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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 JANUARY 31, 1999
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)
<TABLE>
<S> <C>
CALIFORNIA 95-3404374
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
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)
------------------------
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 [X] No [ ]
The number of shares outstanding of the issuer's Common Stock, no par
value, as of January 31, 1999 was 23,297,696.
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MODERN RECORDS, INC. QUARTERLY REPORT ON FORM 10-QSB
INDEX
PART I. FINANCIAL INFORMATION
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PAGE
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ITEM 1. Financial Statements
Balance Sheets as of January 31, 1999 and October 31, 3
1998........................................................
Statements of Operations for the three months ended January 4
31, 1999 and 1998...........................................
Statements of Stockholders' Equity (Deficiency) for the 5
three months ended January 31, 1999.........................
Statements of Cash Flows for the three months ended January 6
31, 1999 and 1998...........................................
Notes to Financial Statements............................... 7
ITEM 2. Management's Discussion and Analysis of Financial Condition 8
and Results of Operations...................................
</TABLE>
PART II. OTHER INFORMATION
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PAGE
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ITEM 1. Legal Proceedings........................................... 9
ITEM 2. Other Information........................................... 9
ITEM 6. Exhibits and Reports on Form 8-K............................ 10
</TABLE>
2
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PART I.
ITEM 1. FINANCIAL INFORMATION
MODERN RECORDS, INC.
BALANCE SHEETS
(unaudited)
ASSETS
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<CAPTION>
JANUARY 31, 1999 OCTOBER 31, 1998
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<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................. $ 814,279 $ 1,656
Receivables............................................... 169,544 156,140
----------- -----------
TOTAL CURRENT ASSETS.............................. 983,823 157,796
DEFERRED RECORD MASTER COST, NET............................ 184,892 184,892
PROPERTY AND EQUIPMENT, NET................................. 21,717 --
OTHER ASSET................................................. 3,089 655
=========== ===========
$ 1,193,521 $ 343,343
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Bank overdraft............................................ $ $ 3,544
Accounts payable and accrued expenses..................... 292,995 299,245
Notes payable............................................. 19,705
Deferred revenue.......................................... 24,984 --
Recoupable advance........................................ 50,000 50,000
Accrued officer's compensation............................ 345,833 283,333
Due to related parties.................................... 91,126 6,823
----------- -----------
TOTAL CURRENT LIABILITIES......................... 804,938 662,650
LONG-TERM DEBT -- RELATED PARTIES........................... 27,195 26,570
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred stock; authorized -- 20,000,000 shares, none
issued................................................. -- --
Common stock, no par value; authorized -- 40,000,000
shares; issued and outstanding -- 23,297,696 shares
(1999) and 23,297,696 shares (1998).................... 3,338,280 2,499,370
Accumulated deficit....................................... (2,976,892) (2,845,247)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY)........... 361,388 (345,877)
----------- -----------
$ 1,193,521 $ 343,343
=========== ===========
</TABLE>
See accompanying notes to financial statements.
3
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MODERN RECORDS, INC.
STATEMENT OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 1999 AND 1998
(unaudited)
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1999 1998
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REVENUE..................................................... $ 144,560 $ 70,082
COST OF REVENUE............................................. -- 28,446
----------- -----------
GROSS PROFIT................................................ 144,560 41,636
EXPENSES
Officer's salaries........................................ 62,500 50,000
Other marketing, general and administrative expenses...... 213,705 60,133
----------- -----------
276,205 110,133
----------- -----------
NET LOSS.................................................... $ (131,645) $ (68,497)
=========== ===========
BASIC AND DILUTED LOSS PER SHARE............................ $ (0.01) $ (0.01)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING........................................ 20,297,696 11,657,770
=========== ===========
</TABLE>
See accompanying notes to financial statements.
4
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MODERN RECORD, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(unaudited)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
---------------- ------------------------ ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
------ ------ ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 31,
1998................. -- $-- 23,297,696 $2,499,370 $(2,845,247) $(345,877)
Special warrants
(838,910 shares of
common stock and
838,910 warrants
issuable upon
exercise plus 44,350
special warrants to
finders)............. 838,910 838,910
Net loss............... (131,645) (131,645)
-- --- ---------- ---------- ----------- ---------
Balance, January 31,
1999................. -- $-- 23,297,696 $3,338,280 $(2,976,892) $ 361,388
== === ========== ========== =========== =========
</TABLE>
See accompanying notes to financial statements.
5
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MODERN RECORDS, INC.
STATEMENT OF CASH FLOWS
THREE MONTHS ENDED JANUARY 31, 1999 AND 1998
(UNAUDITED)
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1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $(131,645) $(68,497)
Adjustments to reconcile net loss to net cash used in
operating activities:
(Increase) decrease in:
Receivables.......................................... (13,404)
Deposits............................................. (2,434)
Increase (decrease) in:
Accounts payable and accrued expenses................ (6,250) (7,584)
Accrued interest on note payable..................... 2,000 33,925
Accrued officer's compensation....................... 62,500 50,000
Deferred revenue..................................... 24,984 (69,782)
--------- --------
NET CASH USED IN OPERATING ACTIVITIES................ (64,249) (61,938)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment........................ (21,717) --
--------- --------
NET CASH USED IN INVESTING ACTIVITIES............. (21,717) --
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft............................................ (3,544) --
Advances from related parties, net........................ 63,223 56,087
Special warrants issued................................... 838,910 --
--------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES......... 898,589 56,087
--------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 812,623 (5,851)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 1,656 15,417
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 814,279 $ 9,566
========= ========
</TABLE>
See accompanying notes to financial statements.
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MODERN RECORDS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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 months ended
January 31, 1999 and 1998, (b) the financial position at January 31, 1999 and
October 31, 1998 and (c) the cash flows for the three months ended January 31,
1999 and 1998. Interim results are not necessarily indicative of results for a
full year.
The balance sheet presented as of October 31, 1998 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.
2. STOCKHOLDERS' EQUITY
Private Placement -- On January 28, 1999, the Company arranged a private
placement of 969,100 special warrants at a price of $1.52Cdn. per special
warrant for gross proceeds of approximately $1,473,032Cdn. Each special warrant
will permit the holder, without additional payment, to acquire one common share
and one non-transferable share purchase warrant on or before the earlier of the
day which is four months from the closing date, if the Company becomes eligible
to rely on the British Columbia Securities Commission's Blanket Order and Ruling
#98/7 to issue the underlying securities subject to a four month hold period in
British Columbia, or 330 days from the closing date. If the Company becomes
eligible to rely on BOR #98/7, the special warrants will be deemed to be
exercised on the day which is four months from the closing. Each share purchase
warrant will be exercisable into one additional common share of the Company for
a period of two years, at a price of $2.25Cdn per share. The special warrants
will not be registered in the United States and will be subject to applicable
restrictions on transfer under United States Securities laws. SAS Corporate
Ltd., International Consultancy Partnership, Yorkton Securities and Jordac
Investment Ltd. received an aggregate of 44,350 special warrants, as a finders'
fee in connection with this private placement. Completion of this private
placement was subject to regulatory approval and the Company finalizing an
agreement for recording an album with Stephen Randell ("Randy") Jackson and his
brothers Sigmond ("Jackie"), Jermaine, Tito and Marlon ("The Jacksons"). As of
filing this report, the Company has finalized the agreement with The Jacksons
and has received regulatory approval. The special warrants are expected to be
issued in the near future. As of January 31, 1999, the Company had received
$838,910 (approximately 1,275,143Cdn.) from this private placement.
Stock Options -- On December 17, 1998, the Company, subject to acceptance
by the applicable securities regulatory authorities, granted incentive stock
options to: (i) Johan Grandin with the right to purchase up to 125,000 shares of
Common Stock; (ii) Kendrik Parker with the right to purchase up to 125,000
shares of Common Stock; and (iii) Wayne Smith with the right to purchase up to
75,000 shares of Common Stock. The stock options are exercisable for a period of
five (5) years, commencing on December 17, 1998 at $2.30Cdn. per share. Messrs.
Grandin and Packer are directors of the Company and Mr. Smith is a consultant to
the Company.
3. OFFICER'S COMPENSATION
Effective November 1, 1998, the compensation of Randy Jackson, the
Company's President and Chief Executive Officer was increased to $250,000 per
year.
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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, Mr. 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. Until recently, the Company had been undercapitalized and
incapable of initiating new artist development, one of the principal drivers of
future profitability.
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. More than one
hundred thousand copies of the "Enchanted" box set have been sold in the past
year.
During the period, the Company and The Jacksons continued discussions to
sign The Jacksons on the Modern label to create and produce a new album. In
March, the Company announced the signing of The Jacksons on the Modern label.
Work has begun on the project and it is expected that the album will be released
in the Fall of 1999. The Jacksons' recording contract (the "Jacksons'
Agreement") requires the Company to make certain advances to The Jacksons upon
commencement of recording and completion of The Jacksons' album, which advances
are recoupable against The Jacksons' share of royalties. Randy Jackson,
Chairman, Chief Executive Officer and President of the Company and Jackie
Jackson, a director of the Company are members of The Jacksons.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 1999 COMPARED TO THREE MONTHS ENDED JANUARY 31,
1998
Gross revenues increased $74,478 or 106.3% to $144,560 for the three months
ended January 31, 1999 compared to the same period in 1998. 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 and to date has sold more than 112,000 copies. A steady revenue
stream through 1999 on this release is anticipated. Sales results of the Jeffrey
Osborne Christmas album were disappointing as a result of delayed marketing and
promotional efforts. Management intends to re-release this seasonal Holiday
album with significant marketing support in 1999 and expects to generate good
results.
Cost of revenues decreased $28,446 or 100% to $0 for the three months ended
January 31, 1999 compared to the same period in 1998. This decrease is due to no
production activity during this period. Management expects cost of revenues to
increase during the year due largely to production associated with the albums
for Abel Mason and The Jacksons. Gross profit improved $102,924 or 247.1% to
$144,560 for the three months ended January 31, 1999 reflecting the flow through
of profit from the Atlantic agreement with Stevie Nicks.
Selling, marketing and general administrative expenses increased in 1999
over the corresponding first quarter of 1998 by $166,072 to $276,205 reflecting
the costs associated with the signing of The Jacksons, 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 three months ended January
31, 1999 totaled $131,645 compared to $68,497 for the same period the prior
year.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's current revenue stream is derived in large part from sales of
Stevie Nicks' albums. In fiscal 1998, the Company realized $241,462 Gross Profit
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.
In the last two fiscal years, the Company has financed its growth strategy
primarily from sales of the Company's Common Stock to a limited number of
investors, including officers and directors of the Company. In fiscal 1998, the
Company raised approximately C$1.7 million from placements of its Common Stock
to a limited number of investors and from the exercise of stock options by
officers and directors of the Company. More recently, in March 1999, the Company
completed a private placement of special warrants in which it received net
proceeds of C$1.47 million. The proceeds from this placement will be applied to
fund production of The Jacksons forthcoming album.
The Company is currently engaged in discussions with a number of lenders
with respect to the possibility of obtaining long term debt financing in the
future. The Company is also exploring alternative sources of financing.
The Company's implementation of its growth strategy is dependent on the
Company's ability to obtain additional debt, equity and other financing,
particularly during the period before the Company releases (and begins to derive
revenues from) albums with its existing artists such as The Jacksons and Abel
Mason. There can be no assurance that such financing will be available to the
Company on favorable terms, if at all.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 5. OTHER INFORMATION
In March 1999, the Company entered into an agreement (the "Jacksons
Agreement") with Randy Jackson and his brothers Jackie, Jermaine, Tito, and
Marlon ("The Jacksons") to produce The Jacksons' forthcoming album (the
"Jacksons' album"). The Jacksons Agreement requires the Company to make certain
advances to The Jacksons upon commencement of recording, and completion of the
Jacksons' album, which advances are recoupable against The Jacksons' share of
royalties.
In March 1999, the Company consummated a private placement of 969,100
special warrants (each special warrant entitles the holder to acquire at no
additional cost one share of Common Stock and one non-transferable share
purchase warrant to purchase one share of common stock at an exercise price of
C$2.25), for net proceeds to the Company of C$1,473,032 (the "March 1999 Private
Placement"). The Company issued an aggregate of 44,350 special warrants to SAS
Corporate Ltd., International Consultancy Partnership, Yorkton Securities and
Jordac Investment Ltd. as a finder's fee. The consummation of the placement was
conditioned on the execution of the Jacksons Agreement and governmental
approval, each of which conditions have been satisfied, and the proceeds from
the placement will be applied to finance production of the Jacksons Agreement.
9
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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.*
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.**
</TABLE>
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<TABLE>
<S> <C>
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.
</TABLE>
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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 2, 3, 4 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.
--------------------------------------
Date: April 20, 1999 /s/ STEPHEN RANDALL JACKSON
--------------------------------------
Stephen Randall Jackson
Chairman of the Board, President
and Chief Executive Officer
S-1
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED JANUARY 31, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 814,279
<SECURITIES> 0
<RECEIVABLES> 169,544
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 983,823
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,193,521
<CURRENT-LIABILITIES> 804,938
<BONDS> 0
0
0
<COMMON> 3,338,280
<OTHER-SE> (2,976,892)
<TOTAL-LIABILITY-AND-EQUITY> 1,193,521
<SALES> 0
<TOTAL-REVENUES> 144,560
<CGS> 0
<TOTAL-COSTS> 276,205
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (131,645)
<INCOME-TAX> 0
<INCOME-CONTINUING> (131,645)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (131,645)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
