --
----------- ----------- ----------- -----------
Total revenue............... 124,463 118,657 302,057 185,424
----------- ----------- ----------- -----------
Cost of sales......................... 56,768 -- 116,083 --
----------- ----------- ----------- -----------
Gross profit.......................... 67,695 118,657 185,974 185,424
----------- ----------- ----------- -----------
EXPENSES
Accounting and legal................ 38,076 -- 62,013 1,300
Automobile.......................... 1,263 (119) 4,629 3,469
Consulting fees..................... 2,300 500 3,032 5,800
Insurance........................... 2,981 (4,208) 5,628 --
Promotions and public relations..... 6,539 -- 32,465 --
Office and miscellaneous............ 9,250 4,556 43,300 4,556
Rent................................ 10,876 -- 31,828 1,200
Salaries............................ 60,334 (2,959) 181,437 56,601
Security registration and filing
costs............................ 3,159 -- 4,484 --
Telephone........................... 6,430 (4,872) 19,990 4,937
Travel and entertainment............ 13,821 (650) 59,999 900
----------- ----------- ----------- -----------
Total expenses.............. 155,029 (7,752) 448,805 78,763
----------- ----------- ----------- -----------
Net income (loss)..................... $ (87,334) $ 126,409 $ (262,831) $ 106,661
=========== =========== =========== ===========
Weighted average number of common
shares outstanding.................. 18,924,282 11,592,770 15,302,233 11,592,770
=========== =========== =========== ===========
Income (Loss) per share............... $ -- $ 0.01 $ (0.02) $ 0.01
=========== =========== =========== ===========
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MODERN RECORDS, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 31, 1998 AND 1997
(UNAUDITED -- PREPARED BY MANAGEMENT)
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1998 1997
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CASH PROVIDED BY (USED FOR)
OPERATIONS
Net income (loss)......................................... $(262,831) $106,661
Amortization of recoverable production costs.............. 50,000 --
CHANGES IN OPERATING ASSETS AND LIABILITIES:
(Increase) decrease in receivables........................ (94,838) --
(Increase) decrease in other current assets............... (10,654) --
Increase (decrease) in accounts payable and accrued
liabilities............................................ (148,753) (112,644)
Increase (decrease) in deferred compensation.............. 150,000 --
Increase (decrease) in deferred revenue................... (141,574) (87,053)
--------- --------
(458,650) (93,036)
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FINANCING
Bank overdraft............................................ 9,477 3,907
Issuance of common shares................................. 882,982 --
Increase (decrease) in loans from related parties......... (472,573) 39,129
Increase in recoupable advances........................... -- 50,000
Increase (decrease) in loans payable...................... 25,000 --
--------- --------
444,886 93,036
--------- --------
Increase (decrease) in cash................................. (13,764) --
Cash at beginning of period................................. 15,417 --
--------- --------
Cash at end of period....................................... $ 1,653 $ --
========= ========
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MODERN RECORDS, INC.
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1998
1. BASIS OF PRESENTATION
The interim financial statements presented have been prepared by Modern
Records, Inc. (the "Company" or "Modern") without audit and, in the opinion of
the management, reflect all adjustments of a normal recurring nature necessary
for a fair statement of (a) the results of operations for the three and nine
months ended July 31, 1998 and 1997, (b) the financial position at July 31, 1998
and (c) the cash flows for the three and nine months ended July 31, 1998 and
1997. Interim results are not necessarily indicative of results for a full year.
The balance sheet presented as of October 31, 1997 has been derived from
the financial statements that have been audited by the Company's independent
public accountants. The financial statements and notes are condensed as
permitted by Form 10-QSB and do not contain certain information included in the
annual financial statements and notes of the Company. The financial statements
and notes included herein should be read in conjunction with the financial
statements and notes included in the Company's Annual Report on Form 10-KSB.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company produces, licenses, acquires, markets and distributes high
quality recorded music for a variety of musical formats.
In May of 1997, Stephen Randall ("Randy") Jackson acquired a controlling
interest in the Company with the intent of repositioning the Company as a
forward thinking, dynamic independent label in the recording industry. During
the remainder of 1997 and throughout 1998, the Company focused on establishing a
more solid financial base while developing strategic initiatives capable of
realizing the Company's objectives.
The primary source of revenue to the Company has been the production and
release of recorded music. The Company has been closely associated with the work
of recording artist Stevie Nicks, who was one of the Company's founders.
Although Ms. Nicks is no longer under contract with the Company, her works
continue to provide the dominant source of revenue. Limited revenue in the
period was driven by the continuing sales of Stevie Nicks' "Enchanted" Album; a
three CD box set which is a shared release with Atlantic Records.
In June 1998, R&B artist Abel Mason signed a five album contract with
Modern after an introduction from Randy Jackson's brother Marlon Jackson. Mr.
Mason's romantic vocal style will be showcased in his first Modern album
expected to be released in the summer of 1999.
RESULTS OF OPERATIONS
NINE MONTHS ENDED JULY 31, 1998 COMPARED TO NINE MONTHS ENDED JULY 31, 1997
Gross revenues increased $116,633 or 62.9% to $302,057 for the nine months
ended July 31, 1998 compared to the same period in 1997. This increase reflects
the revenue sharing from the Atlantic agreement with Stevie Nicks and the
successful selling of her three CD box set "Enchanted," which was released in
May 1998. Sales results of the Jeffrey Osborne Christmas album were
disappointing as a result of delayed marketing and promotional efforts.
Cost of revenues increased to $116,083 for the nine month period ended July
31, 1998 compared to $0 for the same period in 1997. This increase is due to
costs associated with the J. Osborne album. Gross profit improved $550 or .30%
to $185,424 for the nine months ended July 31, 1998 reflecting the flow through
of profit from the Atlantic agreement with Stevie Nicks.
Selling, marketing and general administrative expenses increased in 1998
over the corresponding third quarter of 1997 by $370,042 to $448,805 reflecting
the costs associated with the ongoing work with new artist Abel Mason whose
first album is expected be released in the summer of 1999, legal and accounting
services required to gain new financing for Modern and a developing
infrastructure including payroll, rent, and communications.
The net loss from continuing operations for the nine months ended July 31,
1998 totaled $262,831 compared to a gain of $106,661 for the same period the
prior year. This decrease is due to significant expense growth.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current revenue stream is derived in large part from sales of
Stevie Nicks' albums. The Company's current management, headed by Mr. R. Jackson
who acquired a 47% equity interest in the Company in 1997, intends to pursue a
growth strategy that is centered on signing additional artists to the Modern
label, advancing funds for production of new albums, marketing albums released
on the Modern label and retaining a team of talented executive officers with
experience in the entertainment industry. Revenues from the Company's existing
product are insufficient to fund this strategy since the strategy will require
significant expenditures before additional revenues are generated. The Company's
implementation of its growth strategy is dependent on the Company's ability to
obtain additional debt, equity and other financing. There can be no assurance
that such financing will be available to the Company on favorable terms, if at
all.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS.
UNREGISTERED SECURITIES
In June and July 1998, the Company issued 425,000 shares of Common Stock to
Stig Hans Johan Grandin pursuant to the exercise of stock options with an
exercise price of C$0.15 per share, for total proceeds of C$63,750. The Company
believes that the issuance of the shares upon exercise of Mr. Grandin's options
were exempt from the registration requirements of the Securities Act under
Section 4(2) of the Securities Act because the exercise of the options did not
involve a public offering. Mr. Grandin is an accredited investor. In addition,
the Company believes that the sales of the units were exempt from the
registration requirements of the Securities Act because the units were not
offered or sold in the United States and Mr. Grandin is not a U.S. person.
As set forth above, the Company believes that the sale of its unregistered
securities described above qualified for an exemption from the registration
requirements of the Securities Act, although the Company did not qualify under
the applicable "safe harbor" provision of the exemption with respect to such
sale and, as a result, there can be no assurance that such sale was exempt. If
the sale of the Company's securities was not made pursuant to a valid exemption,
the purchaser of securities in such sale (and purchasers of securities in other
sales, if any, that would be integrated with the non-exempt sales under the
Commission's integration rules) may have a right to rescind his purchase. The
Company believes it is unlikely that the purchaser of securities from the
Company would pursue a claim to rescind his purchase because, such purchaser
acquired the securities for a purchase price significantly lower than the
current market price of the Company's Common Stock. Even if any such claim were
pursued, the Company believes that it would prevail on the grounds that the sale
was exempt from the registration requirements of the Securities Act.
Consequently, the Company believes that any asserted claim for non-compliance
with the registration provisions of the Securities Act would not materially
affect the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) An Annual Meeting of Stockholders was held June 26, 1998.
(b) 1. The Stockholders voted to elect the following directors to serve
until the Annual Meeting of Stockholders in 1999, as provided in the Bylaws of
the Company with the following votes:
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Stephen Randall Jackson
For: 8,224,201 Withheld: 0
Jackie Jackson
For: 6,482,500 Withheld: 0
Johan Grandin
For: 8,224,201 Withheld: 0
David Peteler
For: 1,621,700 Withheld: 6,482,501
Lawrence Gallo
For: 6,482,500 Withheld: 0
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2. The Stockholders voted to authorize the Directors to grant to the
officers, employees and other insiders of the Company incentive stock options,
until the Annual Meeting of Stockholders in 1999, with the following votes:
For: 8,221,501 Against: 2,700
3. The Stockholders voted to approve a private placement of up to 6,120,401
shares of Common Stock of the Company, representing 20% of the issued and
outstanding shares of Common Stock of the Company, at a price of $0.15 per share
with the following votes:
For: 8,221,501 Against: 2,700
4. The Stockholders voted to approve the transfer of up to 2,550,000 escrow
shares in the capital stock of the Company from Paul Fishkin to Randy Jackson
with the following votes:
For: 8,221,700 Against: 2,501
5. The Stockholders voted to (i) increase the number of authorized Common
Stock of the Company to 40,000,000 (ii) authorize 20,000,000 shares of preferred
stock and (iii) provide the Board of Directors with the authority to issue
preferred shares at any time in the future upon such terms and conditions as may
be determined by the Board of Directors with the following votes:
For: 8,224,201 Against: 0
6. The Stockholders voted to amend Section 3.1 of the Bylaws of the Company
to increase the authorized number of Directors to no less than four (4) no more
than seven (7) with the following votes:
For: 8,224,201 Against: 0
7. The Stockholders voted to approve the appointment of Ellis Foster as the
auditor of the Company to hold office until the next Annual General Meeting and
that the Directors of the Company be authorized to fix the compensation to be
paid to the auditor with the following votes:
For: 8,224,201 Against: 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
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3.1 Articles of Incorporation of the Company, as amended.*
3.2 By-laws of the Company, as amended.**
3.3 Certificate of Amendment of Articles of Incorporation.**
10.1 Agreement between Company and Atlantic Recording Corporation
dated July 1, 1979, as amended September 10, 1979, April 30,
1983, May 1, 1983, August 1, 1983, March 27, 1987, December
20, 1988, June 29, 1989 and April 22, 1990.*
10.2 Recording agreement between the Company and Stephanie Nicks
dated December 4, 1978, as amended December 11, 1978, April
26, 1979, May 31, 1979, June 27, 1979 and April 26, 1988.*
10.3 Distribution Agreement between the Company and EMI Records
Limited dated April 15, 1985, as amended by undated
amendment and April 6, 1989.*
10.4 Recording agreement between the Company and Mark Lennon et
al., dba "Venice", dated June 29, 1989.*
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10.5 Recording agreement between the Company and Thomas J.
Henrickson et al., dba "Big Trouble", dated November 22,
1989.*
10.6 Recording agreement between the Company and Rick Vito dated
April 22, 1990.*
10.7 Share Purchase Option Agreement with Paul E. Fishkin, dated
November 2, 1990.*
10.8 Share Purchase Option Agreement with John G. Proust and
Jeffrey C. Ingber, dated January 2, 1991.*
10.9 Pooling Agreement dated June 26, 1990 among Paul E. Fishkin,
Stephanie Nicks, Pacific Corporate Services Limited and the
Company.*
10.10 Pooling Agreement dated June 26, 1990 among certain
non-affiliated shareholders, the Company and Pacific
Corporate Services Limited.*
10.11 Pooling Agreement dated June 26, 1990 among J. Proust and
Associates, Inc., Pacific Corporate Services Limited and the
Company.*
10.12 Pooling Agreement dated July 5, 1990 among Howard Rosen,
Pacific Corporate Services Limited and the Company.*
10.13 Pooling Agreement dated November 2, 1990 among Douglas
Bleeck, Pacific Corporate Services Limited and the Company.*
10.14 Management Agreement dated June 26, 1989 between the Company
and J. Proust and Associates, Inc.*
10.15 Escrow Agreement dated June 26, 1990 among the Company, Paul
E. Fishkin, Stephanie Nicks and Pacific Corporate Services
Limited.*
10.16 Option to purchase 265,000 shares of Common Stock of the
Company issued to Randy Jackson, dated July 10, 1998.**
10.17 Option to purchase 200,000 shares of Common Stock of the
Company issued to Jackie Jackson, dated July 10, 1998.**
10.18 Option to purchase 400,000 shares of Common Stock of the
Company issued to Lawrence W. Gallo, dated July 10, 1998.**
10.19 Option to purchase 125,000 shares of Common Stock of the
Company issued to Johan Grandin, dated December 17, 1998.**
10.20 Option to purchase 125,000 shares of Common Stock of the
Company issued to Kendrik Packer, dated December 17, 1998.**
10.21 Loan Agreement dated March 16, 1998 between the Company,
Randy Jackson and Kendrik Packer.**
10.22 Employment Agreement dated May 15, 1997 between the Company
and Randy Jackson.**
10.23 Recording agreement dated March 1, 1999 between the Company
and The Jacksons.**
27.1 Financial Data Schedule.
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* Incorporated herein by reference to exhibits of the same number in the
Company's S-1 Registration Statement dated September 9, 1991 (33-40804).
** Incorporated herein by reference to exhibits of the same number in the
Company's Report on Form 10-KSB for the fiscal year ended October 31, 1998.
(B) REPORTS ON FORM 8-K
None
Items 3 and 5 are not applicable and have been omitted.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, Modern
Records, Inc. has duly caused this report to be signed by the undersigned
thereunto duly authorized.
MODERN RECORDS, INC.
/s/ STEPHEN RANDALL JACKSON
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Stephen Randall Jackson
Chairman of the Board, President
and Chief Executive Officer
Date: April 20, 1999
11
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED JULY 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> JUL-31-1998
<CASH> 1,653
<SECURITIES> 0
<RECEIVABLES> 94,838
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 107,145
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 282,623
<CURRENT-LIABILITIES> 519,965
<BONDS> 0
0
0
<COMMON> 2,234,324
<OTHER-SE> (2,555,711)
<TOTAL-LIABILITY-AND-EQUITY> 282,623
<SALES> 0
<TOTAL-REVENUES> 302,057
<CGS> 0
<TOTAL-COSTS> 564,888
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (262,831)
<INCOME-TAX> 0
<INCOME-CONTINUING> (262,831)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (262,831)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
