<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from XXX to XXX
MODERN RECORDS, INC.
(Name of Small Business Issuer in its charter)
California 95-3404374
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
468 North Camden Drive
Third Floor
Beverly Hills, California 90210
(Address of principal executive offices, including zip code)
(310) 285-5370
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
(Title of Class)
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 ( )
Indicate by check mark if disclosure of the delinquent filers pursuant
to Item 405 of Regulation S-B is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendments to this Form 10-KSB. ( )
The Company's revenues for the fiscal year ended October 31, 1998 were
$355,246.
The aggregate market value of the Company's voting stock held by
non-affiliates of the registrant (based upon the per share closing sale price of
C$1.45 on April 19, 1999, and for the purpose of this calculation only, the
assumption that all of the Company's directors and executive officers are
affiliates) was approximately C$18,782,939.
The number of shares outstanding of the registrant's Common Stock, no
par value, as of April 19, 1999 was 23,497,414.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference
into this report:
None.
<PAGE> 2
This Annual Report of Modern Records, Inc. (the "Company or "Modern")
for the fiscal year ended October 31, 1998 contains financial information that
would have been provided in Annual Reports on Form 10-KSB for the fiscal years
ended October 31, 1995, 1996 and 1997 had the Company filed such reports. As the
financial statements included as part of this Annual Report indicated, the
Company had limited business activities in fiscal years 1995, 1996 and 1997.
PART I
ITEM 1. BUSINESS.
GENERAL
The Company produces, licenses, acquires, markets and distributes high
quality recorded music for a variety of musical formats.
The Company was founded in 1978 by Paul Fishkin, Stevie Nicks and Danny
Goldberg for the purpose of obtaining an exclusive recording agreement with
Stevie Nicks and securing recording agreements with other artists. At the time,
Stevie Nicks was embarking on a solo career after having been the lead vocalist
with the successful pop/rock band "Fleetwood Mac".
From 1981 to 1994, Stevie Nicks' six releases on the Modern label sold
over 12 million albums. During this period Modern product was distributed
through a joint venture with Atlantic Records wherein Atlantic financed the
production, manufacturing, distribution and promotion of albums. The ownership
position of residual profits was divided between Modern and Atlantic. The
agreement is currently in effect for sales generated from Stevie Nicks
recordings.
In 1991, Modern completed an initial public offering in Canada and
listing its common shares on the Vancouver Stock Exchange (ticker symbol MZR.V).
In 1995, the Company was also listed on the over-the-counter bulletin board
market (ticker symbol BB.MDNR).
In 1996, the Company released an album by the artist "Poe." Although the
Poe album generated revenue for the Company, it could not offset the significant
expenses associated with the project. Contemplated projects in 1995 and 1996
with artists Ugly Mustard, Marylin Martin and others proved either unsuccessful
at retail or incapable of being produced efficiently. The Company did not have
significant other business activities in 1995 and 1996, other than the
collection of revenues from the Stevie Nicks catalog sales under the Atlantic
Records agreement.
In May of 1997, Stephen Randall ("Randy") Jackson acquired 6,822,499
shares of the Company's Common Stock from Mr. Fishkin, constituting all of the
shares then owned by Mr. Fishkin. These shares represented approximately 47% of
the Company's then outstanding Common Stock. Mr. R. Jackson acquired his
controlling interest in the Company because he believed that Modern's catalog
assets were underdeveloped and undervalued, and that cashflow from its music
catalog could be used as a capitalization base for future recording projects.
Mr. R. Jackson serves as the Company's Chairman of the Board, Chief Executive
Officer and President. Of the shares purchased by Mr. R. Jackson from Mr.
Fishkin, 2,550,000 are still registered in the name of Mr. Fishkin and are held
in escrow by the Company's registrar and transfer agent, Pacific Corporate Trust
Company. These shares may not be released from escrow without the consent of the
Vancouver Stock Exchange, which consent is dependent on the Company's financial
performance. Any escrowed shares that have not been released by March 28, 2001
will be canceled.
In 1997, the Company produced and released Jeffrey Osborne's "Something
Warm For Christmas" album. The album was distributed through an arrangement with
Platinum Records, an agreement that has now expired. The Company may re-release
the Osborne album through a different distribution arrangement in 1999 although
no assurances can be made.
<PAGE> 3
In May 1998, Modern, in conjunction with Atlantic, released Stevie
Nicks' three CD boxset - "Enchanted." Nicks' Enchanted album went gold on April
7, 1999, having sold in excess of 166,000 boxsets.
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.
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. See "Certain Relationships and Related Transactions." In connection
with the Jacksons Agreement, the Company consummated a $1.47 million private
placement to fund production costs of The Jacksons album and required advances
under the Jacksons Agreement. See "Market for the Company's Common Equity and
Related Stockholder Matters--Unregistered Securities."
COMPANY STRATEGY
Modern's strategy is to become a dynamic independent label in the
recording industry. The Company's plan for growth and expansion is based on the
following strategic initiatives:
Signing Established Artists
Modern is focused on building a dynamic artist portfolio through
relationships with established artists with proven track records, such as The
Jacksons. The Company plans to enter into recording and music publishing
contracts with select proven artists with consistent sales histories that are no
longer under contract with the major record labels. The Company believes that
Randy Jackson's music industry relationships will significantly assist the
Company in acquiring and marketing such artists.
New Artist Development
The Company also intends to develop new artists to enhance the long term
value of Modern's portfolio. Management believes that it has the ability and the
cultural environment necessary to foster superior performances and creativity on
the part of artists involved with Modern. The Company's culture should afford
each artist an opportunity to develop his or her own skills and personality
while providing the artists with creative support and direction.
Growth through acquisition
The Company will also focus on developing a sustainable cash flow base
by acquiring and integrating independently owned music catalogs, publishing
companies and undercapitalized record labels. The Company believes prudent
acquisitions of such high quality assets can reduce business risk while fueling
growth.
The Company believes that the acquisition and integration of
independently owned music catalogs and publishing companies should enable the
Company to address the primary concern for the continued stability and growth of
record companies: an adequate and diversified base of assets which generate
recurring earnings. These cash flowing assets, like the film libraries of the
major motion picture distributors, often set apart the major record labels from
the independent record companies.
Marketing of Modern's Music
The Company intends to strengthen Modern's brand identification with
both trade and consumer audiences through consistent messaging of Modern's
activities. Packaging and promotions will reinforce the dynamic nature
2
<PAGE> 4
of the Company and it's portfolio of artists. The Company intends to provide
distributors with innovative, well-coordinated marketing campaigns behind each
new release and to support distributors' efforts to gain greater retail presence
and share for Modern.
Multi-channel distribution
The Company plans on leveraging its industry relationships to secure
improved major label distribution for its product. Modern intends to develop the
use of major distributors, as well as independent distributors who have access
to many of the smaller markets and also put greater emphasis on international
distribution.
RELATIONSHIP WITH ARTISTS
Contract Terms
The Company seeks to contract with its artists on an exclusive basis for
the marketing of their recordings in return for a royalty based on the net sales
of the recordings. The Company generally seeks to obtain rights on a worldwide
basis. A typical contract with an artist may provide for a number of albums to
be delivered, with advances against royalties being paid upon execution of the
recording contract and delivery of each album, although advances are often made
prior to recording. The Company generally has an option to take each album that
the artist is contracted to deliver, exercisable within an agreed period of
time, usually a few months following delivery of the previous album. Normally,
if an option is not exercised, the artist has no obligation to deliver
additional albums. Provisions in contracts with established artists vary
considerably, and may, for example, require the Company to release a fixed
number of albums and/or contain an option exercisable by the Company covering
more than one album. The Company seeks to obtain rights to exploit product
delivered by the artist for the life of the product's copyright. Under the
contracts, advances are normally recoupable against royalties paid to the
artist. The Company also seeks to recoup a portion of certain marketing and tour
support costs, if any, against artist royalties.
Recording
Contracts either provide for the artists to deliver completed recordings
or for the Company to undertake the recording with the artist. If the recording
costs are advanced by the Company, they are added to the advances paid to the
artist and recouped against royalties payable to the artist. The Company's staff
is involved in selecting producers, recording studios, any additional musicians
needed and songs to be recorded, as well as supervising the output of recording
sessions. For experienced artists, such involvement may be minimal.
PRODUCTION AND MANUFACTURING
The Company manufactures its finished music product through third
parties and intends to continue this practice.
LICENSING
The Company is engaged in licensing activity involving both the
acquisition of rights to certain master recordings and compositions for its own
projects and the granting of rights to third parties in the master recordings
and compositions it owns. The Company typically obtains an ownership or
co-ownership interest in all newly-recorded compositions appearing on albums
released by the Company that are written by the artists performing the
compositions. The rights to use all other compositions appearing on albums or
audiovisual works are obtained from the publishers of those compositions under
agreements that, for albums, are called mechanical licenses, which are often
issued through a central agency, and for audiovisual works are called
synchronization licenses. The mechanical license fee is customarily indexed to a
statutory rate established under the United States Copyright Act, which
currently is 7.1 cents for a performance of up to five (5) minutes and higher
for performances of greater length. Although fees for synchronization licenses
vary from set fees to percentages of sales price, the fee often corresponds to
the statutory rate for mechanical licenses. The Company typically issues its own
mechanical and synchronization licenses to third parties when compositions from
its own catalog are used by others.
3
<PAGE> 5
Performance rights in compositions owned by the Company are enforced
under agreements the Company has with the performing rights organizations,
American Society of Composers, Authors and Publishers ("ASCAP"), Broadcast
Music, Inc. ("BMI"), and SESAC, Inc., which licenses commercial users of music
such as radio and television broadcasters, restaurants and retailers and
disburses collected fees based upon the frequency and type of performances they
identify.
COMPETITION
The business success of the Company depends, among other things, on the
skill and creativity of the employees of the Company and on their relationships
with artists. The Company faces intense competition for discretionary consumer
spending from numerous other record companies and other forms of entertainment
offered by film companies, video companies and others. The Company competes
directly with other record companies, including the five major international
recorded music companies, as well as other record and music publishing companies
for signing established and new artists and songwriters and acquiring music
catalogs. The Company's competitors generally have significantly longer
operating histories, greater financial resources and larger music catalogs than
the Company. The Company's ability to compete successfully will be largely
dependent upon its ability to obtain financing to fund its growth strategy to
build upon and maintain its reputation for quality music products and to
introduce music products which are accepted by consumers.
EMPLOYEES
As of April, 1999, the Company employed four (4) full-time employees,
located in the Beverly Hills, California facilities.
None of the Company's employees are represented by a labor union. The
Company has not experienced any work stoppage and considers relations with its
employees to be good.
RISK FACTORS
This Annual Report (including without limitation the following Risk
Factors) contains forward-looking statements (within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934) regarding the Company and its business, financial condition, results of
operations and prospects. Words such as "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates" and similar expressions or variations
of such words are intended to identify forward-looking statements, but are not
the exclusive means of identifying forward-looking statements in this Annual
Report.
Although forward-looking statements in this Annual Report reflect the
good faith judgment of the Company's management, such statements can only be
based on facts and factors currently known by the Company. Consequently,
forward-looking statements are inherently subject to risks and uncertainties,
and actual results and outcomes may differ materially from results and outcomes
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences in results and outcomes include without
limitation those discussed below as well as those discussed elsewhere in this
Annual Report. Readers are urged not to place undue reliance on these forward-
looking statements, which speak only as of the date of this Annual Report. The
Company undertakes no obligation to revise or update any forward-looking
statements in order to reflect any event or circumstance that may arise after
the date of this Annual Report.
Historical Losses; Anticipated Losses
Historically, the Company has incurred significant operating losses, and
as of October 31, 1998 had an accumulated deficit of $2,845,247. The Company
expects to increase its operating expenses in order to record, produce,
distribute and market albums in 1999. Such an increase in operating expense will
increase the Company's accumulated deficit unless offset by revenues from sale
of such albums. There can be no assurance that the Company will ever achieve or
maintain profitability in the future.
4
<PAGE> 6
Record Business
The Company will be required to incur substantial costs in the
production, promotion and distribution of its recordings, and a majority of
these costs must be paid whether or not such recordings prove successful. The
ability to generate profit depends upon factors which may be beyond the control
of the Company's management, including acquisition and distribution costs, the
success of advertising and promotional activities (which require substantial
expenditures), the efforts of domestic and foreign distributors, favorable
critical reviews, the ability to obtain radio "airplay", and the buying habits
of the public.
Dependence Upon Signing Acts and Album Release
The Company's business operations are dependent upon signing artists to
the Modern label and releasing of new albums that are currently in production.
In the past, albums released by Stevie Nicks were the primary source of revenue
for the Company. However, Ms. Nicks is no longer under contract with the
Company, and the revenues generated from the past recordings of Ms. Nicks are no
longer sufficient to sustain the business operations of the Company. The Company
currently has only two artists that are in the process of recording albums on
the Modern label -- Abel Mason and The Jacksons. Although, Mr. Mason and The
Jacksons have both executed recording contracts with the Company, there can be
no assurance that their albums will be completed or that their albums will be
profitable upon release. The failure to complete and release these albums could
have a material adverse effect on the Company's business, financial condition
and results of operation. In addition, the failure of the Company to sign
additional artists with popular appeal to the Modern label could have a material
adverse effect on the Company's business, financial condition, prospects and
results of operation.
Need for Additional Financing
The Company has very limited working capital, and the Company will
require additional financing to sign new artists and pursue its growth strategy.
There can be no assurance that the Company will be able to successfully
negotiate or obtain additional financing, or that such financing will be on
terms favorable or acceptable to the Company. The Company's ability to obtain
additional capital will be dependent on many conditions and factors outside the
Company's control. If adequate funds are not available or are not available at
acceptable terms, the Company's ability to attract new artists, procure artist
development and finance production would be significantly limited. The failure
to secure necessary financing could have a material adverse effect on the
Company's business, prospects, financial condition, prospects and results of
operations.
Dependence Upon Distribution Agreement
The profitability of future albums, including Mr. Mason's album and The
Jacksons' album, is dependent upon the Company signing a distribution deal with
a major record label distributor. As of April 20, 1999, the Company has not
secured a distribution arrangement for either album. There can be no assurance
that the Company will obtain satisfactory distribution arrangements by the
anticipated album release dates. Without the assistance of a major record label
distributor to distribute and market recordings by the Company's artists, the
Company will not be able to successfully release an album.
Reliance On Mr. Randy Jackson
The Company's performance is substantially dependent on the continued
services and the performance of its President and Chief Executive Officer, Mr.
R. Jackson. The loss of the services of Mr. R. Jackson could have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations.
Competition
The record industry is highly competitive. Moreover, the Company faces
strong competition from the major record companies and numerous independent
record companies. The Company competes with such other
5
<PAGE> 7
companies for recording artists, airplay, and space for its releases in retail
outlets. The Company may have difficulty in attracting suitable new artists
because of this competition.
Pirate Recordings; Digital Format
Pirated copies of popular musical recordings on cassette tape or CD
formats are routinely produced. In addition, a musical composition recorded in a
digital format and distributed on the Internet allows the end-user to download
and copy the musical composition free of charge. Although this piracy presents a
significant potential problem for the music industry, the Company believes that
it is not affected any more than any other Company in the industry by these
problems.
Fluctuation in Earnings
The Company's earnings are subject to variations due to costs associated
with the production, marketing and distribution of new albums, and the earnings
from quarter to quarter may be materially affected by the timing of any new
releases.
Risks Associated with Product Returns
In accordance with industry practice, the Company's music products are
sold on a returnable basis. An increase in returns could adversely affect the
Company's results of operations.
Control by Management
As of March 16, 1999, the Company's officers, directors and greater than
5% stockholders (and their affiliates) beneficially own in the aggregate
approximately 58% of the issued and outstanding voting shares of the Company's
capital stock. As a result, such persons, acting together, will have the ability
to control all matters submitted to stockholders of the Company for approval
(including the election and removal of directors and any merger, consolidation
or sale of all or substantially all of the Company's assets) and to control the
management and affairs of the Company. Accordingly, such concentration of
ownership may have the effect of delaying or preventing a change in control of
the Company, impede a merger, consolidation, takeover or other business
combination involving the Company or discourage a potential acquirer from making
a tender offer or otherwise attempting to obtain control of the Company, which
in turn could have an adverse effect on the market price of the Company's Common
Stock.
Possible Volatility of Stock Price
The trading price of the Common Stock is likely to be highly volatile
and could be subject to wide fluctuations in response to factors such as actual
or anticipated variations in the Company's quarterly operating results,
announcements of album releases, the signing of new artists to the Modern label,
additions or departures of key personnel, sales of Common Stock in the open
market and other events or factors, many of which are beyond the Company's
control. Market fluctuations, as well as general political and economic
conditions such as recession or interest rate or currency rate fluctuations, may
also adversely affect the market price of the Common Stock. In the past,
following periods of volatility in the market price of a company's securities,
securities class-action litigation has often been instituted against such
company. Such litigation, if instituted, could result in substantial costs and a
diversion of management's attention and resources, which would have a material
adverse effect on the Company's business, prospects, results of operations and
financial condition.
Year 2000
The Company believes that its internal software applications used
primarily for administrative purposes contain source code that is able to
interpret appropriately the upcoming calendar year 2000. In the event of a
software failure or interruption, the Company believes that it will not incur a
material expense to make its computer software programs and operating systems
"Year 2000" compliant. However, there can be no assurance that unanticipated
6
<PAGE> 8
costs necessary to update or replace hardware or software, or potential business
interruptions, will not exceed the Company's present expectations.
ITEM 2. PROPERTIES
The Company is headquartered in Beverly Hills, California. It currently
leases its 1800 square foot office facility on a month to month basis. Its
monthly lease payments are $4,695.00.
The Company is currently reviewing new facility options in the Los
Angeles area, which will support growing space requirements. The Company expects
that the new space it acquires or leases will include a studio which will allow
rehearsals and recordings to take place in the same facility which houses
administrative offices.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in legal actions in the ordinary course of its
business. Although the outcome of any such legal actions cannot be predicted, in
the opinion of management, there is no legal proceeding pending or asserted
against or involving the Company for which the outcome is likely to have a
material adverse effect upon the consolidated financial position or result of
operation of the Company.
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:
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
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
7
<PAGE> 9
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
8
<PAGE> 10
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
On October 31, 1998, there were 35 holders of record of the Company's
Common Stock. The Company did not pay any dividends on its Common Stock in
fiscal years 1997 or 1998.
The Company's Common Stock trades on the Vancouver Stock Exchange
("VSE") under the symbol "MZR.V". The following table sets forth the high and
low closing prices of the Company's Common Stock for the periods reflected
below, as reported by VSE. Such quotations reflect inter-dealer prices without
markup, markdown or commissions and may not necessarily represent actual
transactions. The amounts set forth below are listed in Canadian dollars.
<TABLE>
<CAPTION>
Price Range of
Common Stock
-----------------
High Low
----- -----
<S> <C> <C>
Fiscal Year Ended October 31, 1997: C$.42 C$.07
First Quarter .14 .09
Second Quarter .17 .07
Third Quarter .27 .10
Fourth Quarter .42 .12
Fiscal Year Ended October 31, 1998: C$1.50 C$.15
First Quarter .50 .16
Second Quarter .65 .15
Third Quarter .95 .50
Fourth Quarter 1.50 .50
</TABLE>
9
<PAGE> 11
UNREGISTERED SECURITIES
During the twelve month period ended October 31, 1998, the Company sold
the following unregistered securities:
<TABLE>
<CAPTION>
COMMON
DATE STOCK WARRANTS
- ------------------------------ ------------- ---------
<S> <C> <C>
February 3, 1998* 320,000(1) 320,000(1)
March 16, 1998* 95,050(2)
March 16, 1998* 6,120,401(3)
April 2, 1998* 85,000(4) 85,000(4)
April 2, 1998 175,000(5)
April 16, 1998* 400,000(6) 400,000(6)
June 11, 1998 and July 9, 1998 425,000(7)
August 6, 1998 47,525(8)
August 26, 1998, 729,000(9)
September 22, 1998 and
October 9, 1998
September 25, 1998* 338,000(10) 338,000(10)
--------- ---------
TOTAL 8,639,926 1,238,050
========= =========
</TABLE>
* Indicates the date that the Company announced the pending sale, which
remained, as of such date, subject to final approval of applicable
Canadian regulatory authorities. Such approval was subsequently obtained
from the appropriate Canadian regulatory authority, and each such sale
has been consummated.
(1) Pursuant to a private placement under British Columbia securities laws,
320,000 units were issued at C$0.25 per unit for total proceeds of
C$80,000 (each unit is comprised of 1 share of Common Stock and 1
non-transferable share purchase warrant exercisable at C$0.50 per share
during the first year after purchase and C$0.60 during the second year
after purchase). 260,000 of the units were sold to three Canadian
investors and 60,000 of the units were sold to Johan Grandin, a Swedish
citizen and director of the Company. The Company believes that the sales
of the units were exempt from the registration requirements of the
Securities Act under Section 4(2) of the Securities Act because the
transaction did not involve a public offering--there were less than 10
offerees of the units, each offeree was an accredited investor and each
purchaser was required to hold the units for a period of one year
following the execution of the subscription agreement relating to the
sale. 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 none of the
purchasers was a U.S. person.
(2) Non-transferable share purchase warrants exercisable at C$0.15 per share
during the first year after issuance and C$.17 during the second year
after issuance (the "Loan Warrants") were issued to Mr. R. Jackson, the
Chairman, Chief Executive Officer and President of the Company, and to
Mr. Packer, a director of the Company, in connection with the loans of
US$25,000 (C$35,643) extended by such individuals to the Company. The
Company believes that the issuance of the Loan Warrants were exempt from
the registration requirements of the Securities Act under Section 4(2)
of The Securities Act because they did not involve a public offering.
(3) Pursuant to a private placement under British Columbia securities laws,
6,120,401 shares of Common Stock were issued at C$0.15 per share, for
total proceeds of C$918,060. 786,055 of the shares were sold to three
Canadian investors, 551,055 of the shares were sold to Mr. Grandin and
4,783,371 of the shares were sold to Randy Jackson, the Chairman, Chief
Executive Officer and President of the Company. Although
10
<PAGE> 12
the majority of the shares were issued on June 12, 1998, 1,793,171 of
the shares sold to Mr. R. Jackson were not issued until October 26,
1998, following the date that stockholders approved an increase in the
number of authorized shares of the Company. The Company believes that
the sales of the shares were exempt from the registration requirements
of the Securities Act under Section 4(2) of the Securities Act because
the transaction did not involve a public offering--there were less than
10 offerees of the shares and each offeree (other than a Canadian
investor who purchased 35,000 of the shares for an aggregate purchase
price of $5,250) was an accredited investor and each purchaser was
required to hold the units for a period of one year following the
execution of the subscription agreement relating to the sale. In
addition, the Company believes that the sales of the shares to the
Canadian investors and Mr. Grandin were exempt from the registration
requirements of the Securities because those shares were not offered or
sold in the United States and neither Mr. Grandin nor any of the
Canadian investors is a U.S. person.
(4) Pursuant to a private placement under British Columbia securities laws,
85,000 units were issued at C$0.30 per Unit, for total proceeds of
C$25,500 (each unit is comprised of 1 share of Common Stock and 1
non-transferable share purchase warrant exercisable at C$0.40 per share
during the first year after purchase and C$0.60 during the second year
after purchase). The units were sold to a Canadian investor and to Mr.
Grandin. The Company believes that the sales of the units were exempt
from the registration requirements of the Securities Act under Section
4(2) of the Securities Act because the transaction did not involve a
public offering--there were only two offerees of the units, each offeree
was an accredited investor and each purchaser was required to hold the
units for a period of one year following the execution of the
subscription agreement relating to the sale. 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 neither purchaser was a U.S. person.
(5) Issued to Mr. Grandin pursuant to the exercise of options with an
exercise price of C$0.15 per share, for total proceeds of C$26,250. 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.
(6) Pursuant to a private placement under British Columbia securities laws,
400,000 units were issued at C$0.40 per Unit, for total proceeds of
C$160,000 (each unit is comprised of 1 share of Common Stock and 1
non-transferable share purchase warrant exercisable at C$0.55 per share
during the first year after purchase and $0.75 during the second year
after purchase). The units were sold to two Canadian investors. The
Company believes that the sales of the units were exempt from the
registration requirements of the Securities Act under Section 4(2) of
the Securities Act because the transaction did not involve a public
offering--there were only two offerees of the units, each offeree was an
accredited investor and each purchaser was required to hold the units
for a period of one year following the execution of the subscription
agreement relating to the sale. 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 neither purchaser was a U.S. person.
(7) Issued to Mr. 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.
(8) Issued to Mr. Packer pursuant to the exercise of Loan Warrants, for
total proceeds of C$7,128.75. The Company believes that the issuance of
the shares upon exercise of Mr. Packer's Loan Warrants were
11
<PAGE> 13
exempt from the registration requirements of the Securities Act under
Section 4(2) of the Securities Act because the exercise of the Loan
Warrants did not involve a public offering. Mr. Packer is an accredited
investor.
(9) Mr. R. Jackson exercised stock options at C$0.15 per share, for total
proceeds of C$109,350. The Company believes that the issuance of the
shares upon exercise of Mr. R. Jackson'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. Jackson is an accredited investor.
(10) Pursuant to a private placement under British Columbia Securities law,
338,000 units were issued at C$0.83 per unit, for total proceeds of
C$280,540 (each unit is comprised 1 share of Common Stock and 1
non-transferable share purchase warrant exercisable at C$1.25 per share
during the first year after purchase and C$1.50 during the second year
after purchase). The units were sold to Mr. R. Jackson and Mr. Grandin.
The Company believes that the sales of the units were exempt from the
registration requirements of the Securities Act under Section 4(2) of
the Securities Act because the transaction did not involve a public
offering--there were only two offerees of the units, each of Mr. R.
Jackson and Mr. Grandin is an accredited investor and each purchaser was
required to hold the units for a period of one year following the
execution of the subscription agreement relating to the sale.
In addition, on February 23, 1999, Mr. R. Jackson exercised options to
acquire 199,718 shares at C$.78 per share, for total proceeds of C$155,780. The
Company believes that the issuance of the shares upon exercise of Mr. R.
Jackson'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. Jackson is an accredited
investor.
Also, 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 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. Affiliates of Mr.
Grandin and Mr. Packer purchased 23,000 special warrants and 90,000 special
warrants, respectively, in the March 1999 Private Placement. The Company
believes that the special warrants were exempt from the registration
requirements of the Securities Act because the transaction did not involve a
public offering and fell within the safe harbor afforded by Regulation D under
the Securities Act. There were less than 10 offerees of the units and each
offeree was an accredited investor.
As set forth above, the Company believes that each of the sales of its
unregistered securities described above qualified for exemptions from the
registration requirements of the Securities Act, although the Company did not
qualify under the applicable "safe harbor" provisions of the relevant exemption
with respect to certain of such sales and, as a result, there can be no
assurance that each such sale was exempt. If one or more of the sales of the
Company's securities were not made pursuant to a valid exemption, the purchasers
of securities in such sales (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 their purchases. The Company
believes it is unlikely that purchasers of securities from the Company would
pursue a claim to rescind their purchases because, except in the case of the
March 1999 Private Placement (which the Company believes qualified for the safe
harbor provisions afforded by Regulation D promulgated under the Securities
Act), such purchasers 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.
12
<PAGE> 14
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company's principal business activities are the production,
acquisition, licensing and distribution of audio recordings.
In May of 1997, Mr. R. 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.
Late in 1997, the Company released a Christmas album by Jeffrey Osborne.
Results to date from the Osborne album have been disappointing and attributable
to a lack of marketing and promotions support on the part of the Company.
Management hopes to reposition this album for rerelease in 1999.
Additional revenues have come through a number of less successful
recording artists and agreements. There can be no assurance that this source of
revenues can be maintained.
From time to time, the Company has licensed its music catalog for use by
others. Management believes that the Company's licensing potential with respect
to its existing catalog has been underutilized and that such licensing is a
source of future revenue opportunity.
Additional capital investment in the Company throughout 1998 and 1999
has allowed the Company to enter into two significant artist contracts. The
first was signed with newcomer singing artist Abel Mason who has agreed to
release up to five albums on the Modern label, the first of which is expected to
be released in the summer of 1999. Mr. Mason was discovered by Mr. R. Jackson's
brother Marlon and brings a new musical perspective to the Company.
Negotiations were ongoing throughout the later part of 1998 and early
1999 with The Jacksons. In March 1999, The Jacksons signed with the Company to
create up to two new albums. The first album is expected to be released in the
fall of 1999. While there can be no assurance that the reunion of one of the
most successful musical groups will generate significant revenue, management is
optimistic about launching this project.
A significant recurring funding requirement of the Company is for artist
and repertoire ("A&R") expenses, which includes recording costs and advances to
artists. The Company makes substantial payments each quarter for recording costs
and advances in order to maintain and enhance it's artist roster. These costs
are expected to be recouped from the artists' royalties, to the extent possible,
from future album sales. Such advances are capitalized as an asset when the
current popularity and past performance of the artist provides a sound basis for
estimating the probable future recoupment of such advances from royalties
otherwise payable to the artist.
During the fiscal year ended October 31, 1998, the Company realized a
loss from operations of $552,367. At year end, the Company had a stockholder's
deficiency of $345,877. The future operations of the Company are
13
<PAGE> 15
dependent upon the continued support of the stockholders and management's
ability to achieve profitable operations.
RESULTS OF OPERATIONS
The following table sets forth certain items that are included in the
Company's statements of operations for the periods reflected below. Operating
results for any period are not necessarily indicative of results for any future
periods.
TWELVE MONTHS ENDED OCTOBER 31
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
1998 1997 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUE
Modern/Atlantic agreement $ 297,715 $ 197,819 $ 23,517
Modern/Platinum agreement 57,531 --
Other recording revenue -- 2,000 35,073
Expense reimbursement 931
Other -- 8,377 125,000
--------- --------- ---------
TOTAL REVENUE 355,246 208,196 184,521 196,299
COST OF REVENUE 96,749 39,038 72,222 212,099
--------- --------- --------- --------
GROSS PROFIT 258,497 169,158 112,299 (15,800)
--------- --------- --------- --------
EXPENSES
Accounting and legal 109,800 75,999 53,888 46,114
Automobile 6,327 2,331 11,174 9,814
Consulting fees 90,676 14,224 14,147 16,605
Depreciation 142 748 1,948
Foreign exchange loss 892 6,808 -- 0
Insurance 9,943 6,397 1,907 6,408
Interest 4,596 2,062 3,040 5,486
Investor relations 54,789 5,408 19,875
Office and miscellaneous 94,345 15,064 8,824 19,215
Rent 49,704 20,471 32,497 14,875
Salaries and employee
benefits 270,073 132,456 185,141 247,782
Security registration and
filing costs 10,484 696 7,943 4,872
Telephone 29,466 28,450 21,310 20,872
Travel and entertainment 134,588 26,615 5,843 18,452
--------- --------- --------- --------
810,864 386,504 351,870 432,318
NET LOSS $(552,367) $(217,346) $(239,571) (448,118)
========= ========= ========= ========
</TABLE>
TWELVE MONTHS ENDED OCTOBER 31, 1998 COMPARED TO TWELVE MONTHS ENDED OCTOBER 31,
1997
Gross revenues increased $147,050 or 70.6% to $355,246 for the twelve
months ended October 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 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
14
<PAGE> 16
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 increased $57,711 or 148% to $96,749 for the year ended
October 31, 1998 compared to the same period in 1997. This increase is due
largely to the signing and funding of work being done by a new artist signed to
the Modern label, Abel Mason. His album, the first of a proposed five, is
expected to be released in the summer of 1999. Gross profit improved $89,339 or
53% to $258,497 for the year ended October 31, 1998 reflecting the flow through
of profit from the Atlantic agreement with Stevie Nicks.
Selling, marketing, general administrative expenses increased $424,360
or 110% to $810,864 for the year ended October 31, 1998 representing a
commitment by Modern to develop a strategic business plan, attract appropriate
equity and debt financing and establish an organizational infrastructure.
The net loss from continuing operations for the year ended October 31,
1998 totaled $552,367 compared to $217,346 for the prior year.
Balance Sheet improvements were registered during the year with total
assets increasing to $343,343 from the prior year's $240,895, due largely to the
receivables generated by the success of Stevie Nick's "Enchanted" release
agreement with Atlantic. It is expected that a steady flow of income will
continue from this recording agreement through 1999.
Current Liabilities were reduced from $1,182,433 at year-end 1997 to
$662,650 in 1998 based on repayment of loans and other obligations to third
parties.
Negative cash flow from operations increased to $670,430 in 1998 from
$269,145 in 1997 due to lack of sales activity. At the same time, cash flow from
financing activities increased from $510,040 to $656,669 in 1998 as a result of
issuing 8,639,696 shares of common stock. Total stockholders' deficiency in 1998
was reduced from $941,538 to $345,877.
TWELVE MONTHS ENDED OCTOBER 31, 1997 COMPARED TO TWELVE MONTHS ENDED OCTOBER 31,
1996
Gross revenues increased from $184,521 in 1996 to $208,196 in 1997 with
the majority of the results being reflective of the Atlantic agreement involving
Stevie Nicks. Modern released a Christmas album by Jeffrey Osborne at the end of
the fourth quarter and due to late release, sales results were less than
expected.
Cost of Revenues dropped to $39,038 in 1997 from the prior year's
$72,222 reflecting a reduction in new product investment.
Gross Profit improved to $169,158 in 1997 from $112,999 in 1996 because
of the Atlantic agreement with Stevie Nicks, and an absence of funds being spent
on new product development. Selling, marketing and general administrative
expenses increased to $386,504 from $351,870 in 1996 due to greater expenses
attributable to the Jeffrey Osborne project. Additionally, there were expenses
involved in the Company's financial restructuring activity during the year that
resulted in Randy Jackson acquiring a controlling interest in Modern.
The net loss from continuing operations for the year ended 1997 were
reduced to $217,346 from $239,571 in 1996.
TWELVE MONTHS ENDED OCTOBER 31, 1996 COMPARED TO TWELVE MONTHS ENDED OCTOBER 31,
1995
Gross Revenues decreased in 1996 to $184,521 compared to the 1995
results of $196,299 as a result of no new product being released and slowing of
sales activity on prior year's releases.
Cost of Revenues dropped to $72,222 from $212,099 as a result of
inactivity in creating and releasing new albums.
15
<PAGE> 17
Gross profit improved to $112,299 in 1996 from a loss in 1995 of $15,800
largely as a result of new release inactivity while still collecting revenue
from prior years' album release results.
Selling, marketing and general administrative expenses were reduced
substantially from $432,318 in 1995 to $351,870 in 1996 again reflecting lack of
funds expended on new product development.
The net loss from continuing operations improved from ($448,118) in 1995 to
($239,571) in 1996.
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 potential 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.
YEAR 2000 READINESS
This discussion for "Year 2000" (or "Y2K") relates to the possible
inability of computers, hardware or software to perform properly because they
are unable to interpret date information correctly after December 31, 1999, and
includes all of the associated consequences of such failures on the Company's
operations. If not corrected, such situations could result in a computer-system
failure.
The Year 2000 Program
The Company's plan to address the Year 2000 problem involves the
following phases: assessment and remediation. The "assessment" phase requires
that an evaluation be made of such affected system to determine what actions
need to occur to make the Company's computers Y2K compliant. The "remediation"
phase involves the actual repair or replacement of those hardware and software
components critical to its business.
Third Party Compliance
The Company is not aware of any existing third party Year 2000 issues
that would have a material adverse effect on the Company's business. The Company
intends to make inquiries of third party vendors, distributors and suppliers
with which it enters into material relationships regarding such third party's
Year 2000 compliance. If third
16
<PAGE> 18
parties with which the Company enters into material relationships fail to
achieve Year 2000 compliance, it could result in a material adverse effect on
the Company's results of operations and financial condition.
Cost of the Year 2000 Program
The Company has not incurred any significant costs in association with
its compliance program. The Company believes software and hardware components
currently owned by the Company contain sufficient upgrade capability to operate
after December 31, 1999.
17
<PAGE> 19
Risks
In the worst case scenario, if all of the Company's hardware failed
because of a Year 2000 problem, the Company believes there would not be a
material interruption or failure in its business activities because such
hardware could be replaced at relatively low cost.
The Company's Contingency Plans
The Company does not have and does not plan to devise a contingency plan
for a Year 2000 problem. The Company believes its operations will not be
materially adversely affected upon the occurrence of a hardware or software
failure. In the event of a computer failure, the Company plans to purchase the
new software or hardware needed in order to repair or replace the affected
hardware or software.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information called for by this Item is included on Pages F-1 through
F-11 of this Report on Form 10-KSB. In addition, the Company has included its
audited financial statements for fiscal years 1997, 1996 and 1995 on pages F-12
through F-33.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On December 3, 1998, Ellis Foster resigned as the Company's independent
public accountant. The Company requested Ellis Foster's resignation because the
Company desired to retain an U.S.-based accounting firm to audit its financial
statements in accordance with U.S. generally accepted accounting principles on a
going forward basis. On December 3, 1998, the Company retained Hollander, Lumer
& Co. LLP as its independent public accountant, which action was ratified by the
Company's Board of Directors as of December 3, 1998.
The audit reports of Ellis Foster on the Company's financial statements
as of and for the fiscal years ended October 31, 1997 and 1996 did not contain
an adverse opinion or a disclaimer of opinion nor were they qualified or
modified as to uncertainty, audit scope, or accounting principles. During fiscal
years 1997 and 1996 and the subsequent interim periods through December 3, 1998,
there were no disagreements with financial statements disclosure, or auditing
scope or procedure, which, if satisfied to Ellis Foster's satisfaction, would
have caused it to make reference to the subject matter of the disagreement in
connection with its reports. In addition, there were no such events as described
under Item 304(a)(1)(iv)(B) of Regulation S-B during fiscal years 1997 and 1996
and the subsequent interim periods through December 3, 1998.
A copy of the disclosures made herein have been provided to Ellis
Foster. The response of Ellis Foster, indicating agreement with such
disclosures, is attached as an Exhibit to this Annual Report.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS DIRECTORS.
The following persons served as directors of the Company during the
twelve (12) months ended October 31, 1998 and will continue to serve as
directors until their terms of office expire (as indicated below) or until their
successors are elected and qualified.
18
<PAGE> 20
<TABLE>
<CAPTION>
SERVED AS
NAME POSITION WITH COMPANY AGE DIRECTOR SINCE TERM EXPIRES
---- --------------------- --- -------------- ------------
<S> <C> <C> <C> <C>
Stephen Randall Jackson Chairman of the Board, 37 1997 1999
Chief Executive Office
and President
Stig Hans Director and Secretary 37 1996 1999
Johan Grandin
Kendrik E. Packer Director 36 1998 1999
Sigmund Jackie Jackson Director 47 1998 1999
Lawrence W. Gallo Director 34 1998 1999
</TABLE>
Stephen Randall ("Randy") Jackson - Chairman, CEO and President. Randy
Jackson has over 30 years of performing, writing and producing experience in the
record industry. Randy Jackson currently serves as President of Rand Jack Music
and as President of JCM. In May 1997, Randy Jackson purchased controlling
interest in the Company. Randy Jackson is the brother of Jackie Jackson, a
director of the Company.
Sigmund ("Jackie") Jackson - Director. Jackie Jackson is currently the
President of Siggy Music, a music publishing company, and Brandy Productions, an
independent music recording company which develops new music recording artists.
His TV production credits include: Executive Producer of "The Jackson Story: The
American Dream"; and Producer of "Tomorrow's Stars Today". Jackie Jackson began
his career recording and touring under the Motown Label with the "Jackson 5."
Jackie Jackson is the brother of Randy Jackson, the Chairman, Chief Executive
Officer and President of the Company.
Stig Hans Johan ("Johan") Grandin - Director and Secretary. Mr. Grandin
currently is a Financial Advisor to international companies with Martyn Element
& Associates out of Canada. Mr. Grandin has worked closely with Modern Records
management for over five years. He is a graduate of Uppsala University Sweden
with a MSc. Degree.
Kendrik E. Packer - Director. Mr. Packer has served as the Managing
Partner of Financial Advisory Partners since 1997. Prior to joining Financial
Advisory Partners, he acted as Senior Vice President of Corporate Finance for
Kemper Securities. Mr. Packer was appointed to the Board of Directors of the
Company in November 1998.
Lawrence W. Gallo - Director. Mr. Gallo is the Founder of Launch
Management, a company that provides financial, creative and business management
services to sports figures and entertainers. Previously, he worked for 12 years
with Lehman Brothers, Inc. where he spent 9 years as Senior Vice President of
Institutional Investment Services in New York and 3 years as Director for Equity
Finance in London, England. More recently, Mr. Gallo also served as Senior Vice
President of Hoening, Inc., a New York based brokerage firm.
In addition, David Peteler served on the Company's Board of Directors
until June 26, 1998. He was not reelected to the Board of Directors of the
Company's 1998 annual meeting.
DIRECTOR COMPENSATION
The Company's non-employee Directors do not receive any cash
compensation for their services; however, the Company reimburses such Directors
for travel expenses incurred in connection with their activities on behalf of
the Company. Messrs. Jackson, Jackson, Grandin, Packer, and Gallo have been
granted stock options in their capacities
19
<PAGE> 21
as directors of the Company. In July 1998, stock options were granted to (i) Mr.
R. Jackson with the right to purchase up to 265,000 shares of Common Stock, (ii)
Mr. J. Jackson with the right to purchase up to 200,000 shares of Common Stock
and (iii) Mr. Gallo with the right to purchase up to 400,000 shares of Common
Stock. The stock options granted to Messrs. R. Jackson, J. Jackson and Gallo are
exercisable in whole or in part at any time for a period of five (5) years,
commencing on July 10, 1998 at C$0.78 per share. In December, 1998, the Company
granted stock options to (i) Mr. Grandin for the right to purchase 125,000
shares and (ii) Mr. Packer for the right to purchase 125,000 shares, in each
case at an exercise price of C$2.30.
EXECUTIVE COMPENSATION
The following table provides information concerning the annual and
long-term compensation for services rendered to the Company during the twelve
months ended October 31, 1998 to its Chief Executive Officer. The Company did
not pay compensation to any other executive officer and did not pay compensation
in excess of $50,000 to any other employee during the twelve months ended
October 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
--------------------------------- ----------------------------------------
Awards Payouts
-------------------- -------
Under- All
Other Lying Other
Annual Restricted Options/ LTIP Compen-
Name and Principal Salary Bonus Compen- Stock SARs Payouts sation
Position Year ($) ($) sation Award(s) Securities ($) ($)
------------------ ---- -------- ----- ------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Randy Jackson 1998 $200,000(1)(2) -- (1) -- 265,000
President and CEO 1997 $100,000(2) -- -- -- 729,000
</TABLE>
(1) The Company also pays certain of Mr. Jackson's automobile maintenance
expenses (approximately $1,500 per year).
(2) $200,000 accrued in 1998, $16,667 of which was paid in 1998. $100,000
accrued in 1997 which was not paid in 1997 or 1998.
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information on grants of stock options
during the twelve months ended October 31, 1998 to the Named Executive Officers.
No stock appreciation rights were granted to the Named Executive Officers during
the twelve months ended October 31, 1998.
20
<PAGE> 22
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
Percent Of
Total
Number Of Options/
Securities SARs Granted
Underlying To Employees Exercise
Option/SARs In Fiscal Of Base Expiration
Name Granted(#) Year Price Date
---- ----------- ----------------- -------- --------------
<S> <C> <C> <C> <C>
Randy Jackson 265,000 100% C$.78 July 10, 2003
</TABLE>
EXERCISE OF OPTIONS AND OPTION VALUES
The following table sets forth for the Named Executive Officers
information concerning the exercise of stock options during the 12 month period
ending October 31, 1998 and the value of unexercised stock options at October
31, 1998.
<TABLE>
<CAPTION>
Value of
Number Of Unexercised
Securities In-the-Money
Underlying Options/SARs
Unexercised At Fiscals
Shares Options/SARs Year-End(1)
Acquired On Value At Fiscal Year-End (all
Name Exercise (#) Realized (all exerciseable) exerciseable)
---- ------------ -------- ------------------ -------------
<S> <C> <C> <C> <C>
Randy Jackson 729,000 C$773,800 265,000 C$164,300
</TABLE>
(1) The value per option is calculated by subtracting the exercise price
from the closing price of the Common Stock on the Vancouver Exchange on
October 31, 1998 of C$1.40 per share.
EMPLOYMENT AGREEMENTS
On May 15, 1997, the Company and Randy Jackson, the Company's President
and Chief Operating Officer, entered into an employment agreement (the "Jackson
Employment Agreement"). The Jackson Employment Agreement provides for an annual
salary to Mr. R. Jackson of $200,000. Mr. Jackson's salary was increased to
$250,000 per year effective November 1, 1998.
COMPENSATION POLICY
The Company does not presently have a compensation committee of the
Board of Directors. The Board of Directors is charged with implementing the
compensation policy of the Company. The Company seeks to pay its executive
officers base compensation that is comparable to salaries paid to similarly
situated executives in the recording industry. Bonus and stock option benefits
are contingent upon the performance of the Company, as well as the individual
contributions of the Company's executives.
21
<PAGE> 23
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
Randy Jackson, the Chairman, Chief Executive Officer and President of
the Company participated in deliberations of the Company's Board of Directors
concerning executive officer compensation.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 1, 1999, certain information
with respect to the beneficial ownership of the Company's Common Stock by (i)
each person known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each Company director, (iii) each of
the Named Executive Officers and (iv) all Company executive officers and
directors as a group.
<TABLE>
<CAPTION>
Percent of Common
Name of Beneficial Owner Shares of Common Stock Stock
- ------------------------ ---------------------- -----------------
<S> <C> <C>
5% BENEFICIAL HOLDERS:
Stevie Nicks 1,237,000(1) 5.0%
DIRECTORS AND NAMED EXECUTIVE OFFICERS :
Stephen Randall Jackson 11,984,015(2) 50.2%
Jackie Jackson 200,000(3) 0.8%
Johan Grandin 1,353,505(4) 5.7%
Kendrik E. Packer 491,750(5) 2.1%
Lawrence W. Gallo 400,000(6) 1.7%
All Executive Officers & Directors as a Group 14,429,270 58.0%
</TABLE>
(1) Includes 450,000 shares held in escrow with The Company's register and
transfer agent. These shares may not be released from escrow without the
consent of the Vancouver Stock Exchange, which consent is dependent on
the Company's financial performance. Any escrowed shares that have not
been released by March 28, 2001 will be canceled.
(2) Includes 3,777,499 shares owned by Modern Entertainment, which is owned
by Mr. R. Jackson. Also includes (i) warrants to purchase 47,525 shares
at an exercise price of C$.15 per share during the first year after
purchase and C$.17 per share during the second year after purchase, (ii)
warrants to purchase 251,000 shares at an exercise price of C$1.25
during the first year after purchase and C$1.50 during the second year
after purchase and (iii) options to purchase 65,282 shares at C$.78 per
share. Also includes 2,550,000 shares held in escrow with The Company's
register and transfer agent (which shares are currently registered in
the name of Paul Fishkin but will be transferred to Mr. Jackson upon
receipt of requisite governmental approval). These shares may not be
released from escrow without the consent of the Vancouver Stock
Exchange, which consent is dependent on the Company's financial
performance. Any escrowed shares that have not been released by March
28, 2001 will be canceled.
22
<PAGE> 24
(3) Includes options to purchase 200,000 shares at an exercise price of
C$.78 per share
(4) Includes warrants to purchase (i) 60,000 shares at an exercise of C$.60,
(ii) 87,000 shares at an exercise price of C$1.25, (iii) 42,500 shares
at an exercise price of $.40, (iv) 125,000 shares at an exercise price
of C$2.30. Also includes special warrants convertible, at no additional
cost, into 23,000 shares and warrants to purchase 23,000 shares at an
exercise price of C$2.25 per share.
(5) Includes options to purchase 125,000 shares at an exercise price of
$2.30 per share also includes special warrants convertible, at no
additional cost, into 90,000 shares and warrants to purchase 90,000
shares at an exercise price of C$2.25 per share.
(6) Includes options to purchase 400,000 shares at C$.78 per share.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 16, 1998, the Company borrowed $12,500 and $12,500 from Messrs.
R. Jackson and Packer in exchange for notes payable due March 16, 2000. The
notes bear interest at 10% per annum. In consideration for the loans, the
Company also issued to each Messrs. R. Jackson and Packer 47,525
non-transferable warrants (each to purchase one share of Common Stock)
exercisable at $0.15 per share. Mr. Packer is a director and a stockholder of
the Company and Randy Jackson is an officer and director of the Company and the
controlling stockholder of the Company.
During 1998 and 1997, the Company paid $21,018 and $11,504, respectively
in legal fees to David Peteler a former director of the Company.
In June 1998, R&B artist Abel Mason entered into a recording agreement
with the Company after an introduction from Randy Jackson's brother Marlon
Jackson. The Company paid Marlon Jackson a finders' fee equal to $11,250. Marlon
Jackson is the brother of Jackie Jackson, a director of the Company, and Randy
Jackson, an officer and director of the Company and the controlling stockholder
of the Company.
In June 1998, the Company consummated a private placement of its common
stock for total proceeds of C$918,060. All but C$35,000 of these proceeds were
applied to repay indebtedness that the Company had incurred in the prior 12
months to Mr. R. Jackson, Mr. Grandin and Martyn Element, a business associate
of Mr. Grandin.
During fiscal year 1998, the Company sold shares of its common stock to
certain officers and directors of the Company. See "Market for the Company's
Common Equity and Related Stockholder Matters--Unregistered Stock."
In March 1999, the Company entered into the Jacksons Agreement with
Randy Jackson and his brothers Jackie, Jermaine, Tito, and Marlon Jackson to
produce The Jacksons' forthcoming album. The Jacksons Agreement requires the
Company to advance $1.0 million to The Jacksons upon commencement of recording
of the album and $1.0 million upon completion of recording. The advances are
recoupable against The Jacksons' share of royalties under the Jacksons
Agreement. The Jacksons Agreement is included as an exhibit to this Annual
Report. Jackie Jackson is a director of the Company and Randy Jackson is an
officer and director of the Company and the controlling stockholder of the
Company.
Johan Grandin, a director of the Company, is the owner of Grandin
Financial Consulting Ltd. Through a joint venture arrangement with Martyn
Element & Associates, Grandin Financial is entitled to 50% of fees payable to
Element under a consulting agreement between the Company and Element. The
Company pays $3,500 per month under the consulting agreement.
In the 1980s, the Company released several Stevie Nicks albums on the
Modern label, and, in 1998, the Company released Stevie Nicks' three CD boxset
"Enchanted" on the Modern label. Ms. Nicks owns more than 5% of the outstanding
Common Stock of the Company.
23
<PAGE> 25
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
1. All financial statement schedules are omitted because such schedules
are not required or the information required has been presented in financial
statements included in this filing.
2. The following exhibits are filed with this Report or incorporated by
reference.
<TABLE>
<CAPTION>
Exhibit
Number
------
<S> <C>
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.
3.4 Amended and Restated Bylaws of the Company.
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.
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.
</TABLE>
24
<PAGE> 26
<TABLE>
<CAPTION>
Exhibit
Number
------
<S> <C>
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.
16.1 Letter regarding the change in the accountant from Ellis Foster.
27.1 Financial Data Schedule
</TABLE>
* Incorporated herein by reference to exhibits of the same number in the
Company's S-1 Registration Statement dated September 9, 1991 (33-40804).
25
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Modern Records, Inc. has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized, on this 20th day of April, 1999.
MODERN RECORDS, INC.
By: /s/ Stephen Randall Jackson
-------------------------------------
Stephen Randall Jackson
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons in the capacities
indicated on April 20, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Stephen Randall Jackson Chairman of the Board, President
- --------------------------------- and Chief Executive Officer
Stephen Randall Jackson (principal executive officer
and principal accounting officer)
/s/ Sigmund Jackie Jackson Director
- ---------------------------------
Sigmund Jackie Jackson
/s/ Stig Hans Johan Grandin Director
- ---------------------------------
Stig Hans Johan Grandin
/s/ Lawrence W. Gallo Director
- ---------------------------------
Lawrence W. Gallo
/s/ Kendrik E. Packer Director
- ---------------------------------
Kendrik E. Packer
</TABLE>
S-1
<PAGE> 28
MODERN RECORDS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Financial Statements For The year Ended October 31, 1998
Report of Independent Auditors for the year ended October 31, 1998 F-1
Report of Independent Auditors for the year ended October 31, 1997 F-2
Balance Sheets as of October 31, 1998 and 1997 F-3
Statements of Operations for the years ended October 31, 1998 and 1997 F-4
Statements of Stockholders' Deficiency for the years ended October 31, 1998 and 1997 F-5
Statements of Cash Flows for the years ended October 31, 1998 and 1997 F-6
Notes to Financial Statements F-7
Financial Statements For The Year Ended October 31, 1997
Report of Independent Auditors for the years ended October 31, 1997 and 1996 F-12
Balance Sheets as of October 31, 1997 and 1996 F-13
Statements of Operations and Accumulated Deficit for the years ended
October 31, 1997 and 1996 F-14
Statements of Changes in Financial Position for the years ended
October 31, 1997 and 1996 F-15
Notes to Financial Statements F-16
Financial Statements For The Year Ended October 31, 1996
Report of Independent Auditors for the years ended October 31, 1996 and 1995 F-19
Balance Sheets as of October 31, 1996 and 1995 F-20
Statements of Operations and Accumulated Deficit for the years
ended October 31, 1996, 1995 and 1994 F-21
Statements of Cash Flows for the years ended October 31, 1996, 1995 and 1994 F-22
Notes to Financial Statements F-23
Financial Statements For The Year Ended October 31, 1995
Report of Independent Auditors for the year ended October 31, 1995 and 1994 F-26
Balance Sheets as of October 31, 1995 and 1994 F-27
Statements of Operations and Accumulated Deficit for the years
ended October 31, 1995, 1994 and 1993 F-28
Statements of Cash Flows for the years ended October 31, 1995, 1994 and 1993 F-29
Notes to Financial Statements F-30
</TABLE>
<PAGE> 29
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Modern Records, Inc.
We have audited the accompanying balance sheet of Modern Records, Inc. as of
October 31, 1998 and the related statements of operations, stockholders'
deficiency, and cash flows for year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Modern Records, Inc. as of
October 31, 1998, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
HOLLANDER, LUMER & CO. LLP
Los Angeles, California
February 18, 1999
F-1
<PAGE> 30
AUDITORS' REPORT
To the Shareholders of
MODERN RECORDS, INC.
We have audited the balance sheet of Modern Records, Inc. as of October 31, 1997
and the related statements of operations, stockholders' deficiency and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in Canada. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements referred to above present fairly, in
all material respects, the financial position of Modern Records, Inc. as of
October 31, 1997 and the results of its operations and its cash flows for the
year then ended in accordance with accounting principles generally accepted in
the United States.
ELLIS FOSTER
Chartered Accountants
Vancouver, Canada
February 19, 1999
F-2
<PAGE> 31
MODERN RECORDS, INC.
BALANCE SHEETS
OCTOBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,656 $ 15,417
Receivable from Atlantic Recording Corporation 156,140 --
----------- -----------
TOTAL CURRENT ASSETS 157,796 15,417
DEFERRED RECORD MASTER COST, NET 184,892 225,478
OTHER ASSET 655 --
----------- -----------
$ 343,343 $ 240,895
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Bank overdraft $ 3,544 $ --
Accounts payable and accrued expenses 299,245 347,454
Notes payable 19,705 18,393
Deferred revenue -- 141,574
Recoupable advance 50,000 50,000
Due to related parties 290,156 625,012
----------- -----------
TOTAL CURRENT LIABILITIES 662,650 1,182,433
LONG-TERM DEBT 26,570 --
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' 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 (1998) and
14,657,770 shares (1997) 2,499,370 1,351,342
Accumulated deficit
(2,845,247) (2,292,880)
----------- -----------
TOTAL STOCKHOLDERS' DEFICIENCY (345,877) (941,538)
----------- -----------
$ 343,343 $ 240,895
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 32
MODERN RECORDS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
REVENUE
Modern/Atlantic agreement $ 297,715 $ 197,819
Modern/Platinum agreement 57,531 --
Other recording revenue -- 2,000
Other -- 8,377
------------ ------------
355,246 208,196
COST OF REVENUE 96,749 39,038
------------ ------------
GROSS PROFIT 258,497 169,158
EXPENSES
Officer's salaries 200,000 100,000
Other salaries 63,402 32,456
Other marketing, general and administrative expenses 547,462 254,048
------------ ------------
810,864 386,504
------------ ------------
NET LOSS $ (552,367) $ (217,346)
============ ============
BASIC AND DILUTED LOSS PER SHARE $ (0.03) $ (0.02)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 16,360,000 11,614,000
============ ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 33
MODERN RECORDS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
YEARS ENDED OCTOBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------- -------------------------- Accumulated
Shares Amount Shares Amount Deficit Total
------- -------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, November 1, 1996 -- $ -- $14,592,770 $1,343,497 $(2,075,534) $ (732,037)
Common stock issued 65,000 7,845 7,845
Net loss (217,346) (217,346)
------- -------- ----------- ----------- ----------- -----------
Balance, October 31, 1997 -- -- 14,657,770 1,351,342 (2,292,880) (941,538)
Common stock issued 8,639,926 1,148,028 1,148,028
Net loss (552,367) (552,367)
------- -------- ----------- ----------- ----------- -----------
Balance, October 31, 1998 -- -- $23,297,696 $ 2,499,370 $(2,845,247) $ (345,877)
======= ======== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 34
MODERN RECORDS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (552,367) $(217,346)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation -- 142
Amortization of deferred record master cost 40,586 --
Loss on disposal of equipment -- 259
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable -- 35,214
Receivable from Atlantic Recording Corporation (156,140) --
Deposits (655) --
Increase (decrease) in:
Accounts payable and accrued expenses (48,209) 7,060
Accrued interest on note payable 4,596 3,344
Due to related party for compensation 183,333 100,000
Deferred revenue (141,574) (197,818)
----------- ---------
NET CASH USED IN OPERATING ACTIVITIES (670,430) (269,145)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Deferred record master cost -- (225,478)
----------- ---------
NET CASH USED IN INVESTING ACTIVITIES -- (225,478)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft 3,544 (12,621)
Advances from related parties 112,425 464,816
Repayments of advances from related parties (607,328) --
Common stock issued 1,148,028 7,845
Recoupable advance 50,000
----------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 656,669 510,040
----------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (13,761) 15,417
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 15,417 --
----------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD 1,656 15,417
=========== =========
CASH PAID FOR:
Interest $ -- $ --
Income taxes $ -- $ --
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 35
MODERN RECORDS, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business. Modern Records, Inc. (the "Company") was incorporated
in California on November 28, 1978. The Company produces recorded music and
distributes it through Atlantic Recording Corporation ("Atlantic") and Platinum
Entertainment, Inc.
Use of 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.
Accordingly, actual results could differ from those estimates.
Cash Equivalents. The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents.
Artist Advances. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 50, Financial Reporting in the Record and Music Industry, advances
to artists and producers are capitalized as an asset when the current popularity
and past performance of the artist or producer provides a sound basis for
estimating the probable future recoupment of such advances from earnings
otherwise payable to the artist or producer. Any portion of such advances not
deemed to be recoupable from future royalties is reserved at the time the
advance is made. All other advances that do not meet the above criteria are
reserved when incurred.
Deferred Record Master Cost. The portion of the cost of a record master paid for
by the Company is reported as an asset if the past performance and current
popularity of the artist provide a sound basis for estimating that the cost will
be recovered from future sales. The asset is amortized over the estimated life
of the recorded performance using a method that reasonably relates the amount to
the net revenue expected to be realized.
Receivable from Atlantic/Deferred Revenue. The Company records all advances
against participation from Atlantic as deferred revenue until earned. The
Company earns revenue from its participation on "net profits" as defined under
the agreement between the Company and Atlantic. A receivable from Atlantic is
set-up when earned revenue from participation exceeds advances.
The Company's recording agreement ("Nicks Agreement") with Stephanie Nicks
("Nicks") was terminated effective as of February 3, 1996. Nicks shall have no
further obligation to record or deliver recordings to or on behalf of the
Company or Atlantic. Atlantic's obligation to pay Nicks royalties in accordance
with the Nicks Agreement shall survive the termination of the Nicks Agreement.
Atlantic retains all rights granted to them with respect to recordings produced
and delivered thereunder ("Nicks Albums"). The Company will continue to receive
its participation in the net profits from Nicks Albums.
Fair Value of Financial Instruments. The Company's financial instruments consist
of cash equivalents, receivable from Atlantic, accounts payable, accrued
expenses, notes payable and due to related parties. The fair values of the
Company's financial instruments approximate the carrying value of the
instruments.
Property and Equipment. Property and equipment are stated at cost. Depreciation
is computed using the straight-line method over estimated useful lives ranging
from 5 to 7 years.
F-7
<PAGE> 36
MODERN RECORDS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Income Taxes. The Company utilizes the asset and liability method for income
taxes. Under this method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
Stock-Based Compensation. SFAS No. 123, Accounting for Stock-Based Compensation,
encourages, but does not require, companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method as prescribed in Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations, under
which no compensation cost related to stock options has been recognized as the
exercise price of each option at the date of grant was equal to the fair value
of the underlying common stock.
Basic and Diluted Loss Per Share. Effective December 31, 1997, the Company
adopted SFAS NO. 128, Earnings Per Share, which established simplified standards
for computing and presenting earnings per share information. Basic loss per
common share is based upon the net loss applicable to common shares after
preferred dividend requirements and upon the weighted average number of common
shares outstanding during the period. Diluted loss per common share adjusts for
the effect of convertible securities, stock options and warrants only in the
periods presented in which such effect would have been dilutive. Such effect was
not dilutive in any of the periods presented herein.
Reclassifications. Certain reclassifications have been made to 1997 financial
statements to conform with the 1998 presentation.
2. LIQUIDITY
At October 31, 1998, the Company has a working capital deficiency of $504,854
and stockholders' deficiency of $345,877. The Company's President has agreed to
defer his accrued compensation and all other amounts due him (total of $249,447
at October 31, 1998) until the Company has sufficient cash flows to liquidate
this obligation from cash flows from operations or additional financing. The
Company is currently arranging financing to obtain additional funds so that the
Company can meet its obligations and sustain its development activities. The
Company believes that it will have sufficient cash flows to sustain its
operations through October 31, 1999.
3. NOTES PAYABLE
Notes payable consisted of the following :
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Note dated September 12, 1995, $10,000 principal,
interest at 10%, balance including accrued
interest, past due $13,137 $12,240
Note dated September 12, 1995, $5,000 principal,
interest at 10%, balance including
accrued interest, past due 6,568 6,153
------- -------
$19,705 $18,393
======= =======
</TABLE>
F-8
<PAGE> 37
MODERN RECORDS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. RECOUPABLE ADVANCE
Recoupable advance at October 31, 1998 and 1997 represents a $50,000 advance
made by Atlantic pursuant to a Loan and Security Agreement dated February 12,
1997. The loan was due on February 12, 1998. In the event of default by the
Company, Atlantic shall have the right at all times to withhold, setoff, recoup
and apply in reduction of the loan all sums payable by Atlantic to the Company,
any such 50% "net profits" from the "Poe" album.
5. RELATED PARTY TRANSACTIONS
Long-term debt at October 31, 1998 consisted of notes payable dated March 16,
1998 to Stephen Randall Jackson, the Company's President, Chief Operating
Officer and stockholder, and to another stockholder, in the amounts of $12,500
and $12,500, respectively. The notes bear interest at 10%. Principal with
accrued interest is due on March 16, 2000. Accrued interest at October 31, 1998
amounted to $1,570. (See Note 6)
Due to related parties consisted of the following:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Advances from Stephen Randall Jackson and Jackson
Capital Management, non-interest bearing, no stated
terms of Payment $ (47,171) $ 472,734
Accrued compensation to Stephen Randall Jackson 283,333 100,000
Notes dated November 7, 1994 and April 19, 1995, $25,000
Principal, payable to the father of a stockholder,
interest at 10%, payable on demand 34,289 33,885
Notes dated September 12, 1995 to two stockholders,
$15,000 Principal, interest at 10%, past due 19,705 18,393
--------- ---------
$ 290,156 $ 625,012
========= =========
</TABLE>
During 1998 and 1997, the Company paid $21,018 and $11,504, respectively, in
legal fees to a former director of the Company.
During 1998, the Company paid $11,250 as finders fee to the brother of the
Company's President.
Johan Grandin, a director of the Company, is the owner of Grandin Financial
Consulting Ltd. Through a joint venture arrangement with Martyn Element &
Associates, Grandin Financial is entitled to 50% of fees payable to Element
under a consulting agreement between the Company and Element. The Company pays
$3,500 per month under the consulting agreement.
6. COMMITMENTS AND CONTINGENCIES
On May 15, 1997, the Company and Stephen Randall Jackson entered into an
Employment Agreement. The agreement provides that Mr. Jackson will be paid a
monthly salary of $ 16,666.67 commencing on May 15, 1997. Included in due to
related parties is accrued compensation to Mr. Jackson of $283,333 and $100,000
at October 31, 1998 and 1997, respectively.
7. STOCKHOLDERS' DEFICIENCY
During the fiscal year 1997, the Company issued 65,000 shares of its common
stock for options exercised for $7,845.
F-9
<PAGE> 38
MODERN RECORDS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
The Company completed the following transactions during the fiscal year 1998:
Private placements on February 3, 1998 - 320,000 Units at $0.25 Cdn., total
proceeds of $53,955 ($80,000 Cdn.). Each Unit comprised of 1 common share and 1
non-transferable share purchase warrant exercisable at $0.50 Cdn. per share
during the first year and $0.60 Cdn. during the second year.
Private placements on March 16, 1998 - 6,120,401 shares at $0.15 Cdn., total
proceeds of $640,668 ($918,060 Cdn.).
On March 16, 1998, the Company issued to two lenders an aggregate 95,050
non-transferable share purchase warrants exercisable at $0.15 Cdn. per share
during the first year and $0.17 Cdn. during the second year. The warrants were
issued in consideration for the loans of $25,000 ($35,658 Cdn.) to the Company.
On August 6, 1998, 47,525 warrants were exercised for $4,711 ($7,129 Cdn.)
Options exercised on April 2, 1998 - 175,000 shares at $0.15 Cdn., total
proceeds of $17,958 ($26,250 Cdn.).
Private placements on April 2, 1998 - 85,000 Units at $0.30 Cdn., total proceeds
of $16,882 ($25,500 Cdn.). Each Unit comprised of 1 common share and 1
non-transferable share purchase warrant exercisable at $0.40 Cdn. per share
during the first year and $0.60 Cdn. during the second year.
Private placements on April 16, 1998- 400,000 Units at $0.40 Cdn., total
proceeds of $110,706 ($160,000 Cdn.). Each Unit comprised of 1 common share and
1 non-transferable share purchase warrant exercisable at $0.55 Cdn. per share
during the first year and $0.75 Cdn. during the second year.
Options exercised on June 11, 1998 and July 9, 1998 - 425,000 shares at $0.15
Cdn., total proceeds of $42,814 ($63,750 Cdn.).
Options granted on July 10, 1998 - incentive stock option granted to three
directors of the Company to purchase up to 865,000 common shares for a period of
5 years, commencing on July 10, 1998, at $0.78 Cdn. per share.
Private placements on September 25, 1998 - 338,000 Units at $0.83 Cdn., total
proceeds of $189,500 ($280,540 Cdn.). Each Unit comprised of 1 common share and
1 non-transferable share purchase warrant exercisable at $1.25 Cdn. per share
during the first year and $1.50 Cdn. during the second year
Options exercised on August 26, 1998, September 22, 1998 and October 9, 1998 -
729,000 shares at $0.15 Cdn., total proceeds of $70,834 ($109,350 Cdn.).
Pursuant to SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS No.
123"), the Company is required to disclose the pro forma effects on net loss and
basic and diluted loss per share as if the Company had elected to use the fair
value approach to account for all its stock-based compensation. If compensation
cost for the Company's stock options have been determined consistent with the
fair value approach set forth in SFAS No. 123, the Company's pro forma net loss
and pro forma basic and diluted loss per share for the year ended October 31,
1998 would be increased as follows:
<TABLE>
<S> <C>
Net loss $ (552,367)
Pro forma net loss $ (780,367)
Basic and diluted loss per share $ (0.03)
Pro forma basic and diluted loss per share $ (0.04)
</TABLE>
F-10
<PAGE> 39
MODERN RECORDS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option valuation model with the following assumptions:
expected dividend yield of 0%, expected stock price volatility of .50, risk-free
interest rate of 5.40% and expected life of 5 years.
Option valuation models require the input of highly subjective assumptions.
Because the Company's stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate in management's
opinion, the existing model does not necessarily provide a reliable single
measure of the fair value of its stock options.
As of October 31, 1997 and 1998, there were 3,000,000 shares of common stock
held in escrow by the Company's registrar and transfer agent. The escrow shares
will be released from escrow to the holders of the shares as, and if, the
Company meets certain net earnings and cash flow requirements. Any escrowed
shares that have not been released by March 28, 2001 will be canceled. Under
United States generally accepted accounting principles, escrow shares which are
released upon the Company meeting certain performance criteria are considered to
be contingently issuable. These escrow shares are excluded from the weighted
average shares calculation and is reflected as compensation expense in the
period that the shares are released from escrow.
8. INCOME TAXES
At October 31, 1998, deferred tax assets were composed primarily of the
following:
<TABLE>
<CAPTION>
Federal State
--------- ---------
<S> <C> <C>
Net operating loss carryforward $ 718,000 $ 101,000
Less valuation allowance (718,000) (101,000)
--------- ---------
Net deferred tax assets $ -- $ --
========= =========
</TABLE>
At October 31, 1998, the Company has federal and state net operating loss
carryforwards of $2,111,000 and $1,145,000 that expire through 2018 and 2003,
respectively. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The amount that the Company can
utilize from its federal and state net operating loss carryforwards will be
subject to annual limitations due to change of ownership. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income. Management believes that a valuation allowance equal to deferred
tax assets is necessary at October 31, 1998.
F-11
<PAGE> 40
AUDITORS' REPORT
To the Shareholders of
MODERN RECORDS, INC.
We have audited the balance sheets of MODERN RECORDS, INC. as at October 31,
1997 and 1996 and the statements of operations and accumulated deficit and
changes in financial position for the years then ended. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.
In our opinion these financial statements referred to above present fairly, in
all material respects, the financial position of Modern Records, Inc. as at
October 31, 1997 and 1996 and the results of its operations and the changes in
its financial position for the years then ended in accordance with generally
accepted accounting principles.
Vancouver, Canada ELLIS FOSTER
March 17, 1998 Chartered Accountants
F-12
<PAGE> 41
MODERN RECORDS, INC.
Balance Sheet
October 31, 1997
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
CURRENT
Cash $ 15,417 $ --
Accounts receivable -- 35,214
----------- -----------
TOTAL CURRENT ASSETS 15,417 35,214
----------- -----------
RECOVERABLE PRODUCTION COSTS (note 4) 225,478 --
FURNITURE AND EQUIPMENT -- 34,711
Less accumulated depreciation -- 34,310
----------- -----------
225,478 401
----------- -----------
$ 240,895 $ 35,615
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Cheques issued in excess of funds on deposit $ -- $ 12,621
Accounts payable and accrued liabilities 347,454 340,394
Loans payable (note 5) 36,787 33,443
Deferred compensation (note 6) 100,000 --
----------- -----------
TOTAL CURRENT LIABILITIES 484,241 386,458
----------- -----------
LOANS FROM RELATED PARTIES, non-interest bearing
with no state terms of repayment 506,618 41,802
RECOUPABLE ADVANCES 50,000 --
DEFERRED REVENUE 141,574 339,392
----------- -----------
1,182,433 767,652
----------- -----------
SHAREHOLDERS' DEFICIENCY Capital stock (note 7)
Authorized: 20,000,000 common shares without par value
Issued: 14,657,770 shares (1996-14,592,770 shares) 1,351,342 1,343,497
Accumulated deficit (2,292,880) (2,075,534)
----------- -----------
(941,538) (732,037)
----------- -----------
$ 240,895 $ 35,615
=========== ===========
</TABLE>
<TABLE>
<S> <C> <C>
Approved by the Directors: "Stephen Randall Jackson" "Johan Grandin"
------------------------- ---------------
Stephen Randall Jackson Johan Grandin
</TABLE>
F-13
<PAGE> 42
MODERN RECORDS, INC.
Statement of Operations and Accumulated Deficit
Year Ended October 31, 1997
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
REVENUE
Modern/Atlantic agreement $ 197,819 $ 23,517
Other recording revenue 2,000 35,073
Expense reimbursement -- 931
Other 8,377 125,000
----------- -----------
208,196 184,521
----------- -----------
COST OF SALES
Production and packaging costs 33,476 61,574
Promotion and travel 5,562 10,648
----------- -----------
39,038 72,222
----------- -----------
GROSS PROFIT 169,158 112,299
----------- -----------
EXPENSES
Accounting and legal 75,999 53,888
Automobile 2,331 11,174
Consulting fees 14,224 14,147
Depreciation 142 748
Foreign exchange loss 6,808 --
Insurance 6,397 1,907
Interest 2,062 3,040
Investor relations 54,789 5,408
Office and miscellaneous 15,064 8,824
Rent 20,471 32,497
Salaries and employee benefits 132,456 185,141
Security registration and filing costs 696 7,943
Telephone 28,450 21,310
Travel and entertainment 26,615 5,843
----------- -----------
386,504 351,870
----------- -----------
LOSS FOR THE YEAR (217,346) (239,571)
ACCUMULATED DEFICIT AT BEGINNING OF YEAR (2,075,534) (1,835,963)
----------- -----------
ACCUMULATED DEFICIT AT END OF YEAR $(2,292,880) $(2,075,534)
=========== ===========
Loss per share $ (0.015) $ (0.016)
=========== ===========
</TABLE>
F-14
<PAGE> 43
MODERN RECORDS, INC.
Statement of Changes in Financial Position
Year Ended October 31, 1997
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
CASH PROVIDED BY (USED FOR)
OPERATIONS $(217,346) $(239,571)
Item not involving cash
Depreciation 142 748
Loss on disposal of fixed assets 259 --
CHANGES IN NON-CASH OPERATING WORKING CAPITAL
Decrease (increase) in accounts receivable 35,214 (26,124)
Decrease in prepaid expenses -- 633
Increase in accounts payable
and accrued liabilities 7,060 106,863
Increase (decrease) in deferred revenue (197,818) (23,517)
--------- ---------
(372,489) (180,968)
--------- ---------
FINANCING
Increase (decrease) in advances from related parties 464,816 9,302
Increase (decrease) in advances from shareholder -- 123,613
Proceeds from issuance of shares 7,845 35,109
Increase (decrease) in loans payable 3,344 3,040
Increase (decrease) in recoupable advances 50,000 --
Increase (decrease) in deferred compensation 100,000 --
--------- ---------
626,005 171,064
--------- ---------
INVESTING
Increase (decrease) in recoverable production costs (225,478) --
--------- ---------
INCREASE (DECREASE) IN CASH 28,038 (9,904)
CASH (DEFICIENCY) AT BEGINNING OF YEAR (12,621) (2,717)
--------- ---------
CASH (DEFICIENCY) AT END OF YEAR $ 15,417 $ (12,621)
========= =========
</TABLE>
F-15
<PAGE> 44
MODERN RECORDS, INC.
Notes to Financial Statements
October 31, 1997
(Expressed in U.S. Dollars)
1. GENERAL
The Company is incorporated under the laws of the State of California,
U.S.A. and its principal business activities are the production and
distribution of audio recordings.
2. FUTURE OPERATIONS
During the year the Company realized a loss from operations of $217,346.
At year end the Company had a working capital deficiency of $468,824 and
a shareholders' deficiency of $941,538. The future operations of the
Company are dependent upon the continued support of the shareholders and
creditors and the Company's ability to achieve profitable operations.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Furniture and Equipment
Furniture and equipment are stated at cost. Depreciation is
provided on a straight-line basis over five years.
b) Foreign Currency Transactions
Monetary assets and liabilities of the Company in foreign
currencies are recorded at the year end rate of exchange. Income
statement items are recorded at average exchange rates. Gains and
losses realized from exchange transactions are included in the
statement of earnings.
c) Deferred Revenue/Receivable from Atlantic Recording Corporation
The Company records all advances against participation received
from Atlantic Recording Corporation as deferred revenue until
earned. The deferred revenue is earned as revenues are received
under the Modern/Atlantic Agreement. A receivable from Atlantic
Recording Corporation is set up in years where earned revenues
exceed advances.
F-16
<PAGE> 45
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
d) Recoverable Production Costs
The Company records that portion of the production costs of record
masters recoverable from artists' royalties as an asset in those
instances where the costs are not covered under the agreement with
Atlantic Recording Corporation and the Company estimates that the
costs will be recoverable from future artist royalties based upon
current popularity of the artist and advance orders. The
recoverable costs will be charged to expense as subsequent
royalties are earned by the artists. In those cases where the
costs subsequently appear not to be recoverable from future
royalties to be earned by the artist, those costs will be charged
to expense during the period in which the loss becomes evident.
4. RECOVERABLE PRODUCTION COSTS
The recoverable production costs relate to production costs associated
with the Jeffrey Osborne Christmas Album. The costs will be charged to
expense as subsequent sales are received from the album.
5. LOANS PAYABLE
Loans payable of $36,787 includes accrued interest of $6,787 and bears
interest at a rate of 10% per annum.
6. DEFERRED COMPENSATION
During the year, the Company entered into an employment contract with a
shareholder of the company to perform the duties of president.
At year end, the total compensation under the contract of $100,000 is
being deferred until such time as the company has sufficient cash flow
to pay the compensation. No interest is to be accrued.
F-17
<PAGE> 46
7. CAPITAL STOCK
<TABLE>
<CAPTION>
1997 1996
------------------------------ ------------------------------
Shares Shares
Issued Amount Issued Amount
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at beginning of year 14,592,770 $ 1,343,497 14,272,770 $ 1,308,388
Shares issued pursuant
to exercising warrants - - 320,000 35,109
Shares issued pursuant
to exercising options 65,000 7,845 -- --
----------- ----------- ----------- -----------
14,657,770 1,351,342 14,592,770 1,343,497
=========== =========== =========== ===========
</TABLE>
a) At October 31, 1997 there are 3,000,000 performance shares of the
Company held in escrow. These shares may not be released from
escrow without the consent of regulatory authorities.
b) During the year, the Company issued 65,000 common shares upon the
exercising of options at a price of $0.17 Cdn. per share for total
cash consideration of $7,845 ($11,050 Cdn.).
8. The Company has granted to its employees the following share purchase
options:
<TABLE>
<CAPTION>
Number Exercise Price Expiration Date
------ -------------- ---------------
<S> <C> <C>
729,000 $0.15 Cdn. April 1, 2002
600,000 $0.15 Cdn. December 10, 1998
</TABLE>
During the year 725,000 share purchase options exerciseable at $0.25
Cdn. expiry on March 15, 1999 were cancelled and 43,000 share purchase
options exercisable at $0.17 Cdn.
expired.
9. RELATED PARTY TRANSACTIONS
Included in accounting and legal fees are $11,504 relating to legal
services provided by a director of the Company.
10. COMPARATIVE FIGURES
Certain comparative figures have been changed to conform to the
presentation adopted for the current year.
F-18
<PAGE> 47
AUDITORS' REPORT
TO THE SHAREHOLDERS OF
MODERN RECORDS, INC.
We have audited the balance sheets of MODERN RECORDS, INC. as at October 31,
1996 and 1995 and the statements of operations and accumulated deficit and cash
flows for the years ended October 31, 1996, 1995 and 1994. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, these financial statements referred to above present fairly, in
all material respects, the financial position of Modern Records, Inc. as at
October 31, 1996 and 1995 and the results of its operations and its cash flows
for the years ended October 31, 1996, 1995 and 1994 in conformity with generally
accepted accounting principles.
Vancouver, Canada ELLIS FOSTER
February 28, 1997 Chartered Accountants
F-19
<PAGE> 48
MODERN RECORDS, INC.
Balance Sheet
October 31, 1996
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
CURRENT
Accounts receivable $ 35,214 $ 9,090
Receivable from shareholder -- 123,613
Prepaid expenses -- 633
----------- -----------
TOTAL CURRENT ASSETS 35,214 133,336
----------- -----------
FURNITURE AND EQUIPMENT 34,711 34,711
Less accumulated depreciation 34,310 33,562
----------- -----------
401 1,149
----------- -----------
$ 35,615 $ 134,485
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Cheques issued in excess of funds on deposit $ 12,621 $ 2,717
Accounts payable and accrued liabilities 340,394 233,531
Loans payable (note 4) 33,443 30,403
Loans from related parties, non-interest
bearing with no stated terms of repayment 41,802 32,500
----------- -----------
TOTAL CURRENT LIABILITIES 428,260 299,151
----------- -----------
DEFERRED REVENUE (note 5) 339,392 362,909
----------- -----------
SHAREHOLDERS' DEFICIENCY Capital stock (note 6)
Authorized: 20,000,000 common shares without par value
Issued: 14,592,770 (1995-13,872,770; 1994-13,572,770) 1,343,497 1,308,388
Accumulated deficit (2,075,534) (1,835,963)
----------- -----------
(732,037) (527,575)
$ 35,615 $ 134,485
=========== ===========
</TABLE>
Approved by the Directors ________________ Director _________________ Director
F-20
<PAGE> 49
MODERN RECORDS, INC.
Statement of Operations and Accumulated Deficit
Year Ended October 31, 1996
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE
Modern/Atlantic agreement (note 5) $ 23,517 $ 80,644 $ 297,030
Other recording revenue 35,073 42,098 99,347
Expense reimbursement 931 73,388 45,833
Interest income -- 169 1,452
Dividend income -- -- 3,050
Other (note 5) 125,000 -- 3,475
----------- ----------- -----------
184,521 196,299 450,187
----------- ----------- -----------
EXPENSES
Accounting and legal 53,888 46,114 30,089
Amortization of recoverable production costs -- 21,908 24,210
Artist marketing and promotion 10,648 73,092 32,829
Artist production and development 61,574 117,099 80,125
Automobile 11,174 9,814 14,660
Bad debts -- -- 27,660
Consulting fees 14,147 16,605 9,286
Depreciation 748 1,948 1,847
Foreign exchange loss -- -- 10
Insurance 1,907 6,408 16,094
Interest 3,040 5,486 1,580
Investor relations 5,408 19,875 51,995
Office and miscellaneous 8,824 19,215 22,697
Rent - equipment -- 204 4,669
Rent - premises 32,497 14,451 9,125
Repairs and maintenance -- 220 246
Salaries and employee benefits 185,141 247,782 256,433
Security registration and filing costs 7,943 4,872 3,619
Telephone 21,310 20,872 12,694
Travel and entertainment 5,843 18,452 23,061
----------- ----------- -----------
424,092 644,417 622,929
----------- ----------- -----------
LOSS FROM OPERATIONS (239,571) (448,118) (172,742)
RECOVERY ON SETTLEMENT OF DEBT -- -- 23,287
LOSS ON SALE OF SECURITIES -- -- (3,037)
----------- ----------- -----------
LOSS FOR THE YEAR $ (239,571) $ (448,118) $ (152,492)
ACCUMULATED DEFICIT AT BEGINNING OF YEAR (1,835,963) (1,387,845) (1,235,353)
----------- ----------- -----------
ACCUMULATED DEFICIT AT END OF YEAR $(2,075,534) $(1,835,963) $(1,387,845)
=========== =========== ===========
GAIN (LOSS) PER SHARE $ (.016) $ (.032) $ (.011)
=========== =========== ===========
</TABLE>
F-21
<PAGE> 50
MODERN RECORDS, INC.
Statement of Cash Flows
Year Ended October 31, 1996
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss) $(239,571) $(448,118) $(152,492)
Depreciation 748 1,948 1,847
Amortization of recoverable production costs -- 21,908 24,210
Changes in operating assets and liabilities
Decrease (increase) in accounts receivable (26,124) 135,876 (110,064)
Decrease in prepaid expenses 633 319 --
Increase (increase) in accounts payable
and accrued liabilities 106,863 81,054 (52,639)
Increase (decrease) in deferred revenue (23,517) 28,154 334,755
--------- --------- ---------
Net cash provided (used) by operating activities (180,968) (178,859) 45,617
--------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Decrease (increase) in receivable from shareholder 123,613 71,574 (61,070)
Purchase of furniture and equipment -- (60) (650)
Recoverable production costs -- -- (46,118)
---------
Net cash (used for) provided by investing activities 123,613 71,514 (107,838)
--------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Increase in loans from related parties 9,302 -- --
Increase (decrease) in loans payable 3,040 (4,597) 35,000
Proceeds from issuance of shares 35,109 113,033 16,209
--------- --------- ---------
Net cash provided by financing activities 47,451 108,436 51,209
INCREASE (DECREASE) IN CASH (9,904) 1,091 (11,012)
CASH (DEFICIENCY) AT BEGINNING OF YEAR (2,717) (3,808) 7,204
--------- --------- ---------
CASH (DEFICIENCY) AT END OF YEAR $ (12,621) $ (2,717) $ (3,808)
========= ========= =========
</TABLE>
F-22
<PAGE> 51
MODERN RECORDS, INC.
Notes to Financial Statements
October 31, 1996
(Expressed in U.S. Dollars)
1. GENERAL
The Company is incorporated under the laws of the State of California,
U.S.A. and its principal business activities are the production and
distribution of audio recordings.
2. FUTURE OPERATIONS
During the year the Company realized a loss from operations of $239,571.
At year end the Company had a working capital deficiency of $393,046 and
a shareholders' deficiency of $732,037. The future operations of the
Company are dependent upon the continued support of the shareholders and
creditors and the Company's ability to achieve profitable operations.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Furniture and Equipment
Furniture and equipment are stated at cost. Depreciation is
provided on a straight-line basis over five years.
b) Foreign Currency Transactions
Monetary assets and liabilities of the Company in foreign
currencies are recorded at the year end rate of exchange. Income
statement items are recorded at average exchange rates. Gains
and losses realized from exchange transactions are included in
the statement of earnings.
c) Deferred Revenue/Receivable from Atlantic Recording Corporation
The Company records all advances against participation received
from Atlantic Recording Corporation as deferred revenue until
earned. The deferred revenue is earned as revenues are received
under the Modern/Atlantic Agreement. A receivable from Atlantic
Recording Corporation is set up in years where earned revenues
exceed advances.
4. LOANS PAYABLE
Loans payable consist of $30,000 plus accrued interest of $3,443
($44,840 Cdn.) bearing interest at a rate of 10% per annum.
5. MODERN/ATLANTIC AGREEMENT
Subsequent to the year end, but retroactively applied to February 3,
1996, the Company and Atlantic Recording Corporation ("Atlantic") have
agreed to release Stevie Nicks from her contract for any future
recordings. As consideration, Modern is to receive a total of $125,000;
$89,786 was advanced during the year towards the finalization of the
agreement. A further $35,214 was received subsequent to year end. As the
agreement has now been finalized, these amounts have been recognized as
revenue in the current year.
The previous arrangement negotiated on July 1, 1979 ("Recording
Agreement") remains in place for all the previously-produced recordings
of Stevie Nicks. The agreement continues to provide Atlantic with a
first right of refusal regarding any distribution for other artists
signed to exclusive recording agreements by the Company.
F-23
<PAGE> 52
MODERN RECORDS, INC.
Notes to Financial Statements
October 31, 1996
(Expressed in U.S. Dollars)
Under the agreement, Atlantic is responsible for all of the
administration associated with the production, manufacture,
distribution, financing and record keeping associated with the
production and release of the recordings undertaken by the parties. The
Company provides input regarding managerial decisions, strategy
regarding recording material, timing of releases, and promotion. The
Company also acts as liaison between Atlantic and the artists.
The Company is to share in the net profits (after Atlantic has recouped
its expenses described above) realized from the past recordings by Ms.
Nicks in proportions ranging from 30% to 50%. In the case of all other
artists signed with Atlantic, the Company's share of net profits or
losses is 50%.
In all other respects, the Recording Agreement with Atlantic remains
unchanged from previous years excepting the Company's profit
participation in the future recordings of Ms. Nicks as previously
described.
6. CAPITAL STOCK
a) At October 31, 1996 there are 3,000,000 performance shares of the
Company held in escrow. These shares may not be released from
escrow without the consent of regulatory authorities.
b) During the year, the Company issued 320,000 common shares for
total cash and debt consideration of $35,109 the details of which
are as follows:
i) Issuance of 145,000 units pursuant to a private placement
at a price of $0.15 per share for total cash proceeds of
$15,952 ($21,750 Cdn.), each unit consisting of one common
share and one non-transferable share purchase warrant. Each
warrant entitles the holder to purchase a further common
share at a price of $0.17 Cdn. per share until September
12, 1997.
ii) Issuance of 175,000 units pursuant to a private placement
at a price of $0.15 Cdn. per share for a total cash
consideration of $19,157 ($26,250 Cdn.), each unit
consisting of one common share and one non-transferable
share purchase warrant. Each warrant entitles the holder to
purchase a further common share at a price of $0.17 Cdn.
per share until September 15, 1997.
c) During the year, the Company issued 400,000 common shares which
had been subscribed for and fully paid in the 1995 fiscal period.
These shares included warrants which entitle the holders to
purchase a further one common share at a price of $0.45 Cdn per
share expiring March 6, 1997.
7. The Company has granted to its employees the following share purchase
options:
<TABLE>
<CAPTION>
Number Exercise Price Expiration Date
------ -------------- ---------------
<S> <C> <C>
994,000 $0.25 Cdn. March 15, 1999
</TABLE>
8. RELATED PARTY TRANSACTIONS
Included in accounts payable are $5,000 relating to consulting
services provided by a director of the Company.
Included in salaries and benefits if $145,000 paid to an officer and
shareholder of the Company.
F-24
<PAGE> 53
MODERN RECORDS, INC.
Statement of Changes in Shareholders' Deficiency Schedule A
Year Ended October 31, 1996
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
Capital Stock
------------------------------ Accumulated
Shares Issued Amount Deficit
----------- ----------- -----------
<S> <C> <C> <C>
BALANCE, at November 1, 1992 12,115,950 $ 1,007,000 $(1,257,591)
Income for the year -- -- 22,238
Shares issued pursuant to private placement 150,000 18,046 --
Shares issued pursuant to exercising options 820,000 103,385 --
Shares issued for services 361,820 50,715 --
----------- ----------- -----------
BALANCE, at October 31, 1993 13,447,770 1,179,146 (1,235,353)
Loss for the year -- -- (152,492)
Shares issued pursuant to exercising warrants 75,000 10,718 --
Shares issued pursuant to exercising options 50,000 5,491 --
----------- ----------- -----------
BALANCE, at October 31, 1994 13,572,770 1,195,355 (1,387,845)
LOSS FOR THE YEAR -- -- (448,118)
SHARES ISSUED PURSUANT TO EXERCISING OPTIONS 700,000 113,033 --
----------- ----------- -----------
BALANCE, at October 31, 1995 14,272,770 $ 1,308,388 $(1,835,963)
LOSS FOR THE YEAR -- -- (239,571)
SHARES ISSUED PURSUANT TO EXERCISING WARRANTS 320,000 35,109 --
----------- ----------- -----------
BALANCE, at October 31, 1996 14,592,770 $ 1,343,497 $(2,075,534)
=========== =========== ===========
</TABLE>
F-25
<PAGE> 54
AUDITORS' REPORT
TO THE SHAREHOLDERS OF
MODERN RECORDS, INC.
We have audited the balance sheets of MODERN RECORDS, INC. as at October 31,
1995 and 1994 and the statements of operations and accumulated deficit and cash
flows for the years ended October 31, 1995, 1994 and 1993. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion these financial statements referred to above present fairly, in
all material respects, the financial position of Modern Records, Inc. as at
October 31, 1995 and 1994 and the results of its operations and its cash flows
for the years ended October 31, 1995, 1994 and 1993 in conformity with generally
accepted accounting principles.
Vancouver, Canada ELLIS FOSTER
March 15, 1996 Chartered Accountants
F-26
<PAGE> 55
MODERN RECORDS, INC.
Balance Sheet
October 31, 1995
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
CURRENT
Accounts receivable $ 9,090 $ 144,966
Receivable from shareholder (note 4) 123,613 195,187
Prepaid expenses 633 952
----------- -----------
TOTAL CURRENT ASSETS 133,336 341,105
----------- -----------
RECOVERABLE PRODUCTION COSTS (note 5) -- 21,908
----------- -----------
FURNITURE AND EQUIPMENT 34,711 34,651
Less accumulated depreciation 33,562 31,614
----------- -----------
1,149 3,037
----------- -----------
$ 134,485 $ 366,050
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Cheques issued in excess of funds on deposit $ 2,717 $ 3,808
Accounts payable and accrued liabilities 233,531 184,977
Loans payable (note 6) 30,403 35,000
Loans from related parties, non-interest
bearing with no stated terms of repayment 32,500 --
----------- -----------
TOTAL CURRENT LIABILITIES 299,151 223,785
----------- -----------
DEFERRED REVENUE (note 7) 362,909 334,755
----------- -----------
SHAREHOLDERS' DEFICIENCY Capital stock (note 8)
Authorized: 20,000,000 common shares without par value
Issued: 13,872,770 shares (1994-13,572,770 shares) 1,308,388 1,195,355
Accumulated deficit (1,835,963) (1,387,845)
----------- -----------
(527,575) (192,490)
FUTURE OPERATIONS (note 2)
$ 134,485 $ 366,050
=========== ===========
</TABLE>
Approved by the Directors __________________ Director ________________ Director
F-27
<PAGE> 56
MODERN RECORDS, INC.
Statement of Operations and Accumulated Deficit
Year Ended October 31, 1995
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE
Modern/Atlantic agreement (note 7) $ 80,644 $ 297,030 $ 329,491
Other recording revenue 42,098 99,347 --
Expense reimbursement 73,388 45,833 --
Interest income 169 1,452 29
Dividend income -- 3,050 --
Other -- 3,475 1,175
----------- ----------- -----------
196,299 450,187 330,695
----------- ----------- -----------
EXPENSES
Accounting and legal 46,114 30,089 41,026
Amortization of recoverable production costs 21,908 24,210 --
Artist marketing and promotion 73,092 32,829 1,659
Artist production and development 117,099 80,125 21,786
Automobile 9,814 14,660 12,907
Bad debts -- 27,660 --
Consulting fees 16,605 9,286 --
Depreciation 1,948 1,847 1,814
Foreign exchange loss -- 10 888
Insurance 6,408 16,094 6,066
Interest 5,486 1,580 --
Investor relations 19,875 51,995 21,734
Office and miscellaneous 19,215 22,697 4,392
Rent - equipment 204 4,669 6,931
Rent - premises 14,451 9,125 14,929
Repairs and maintenance 220 246 1,542
Salaries and employee benefits 247,782 256,433 143,804
Security registration and filing costs 4,872 3,619 3,670
Telephone 20,872 12,694 13,041
Travel and entertainment 18,452 23,061 12,268
----------- -----------
644,417 622,929 308,457
----------- ----------- -----------
LOSS FROM OPERATIONS (448,118) (172,742) 22,238
RECOVERY ON SETTLEMENT OF DEBT -- 23,287 --
LOSS ON SALE OF SECURITIES -- (3,037) --
----------- ----------- -----------
LOSS FOR THE YEAR (448,118) (152,492) 22,238
ACCUMULATED DEFICIT AT BEGINNING OF YEAR (1,387,845) (1,235,353) (1,257,591)
----------- ----------- -----------
ACCUMULATED DEFICIT AT END OF YEAR $(1,835,963) $(1,387,845) $(1,235,353)
=========== =========== ===========
GAIN (LOSS) PER SHARE $ (.032) $ (.011) $ --
=========== =========== ===========
</TABLE>
F-28
<PAGE> 57
MODERN RECORDS, INC.
Statement of Cash Flows
Year Ended October 31, 1995
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss) $(448,118) $(152,492) $ 22,238
Depreciation 1,948 1,847 1,814
Amortization of recoverable production costs 21,908 24,210 --
Changes in operating assets and liabilities
Decrease (increase) in accounts receivable 168,376 (110,064) (7,242)
Decrease in prepaid expenses 319 -- 1,994
Decrease (increase) in accounts payable
and accrued liabilities 48,554 (52,639) 21,322
Increase (decrease) in deferred revenue 28,154 334,755 (122,449)
--------- --------- ---------
Net cash provided (used) by operating activities (178,859) 45,617 (82,323)
--------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Increase in receivable from shareholder 71,574 (61,070) (82,514)
Purchase of furniture and equipment (60) (650) --
Recoverable production costs -- (46,118) --
--------- --------- ---------
Net cash used by investing activities 71,514 (107,838) (82,514)
--------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Increase (decrease) in loans payable (4,597) 35,000 --
Proceeds from issuance of shares 113,033 16,209 172,146
--------- --------- ---------
Net cash provided by financing activities 108,436 51,209 172,146
--------- --------- ---------
INCREASE (DECREASE) IN CASH 1,091 (11,012) 7,309
CASH AT BEGINNING OF YEAR (3,808) 7,204 (105)
--------- --------- ---------
CASH AT END OF YEAR $ (2,717) $ (3,808) $ 7,204
========= ========= =========
</TABLE>
F-29
<PAGE> 58
MODERN RECORDS, INC.
Notes to Financial Statements
October 31, 1995
(Expressed in U.S. Dollars)
1. GENERAL
The Company is incorporated under the laws of the State of California,
U.S.A. and its principal business activities are the production and
distribution of audio recordings.
2. FUTURE OPERATIONS
During the year the Company realized a loss from operations of $448,118.
At year end the Company had a working capital deficiency of $165,815 and
a shareholders' deficiency of $527,575. The future operations of the
Company are dependent upon the continued support of the shareholders and
creditors and the Company's ability to achieve profitable operations.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Furniture and Equipment
Furniture and equipment are stated at cost. Depreciation is
provided on a straight-line basis over five years.
b) Foreign Currency Transactions
Monetary assets and liabilities of the Company in foreign
currencies are recorded at the year end rate of exchange. Income
statement items are recorded at average exchange rates. Gains and
losses realized from exchange transactions are included in the
statement of earnings.
c) Deferred Revenue/Receivable from Atlantic Recording Corporation
The Company records all advances against participation received
from Atlantic Recording Corporation as deferred revenue until
earned. The deferred revenue is earned as revenues are received
under the Modern/Atlantic Agreement. A receivable from Atlantic
Recording Corporation is set up in years where earned revenues
exceed advances.
d) Recoverable Production Costs
The Company records that portion of the production costs of record
masters recoverable from artists' royalties as an asset in those
instances where the costs are not covered under the agreement with
Atlantic Recording Corporation and the Company estimates that the
costs will be recoverable from future artist royalties based upon
current popularity of the artist and advance orders. The
recoverable costs will be charged to expense as subsequent
royalties are earned by the artists. In those cases where the
costs subsequently appear not to be recoverable from future
royalties to be earned by the artist, those costs will be charged
to expense during the period in which the loss becomes evident.
4. RECEIVABLE FROM SHAREHOLDER
The receivable from shareholder is non-interest-bearing and has no fixed
terms of repayment.
Subsequent to year end the Company declared a bonus of $100,000 payable
to the Company's president. This bonus shall be applied against the
president's shareholder account.
F-30
<PAGE> 59
MODERN RECORDS, INC.
Notes to Financial Statements
October 31, 1995
(Expressed in U.S. Dollars)
5. RECOVERABLE PRODUCTION COSTS
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Recoverable production costs $ 46,118 $ 46,118
Accumulated amortization (46,118) (24,210)
-------- --------
$ -- $ 21,908
======== ========
</TABLE>
6. LOANS PAYABLE
Loans payable consist of $30,000 ($40,800 Cdn.) bearing interest at a
rate of 10% per annum. As consideration for granting the loan the
lenders were issued warrants, subsequent to year end, entitling them to
purchase up to 108,000 common shares at a price of $0.15 Cdn. per share
up to September 12, 1996 and at $0.17 Cdn. per share up to September 12,
1997.
7. MODERN/ATLANTIC AGREEMENT
On July 1, 1979, the Company negotiated an arrangement ("Recording
Agreement") with Atlantic Recording Corporation ("Atlantic"). This
original agreement has been subject to several amendments and addenda.
The agreement applies specifically to the Company's exclusive Recording
Agreement with Ms. Stephanie Nicks and also provides Atlantic with a
first right of refusal regarding any distribution agreement for other
artists signed to exclusive recording agreements by the Company.
Under the agreement, Atlantic is responsible for all of the
administration associated with the production, manufacture,
distribution, financing and record keeping associated with the
production and release of the recordings undertaken by the parties. The
Company provides input regarding managerial decisions, strategy
regarding recording material, timing of releases, and promotion. The
Company also acts as liaison between Atlantic and the artists.
The Company is to share in the net profits (after Atlantic has recouped
its expenses described above) realized from the release of recordings by
Ms. Nicks in proportions ranging from 30% to 50%. In the case of all
other artists signed with Atlantic, the Company's share of net profits
or losses is 50%.
Under the present Recording Agreement, as modified during the year, the
Company has assigned all of its rights under its exclusive recording
agreement with Ms. Nicks in perpetuity and throughout the world to
Atlantic.
In consideration for the assignment, the Company received $600,000 in
prior years upon the execution of the agreement and the delivery of Ms.
Nicks' last album. The Company will receive a further $200,000 upon the
successful negotiation with Ms. Nicks for a compilation recording. These
amounts are recorded as deferred revenue until earned from future profit
participation.
In all other respects the Recording Agreement with Atlantic remains
unchanged from previous years including the Company's continuing profit
participation in the future recordings of Ms. Nicks as previously
described.
F-31
<PAGE> 60
MODERN RECORDS, INC.
Notes to Financial Statements
October 31, 1995
(Expressed in U.S. Dollars)
8. CAPITAL STOCK
a) At October 31, 1995 there are 3,000,000 performance shares of the
Company held in escrow. These shares may not be released from
escrow without the consent of regulatory authorities.
b) During the year, the Company issued 300,000 common shares for
total cash consideration of $34,438 ($48,000 Cdn.) upon the
exercising of 300,000 options at $0.16 Cdn. per share.
c) Subsequent to year end, the Company issued 720,000 common shares
for total cash and debt consideration of $114,617 ($156,000 Cdn.)
the details of which are as follows:
i) Issuance of 400,000 units pursuant to a private placement
at a price of $0.27 Cdn. for cash consideration in the
amount of $78,595 ($108,000 Cdn.). Each unit consisting of
one common share and one non-transferable share purchase
warrant. Each warrant entitles the holder to purchase a
further one common share at a price of $0.45 Cdn. per share
expiring March 6, 1997. These units had been subscribed for
but not issued at October 31, 1995.
ii) Issuance of 145,000 units pursuant to a private placement
at a price of $0.15 per share for total cash proceeds of
$16,322 ($21,750 Cdn.). Each unit consisting of one common
share and one non-transferable share purchase warrant. Each
warrant entitles the holder to purchase a further common
share at a price of $0.15 Cdn. per share until September
12, 1996 and at $0.17 Cdn. per share until September 12,
1997.
iii) Issuance of 175,000 units pursuant to a private placement
at a price of $0.15 Cdn. per share for a total cash
consideration of $19,700 ($26,250 Cdn.). Each unit
consisting of one common share and one non-transferable
share purchase warrant. Each warrant entitles the holder to
purchase a further common share at a price of $0.15 Cdn.
per share until September 15, 1996 and at $0.17 Cdn. per
share until September 15, 1997.
d) The Company has granted to its employees the following share
purchase options:
<TABLE>
<CAPTION>
Number Exercise Price Expiration Date
------- ---------- --------------
<S> <C> <C>
994,000 $0.25 Cdn. March 15, 1999
</TABLE>
9. RELATED PARTY TRANSACTIONS
Included in accounts payable are $14,500 relating to consulting
services provided by a director of the Company.
F-32
<PAGE> 61
MODERN RECORDS, INC.
Statement of Changes in Shareholders' Deficiency Schedule A
Year Ended October 31, 1992 to October 31, 1995
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
Capital Stock
------------------------------- Accumulated
Shares Issued Amount Deficit
----------- ----------- -----------
<S> <C> <C> <C>
BALANCE, at November 1, 1992 $12,115,950 $ 1,007,000 $(1,257,591)
Income for the year -- -- 22,238
Shares issued pursuant to private placement 150,000 18,046 --
Shares issued pursuant to exercising options 820,000 103,385 --
Shares issued for services 361,820 50,715 --
----------- ----------- -----------
BALANCE, at October 31, 1993 13,447,770 1,179,146 (1,235,353)
Loss for the year -- -- (152,492)
Shares issued pursuant to exercising warrants 75,000 10,718 --
Shares issued pursuant to exercising options 50,000 5,491 --
----------- ----------- -----------
BALANCE, at October 31, 1994 13,572,770 1,195,355 (1,387,845)
LOSS FOR THE YEAR -- -- (448,118)
SHARES ISSUED PURSUANT TO EXERCISING OPTIONS 300,000 34,438 --
----------- ----------- -----------
13,872,770 1,229,793 (1,835,963)
SHARES SUBSCRIBED FOR BUT NOT ISSUED 400,000 78,595 --
----------- ----------- -----------
BALANCE, at October 31, 1995 $14,272,770 $ 1,308,388 $(1,835,963)
=========== =========== ===========
</TABLE>
F-33
<PAGE> 1
Exhibit 3.3
CERTIFICATE OF AMENDMENT
OF ARTICLES OF INCORPORATION OF
MODERN RECORDS, INC.
Randy Jackson and Johan Grandin certify that:
1. They are the President and Secretary, respectively, of Modern
Records, Inc., a California Corporation.
2. Article 4 of the Articles of Incorporation is amended in its
entirety to read as follows:
1. This Corporation is authorized to issue two classes of
shares, to be designated common stock and preferred stock, respectively.
This Corporation is authorized to issue forty million (40,000,000)
shares of common stock and twenty million (20,000,000) shares of
preferred stock.
2. The Preferred Shares may be issued in any number of
series as determined by the Board of Directors. The Board of Directors
may by resolution fix the designation and number of shares of any such
series.
3. The Board of Directors may determine, alter, or revoke
the right to, preferences, privileges and restrictions pertaining to any
wholly unissued class or series of preferred shares. The Board of
Directors may thereafter in the same manner increase or decrease the
number of shares of any such series (but not below the
3. The foregoing amendment of the Articles of Incorporation has
been duly approved by the Board of Directors.
4. The foregoing amendment of the Articles of Incorporation has
been duly approved by the required vote of the shareholders in accordance with
Section 502 of the California Corporation Code. The number of outstanding shares
is Nineteen Million, Six Hundred Eighty Thousand (19,680,000). The number of
shares voting in favor of the Amendment equalied or exceeded the vote required.
The percentage vote required was more than Fifty Percent (50%).
I further declare under penalty of perjury that the matters set
forth on this Certificate are true and correct of my own knowledge.
Dated: July 20, 1998 /s/ Randy Jackson
-----------------------------------
Randy Jackson, President
/s/ Johan Grandin
-----------------------------------
Johan Grandin, Secretary
<PAGE> 1
Exhibit 3.4
AMENDED AND RESTATED
BYLAWS
OF
MODERN RECORDS, INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
ARTICLE I. OFFICES...........................................................................1
Section 1.1. Principal Executive office..............................................1
Section 1.2. Other Offices...........................................................1
ARTICLE II. MEETING OF SHAREHOLDERS..........................................................1
Section 2.1. Annual Meetings.........................................................1
Section 2.2. Special meetings........................................................1
Section 2.3. Notice of Meetings......................................................1
Section 2.4. Delivery of Notice......................................................1
Section 2.5. Approvals...............................................................2
Section 2.6. Quorum..................................................................2
Section 2.7. Adjourned Meeting and Notice Thereof....................................2
Section 2.8. Record Date.............................................................3
Section 2.9. Voting at Meetings......................................................3
Section 2.10. Proxies................................................................3
Section 2.11. Inspectors of Election.................................................4
Section 2.12. Action Without Meeting.................................................4
ARTICLE III. DIRECTORS.......................................................................5
Section 3.1. Number of Directors.....................................................5
Section 3.2. Powers..................................................................5
Section 3.3. Committees..............................................................5
Section 3.4. Election and Term of Office.............................................6
Section 3.5. Vacancies...............................................................6
Section 3.6. Removal.................................................................7
Section 3.7. Place of Meeting........................................................7
Section 3.8. Annual Meeting..........................................................7
Section 3.9. Regular Meetings........................................................7
Section 3.10. Special Meetings.......................................................7
Section 3.11. Waiver of Notice.......................................................7
Section 3.12. Adjournment of Meetings................................................8
Section 3.13. Quorum.................................................................8
Section 3.14. Telephonic Meetings....................................................8
Section 3.15. Action Without Meeting.................................................8
Section 3.16. Fees and Compensation..................................................8
ARTICLE IV. OFFICERS.........................................................................8
Section 4.1. Officers................................................................8
Section 4.2. Appointment of Officers.................................................8
Section 4.3. Other Officers..........................................................9
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
Section 4.4. Removal and Resignation.................................................9
Section 4.5. Vacancies...............................................................9
Section 4.6. Chairman of the Board of Directors......................................9
Section 4.7. President...............................................................9
Section 4.8. Vice President..........................................................9
Section 4.9. Secretary...............................................................9
Section 4.10. Chief Financial Officer...............................................10
ARTICLE V. INDEMNIFICATION AND INSURANCE....................................................10
Section 5.1. Definitions............................................................10
Section 5.2. Actions by Third Parties...............................................10
Section 5.3. Actions by or in the Right of the Corporation..........................11
Section 5.4. Indemnification Against Expenses.......................................11
Section 5.5. Required Determinations................................................11
Section 5.6. Advance of Expenses....................................................12
Section 5.7. Other Indemnification..................................................12
Section 5.8. Forms of Indemnification Not Permitted.................................12
Section 5.9. Insurance..............................................................12
Section 5.10. Nonapplicability to Fiduciaries of Employee Benefit Plans.............13
Section 5.11. Limitations to Authority to Provide Indemnification...................13
ARTICLE VI. SHARE CERTIFICATES..............................................................13
Section 6.1. Execution of Certificates..............................................13
Section 6.2. Certificates...........................................................14
Section 6.3. Partial Payment........................................................14
Section 6.4. Transfer of Certificates...............................................14
Section 6.5. Lost, Stolen or Destroyed Certificate..................................14
ARTICLE VII. MISCELLANEOUS..................................................................15
Section 7.1. Checks, Drafts, Etc....................................................15
Section 7.2. Authority to Execute Contracts.........................................15
Section 7.3. Representation of Shares of Other Corporations.........................15
Section 7.4. Inspection of Bylaws...................................................15
Section 7.5. Annual Report to Shareholders..........................................15
Section 7.6. Construction and Definitions...........................................15
Section 7.7. Shareholder's Right to Inspect Corporate Records.......................16
ARTICLE VIII. AMENDMENTS....................................................................16
Section 8.1. Power of Shareholders..................................................16
Section 8.2. Power of Directors.....................................................16
</TABLE>
ii
<PAGE> 4
ARTICLE I.
OFFICES
Section 1.1. Principal Executive office. The board shall have the
power to designate and change the principal executive office from one location
to another, within or without the State of California.
Section 1.2. Other Offices. Other business offices may be
established by the board at any place where the Corporation is qualified to do
business.
ARTICLE II.
MEETINGS OF SHAREHOLDERS
Section 2.1. Annual Meetings. The purposes of the annual meeting
are to elect directors, to receive and consider reports on the affairs of the
Corporation, and to deal with any other matters as may properly came before such
meeting.
The annual meeting of shareholders shall be held at the principal
executive office of this Corporation or at such other place within or without
the State of California as may be designated by the board at 10:00 a.m. on the
28th day of October of each year, beginning in 1990 or such other date or such
other time as may be fixed by the board; provided, however, that should said day
fall upon a legal holiday, then such meeting will be held at the same time on
the next succeeding business day.
Section 2.2. Special meetings. Special meetings of the
shareholders may be held for any lawful purpose. Special meetings may be called
by the board, chairman of the board, the president, the secretary or by holders
of shares entitled to cast not less than ten percent (10%) of the votes at such
meeting.
Section 2.3. Notice of Meetings. Whenever shareholders are
required or permitted to take any action at a meeting, a written notice of the
meeting shall be given not less than ten (10) nor more than sixty (60) days
before the date of the meeting to each shareholder entitled to vote thereat.
Such notice shall state the place, date and hour of the meeting and (a) in the
case of a special meeting, the general nature of the business to be transacted,
and that no other business may be transacted, or (b) in the case of the annual
meeting, (i) those matters which the board at the time of the mailing of the
notice, intends to present for action by the shareholders subject to the General
Corporation Law. The notice of any meeting at which directors are to be elected
shall include the names of the nominees intended at the time of the notice to be
presented by management for election. If the place of meeting has not been
stated in the notice, then the meeting shall be held at the principal executive
office of this Corporation.
Section 2.4. Delivery of Notice. Notice of a meeting of
shareholders shall be given either personally or by first class mail or other
means of written communication, addressed to the shareholder at the address of
such shareholder appearing on the books of this Corporation or given by the
shareholder to this Corporation for the purpose of notice. If no such address
appears or is given, notice shall be addressed to the place where the principal
executive office of the Corporation is located or shall be published at least
once in a newspaper of general circulation in the county in which the principal
executive office is located. The notice shall be
<PAGE> 5
deemed to have been given at the time when delivered, personally or deposited in
the mail, or sent by other means of written communication. An affidavit of
mailing of any such notice given or delivered, in accordance with the foregoing
provisions, executed by the secretary, assistant secretary or any transfer agent
of this Corporation shall be prima facie evidence of the giving of the notice.
If any notice, addressed to the shareholder at the address of
such shareholder appearing on the books of this Corporation, is returned to the
Corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice or report to the
shareholder at such address, all future notices shall be deemed to have been
duly given without further mailing if the same shall be available to the
shareholder upon written demand of the shareholder at the principal executive
office of the Corporation for a period of one (1) year from the date of the
giving of the notice to all other shareholders.
Upon request made in writing to the chairman of the board,
president, vice president or secretary by any person (other than the board)
entitled to call a special meeting of shareholders, the officer forthwith shall
cause notice to be given to the shareholders entitled to vote thereat specifying
that a meeting will be held at a time requested by the person or persons calling
the meeting, which meeting shall not be held less than thirty-five (35) days nor
more than sixty (60) days after the receipt of the request.
Section 2.5. Approvals. If a quorum is present either in person
or by proxy, and if, either before or after the meeting, each of the persons
entitled to vote, not present in person or by proxy, signs a written waiver of
notice or a consent to the holding of the meeting or an approval of the minutes
thereof, the transactions of any meeting of shareholders, however called and
noticed, and wherever held, are as valid as though had at a meeting duly held
after regular call and notice. All such waivers, consents and approvals shall be
filed with the corporate records or made a part of the minutes of the meeting.
Attendance of a person at a meeting constitutes a waiver of
notice of such meeting, except (i) when at the beginning of the meeting the
person objects to the transaction of any business because the meeting is not
lawfully called or convened, and (ii) that attendance at a meeting is not a
waiver of any right to object to the consideration of matters required by the
General Corporation Law to be included in the notice but not so included, if
such objection is expressly made at the meeting.
Section 2.6. Quorum. The presence of a majority of shares
entitled to vote in person or by proxy at any meeting shall constitute a quorum
for the transaction of business. The shareholders present at a duly called or
held meeting at which a quorum is present may continue to transact business
until adjournment, notwithstanding the withdrawal of enough shareholders to
leave less than a quorum, if any action taken (other than adjournment) is
approved by at least a majority of the shares required to constitute a quorum.
Section 2.7. Adjourned Meeting and Notice Thereof. Any
shareholders' meeting, annual or special, whether or not a quorum is present,
may be adjourned from time to time by the vote of a majority of the shares,
represented in person or by proxy, but in the absence of a quorum no other
business may be transacted at such meeting, except as provided in Section
2
<PAGE> 6
2.6 of these Bylaws. Notice need not be given of the adjourned meeting if the
time and place thereof is announced at the meeting at which such adjournment is
taken. At the adjourned meeting, the corporation may transact any business which
might have been transacted at the original meeting. If the meeting is adjourned
for forty five (45) days or more, or if after the adjournment a new record date
is fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to the shareholders of record entitled to vote at a meeting as provided in
these bylaws as in the case of an original meeting.
Section 2.8. Record Date. In order that the corporation may
determine the shareholders entitled to notice of any meeting and to vote, to
receive any dividend or distribution, or any allotment of any rights, or to
exercise rights in respect to any change, conversion, or exchange of shares. The
board may fix in advance a record date which shall not be more than sixty (60)
days nor less than ten (10) days prior to the date of any meeting, nor more than
sixty (60) days prior to any other action.
If the board shall not have fixed a record date as aforesaid, the
record date for determining shareholders entitled to notice of or to vote at a
meeting of the shareholders shall be at the close of business on the business
day next preceding the day on which the meeting is held. The record date for
determining the shareholders entitled to give consent to corporate action by the
board has been taken shall be the day on which the first written consent is
given. The record date for determining the shareholders for any other purpose
shall be at the close of business on the day of which the board adopts the
resolution relating thereto, or the sixtieth (60th) day prior to the day of such
other action, whichever is later.
Section 2.9. Voting at Meetings. Unless a record date for voting
purposes is fixed by the board, as provided for in this Article then, subject to
the provisions of Chapter 7 of the General Corporation Law relating to voting
shares, the only persons entitled to vote shall be those persons in whose name
shares stand on the stock records of the corporation at the close of business on
the business day next preceding the date on which notice of the meeting is given
or, if notice is waived, at the close of business on the business day next
preceding the day on which the meeting is held, such day shall be the record
date for such meeting.
At a meeting for the election of directors, a majority of the
affirmative votes cast in person and by proxy shall effect the election of
directors. No shareholder shall be entitled to cumulate votes for any one (1) or
more candidates unless the names of such candidates were placed in nomination
prior to voting and the shareholder has given notice at the meeting prior to the
voting of the shareholder's intention to cumulate the shareholder's votes. If
any shareholder has given such notice, all shareholders may cumulate their votes
for candidates in nomination.
Section 2.10. Proxies. Every person entitled to vote shares may
do so either in person or by one or more agents authorized by a written proxy
executed by such person or his duly authorized agent and filed with the
secretary of the Corporation. Any duly executed proxy continues in full force
and effect until (a) an instrument revoking it or a duly executed proxy bearing
a later date is received by the Corporation prior to the vote pursuant thereto,
(b) the person executing the proxy attends the meeting and votes in person, or
(c) before the vote is counted written notice of the death or incapacity of the
maker is received by the Corporation. No
3
<PAGE> 7
proxy shall be valid after the expiration of eleven (11) months from the date of
its execution unless otherwise provided for in the proxy.
Section 2.11. Inspectors of Election. Prior to any meeting of
shareholders, the board may appoint inspectors of election to act at the meeting
or any adjournment thereof. If inspectors of election are not appointed or fail
or refuse to appear, the chairman of any such meeting may, and on the request of
any shareholder or shareholder's proxy shall, appoint inspectors of election at
the meeting. The number of inspectors shall be either one (1) or three (3). If
appointed at a meeting on the request of one or more shareholders or their
proxies, the majority of shares represented shall determine whether one (1) or
three (3) Inspectors are to be appointed.
The inspectors of election shall determine the number of shares
outstanding and the voting power of each, the shares represented at the meeting,
the existence of a quorum, the authenticity, validity, and effect of proxies.
The inspectors shall also receive votes, ballots or consents, hear and determine
all challenges and questions in any way arising in connection with the right to
vote, shall count and tabulate all votes or consents, determine when the polls
shall close, determine the result, and do such acts as may be proper to conduct
the election or vote with fairness to all shareholders.
If there are three (3) inspectors of election, the decision, act
or certificate of a majority shall be effective in all respects as the decision,
act or certificate of all. Any report or certificate made by the inspectors of
election shall be prima facie evidence of the facts stated therein.
Section 2.12. Action Without Meeting. Except as hereinafter set
forth, any action which, under any provision of the General Corporation Law, may
be taken at a meeting of the shareholders, may be taken without meeting and
without prior notice if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding shares having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted. Notwithstanding the foregoing, directors may not be elected by written
consent except by unanimous written consent of all shares entitled to vote for
the election of directors, provided that a director may be elected at any time
to fill a vacancy not filled by the directors by the written consent of persons
holding a majority of the outstanding shares entitled to vote for the election
of directors.
In the case where shareholder approval is required for (i) a
contract or other transaction with an interested director, (ii) indemnification
of an agent of the Corporation as authorized by the General Corporation Law,
(iii) a reorganization of the Corporation as defined in Section 181 of the
General Corporation Law, or (iv) a distribution in dissolution other than in
accordance with the rights of outstanding preferred shares, unless the consent
of all shareholders entitled to vote has been received, notice of any action
described above, approved by less than unanimous written consent shall be given
at least ten (10) days before the consummation of the action authorized by such
approval. Prompt notice of any other corporate action approved by shareholders
by less than unanimous written consent, shall be given to those shareholders
entitled to vote who did not consent in writing.
4
<PAGE> 8
Unless otherwise designated by the board the record date for
determining shareholders entitled to give consent to corporate action in writing
shall be the day on which the first written consent is given.
Any shareholder giving a written consent, proxy or the
shareholder's proxyholder, a transferee of the shares, a personal representative
of the shareholder or their respective proxyholders, may revoke the consent by a
written notice delivered to the Corporation. If such revocation is received
prior to the time that written consents for the number of shares required to
authorize the proposed action have been received by the Corporation, the
revocation is then effective upon its receipt by the Corporation.
ARTICLE III.
DIRECTORS
Section 3.1. Number of Directors. The authorized number of
directors of this Corporation shall be no less than four (4) no more than seven
(7), with the exact number of directors to be determined by the Board of
Directors. The authorized number of directors may be changed by an amendment of
these Bylaws duly adopted by the approval of the outstanding shares of the
Corporation entitled to vote. No reduction of the authorized number of directors
shall have the effect of removing any director prior to the expiration of his
term of office.
Section 3.2. Powers. The business and affairs of the Corporation
shall be managed and all corporate powers shall be exercised by or under the
direction of the board. The board may delegate the management of the day-to-day
operation of the business of the Corporation to a management company or other
person provided that the business and affairs of the Corporation shall be
managed and all corporate powers shall be exercised under the ultimate direction
of the board.
The board has the authority to fix the compensation of directors
for services in any lawful capacity. Each director shall exercise such powers
and otherwise perform the duties of a director in good faith, in the manner such
director believes to be in the best interests of the Corporation, and with such
care, including reasonable inquiry, using ordinary prudence, as an ordinarily
prudent person in a like position would use under similar circumstances.
Section 3.3. Committees. The board may, by resolution adopted by
a majority of the authorized number of directors, establish one or more
committees, each consisting of two (2) or more directors to serve at the
pleasure of the board. Any such committee, to the extent provided in the
resolution of the board, shall have all the authority of the board except with
respect to:
(a) The approval of any action for which the General Corporation
Law or the Articles of Incorporation requires shareholder approval.
5
<PAGE> 9
(b) The filling of vacancies on the board or any committee.
(c) The fixing of compensation of the directors for serving on
the board or on any committee.
(d) The adoption, amendment or repeal of these Bylaws.
(e) The amendment or repeal of any resolution of the board which
by its express terms is not so amendable or repealable.
(f) Any distribution to the shareholders except at a rate, in a
periodic amount or within a price range set forth in the Articles of
Incorporation or determined by the board.
(g) The appointment of other committees of the board or the
members thereof.
The board shall have the power to prescribe the manner in which
proceedings of the committees shall be conducted. Unless the board provides
otherwise all provisions of these bylaws applicable to board meetings apply to
committee meetings.
Section 3.4. Election and Term of Office. The initial board shall
consist of the persons either designated in the Articles of Incorporation or
elected by the incorporators. Directors shall hold office until the expiration
of the term for which elected and until their successors have been elected and
qualified, or until their earlier resignation or removal from office.
Thereafter, the directors elected at each annual meeting of the shareholders
shall hold office until the next annual meeting. Each director, including
directors who are elected to fill vacancies, shall hold office until the next
annual meeting of the shareholders and until their successors have been elected
and qualified, or until their earlier resignation, removal from office, or
death.
Section 3.5. Vacancies. A vacancy on the board shall be deemed to
exist in case of death, resignation or removal of any director, or if the
authorized number of directors is increased, or if at any annual or special
meeting of shareholders at which any director or directors are elected, the
shareholders fail to elect the full authorized number of directors to be voted
for at that meeting. The board shall have the power to declare vacant the office
of a director if he is either declared of unsound mind by an order of court or
convicted of a felony.
Vacancies on the board may be filled by a majority of the
directors then in office, whether or not less than a quorum, or by the sole
remaining director. A vacancy on the board created by the removal of a director
may only be filled by the vote of a majority of the shares entitled to vote
represented at a duly held meeting at which a quorum is present, or by the
written consent of a majority of the outstanding shares entitled to vote. The
shareholders may elect a director at any time to fill any vacancy not filled by
the directors. Any director may resign effective upon giving written notice to
the chairman of the board, the president, the secretary or the board, unless the
notice specifies a later time for the effectiveness of such resignation. If the
resignation is effective at a future time, the board or the shareholders shall
have the power to elect a successor to take office when the resignation is to
become effective.
6
<PAGE> 10
Section 3.6. Removal. The entire board or any individual director
may be removed from office by a vote of shareholders holding a majority of the
outstanding shares entitled to vote at an election of directors; provided, that
unless the entire board is removed, an individual director shall not be removed
if the number of shares against his removal or not consenting in writing to such
removal would be sufficient to elect such individual director if voted
cumulatively at an election at which the same total number of votes were cast
(or, if such action is taken by written consent, all shares entitled to vote
were voted) and the entire number of directors authorized at the time of the
directors' most recent election were then being elected. If any or all directors
are so removed, new directors may be elected at the same meeting.
Section 3.7. Place of Meeting. Regular meetings of the board
shall be held at any place within or without the State of California which has
been designated in the notice of the meeting or, if there is no notice, as
designated from time to time by resolution of the board or by written consent of
all members of the board given either before or after the meeting and filed with
the secretary of the Corporation. In the absence of such designation, regular
meetings shall be held at the principal executive office of the Corporation.
special meetings of the board may be held either at a place so designated or at
the principal executive office.
Section 3.8. Annual Meeting. The annual meeting of the board
shall be held immediately following the annual meeting of shareholders or at
such other time and place as shall be fixed by the board. The purpose of the
annual meeting is to elect officers and to transact such other business as may
properly come before the meeting. In the event that the newly elected board
shall meet immediately following the annual meeting of the shareholders, call
and notice of such meetings is hereby waived.
Section 3.9. Regular Meetings. Regular meetings of the board may
be held without notice or waiver thereof if the time and place have been
established and fixed by resolution of the board.
Section 3.10. Special Meetings. Special meetings of the board may
be held for any lawful purpose. Special meetings may be called at any time by
the chairman, the president, any vice president, the secretary, or any two (2)
directors.
Special meetings shall be held upon four (4) days' notice by mail
or forty-eight (48) hours' notice delivered personally or by telephone or
telegraph. In case such notice is mailed, it shall be effective upon deposit in
the United States mail, postage prepaid. The notice shall state the date, place
and hour of the meeting, but the notice or a waiver of notice need not specify
the purpose of any meeting of the board.
Section 3.11. Waiver of Notice. The transactions of any meeting
of the board, however called and noticed shall be as valid as though had at a
meeting duly held after regular call and notice, if a quorum is present and, if,
either before or after the meeting, each of the directors not present, or who,
though present has not, prior to the meeting or at its commencement, protested
the lack of proper notice to him, signs a written waiver of notice or a consent
to holding such meeting or an approval of the minutes thereof. All such waivers,
consents or approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.
7
<PAGE> 11
Section 3.12. Adjournment of Meetings. In the absence of a
quorum, a majority of the directors present at any meeting, either regular or
special, may adjourn any meeting to another time and place. If the meeting is
adjourned for more than twenty-four (24) hours, notice of any adjournment to
another time or place shall be given prior to the time of the adjourned meeting
to the directors who were not present at the time of adjournment.
Section 3.13. Quorum. A majority of the authorized number of
directors shall constitute a quorum for the transaction of business. When a
vacancy exists a majority of the directors in office shall constitute a quorum,
such majority shall be at least one third (1/3) of the authorized number of
directors or at least two directors whichever is larger, unless the authorized
number of directors is one (1).
Every act or decision, done or made by a majority of the
directors present, shall be regarded as the act of the board unless a greater
number is required by law or by the Articles of Incorporation.
A meeting at which a quorum is initially present may continue
notwithstanding the withdrawal of directors, if any action taken is approved by
at least a majority of the required quorum for such meeting.
Section 3.14. Telephonic Meetings. Members of the board may
participate in a meeting through use of a conference telephone or similar
communications equipment, so long as all members participating in such a meeting
can hear one another. Participation in a meeting as herein described constitutes
presence in person at such meeting.
Section 3.15. Action Without Meeting. Any action required or
permitted to be taken by the board or a committee of the board may be taken
without a meeting if all members of the board or committee individually or
collectively consent in writing to such action. Each such written consent shall
be filed with the minutes of the proceedings of the board or committee. Such
action by written consent shall have the same force and effect as a unanimous
vote of such directors or committee members.
Section 3.16. Fees and Compensation. Directors and members of
committees shall not receive any salary for their services as directors or
members, however, upon resolution of the board, a fixed fee, with or without
reimbursement for expenses of attendance, may be allowed. Nothing herein
contained shall be construed to preclude any director or committee member from
serving the Corporation in any other capacity and receiving compensation
therefor.
ARTICLE IV.
OFFICERS
Section 4.1. Officers. The officers of the Corporation shall be a
chairman of the board or a president, or both, a secretary, a chief financial
officer and such additional officers as may be elected or appointed in
accordance with Section 4.3 of these Bylaws. One (1) person may hold two (2) or
more offices.
Section 4.2. Appointment of Officers. All officers of the
Corporation, except such officers as may be appointed in accordance with Section
4.3, shall be appointed annually by
8
<PAGE> 12
the board, and each shall hold office until they shall severally resign or shall
be removed or otherwise disqualified to serve, or until their successors shall
be elected and qualified.
Section 4.3. Other Officers. The board may appoint such other
officers as the business of the Corporation may require, each of whom shall hold
office for such period, have such authority, and perform such duties as the
board may determine.
Section 4.4. Removal and Resignation. Any officer may be removed,
either with or without cause, by a majority of the directors then in office.
Any officer may resign at any time by giving written notice to
the board or any other officer of the Corporation. Any such resignation shall
take effect at the date of the receipt of such notice or at any later time
specified therein.
Section 4.5. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled in the
manner prescribed in these Bylaws for regular appointments to such office.
Section 4.6. Chairman of the Board of Directors. The chairman of
the board, if there shall be such, shall, if present, preside at all meetings of
the board and exercise and perform such other powers and duties as may from time
to time be assigned to him by the board or prescribed by the Bylaws.
Section 4.7. President. Subject to such supervisory powers as may
be given by the board to the chairman, the president shall be the general
manager and the chief executive officer of the Corporation and shall, subject to
the control of the board have general supervision, direction and control of the
business and officers of the Corporation. He shall preside at all meetings of
the shareholders and, in the absence of the chairman, or if there be none, at
all meetings of the board. The president shall have the general powers and
duties of management usually vested in the office of president of a corporation,
and shall have such other powers and duties as may be prescribed by the board or
these Bylaws.
Section 4.8. Vice President. In the absence or disability of the
president, the vice presidents, in order of their rank as fixed by the board, or
if not ranked, the vice president designated by the board, shall perform all the
duties of the president, and when so acting shall have all the powers of, and be
subject to all the restrictions upon the president. The vice president shall
have such other powers and perform such other duties as from time to time may be
prescribed by the board or these Bylaws.
Section 4.9. Secretary. The secretary shall keep or cause to be
kept, at the principal executive office or such other place as the board may
designate, a book of minutes of all meetings of shareholders, the board and the
committees of the board, with the time and place of holding, whether regular or
special, and if special, how authorized, the notice thereof given, the names of
those present at the directors' or the committee meetings, the number of shares
present or represented at shareholders' meetings and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office or at the office of the Corporation's transfer agent or
registrar, a record of its shareholders giving the
9
<PAGE> 13
names and addresses of all shareholders and the number, class and series of
shares held by each, the number and date of certificates issued for shares, and
the number and date of cancellation of every certificate surrendered for
cancellation. This information may be kept in written form or in any other form
capable of being converted into written form.
The secretary shall give, or cause to be given, notice of all the
meetings of the shareholders and of the board required by the Bylaws or by law
to be given, and shall have such other powers and perform such other duties as
may be prescribed by the board or by these Bylaws.
Section 4.10. Chief Financial Officer. The chief financial
officer shall also be the treasurer of the corporation. The chief financial
officer shall keep and maintain, or cause to be kept and maintained, in
accordance with generally accepted accounting principals adequate and correct
accounts of the properties and transactions of the corporation, including
accounts of its assets, liabilities, receipts, disbursements, gains, losses,
capital, surplus and shares. The books of account shall at all reasonable times
be open to inspection by any director.
The chief financial officer shall deposit all monies and other
valuables in the name and to the credit of the Corporation with such
depositories as may be designated by the board. He shall disburse the funds of
the Corporation as may be ordered by the board, shall render to the chief
executive officer and directors, whenever they request it, an account of all of
his transactions as chief financial officer and of the financial condition of
the Corporation, and shall have such other powers and perform such other duties
as may be prescribed by the board or these Bylaws.
ARTICLE V.
INDEMNIFICATION AND INSURANCE
Section 5.1. Definitions.
"Agent" Any person who is or was a director, officer, employee or
other agent of this Corporation, or is or was serving at the request of this
corporation as a director, officer, employee or agent of another foreign or
domestic Corporation, partnership, joint venture, trust or other enterprise, or
was a director, officer, employee or agent of a foreign or domestic Corporation
which was a predecessor Corporation of this Corporation or of another enterprise
at the request of such predecessor corporation.
"Proceeding" Any threatened, pending or completed action or
proceeding, whether civil, criminal, administrative or investigative; and
"expenses" includes, without limitation, attorneys' fees and any expenses of
establishing a right to indemnification under Sections 5.4 or 5.5(c) of this
Article.
Section 5.2. Actions by Third Parties. This Corporation shall
have the power to indemnify any person who was or is a party, or is threatened
to be made a party, to any proceeding (other than an action by or in the right
of this Corporation to procure a judgment in its favor) by reason of the fact
that such person is or was an agent of this corporation, against expenses,
judgments, fines, settlements, and other amounts actually and reasonably
incurred in
10
<PAGE> 14
connection with such proceeding if such person acted in good faith and in a
manner such person reasonably believed to be in the best interests of this
Corporation and, in the case of a criminal proceeding, had no reasonable cause
to believe the conduct of such person was unlawful. The termination of any
proceeding by judgment, order, settlement, conviction or upon a plea of nolo
contendere or its equivalent shall not, of itself, create a presumption that the
person did not act in good faith and in a manner which the person reasonably
believed to be in the best interests of this Corporation or that the person had
reasonable cause to believe that the person's conduct was unlawful.
Section 5.3. Actions by or in the Right of the Corporation. This
corporation shall indemnify any person who was or is a party, or is threatened
to be made a party, to any threatened, pending or completed action by or in the
right of this corporation to procure a judgment in its favor by reason of the
fact that that person is or was an agent of this corporation, against expenses
actually and reasonably incurred by that person in connection with the defense
or settlement of that action if that person acted in good faith, in a manner
that person believed to be in the best interests of this corporation and its
shareholders. No indemnification shall be made under this Section 5.3:
(a) in respect of any claim, issue or matter as to which that
person shall have been adjudged to be liable to this corporation in the
performance of that person's duty to this corporation and its shareholders,
unless and only to the extent that the court in which that proceeding is or was
pending shall determine upon application that, in view of all the circumstances
of the case, that person is fairly and reasonably entitled to indemnity for the
expenses and then only to the extent that the court shall determine;
(b) of amounts paid in settling or otherwise disposing of a
pending action, without court approval; or
(c) of expenses incurred in defending a pending action which is
settled or otherwise disposed of without court approval.
Section 5.4. Indemnification Against Expenses. To the extent that
an agent of this Corporation has been successful on the merits in defense of any
proceeding referred to in Sections 5.2 or 5.3, or in defense of any claim, issue
or matter therein, the agent shall be indemnified against expenses actually and
reasonably incurred by the agent in connection therewith.
Section 5.5. Required Determinations. Except as provided for in
Section 5.4 of this Article, any indemnification under this Article shall be
made by this corporation only if authorized in the specific case on a
determination that indemnification of the agent is proper in the circumstances
because the agent has met the applicable standard of conduct set forth in
Sections 5.2 or 5.3 of this Article, by:
(a) a majority vote of a quorum consisting of directors who are
not parties to the proceeding;
11
<PAGE> 15
(b) if such quorum of directors is not obtainable, by independent
legal counsel in a written opinion;
(c) approval by the affirmative vote of a majority of the shares
of this corporation entitled to vote and represented at a duly held meeting at
which a quorum is present or by the written consent of holders of a majority of
the outstanding shares entitled to vote. For this purpose, the shares owned by
the person to be indemnified shall not be considered outstanding or entitled to
vote thereon; or
(d) the court in which the proceeding is or was pending, upon
application made by this corporation or the agent or the attorney or other
person rendering services in connection with the defense, whether or not such
application by the agent, attorney, or other person is opposed by this
corporation.
Section 5.6. Advance of Expenses. Expenses incurred in defending
any proceeding may be advanced by this Corporation prior to the final
disposition of such proceeding upon receipt of an undertaking by or on behalf of
the agent to repay such amount unless it shall be determined ultimately that the
agent is entitled to be indemnified as authorized in this section.
Section 5.7. Other Indemnification. No provision made by the
Corporation to indemnify its directors or officers or those of any of its
subsidiaries for the defense of any proceeding, whether contained in the
Articles of Incorporation, Bylaws, a resolution of shareholders or directors, an
agreement or otherwise, shall be valid unless consistent with this Article.
Nothing contained in this Section shall affect any right to indemnification to
which persons other than directors and officers of this Corporation or any
subsidiary hereof may be entitled by contract or otherwise.
Section 5.8. Forms of Indemnification Not Permitted. No
indemnification or advance shall be made under this Article, except as provided
in Sections 5.4 or 5.5(c), in any circumstance where it appears:
(a) That it would be inconsistent with a provision of the
Articles of Incorporation, a resolution of the shareholders or an agreement in
effect at the time of the accrual of the alleged cause of action asserted in the
proceeding in which the expenses were incurred or other amounts were paid, which
prohibits or otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
Section 5.9. Insurance. Upon and in the event of a determination
by the board of directors of this corporation to purchase insurance, this
corporation shall purchase and maintain insurance on behalf of any agent of the
corporation against any liability asserted against or incurred by the agent in
such capacity or arising out of the agent's status as such whether or not this
corporation would have the power to indemnify the agent against that liability
under the provisions of this section. If so determined by the board of
directors, this corporation may purchase insurance pursuant to this Section 9
from an insurer of which this company owns all or
12
<PAGE> 16
a portion of the shares, provided that, such insurer shall comply with
applicable law, including Section 317(i) of the California Corporations Code.
Section 5.10. Nonapplicability to Fiduciaries of Employee Benefit
Plans. This Article does not apply to any proceeding against any trustee,
investment manager or other fiduciary of an employee benefit plan in such
person's capacity as such, even though such person may also be an agent as
defined in Section 5.1 of these Bylaws. A Corporation shall have power to
indemnify such a trustee, investment manager or other fiduciary to the extent
permitted by subdivision (f) of Section 207 of the California Corporations Code.
Section 5.11. Limitations to Authority to Provide
Indemnification. This corporation may provide for indemnification of its agents
by agreement, or otherwise, in excess of that expressly permitted by Section 317
of the California Corporations Code for breach of duty to the corporation and
its stockholders provided, however, that the provisions may not indemnify an
agent:
(a) for acts or omissions that involve intentional misconduct or
a knowing and culpable violation of law;
(b) for acts or omissions that the agent believes to be contrary
to the best interests of the corporation or its shareholders or that involve the
absence of good faith on the part of the agent;
(c) for any transaction from which the agent derived an improper
personal benefit;
(d) for acts or omissions that show a reckless disregard for the
agent's duty to the corporation or its shareholders in circumstances in which
the agent was aware, or should have been aware, in the ordinary course of
performing such person's duties, of a risk of serious injury to the corporation
or its shareholders;
(e) for acts or omissions that constitute an unexcused pattern of
inattention tantamount to an abdication of the agent's duty to the corporation
or its shareholders;
(f) for violation of Section 310 of the California Corporations
Code;
(g) for violation of Section 316 of the California Corporations
Code.
(h) for circumstances in which indemnity is expressly prohibited
by Section 317 of the California Corporations Code.
ARTICLE VI.
SHARE CERTIFICATES
Section 6.1. Execution of Certificates. Every holder of shares in
the Corporation shall be entitled to have a certificate signed in the name of
the Corporation by the chairman or vice chairman of the board or the president
or a vice president and by the chief financial officer or an assistant treasurer
or the secretary or any assistant secretary, certifying the
13
<PAGE> 17
number of shares and the class or series of shares owned by the shareholder. Any
or all of the signatures on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the Corporation with the same effect as if such person were an officer,
transfer agent or registrar at the date of issue.
Section 6.2. Certificates. Each certificate for shares of stock
of the Corporation shall set forth thereon the name of the record holder of the
shares represented thereby, the kind or class and the number of shares of stock,
and the series of shares of stock owned by said holder. If the shares of the
Corporation are classified, or if any class of shares has two (2) or more
series, there shall appear on the Certificate one of the following:
(a) A statement of the rights, preferences, privileges, and
restrictions granted to or imposed upon each class or series of shares
authorized to be issued and upon the holders thereof; or
(b) A summary of such rights, preferences, privileges, and
restrictions with reference to the provisions of the Articles of Incorporation
and any certificate of determination of preferences establishing the same; or
(c) A statement setting forth the office or agency of the
Corporation from which shareholders may obtain, upon request and without charge,
a copy of the statement referred to in subdivision (a).
Any certificate shall also contain such legend or other statement
as may be required by Section 418 of the General Corporation Law, the Corporate
Securities Law of 1968, the federal securities laws, and any agreement between
the Corporation and the issuee thereof.
Section 6.3. Partial Payment. Certificates for shares may be
issued prior to full payment under such restrictions and for such purposes as
the board or the Bylaws may provide; provided, however, that any such
certificate so issued prior to full payment shall state on the face thereof the
amount remaining unpaid and the terms of payment thereof.
Section 6.4. Transfer of Certificates. Where a certificate for
shares is presented to the Corporation or its transfer clerk or transfer agent
with a request to register a transfer of shares, the Corporation shall register
the transfer, cancel the certificate presented, and issue a new certificate if:
(a) the security is endorsed by the appropriate person or persons; (b)
reasonable assurance is given that those endorsements are genuine and effective;
(c) the Corporation has no notice of adverse claims or has discharged any duty
to inquire into such adverse claims; (d) any applicable law relating to the
collection of taxes has been complied with; and (e) the transfer is not in
violation of any federal or state securities law.
Section 6.5. Lost, Stolen or Destroyed Certificate. Where a
certificate has been lost, destroyed or wrongfully taken, the Corporation shall
issue a new certificate in place of the original if the owner: (a) so requests
before the Corporation has notice that the certificate has been acquired by a
bona fide purchaser; (b) files with the Corporation a bond (or other adequate
14
<PAGE> 18
security) sufficient to indemnify the Corporation against any claim that may be
made against it (including any expense or liability) on account of the alleged
loss, theft or destruction of any such certificate or the issuance of such new
certificate; and (c) satisfies any other reasonable requirements as may be
imposed by the corporation. Except as above provided, no new certificate for
shares shall be issued in lieu of an old certificate unless the Corporation is
ordered to do so by a court in the judgment in an action brought under Section
419 of the General Corporation Law.
ARTICLE VII.
MISCELLANEOUS
Section 7.1. Checks, Drafts, Etc. All checks, drafts, or other
orders for payment of money, notes or other evidences of indebtedness, issued in
the name of or payable to the Corporation, shall be signed or endorsed by such
person or persons and in such manner as, from time to time, shall be determined
by resolution of the board.
Section 7.2. Authority to Execute Contracts. The board may
authorize any officer, agent or employee to enter into any contract or execute
any instrument in the name of and on behalf of the Corporation, and such
authority may be general or confined to specific instances; and, unless so
authorized by the board, no officer, agent or employee shall have any power or
authority to bind the Corporation by any contract or engagements or to pledge
its credit or to render it liable for any purpose or to any amount.
Section 7.3. Representation of Shares of Other Corporations. The
chairman of the board, the president, vice president, secretary or chief
financial officer of this Corporation are authorized to vote, represent and
exercise on behalf of this Corporation all rights incident to any and all shares
of any other Corporation or Corporations standing in the name of this
Corporation. The authority herein granted to said chairman of the board or
officers to vote or represent on behalf of this Corporation any and all shares
held by this corporation in any other Corporation or Corporations may be
exercised either by such officers in person or by any other person authorized so
to do by proxy or power of attorney duly executed by said chairman of the board
or officer.
Section 7.4. Inspection of Bylaws. The Corporation shall keep in
its principal executive office in California, or if its principal executive
office is not in California, then at its principal business office in
California, the original or a copy of the Bylaws, as amended, or otherwise
altered to date, certified by the secretary, which shall be open to inspection
by the shareholders at all reasonable times during office hours.
Section 7.5. Annual Report to Shareholders. The annual report to
shareholders referred to in Section 1501 of the General Corporation Law is
expressly waived, but nothing herein shall be interpreted as prohibiting the
board from issuing annual or other periodic reports to shareholders.
Section 7.6. Construction and Definitions. Unless the context
otherwise requires, the general provisions, rules of construction and
definitions contained in the General Corporation Law shall govern the
construction of these Bylaws. Without limiting the generality
15
<PAGE> 19
of the foregoing, the masculine gender includes the feminine and neuter, the
singular number includes the plural and the plural number includes the singular,
and the tern "person" includes a Corporation as well as a natural person.
Section 7.7. Shareholder's Right to Inspect Corporate Records.
The accounting books and records, minutes of proceedings of the shareholders and
the board and committees of the board shall be open to inspection upon the
written demand on the Corporation of any shareholder or holder of a voting trust
certificate, at any reasonable time during usual business hours, for a purpose
reasonably related to the shareholder's interest as a shareholder or as the
holder of such voting trust certificate. The right of inspection created by this
Section shall extend to the records of each subsidiary of this Corporation. Such
inspection by a shareholder or a holder of a voting trust certificate may be
made in person or by an agent or attorney, and the right of inspection includes
the right to copy and to make extracts.
A shareholder or shareholders holding at least five percent (5%)
in the aggregate of the outstanding voting shares of the Corporation or who hold
at least one percent (1%) of such voting shares and have filed a Schedule 14B
with the United States Securities and Exchange Commission relating to the
election of directors of the Corporation shall have (in person, or by agent or
attorney) the right to inspect and copy the record of shareholder's names and
addresses and shareholdings during usual business hours upon five (5) business
days' prior written demand upon the Corporation and to obtain from the transfer
agent for the Corporation, upon written demand and upon the tender of its usual
charges, a list of the shareholders' names and addresses who are entitled to
vote for the election of directors and their shareholdings, as of the most
recent record date for which it has been compiled or as of a date specified by
the shareholder subsequent to the date of demand. This list shall be made
available on or before the later of five (5) business days after the demand is
received or the date specified therein as the date as of which the list is to be
compiled.
ARTICLE VIII.
AMENDMENTS
Section 8.1. Power of Shareholders. New Bylaws may be adopted or
these Bylaws may be amended or repealed by the affirmative vote of a majority of
the outstanding shares entitled to vote or by the written consent of
shareholders entitled to vote such shares, except as otherwise provided by law
or by the Articles of Incorporation.
Section 8.2. Power of Directors. Subject to the right of
shareholders, as provided in Section 8.1 to adopt, amend or repeal Bylaws, any
Bylaw may be adopted, amended or repealed by the board other than a Bylaw or
amendment thereof changing the authorized number of directors.
16
<PAGE> 1
Exhibit 10.16
DATED: JULY 10, 1998
- --------------------------------------------------------------------------------
BETWEEN:
MODERN RECORDS, INC.
AND:
RANDY JACKSON
- --------------------------------------------------------------------------------
INCENTIVE
STOCK OPTION
AGREEMENT
- --------------------------------------------------------------------------------
SCOTT, BISSETT
Barristers & Solicitors
1040-999 West Hastings Street
Vancouver, B.C. V6C 2W2
Tel: (604) 683-1102
<PAGE> 2
INCENTIVE STOCK OPTION AGREEMENT
THIS AGREEMENT is made as of the 10th day of July, 1998.
BETWEEN:
MODERN RECORDS, INC., a company duly incorporated under the laws
of the State of California, having an office at 468 N. Camden
Drive, 3rd Floor, Beverly Hills, California, USA, 90210
(hereinafter called the "COMPANY")
OF THE FIRST PART
AND:
RANDY JACKSON, of 4641 Havenhurst Avenue, Encino, California,
USA, 91304
(hereinafter called the "OPTIONEE")
OF THE SECOND PART.
WHEREAS the Optionee (hereinafter referred to as the "DIRECTOR OR
EMPLOYEE") is a director and/or senior officer and/or an employee or, or a
consultant, as defined in BOR #96/15. dated August 29, 1996, to the Company and
requires as a condition of holding such position that the parties enter into
this Incentive Stock Option Agreement on the terms and conditions hereinafter
set forth;
AND WHEREAS this incentive stock option is granted by the Company in
reliance on exemptions from registration and prospectus requirements contained
in Sections 45(2)(10) and 74(2)(9), respectively, of the Securities Act (British
Columbia);
AND WHEREAS the Company has been classified as a "Venture Board" company
by the Vancouver Stock Exchange;
NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the
premises and of the covenants and agreements herein contained the parties hereto
covenant and agree as follows:
1. From the date hereof, and for so long as the Optionee shall be a Director or
Employee, the Optionee shall have and be entitled to and the Company hereby
grants to the Optionee an option to purchase all or any portion of TWO HUNDRED
AND SIXTY-FIVE THOUSAND (265,000) fully paid and non-assessable shares of the
Company from the treasury on or before JULY 10, 2003 at the price of
SEVENTY-EIGHT CENTS ($0.78) per share.
1
<PAGE> 3
2. The right to take up shares pursuant to the option herein granted is
exercisable by notice in writing to the Company accompanied by a certified
cheque in favour of the Company for the full amount of the purchase price of the
shares being then purchased. When such payment is received, the Company
covenants and agrees to issue and deliver to the Optionee share certificates in
the name of the Optionee for the number of shares so purchased.
3. This is an option agreement only and does not impose upon the Optionee any
obligation to take up and pay for any of the shares under option.
4. The option herein granted shall be non-transferable and non-assignable by the
Optionee otherwise than by Will or the law of intestacy and the option may be
exercised during the lifetime of the Optionee only by the Optionee.
5. If the Optionee should die while he is a Director or Employee of the Company,
the option herein granted may then be exercised by his legal heirs or personal
representatives to the same extent as if the Optionee were alive and a Director
or Employee of the Company for a period of six (6) months after the death of the
Optionee but only for such shares as the Optionee was entitled to at the date of
the death of the Optionee.
6. Subject to paragraph 5 hereof, the option herein granted shall cease and
become null and void following the thirtieth day after which the Optionee ceases
to act as a Director or Employee of the Company.
7. Where the Optionee is not a director or senior officer, the Company and the
Optionee acknowledge that the Optionee is:
(a) a bona fide employee of the Company, its subsidiary or a
management company providing services (other than investor
relations) to the Company or an affiliate thereof; or
(b) a bona fide employee of a company under contract to provide
management services to the Company.
8. The provisions of this agreement and the exercise of the rights herein before
granted to the Optionee are subject to the approvals of the British Columbia
Securities Commission or, if listed thereon, the Vancouver Stock Exchange (the
"EXCHANGE") and the members of the Company; provided, however, that in the event
that such approvals are not obtained within 12 months of the date of this
agreement, then this agreement shall from that date be null and void and of no
further force and effect.
9. The Optionee hereby acknowledges that, in the event the Optionee is an
insider of the Company, the option herein granted may not be exercised in full
or in part until this agreement has been approved by the members at a general
meeting of the Company.
10. In the event of any subdivision, consolidation or other change in the share
capital of the Company while any portion of the options hereby granted are
outstanding, the number of shares under option to the Optionee and the price
thereof shall be deemed adjusted in accordance with such subdivision,
consolidation or other change in the share capital of the Company.
2
<PAGE> 4
11. The Company hereby covenants and agrees to and with the Optionee that it
will reserve in its treasury sufficient shares to permit the issuance and
allotment of shares to the Optionee upon full exercise of the option herein
granted.
12. If at any time during the continuance of this agreement, the parties hereto
deem it necessary or expedient to make any alteration or addition to this
agreement, they may do so by means of a written agreement between them which
will be supplemental hereto and form part hereof and which will be subject to
the approval of the Exchange and the members at a general meeting of the Company
and/or any requirements of the securities regulatory bodies in effect at that
time.
13. This agreement may be executed in several parts in the same form and such
parts as so executed will together constitute one original agreement, and such
parts, if more than one, will be read together as if all the signing parties
hereto had executed one copy of this agreement.
14. This agreement shall enure to the benefit of and be binding upon the parties
hereto and their respective heirs, executors, administrators, and successors.
15. Wherever the plural or masculine are used throughout this agreement, the
same shall be construed as meaning singular or feminine or neuter or the body
politic where the context of the parties thereto require.
16. The Optionee hereby acknowledges and confirms that he has obtained
independent legal advice with respect to this agreement and understands and is
aware that the securities of the Company have not be registered under the
Securities Act of 1933, as amended, and that the granting of this option is
conditional upon it being exempt from the application of the Securities Act of
1933 and any applicable state laws. The Optionee covenants with and to the
Company that he will exercise the option herein granted, and dispose of the
shares thereby acquired, only in accordance with the applicable laws.
3
<PAGE> 5
IN WITNESS WHEREOF the parties have hereunto caused these presents to be
executed as of the day and year first above written.
The COMMON SEAL of )
MODERN RECORDS, INC. )
in the presence of: )
)
- ------------------------------------- ) c/s
Signature )
)
- -------------------------------------- )
Name - please print )
)
SIGNED, SEALED AND DELIVERED )
by RANDY JACKSON )
in the presence of: )
)
- -------------------------------------- )
Witness ) /s/ Randy Jackson
------------------------
Randy Jackson
This is page 4 to that certain Incentive Stock Option Agreement between MODERN
RECORDS, INC. and RANDY JACKSON dated as of the 10th day of JULY, 1998.
4
<PAGE> 1
Exhibit 10.17
DATED: JULY 10, 1998
- --------------------------------------------------------------------------------
BETWEEN:
MODERN RECORDS, INC.
AND:
JACKIE JACKSON
- --------------------------------------------------------------------------------
INCENTIVE
STOCK OPTION
AGREEMENT
- --------------------------------------------------------------------------------
SCOTT, BISSETT
Barristers & Solicitors
1040-999 West Hastings Street
Vancouver, B.C. V6C 2W2
Tel: (604) 683-1102
<PAGE> 2
INCENTIVE STOCK OPTION AGREEMENT
THIS AGREEMENT is made as of the 10th day of July, 1998.
BETWEEN:
MODERN RECORDS, INC., a company duly incorporated under the laws
of the State of California, having an office at 468 N. Camden
Drive, 3rd Floor, Beverly Hills, California, USA, 90210
(hereinafter called the "COMPANY")
OF THE FIRST PART
AND:
JACKIE JACKSON, of 468 N. Camden Drive, 3rd Floor, Beverly
Hills, California, USA, 90210
(hereinafter called the "OPTIONEE")
OF THE SECOND PART.
WHEREAS the Optionee (hereinafter referred to as the "DIRECTOR OR
EMPLOYEE") is a director and/or senior officer and/or an employee of, or a
consultant, as defined in BOR #96/15. dated August 29, 1996, to the Company and
requires as a condition of holding such position that the parties enter into
this Incentive Stock Option Agreement on the terms and conditions hereinafter
set forth;
AND WHEREAS this incentive stock option is granted by the Company in
reliance on exemptions from registration and prospectus requirements contained
in Sections 45(2)(10) and 74(2)(9), respectively, of the Securities Act (British
Columbia);
AND WHEREAS the Company has been classified as a "Venture Board" company
by the Vancouver Stock Exchange;
NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the
premises and of the covenants and agreements herein contained the parties hereto
covenant and agree as follows:
1. From the date hereof, and for so long as the Optionee shall be a Director or
Employee, the Optionee shall have and be entitled to and the Company hereby
grants to the Optionee an option to purchase all or any portion of TWO HUNDRED
THOUSAND (200,000) fully paid and non-assessable shares of the Company from the
treasury on or before JULY 10, 2003 at the price of SEVENTY-EIGHT CENTS ($0.78)
per share.
1
<PAGE> 3
2. The right to take up shares pursuant to the option herein granted is
exercisable by notice in writing to the Company accompanied by a certified
cheque in favour of the Company for the full amount of the purchase price of the
shares being then purchased. When such payment is received, the Company
covenants and agrees to issue and deliver to the Optionee share certificates in
the name of the Optionee for the number of shares so purchased.
3. This is an option agreement only and does not impose upon the Optionee any
obligation to take up and pay for any of the shares under option.
4. The option herein granted shall be non-transferable and non-assignable by the
Optionee otherwise than by Will or the law of intestacy and the option may be
exercised during the lifetime of the Optionee only by the Optionee.
5. If the Optionee should die while he is a Director or Employee of the Company,
the option herein granted may then be exercised by his legal heirs or personal
representatives to the same extent as if the Optionee were alive and a Director
or Employee of the Company for a period of six (6) months after the death of the
Optionee but only for such shares as the Optionee was entitled to at the date of
the death of the Optionee.
6. Subject to paragraph 5 hereof, the option herein granted shall cease and
become null and void following the thirtieth day after which the Optionee ceases
to act as a Director or Employee of the Company.
7. Where the Optionee is not a director or senior officer, the Company and the
Optionee acknowledge that the Optionee is:
(a) a bona fide employee of the Company, its subsidiary or a
management company providing services (other than investor
relations) to the Company or an affiliate thereof; or
(b) a bona fide employee of a company under contract to provide
management services to the Company.
8. The provisions of this agreement and the exercise of the rights hereinbefore
granted to the Optionee are subject to the approvals of the British Columbia
Securities Commission or, if listed thereon, the Vancouver Stock Exchange (the
"EXCHANGE") and the members of the Company; provided, however, that in the event
that such approvals are not obtained within 12 months of the date of this
agreement, then this agreement shall from that date be null and void and of no
further force and effect.
9. The Optionee hereby acknowledges that, in the event the Optionee is an
insider of the Company, the option herein granted may not be exercised in full
or in part until this agreement has been approved by the members at a general
meeting of the Company.
10. In the event of any subdivision, consolidation or other change in the share
capital of the Company while any portion of the options hereby granted are
outstanding, the number of shares under option to the Optionee and the price
thereof shall be deemed adjusted in accordance with such subdivision,
consolidation or other change in the share capital of the Company.
2
<PAGE> 4
11. The Company hereby covenants and agrees to and with the Optionee that it
will reserve in its treasury sufficient shares to permit the issuance and
allotment of shares to the Optionee upon full exercise of the option herein
granted.
12. If at anytime during the continuance of this agreement, the parties hereto
deem it necessary or expedient to make any alteration or addition to this
agreement, they may do so by means of a written agreement between them which
will be supplemental hereto and form part hereof and which will be subject to
the approval of the Exchange and the members at a general meeting of the Company
and/or any requirements of the securities regulatory bodies in effect at that
time.
13. This agreement may be executed in several parts in the same form and such
parts as so executed will together constitute one original agreement, and such
parts, if more than one, will be read together as if all the signing parties
hereto had executed one copy of this agreement.
14. This agreement shall enure to the benefit of and be binding upon the parties
hereto and their respective heirs, executors, administrators, and successors.
15. Wherever the plural or masculine are used throughout this agreement, the
same shall be construed as meaning singular or feminine or neuter or the body
politic where the context of the parties thereto require.
16. The Optionee hereby acknowledges and confirms that he has obtained
independent legal advice with respect to this agreement and understands and is
aware that the securities of the Company have not be registered under the
Securities Act of 1933, as amended, and that the granting of this option is
conditional upon it being exempt from the application of the Securities Act of
1933 and any applicable state laws. The Optionee covenants with and to the
Company that he will exercise the option herein granted, and dispose of the
shares thereby acquired, only in accordance with the applicable laws.
3
<PAGE> 5
IN WITNESS WHEREOF the parties have hereunto caused these presents to be
executed as of the day and year first above written.
The COMMON SEAL of )
MODERN RECORDS, INC. )
in the presence of: )
)
- ------------------------------------- )
Signature )
) c/s
- -------------------------------------- )
Name - please print )
)
SIGNED, SEALED AND DELIVERED )
by JACKIE JACKSON )
in the presence of: )
)
- -------------------------------------- ) /s/ Jackie Jackson
Witness ) ------------------------
Jackie Jackson
This is page 4 to that certain Incentive Stock Option Agreement between MODERN
RECORDS, INC. and JACKIE JACKSON dated as of the 10th day of JULY, 1998.
4
<PAGE> 1
Exhibit 10.18
DATED: JULY 10, 1998
- --------------------------------------------------------------------------------
BETWEEN:
MODERN RECORDS, INC.
AND:
LAWRENCE GALLO
- --------------------------------------------------------------------------------
INCENTIVE
STOCK OPTION
AGREEMENT
- --------------------------------------------------------------------------------
SCOTT, BISSETT
Barristers & Solicitors
1040-999 West Hastings Street
Vancouver, B.C. V6C 2W2
Tel: (604) 683-1102
<PAGE> 2
INCENTIVE STOCK OPTION AGREEMENT
THIS AGREEMENT is made as of the 10th day of July, 1998.
BETWEEN:
MODERN RECORDS, INC., a company duly incorporated under the laws of
the State of California, having an office at 468 N. Camden Drive, 3rd
Floor, Beverly Hills, California, USA, 90210
(hereinafter called the "COMPANY")
OF THE FIRST PART
AND:
LAWRENCE GALLO, of 9483 Ridge Boulevard, Apt 1A, Brooklyn, New York,
New York, USA, 11209
(hereinafter called the "OPTIONEE")
OF THE SECOND PART.
WHEREAS the Optionee (hereinafter referred to as the "DIRECTOR OR
EMPLOYEE") is a director and/or senior officer and/or an employee of, or a
consultant, as defined in BOR #96/15, dated August 29, 1996, to the Company and
requires as a condition of holding such position that the parties enter into
this Incentive Stock Option Agreement on the terms and conditions hereinafter
set forth;
AND WHEREAS this incentive stock option is granted by the Company in
reliance on exemptions from registration and prospectus requirements contained
in Sections 45(2)(10) and 74(2)(9), respectively, of the Securities Act (British
Columbia);
AND WHEREAS the Company has been classified as a "Venture Board" company
by the Vancouver Stock Exchange;
NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the
premises and of the covenants and agreements herein contained the parties hereto
covenant and agree as follows:
1. From the date hereof, and for so long as the Optionee shall be a Director or
Employee, the Optionee shall have and be entitled to and the Company hereby
grants to the Optionee an option to purchase all or any portion of FOUR HUNDRED
THOUSAND (400,000) fully paid and non-assessable shares of the Company from the
treasury on or before JULY 10, 2003 at the price of SEVENTY-EIGHT CENTS ($0.78)
per share.
1
<PAGE> 3
2. The right to take up shares pursuant to the option herein granted is
exercisable by notice in writing to the Company accompanied by a certified
cheque in favour of the Company for the full amount of the purchase price of the
shares being then purchased. When such payment is received, the Company
covenants and agrees to issue and deliver to the Optionee share certificates in
the name of the Optionee for the number of shares so purchased.
3. This is an option agreement only and does not impose upon the Option any
obligation to take up and pay for any of the shares under option.
4. The option herein granted shall be non-transferable and non-assignable by the
Optionee otherwise than by Will or the law of intestacy and the option may be
exercised during the lifetime of the Optionee only by the Optionee.
5. If the Optionee should die while he is a Director or Employee of the Company,
the option herein granted may then be exercised by his legal heirs or personal
representatives to the same extent as if the Optionee were alive and a Director
or Employee of the Company for a period of six (6) months after the death of the
Optionee but only for such shares as the Optionee was entitled to at the date of
the death of the Optionee.
6. Subject to paragraph 5 hereof, the option herein granted shall cease and
become null and void following the thirtieth day after which the Optionee ceases
to act as a Director or Employee of the Company.
7. Where the Optionee is not a director or senior officer, the Company and the
Optionee acknowledge that the Optionee is:
(a) a bona fide employee of the Company, its subsidiary or a
management company providing services (other than investor
relations) to the Company or an affiliate thereof; or
(b) a bona fide employee of a company under contract to provide
management services to the Company.
8. The provisions of this agreement and the exercise of the rights hereinbefore
granted to the Optionee are subject to the approvals of the British Columbia
Securities Commission or, if listed thereon, the Vancouver Stock Exchange (the
"EXCHANGE") and the members of the Company; provided, however, that in the event
that such approvals are not obtained within 12 months of the date of this
agreement, then this agreement shall from that date be null and void and of no
further force and effect.
9. The Optionee hereby acknowledges that, in the event the Optionee is an
insider of the Company, the option herein granted may not be exercised in full
or in part until this agreement has been approved by the members at a general
meeting of the Company.
10. In the event of any subdivision, consolidation or other change in the share
capital of the Company while any portion of the options hereby granted are
outstanding, the number of shares under option to the Optionee and the price
thereof shall be deemed adjusted in accordance with such subdivision,
consolidation or other change in the share capital of the Company.
2
<PAGE> 4
11. The Company hereby covenants and agrees to and with the Optionee that it
will reserve in its treasury sufficient shares to permit the issuance and
allotment of shares to the Optionee upon full exercise of the option herein
granted.
12. If at anytime during the continuance of this agreement, the parties hereto
deem it necessary or expedient to make any alteration or addition to this
agreement, they may do so by means of a written agreement between them which
will be supplemental hereto and form part hereof and which will be subject to
the approval of the Exchange and the members at a general meeting of the Company
and/or any requirements of the securities regulatory bodies in effect at that
time.
13. This agreement may be executed in several parts in the same form and such
parts as so executed will together constitute one original agreement, and such
parts, if more than one, will be read together as if all the signing parties
hereto had executed one copy of this agreement.
14. This agreement shall enure to the benefit of and be binding upon the parties
hereto and their respective heirs, executors, administrators, and successors.
15. Wherever the plural or masculine are used throughout this agreement, the
same shall be construed as meaning singular or feminine or neuter or the body
politic where the context of the parties thereto require.
16. The Optionee hereby acknowledges and confirms that he has obtained
independent legal advice with respect to this agreement and understands and is
aware that the securities of the Company have not be registered under the
Securities Act of 1933, as amended, and that the granting of this option is
conditional upon it being exempt from the application of the Securities Act of
1933 and any applicable state laws. The Optionee covenants with and to the
Company that he will exercise the option herein granted, and dispose of the
shares thereby acquired, only in accordance with the applicable laws.
3
<PAGE> 5
IN WITNESS WHEREOF the parties have hereunto caused these presents to be
executed as of the day and year first above written.
The COMMON SEAL of )
MODERN RECORDS, INC. )
in the presence of: )
)
- ------------------------------------- )
Signature )
) c/s
- -------------------------------------- )
Name - please print )
SIGNED, SEALED AND DELIVERED )
by LAWRENCE GALLO )
in the presence of: )
) /s/ Lawrence Gallo
______________________________________ ) ----------------------------
Witness ) Lawrence Gallo
This is page 4 to that certain Incentive Stock Option Agreement between MODERN
RECORDS, INC. and LAWRENCE GALLO dated as of the 10th day of JULY, 1998.
4
<PAGE> 1
Exhibit 10.19
DATED: DECEMBER 17, 1998
- --------------------------------------------------------------------------------
BETWEEN:
MODERN RECORDS, INC.
AND:
JOHAN GRANDIN
- --------------------------------------------------------------------------------
INCENTIVE
STOCK OPTION
AGREEMENT
- --------------------------------------------------------------------------------
SCOTT, BISSETT
Barristers & Solicitors
1040-999 West Hastings Street
Vancouver, B.C. V6C 2W2
Tel: (604) 683-1102
<PAGE> 2
INCENTIVE STOCK OPTION AGREEMENT
THIS AGREEMENT is made as of the 17th day of December, 1998.
BETWEEN:
MODERN RECORDS, INC., a company duly incorporated under the laws
of the State of California, having an office at 468 N. Camden
Drive, 3rd Floor, Beverly Hills, California, USA, 90210
(hereinafter called the "COMPANY")
OF THE FIRST PART
AND:
JOHAN GRANDIN, of 4887 Angus Drive, Vancouver, British Columbia,
Canada, V6J 4J6
(hereinafter called the "OPTIONEE")
OF THE SECOND PART.
WHEREAS the Optionee is a director of the Company and requires as a
condition of holding such a position that the parties enter into this Incentive
Stock Option Agreement on the terms and conditions hereinafter set forth;
AND WHEREAS this incentive stock option is granted by the Company in
reliance on exemptions from registration and prospectus requirements contained
in Sections 31(2)(10) and 55(2)(9), respectively, of the Securities Act (British
Columbia);
AND WHEREAS the Company has been classified as a "Venture Board" company
by the Vancouver Stock Exchange;
NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the
premises and of the covenants and agreements herein contained the parties hereto
covenant and agree as follows:
1. From the date hereof, and for so long as the Optionee shall be a Director,
the Optionee shall have and be entitled to and the Company hereby grants to the
Optionee and option to purchase all or any portion of ONE HUNDRED AND
TWENTY-FIVE THOUSAND (125,000) fully paid and non-assessable shares of the
Company from the treasury on or before DECEMBER 17, 2003 at the price of TWO
DOLLARS AND THIRTY CENTS ($2.30) per share.
1
<PAGE> 3
2. The right to take up shares pursuant to the option herein granted is
exercisable by notice in writing to the Company accompanied by a certified
cheque in favour of the Company for the full amount of the purchase price of the
shares being then purchased. When such payment is received, the Company
covenants and agrees to issue and deliver to the Optionee share certificates in
the name of the Optionee for the number of shares so purchased.
3. This is an option agreement only and does not impose upon the Optionee any
obligation to take up and pay for any of the shares under option.
4. The option herein granted shall be non-transferable and non-assignable by the
Optionee otherwise than by Will or the law of intestacy and the option may be
exercised during the lifetime of the Optionee only by the Optionee.
5. If the Optionee should die while he is a Director of the Company, the option
herein granted may then be exercised by his legal heirs or personal
representatives to the same extent as if the Optionee were alive and a Director
of the Company for a period of six (6) months after the death of the Optionee
but only for such shares as the Optionee was entitled to at the date of the
death of the Optionee.
6. Subject to paragraph 5 hereof, the option herein granted shall cease and
become null and void following the thirtieth day after which the Optionee ceases
to act as a Director of the Company.
7. The provisions of the agreement and the exercise of the rights hereinbefore
granted to the Optionee are subject to the approvals of the British Columbia
Securities Commission or, if listed thereon, the Vancouver Stock Exchange (the
"EXCHANGE") and the members of the Company; provided, however, that in the event
that such approvals are not obtained within 12 months of the date of this
agreement, then this agreement shall from that date be null and void and of no
further force and effect.
8. The Optionee hereby acknowledges that, in the event the Optionee is an
insider of the Company, the option herein granted may not be exercised in full
or in part until this agreement has been approved by the members at a general
meeting of the Company.
9. In the event of any subdivision, consolidation or other change in the share
capital of the Company while any portion of the options hereby granted are
outstanding, the number of shares under option to the Optionee and the price
thereof shall be deemed adjusted in accordance with such subdivision,
consolidation or other change in the share capital of the Company.
10. The Company hereby covenants and agrees to and with the Optionee that it
will reserve in its treasury sufficient shares to permit the issuance and
allotment of shares to the Optionee upon full exercise of the option herein
granted.
11. If at any time during the continuance of this agreement, the parties hereto
deem it necessary or expedient to make any alteration or addition to this
agreement, they may do so by means of a written agreement between them which
will be supplemental hereto and form part hereof and which will be subject to
the approval of the Exchange and the members at a general
2
<PAGE> 4
meeting of the Company and/or any requirements of the securities regulatory
bodies in effect at that time.
12. This agreement may be executed in several parts in the same form and such
parts as so executed will together constitute one original agreement, and such
parts, if more than one, will be read together as if all the signing parties
hereto had executed one copy of this agreement.
13. This agreement shall enure to the benefit of and be binding upon the parties
hereto and their respective heirs, executors, administrators, and successors.
14. Wherever the plural or masculine are used throughout this agreement, the
same shall be construed as meaning singular or feminine or neuter or the body
politic where the context of the parties thereto require.
15. The Optionee hereby acknowledges and confirms that he has obtained
independent legal advice with respect to this agreement and understands and is
aware that the securities of the Company have not be registered under the
Securities Act of 1933, as amended, and that the granting of this option is
conditional upon it being exempt from the application of the Securities Act of
1933 and any applicable state laws. The Optionee covenants with and to the
Company that he will exercise the option herein granted, and dispose of the
shares thereby acquired, only in accordance with the applicable laws.
IN WITNESS WHEREOF the parties have hereunto caused these presents to be
executed as of the day and year first above written.
The COMMON SEAL of )
MODERN RECORDS, INC. )
in the presence of: )
)
______________________________________ )
Signature )
) c/s
______________________________________ )
Name - please print )
SIGNED, SEALED AND DELIVERED )
by JOHAN GRANDIN in the )
presence of: )
______________________________________ ) /s/ Johan Grandin
Witness ) -------------------------------
Johan Grandin
This is page 3 to that certain Incentive Stock Option Agreement between MODERN
RECORDS, INC. and JOHAN GRANDIN dated as of the 17th day of December, 1998.
3
<PAGE> 1
Exhibit 10.20
DATED: DECEMBER 17, 1998
- --------------------------------------------------------------------------------
BETWEEN:
MODERN RECORDS, INC.
AND:
KENDRIK PACKER
- --------------------------------------------------------------------------------
INCENTIVE
STOCK OPTION
AGREEMENT
- --------------------------------------------------------------------------------
SCOTT, BISSETT
Barristers & Solicitors
1040-999 West Hastings Street
Vancouver, B.C. V6C 2W2
Tel: (604) 683-1102
<PAGE> 2
INCENTIVE STOCK OPTION AGREEMENT
THIS AGREEMENT is made as of the 17th day of December, 1998.
BETWEEN:
MODERN RECORDS, INC., a company duly incorporated under the laws
of the State of California, having an office at 468 N. Camden
Drive, 3rd Floor, Beverly Hills, California, USA, 90210
(hereinafter called the "COMPANY")
OF THE FIRST PART
AND:
KENDRIK PACKER, of 805 52nd Place, West Des Moines, Iowa, USA
50265
(hereinafter called the "OPTIONEE")
OF THE SECOND PART.
WHEREAS the Optionee is a director of the Company and requires as a
condition of holding such a position that the parties enter into this Incentive
Stock Option Agreement on the terms and conditions hereinafter set forth;
AND WHEREAS this incentive stock option is granted by the Company in
reliance on exemptions from registration and prospectus requirements contained
in Sections 31(2)(10) and 55(2)(9), respectively, of the Securities Act (British
Columbia);
AND WHEREAS the Company has been classified as a "Venture Board" company
by the Vancouver Stock Exchange;
NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the
premises and of the covenants and agreements herein contained the parties hereto
covenant and agree as follows:
1. From the date hereof, and for so long as the Optionee shall be a Director,
the Optionee shall have and be entitled to and the Company hereby grants to the
Optionee an option to purchase all or any portion of ONE HUNDRED AND TWENTY-FIVE
THOUSAND (125,000) fully paid and non-assessable shares of the Company from the
treasury on or before DECEMBER 17, 2003 at the price of TWO DOLLARS AND THIRTY
CENTS ($2.30) per share.
1
<PAGE> 3
2. The right to take up shares pursuant to the option herein granted is
exercisable by notice in writing to the Company accompanied by a certified
cheque in favour of the Company for the full amount of the purchase price of the
shares being then purchased. When such payment is received, the Company
covenants and agrees to issue and deliver to the Optionee share certificates in
the name of the Optionee for the number of shares so purchased.
3. This is an option agreement only and does not impose upon the Option any
obligation to take up and pay for any of the shares under option.
4. The option herein granted shall be non-transferable and non-assignable by the
Optionee otherwise than by Will or the law of intestacy and the option may be
exercised during the lifetime of the Optionee only by the Optionee.
5. If the Optionee should die while he is a Director of the Company, the option
herein granted may then be exercised by his legal heirs or personal
representatives to the same extent as if the Optionee were alive and a Director
of the Company for a period of six (6) months after the death of the Optionee
but only for such shares as the Optionee was entitled to at the date of the
death of the Optionee.
6. Subject to paragraph 5 hereof, the option herein granted shall cease and
become null and void following the thirtieth day after which the Optionee ceases
to act as a Director of the Company.
7. The provisions of the agreement and the exercise of the rights hereinbefore
granted to the Optionee are subject to the approvals of the British Columbia
Securities Commission or, if listed thereon, the Vancouver Stock Exchange (the
"EXCHANGE") and the members of the Company; provided, however, that in the event
that such approvals are not obtained within 12 months of the date of this
agreement, then this agreement shall from that date be null and void and of no
further force and effect.
8. The Optionee hereby acknowledges that, in the event the Optionee is an
insider of the Company, the option herein granted may not be exercised in full
or in part until this agreement has been approved by the members at a general
meeting of the Company.
9. In the event of any subdivision, consolidation or other change in the share
capital of the Company while any portion of the options hereby granted are
outstanding, the number of shares under option to the Optionee and the price
thereof shall be deemed adjusted in accordance with such subdivision,
consolidation or other change in the share capital of the Company.
10. The Company hereby covenants and agrees to and with the Optionee that it
will reserve in its treasury sufficient shares to permit the issuance and
allotment of shares to the Optionee upon full exercise of the option herein
granted.
11. If at any time during the continuance of this agreement, the parties hereto
deem it necessary or expedient to make any alteration or addition to this
agreement, they may do so by means of a written agreement between them which
will be supplemental hereto and form part hereof and which will be subject to
the approval of the Exchange and the members at a general
2
<PAGE> 4
meeting of the Company and/or any requirements of the securities regulatory
bodies in effect at that time.
12. This agreement may be executed in several parts in the same form and such
parts as so executed will together constitute one original agreement, and such
parts, if more than one, will be read together as if all the signing parties
hereto had executed one copy of this agreement.
13. This agreement shall enure to the benefit of and be binding upon the parties
hereto and their respective heirs, executors, administrators, and successors.
14. Wherever the plural or masculine are used throughout this agreement, the
same shall be construed as meaning singular or feminine or neuter or the body
politic where the context of the parties thereto require.
15. The Optionee hereby acknowledges and confirms that he has obtained
independent legal advice with respect to this agreement and understands and is
aware that the securities of the Company have not be registered under the
Securities Act of 1933, as amended, and that the granting of this option is
conditional upon it being exempt from the application of the Securities Act of
1933 and any applicable state laws. The Optionee covenants with and to the
Company that he will exercise the option herein granted, and dispose of the
shares thereby acquired, only in accordance with the applicable laws.
IN WITNESS WHEREOF the parties have hereunto caused these presents to be
executed as of the day and year first above written.
The COMMON SEAL of )
MODERN RECORDS, INC. )
in the presence of: )
)
_____________________________________ ) c/s
Signature )
Sworn and subscribed before me on this 19th day of January, 1999
SIGNED, SEALED AND DELIVERED )
by KENDRIK PACKER in the )
presence of: ) /s/ Kendrik Packer
______________________________________ ) ----------------------------------
Witness ) Kendrik Packer
This is page 3 to that certain Incentive Stock Option Agreement between MODERN
RECORDS, INC. and KENDRIK PACKER dated as of the 17th day of December, 1998.
3
<PAGE> 1
EXHIBIT 10.21
LOAN AGREEMENT
THIS AGREEMENT is made and dated for reference the 16th day of March,
1998
BETWEEN:
MODERN RECORDS, INC., a company duly incorporated under the laws
of the State of California and having an office at 468 North
Camden Drive, Beverly Hills, California, U.S.A., 90210
(the "COMPANY")
OF THE FIRST PART
AND:
RANDALL JACKSON, President of Modern Records, Inc., of 468 North
Camden Drive, Beverly Hills, California, U.S.A., 90210
("LENDER A")
OF THE SECOND PART
AND:
KENDRIK PACKER, businessman, of 805 - 52nd Place, West Des
Moines, Iowa, U.S.A., 50265
("LENDER B")
OF THE THIRD PART
WHEREAS:
A. The Company requires financing for accounts payable, general overhead
expenses and expenses associated with signing up new artists;
B. Lender A and Lender B (collectively the "LENDERS") have provided
funds in the total of $25,000 U.S. (Lender A as to $12,500 U.S. and Lender B as
to $12,500 U.S.) to the Company (the "LOAN") for financing for accounts payable,
general overhead expenses and expenses associated with signing up new artists;
C. The ability of the Company to repay the Loan is not evident;
<PAGE> 2
2
NOW THEREFORE THIS AGREEMENT WITNESSES that for and in consideration of
the sum of Ten Dollars paid by each of the parties hereto to the other (the
receipt and sufficiency whereof is hereby acknowledged), the parties hereto
covenant and agree as follows:
1. The Lenders hereby agree to advance to the Company the sum of $25,000
U.S. (Lender A as to $12,500 U.S. and Lender B as to $12,500 U.S.) for financing
for accounts payable, general overhead expenses and expenses associated with
signing up new artists.
2. The Loan, or as much thereof as is outstanding from time to time,
will bear interest from the date of advance at the rate of 10% per annum.
3. The principal amount of the Loan, together with interest accrued
thereon, will be payable two years from the date of advance i.e. March 16, 2000,
unless otherwise extended by mutual agreement in writing by the parties hereto.
4. The Company may repay at any time, without notice, bonus or penalty,
all or any part of the Loan, together with interest accrued thereon.
5. The Company represents and warrants that the Loan is to be used
solely for its corporate purposes.
6. In consideration of the granting of the Loan, the Company agrees to
issue share purchase warrants entitling the holders thereof to purchase up to a
total of 95,050 shares of the Company (as to 47,525 to Lender A and as to 47,525
to Lender B). Each warrant is exercisable for a period of two years at an
exercise price of $0.15 Cdn. during the first year and at a price of $0.17 Cdn.
during the second year.
7. This agreement may be executed in several parts in the same form and
such parts as so executed will together constitute one original agreement, and
such parts, if more than one, will be read together as if all the signing
parties hereto had executed one copy of this agreement.
8. This agreement shall enure to the benefit of and be binding upon the
parties hereto and their respective heirs, executors, administrators, and
successors.
<PAGE> 3
3
IN WITNESS WHEREOF the parties hereto have hereunto caused these
presents to be executed as of the day and year first above written.
THE COMMON SEAL of )
MODERN RECORDS, INC. )
was hereunto affixed in )
the presence of: )
_____________________________ ) c/s
Authorized signatory )
SIGNED, SEALED AND DELIVERED )
by RANDALL JACKSON )
in the presence of: ) /s/ Randall Jackson
_____________________________ ) --------------------------------
Witness ) Randall Jackson
SIGNED, SEALED AND DELIVERED )
by KENDRIK PACKER )
in the presence of: ) /s/ Kendrik Packer
_____________________________ ) --------------------------------
Witness ) Kendrik Packer
<PAGE> 1
EXHIBIT 10.22
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement") is dated as of May 15, 1997
("Effective Date") by and between Modern Records, Inc., a California corporation
(the "Company"), and Steven Randall Jackson (the "Employee").
1. Employment. The Company hereby agrees to employ the Employee
and the Employee hereby agrees to serve the Company on the terms and conditions
hereinafter set forth.
(a) Position. The Employees shall serve as President and
Chief Operating Officer, and, as such, the Employee hereby promises to
perform and discharge well and faithfully the duties that may be
assigned to him from time to time by the Board of Directors.
(b) Full Time Employment. The Employee shall devote his
full business time, retention and energies to the business of the
Company as may reasonable be required by the Board.
2. Compensation. As reimbursement to the Employee for his
services hereunder the Company shall compensate the Employee as follows:
(a) Base Salary. The Employee shall receive a base salary
as may be adjusted from time to time. The "Base Salary" is payable in
conformity with the Company's then current payroll practice as modified
from time to time as follows:
(i) Commencing on the Effective Date and ending on
December 31, 1997, the amount of $16,667.67 per month.
(ii) Commencing on July 1, 1998, and ending on
December 31, 1998, the amount of $16,667.67 per month.
(iii) Commencing on January 1, 1999, and
thereafter, such amount as the Board of Directors shall
determine.
(b) Bonus. The Employee may be eligible to receive a cash
bonus if, when and in the amount determined by the Board of Directors
from time to time.
(c) Expenses. Employee shall be entitled to receive prompt
reimbursement for all reasonable expenses, permitted under the Company's
expense reimbursement policy, that are incurred by him in connection
with his services hereunder. The Employee shall account to the Company
for such expenses in accordance with the Company's reasonable policies.
<PAGE> 2
(d) Employee Benefit Programs. Company shall use its best
efforts to obtain group health, life and dental benefits for its
employees, provided, however, that until such time as Employee is
covered under a group health plan maintained by the Company, the Company
shall reimburse Employee for premiums paid by him to maintain individual
health insurance which was in effect with respect to Employee on the
Effective Date hereof or to maintain continuation coverage under the
group health plan of a prior
(i) any Base Salary installments due for the
calendar month in which the Date of Termination occurs;
(ii) any Bonus declared by the Board prior to the
Date of Termination but unpaid; and
(iii) payments accrued under any benefit plans
through the Date of Termination.
(c) Termination by the Company. Notwithstanding the
provisions of Section 4 and as a mutually exclusive alternative to the
provisions of Section 5(a), 5(b), 5(d) and 5(e), the Company may
terminate the Employee's employment hereunder at any time, for any
reason, including but not limited to, as a result of Company's
determination to cease the active conduct of its business prior to the
Expiration Date of this Agreement by delivering to the Employee a Notice
of Termination, as provided in Section 5(f). For a period which
commences on its Date of Termination and ends six (6) months later, the
Employee's exclusive termination remuneration at the event of
Termination under this Section 5(e) shall be continuation of coverage
under the medical, dental and life insurance programs maintained by the
Company to the extent such continuation thereunder is permitted under
the terms of the insurance contracts governing such programs, or, in the
alternative reimbursement of Employee for premiums paid to maintain
medical coverage under the continuation coverage provisions of the
Consolidated Omnibus Budge Reconciliation Act of 1986.
(d) Termination for Cause. Notwithstanding the provisions
of Section 5(e) and in the alternative thereto, if the Employee's
employment with the Company is terminated for Cause (as specified
below), the Employee's exclusive termination remuneration shall be the
amounts provided under Sections 2(b), (c), and (d), accrued to the Date
of Termination. The determination of "Cause" shall be made in accordance
with the normal personnel practices of the Company, and as approved by
the Board of Directors of the Company within ten (10) business days of
written notice to the Employee and an opportunity for the Employee to
meet with the Board to discuss the basis for such determination. For
purposes of this Agreement, the Company shall have "Cause" to terminate
the Employee's employment hereunder upon (1) the Employee having been
convicted of any felony or other crime involving moral turpitude; (2)
the continued and habitual use of narcotics or alcohol to an extent
which materially impairs the Employee's performance of his duties
hereunder; (3) malfeasance or gross negligence by the Employee in the
performance of his duties hereunder; (4) the knowing, continued
violation to a material extent by the Employee of any material provision
of this
2
<PAGE> 3
Agreement; or (5) willful and gross misconduct by the Employee
materially injurious to the Company.
(e) Voluntary Termination. Notwithstanding Sections 5(a),
5(b), 5(c) and 5(d), the Employee may terminate his employment with the
Company at any time, by giving the Company a Notice of Termination, as
provided in Section 5(f). If the Employee voluntarily terminates his
employment with the Company under this Agreement, the Employee's
exclusive termination remuneration shall be the amounts determined under
Sections 2(a), (c), and (d), accrued through the Date of Termination.
(i) Notice of Termination. For purposes of this
Agreement, the term "Notice of Termination" shall mean a written
document delivered to the Employee, which shall specify the
section of this Agreement under which termination is made.
Termination shall be effective thirty (30) calendar days after
the Notice of Termination is given. Notwithstanding the
foregoing, the Notice of Termination shall be effective
immediately in the event the Employee is terminated for Cause.
(f) Date of Termination. For purposes of this Agreement,
the term "Date of Termination" shall mean the effective date of a Notice
of Termination, as provided in Section 5(f) or the date of the
Employee's death.
6. Restriction of Employee's Activities. During the period of his
employment and during the period of the Company is making payments to the
Employee pursuant to Section 5(c) of this Agreement, even though the Employee is
not then employed by the Company, the Employee agrees that unless the Company
shall prior thereto consent in writing, he shall not engage in any activity for
or have any interest in any person, firm, corporation, partnership or business
(whether as an advisor, principal, consultant, independent contractor, agent,
partner, officer, director, stockholder, employee, member of any association or
otherwise that engages in any activity within the State of California or any
counties in the State of California, except for investments as a passive
investor in companies, partnerships or limited liability companies that do not
involve any commitment of time (other than reasonable time for managing
Employee's personal investment(s) and do not involve Employee taking a position
as an officer, director, employee, advisor or consultant to such entity, unless
approved by the Board of Directors from time to time.
7. Confidential Information. Employee shall not during the period
of his employment by Company or at any time thereafter divulge, furnish or make
accessible to anyone or use in any way (other than in the ordinary course of
business of the Company or its subsidiaries and affiliates) the Company's
Confidential information. As used herein, the term Company's "Confidential
Information" shall mean (1) any knowledge or information which Employee has
acquired or become acquainted with or will acquire or become acquainted with
prior to the termination of his employment by Company, whether developed by
himself or by others and whether developed or acquired by Company, or its
subsidiaries or affiliates, from others, concerning any trade secrets,
including, but not limited to trade secrets as defined in Section 3416.1 of the
California Civil Code, confidential or secret designs, processes, formulas,
plans, devices or material (whether or not copyrighted or copyrightable or
patented as patentable)
3
<PAGE> 4
directly or indirectly materially useful in any aspect of the business of the
Company, or its subsidiaries or affiliates; (2) the names and locations and
requirements of any customers, prospective customers, vendors, suppliers of, or
any other persons having a business relationship during the term of this
Agreement with Company or its subsidiaries or affiliates; (3) any confidential
or secret development or research work of Company, or its subsidiaries or
affiliates, whether developed by Employee individually, jointly or by others,
(4) all accounting, cost, revenue and other financial records and documents of
the Company, as well as the contents thereof; (5) documents, agreements,
correspondence and other similar business records of the Company; and (6) any
other confidential or secret aspect of the business of Company, or its
subsidiaries and affiliates. Employee acknowledges that the Company's
Confidential Information constitutes a unique and valuable asset of Company
acquired at great time and expense by Company which is secret and confidential
and which will only be available to or communicated to Employee in confidence in
the course of his professional duties, and that any disclosure or other use of
Company's Confidential Information other than for the sole benefit of Company
would be wrongful and could cause irreparable and incalculable harm to Company
and to its subsidiaries and affiliates. Both during and after his employment
with Company. Employee will refrain from any knowing acts or omissions that
would materially reduce the value to the Company, of the Confidential
Information of Company or its subsidiaries and affiliates. Anything herein to
the contrary notwithstanding, no knowledge or information described herein that
is part of the public domain or otherwise acquired by Employee outside the
course of his employment with the Company shall be deemed Confidential
Information hereunder.
8. Property Rights. Employee shall promptly and fully inform
Company of, and disclose to Company, any and all ideas, concepts, themes,
inventions, designs, creations, improvements and discoveries that he makes
during the term of this Agreement, whether individually or jointly in
collaboration with others, which relate, at the time any such item is conceived
or reduced to practice, to Company's business or to actual or anticipated
research or development of the Company, or which result from any work performed
by Employee for Company. Employee agrees that any and all intellectual
properties, including, but not limited to all ideas, concepts, themes,
inventories, designs, creations, improvements or discoveries conceived,
developed or written by Employee, either individually or jointly in
collaboration with others, pursuant to this Agreement, whether patentable or
unpatentable or copyrightable or uncopyrightable, shall belong to and be the
sole and exclusive property of Company. Employee shall assist Company in
obtaining patents or copyright registration on such intellectual properties and
exercise all documents and do all things necessary to enable Company to obtain
and enforce full and exclusive title to such properties.
9. Successors Binding Agreement. This Agreement is fully
assignable by the Company to any successor, provided, however, that said
successor shall be obligated to perform this Agreement in accordance with its
terms. As to the Employee, this is a personal service contract and the Employee
may not assign this Agreement or any part hereof without the prior written
consent of the Company, which consent may be withheld by the Company for any
reason it deems appropriate.
10. Notice. For purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have
4
<PAGE> 5
been duly given when delivered in person or when placed in the United States
mail, by certified mail, return receipt requested, postage prepaid, addressed as
follows:
By the Company:
Modern Records, Inc.
_________________________________
_________________________________
_________________________________
If to the Employees:
_________________________________
_________________________________
_________________________________
With a copy to:
David Kern Peteler, Esq.
Law Offices of David Kern Peteler
5260 Campo Road, Suite 200
Woodland Hills, CA 91364
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
11. Remedies.
(a) Injunctive Relief. Company and Employee agree that it
would be difficult to calculate the extent of damages caused and to
compensate Company duly for such damages for any violation of the
provisions of the Agreement by the Employee. Accordingly, Company and
Employee agree that Company shall be entitled to temporary and permanent
injunctive relief, without necessity of posting bond, to enforce the
provisions of this Agreement and that such relief may be granted without
the necessity of proving actual damages. This provision with respect to
injunctive relief shall not, however, diminish the right of Company to
claim and recover damages from the Employee in addition to injunctive
relief;
(b) Offset. In the event that Employee breaches this
Agreement, Company shall have the right to offset any damages it meets
with regard to such breach, against any sums that remain thereafter due
to Employee hereunder, provided, however, that the exercise of such
right of offset shall in no way diminish Company's rights to seek any
other remedies it may be entitled to hereunder at or in equity;
(c) Uniform Trade Secrets Act. In the event Employee
breaches Section 8 of this Agreement, Company shall have the right to
invoke any and all remedies provided under the California Uniform Trade
Secrets Act (California Civil Code Sections 3426, et seq.) or other
statutes or common law remedies of similar effect.
5
<PAGE> 6
12. Publicity. Employee shall not make any public announcements,
press releases, or similar public communications without the prior approval of
the Company's Board of Directors.
13. Prior Agreements; Modifications; Waiver. This Agreement
constitutes the entire agreement between the parties hereto regarding the
subject matter hereof, and supersedes any prior or contemporaneous agreements,
letters of intent, or other understandings between the parties. No provision of
this Agreement may be modified, waived or discharged unless such waiver,
modification or discharge is agreed to in writing signed by this Employee and a
non-interested majority of the Board of Directors. No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with, any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of any similar or dissimilar provision or
condition at the same or any prior or subsequent time.
14. Choice of Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California.
15. Severability. To the extent any provision or any portion of
any provisions of this Agreement shall be invalid or unenforceable, it shall be
considered deleted herefrom and the remainder of such provision and of this
Agreement shall be unaffected and shall continue in full force and effect. In
furtherance and not in limitation of the foregoing, should the duration or
geographical extent of, or business activities covered by, any provision of this
Agreement be in excess of that which is valid and enforceable under applicable
law, then such provision shall be construed to cover only that duration, extent
or activities which may validly and enforceably be covered.
16. Withholding. Anything in this Agreement to the contrary
notwithstanding, all payments required to be made by the Company hereunder to
the Employee or his estate or beneficiaries shall be subject to the withholding
of such amounts relating to taxes as the Company may reasonably determine it
should withhold pursuant to any applicable law or regulation.
17. Tax Consequences. The Company shall have no obligation to any
person entitled to the benefits of this Agreement with respect to any tax
obligation any such person incurs as a result of or attributable to this
Agreement, including all supplemental agreements and employee benefit plans
incorporated by reference therein, or arising from any payments made or to be
made hereunder or thereunder.
18. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument, even though the parties
do not sign the same counterpart.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date and year first above written.
MODERN RECORDS, INC.
By:
---------------------------------
Title:
EMPLOYEE
/s/ Steven Randall Jackson
------------------------------------
Steven Randall Jackson
7
<PAGE> 1
Exhibit 10.23
AGREEMENT dated as of March 1, 1999, by and between Modern Records, Inc.
("Company"), c/o The Marshall Firm, 1065 Avenue of the Americas, New York, NY
10018, Attn: David Benjamin, Esq., on the one hand, and Jermaine Jackson, Tito
Jackson, Marlon Jackson and Jackie Jackson and Randy Jackson, collectively p/k/a
"The JACKSONS" (individually and collectively "Producer", "Artist" and/or
"you"), c/o Jackie Jackson, 4641 Havenhurst, Encino, CA 91316, on the other
hand.
1. Term.
(a) Company hereby engages Artist to produce and record master
recordings embodying the performances of Artist for an initial period commencing
as of the date hereof and expiring, subject to paragraph 7(a) below, nine (9)
months after the delivery of the First Album (as herein defined). Producer
hereby grants to Company one (1) separate, consecutive and irrevocable option,
to renew the term of this agreement for a period commencing upon the expiration
of the immediately preceding period of the term and expiring, subject to
paragraph 7(a) below, nine (9) months after Producer's delivery to Company of
the Commitment Album (as herein defined) to be delivered during such period of
the term in satisfaction of the Recording Commitment (as herein defined)
therefor. Each such option period shall be upon all of the terms and conditions
applicable to the initial period, except as otherwise specifically set forth
herein. Each such option shall be exercised, if at all, by Company giving
Producer notice (all notices hereunder to be in writing as provided in paragraph
16 below) at any time prior to the expiration of the then-current period of the
term. Producer accepts such engagement and agrees to perform Producer's
obligations under this agreement; without limiting the foregoing, Producer
agrees to perform such obligations to the best of Producer's ability.
(b) Notwithstanding the foregoing, Producer hereby grants to
Company a so-called "matching right" (the "Matching Right") with respect to each
and every third-party offer (the "Third-Party Offer") made to Producer and/or
Artist to enter into a recording agreement regarding those of Artist's recording
and performing services which become available to third-parties after the
expiration of the term set forth in subparagraph 1(a) hereinabove (the
"Recording Agreement"). Such Matching Right shall function as follows: (i) prior
to Producer or Artist accepting any such Third-Party Offer, Producer and/or
Artist (as applicable) shall first offer to Company the right to enter into such
a Recording Agreement with Producer and/or Artist (as applicable) upon the same
material terms and conditions as such Third-Party Offer, provided that Company
shall only be obligated to "match" up to ninety percent (90%) of such
Third-Party Offer (e.g., if, as set forth in such Third-Party Offer, the royalty
rate for the first album to be delivered thereunder is ten percent (10%),
Company shall only be obligated to offer a royalty rate of nine percent (9%) for
such first album to be deemed to have "matched" such provision of the subject
Third Party Offer); (ii) Producer and/or Artist (as applicable) shall provide
Company with written notice of each such Third Party Offer, which notice shall
set forth the name of the prospective recording label, the material terms and
conditions of such Third-Party Offer (i.e., all terms which must be "matched")
and any other information reasonably necessary in order for Company to determine
and be capable of "matching" such Third-Party Offer. If Company fails to notify
you within thirty (30) days after Company's actual receipt of such written
notice that Company will match the terms of any such Third-Party Offer, then
Producer shall have the right
<PAGE> 2
to enter into a Recording Agreement with the prospective recording label,
provided that the terms of that Recording Agreement are the same as the terms
set forth in Producer's written notice to Company regarding same. If such
Recording Agreement is not consummated within one hundred and twenty (120) days
after Company has failed to (whether affirmatively or as a result of the
preceding sentence) "match" such Third-Party Offer, then neither Producer nor
Artist shall enter into any such Recording Agreement without offering to enter
into a new agreement with Company in conformity with this paragraph.
2. Recording Commitment.
(a) During the initial period and each option period of the term
hereof, Producer agrees to cause to be recorded and delivered to Company the
number of Masters set forth below (the "Recording Commitment"):
<TABLE>
<CAPTION>
Period of the Term Recording Commitment
------------------ --------------------
<S> <C>
Initial period 1 album
First option period 1 album
</TABLE>
(b) The album to be delivered in satisfaction of the Recording
Commitment for the initial period is herein referred to as the "First Album,"
and album to be delivered in satisfaction of the Recording Commitment after the
delivery of the First Album is herein referred to as the "Second Album"; each
such album is herein sometimes referred to as a "Commitment Album". No multiple
album shall be recorded or delivered hereunder in satisfaction of the Recording
Commitment without Company's and Producer's prior written consent, which consent
may be withheld in either party's sole discretion; provided, that if Company
consents to the delivery of any multiple album hereunder, then such multiple
album shall, subject to paragraph 5 below, be deemed a single album for all
purposes hereunder.
(c) Producer shall deliver the First Album no later than four
(4) months after the date hereof. Producer shall deliver each subsequent
Commitment Album no sooner than nine (9) months and no later than eighteen (18)
months after Producer's delivery of the immediately preceding Commitment Album.
(d) Subject to the notice and cure provisions of paragraph 14
hereof, time is of the essence in Producer's delivery of Masters in satisfaction
of the Recording Commitment, and Producer's failure to make timely delivery of
any Masters shall constitute an event of default under paragraph 11 hereof.
Neither Company's exercise of any option hereunder nor Company's failure to
suspend its obligations hereunder shall constitute a waiver of any of Company's
rights to undelivered Masters. Moreover, Company's failure to notify Producer if
Producer is delinquent in the delivery of any Masters shall not constitute a
waiver of any of Company's rights or remedies as a result of such delinquency
unless Company waives such rights in writing. If Producer is delinquent in the
delivery of any Masters hereunder, then the next delivered Masters shall be
deemed to satisfy the most delinquent requirements first. Producer may not
commence the recording of Masters constituting any particular Commitment Album
until Producer has delivered to Company all Masters constituting each prior
Commitment Album unless Company otherwise agrees in writing.
2
<PAGE> 3
(e) Nothing herein contained shall obligate Company to permit
Artist to record the Second Album or any subsequent Commitment Album that Artist
is otherwise obligated to record during the then-current period of the term, it
being understood that Company's sole obligation to Producer and Artist as to any
such unrecorded Commitment Album required to be recorded by Artist during the
then-current period of the term shall be to pay Producer the amount by which the
applicable of the advance or the "Minimum Advance" [as such term is used in
paragraph 3(b)(ii)(C) below] therefor as specified in paragraph 3(b) below
exceeds the aggregate of all recording costs incurred in connection with the
"Previous Album" [as such term is defined in paragraph 3(b)(ii) (D) below];
provided, that in no event shall the amount payable by Company under this
paragraph 2(e) be more than fifteen percent (15%) of the advance or Minimum
Advance, as applicable, for the unrecorded Commitment Album in question. In the
event that Company shall exercise Company's rights pursuant to this paragraph
2(e), the term of this agreement shall thereupon terminate. In the event of such
termination Company shall be relieved of any and all obligations hereunder
except Company's obligations with respect to Masters recorded and delivered to
Company hereunder prior to such termination.
3. Royalties and Advances.
(a) Company shall pay a royalty to Producer on net sales of
records embodying Masters, which royalty shall be computed and paid pursuant to
the provisions of Exhibit A attached hereto and by this reference made a part
hereof. Such royalty shall include Producer's royalties and all royalties
payable to all artists (including Artist), individual producers and other
persons which become or may become due by reason of the recording and/or
exploitation of Masters hereunder; provided, that Company shall make and be
solely responsible for payments to the AFM Music Performance Trust Fund and
Special Payments Fund, as well as to any similar funds whose contributions are
based upon the sale of records.
(b) Provided that neither Producer nor Artist is then in
material breach of this agreement and provided further that Producer has
theretofore delivered to Company completed and duly executed copies of both the
W-9 form attached hereto as Exhibit H (indicating the payee name for all monies
payable to Producer under this agreement) and the I-9 form attached hereto as
Exhibit I, Company shall pay to Producer the following amounts as recoupable
advances against royalties payable in accordance with paragraph 3(a) hereof and
Exhibit A hereto:
(i) Two Million Dollars ($2,000,000) with respect to the
First Album, payable as set forth in paragraph 3(c) below as if such sum were
the Sales Advance for the First Album and the Qualifying Date for the Previous
Album had occurred prior to the commencement of recording.
(ii) An advance (a "Sales Advance") for each Commitment
Album paid in accordance with paragraph 3(c) below and computed as follows:
(A) Unless Company, on Producer's behalf, pays
royalties directly to the individual producer(s) of the Subject Album (as
hereinafter defined), which Company is only obligated to do as set forth herein,
such Sales Advance shall be an unadjusted sales advance ("Unadjusted Sales
Advance") that equals sixty-six and two-thirds percent (66-
3
<PAGE> 4
2/3%) of the aggregate of the royalties accrued to Producer's royalty account
(after allowance for reserves which are reasonable in the light of data from
SoundScan or any similar retail reporting system) in respect of U.S. Net Sales
of the Previous Album (as herein defined) as of the Qualifying Date (as herein
defined); provided, that in no event shall such Unadjusted Sales Advance be less
than the Minimum Advance or more than Maximum Advance set forth in paragraph
3(b)(ii)(C) below for the Subject Album.
(B) If Producer requests Company to pay
royalties directly to the individual producer(s) of the Subject Album
(including, without limitation, a producer on Company's staff), and Company is
either obligated to do so pursuant to the terms hereof or otherwise agrees to do
so in writing, then the Sales Advance shall be an adjusted sales advance
("Adjusted Sales Advance") that equals the sum of (1) the Unadjusted Sales
Advance for the Subject Album multiplied by a fraction, the denominator of which
is the aggregate royalty rate in respect of U.S. Net Sales of the Subject Album
[as set forth in paragraph 1(a) of Exhibit A hereto] and the numerator of which
is the rate at which royalties will be payable to Producer in respect of such
sales after deducting the rate at which the royalties are payable to the
individual producer(s) of the Subject Album (and any other third parties) in
respect of such sales, and (2) the total producer advance(s) payable to the
individual producer(s) of the Subject Album; provided, that in no event shall
the Adjusted Sales Advance exceed the Unadjusted Sales Advance; provided,
further, that in no event shall the Adjusted Sales Advance be less than the
Minimum Advance nor more than the Maximum Advance set forth in paragraph
3(b)(ii)(C) below with respect to the Subject Album.
(C) In no event shall the Sales Advance be less
than the Minimum Advance nor more than the Maximum Advance set forth below with
respect to each Commitment Album:
<TABLE>
<CAPTION>
Album Minimum Advance Maximum Advance
----- --------------- ---------------
<S> <C> <C>
Second Album $1,500,000 $2,500,000
</TABLE>
(D) As used herein, the term "Previous Album"
means the Commitment Album delivered by Producer to Company immediately prior to
the delivery of the Commitment Album (sometimes referred to herein as the
"Subject Album") for which the Sales Advance is being calculated, and the term
"Qualifying Date" means the date of Company's accounting close (the "Close
Date") of the calendar month in which falls the date occurring nine (9) months
after the initial commercial release in the United States of the Previous Album;
provided, that in no event shall the Qualifying Date be later than the Close
Date of the calendar month immediately preceding the calendar month in which the
Subject Album is initially released in the United States. No "Greatest Hits" or
"Best Of" or "Anthology"-type album (each such album being herein referred to as
a "Greatest Hits Album") shall be considered a Previous Album for the purpose of
calculating any Sales Advance.
(c) The applicable Advance shall be payable to Producer as
follows: (i) one-half ( 1/2) upon commencement of recording of the applicable
album and (ii) the balance upon complete and satisfactory delivery to and
acceptance by Company of the Masters, the Delivery Materials and all other
materials required to be delivered to Company hereunder in connection
4
<PAGE> 5
with each album.
(d) Notwithstanding anything to the contrary contained herein,
if Company pays any recording costs and/or any portion of an advance hereunder
with respect to any particular Masters and the term of this agreement expires or
terminates prior to delivery of such Masters for any reason other than Company's
material breach hereof, then, without limiting Company's other rights and
remedies, Producer shall promptly pay to Company an amount equal to all monies
paid by Company hereunder with respect to such Masters and, without limiting
Company's other rights and remedies, Company may deduct same from any and all
advances, royalties, mechanical copyright royalties with respect to Controlled
Compositions and/or other monies payable pursuant to this agreement and/or
pursuant to any other agreement between (i) Producer and Company, (ii) Artist
and Company and/or (iii) Company and any other entity furnishing thereunder any
services of Artist. Producer acknowledges that the payment by Producer of any
monies under this paragraph 3(d) is not intended to be a penalty or liquidated
damages for Producer's failure to deliver any Masters which Producer is required
to deliver hereunder nor is it intended to compensate Company for any damages
suffered by Company as a result of lost profits or otherwise resulting from any
such failure.
4. Recording Procedure.
(a) Producer shall schedule and conduct recording sessions hereunder
only after obtaining Company's written approval (such approvals not to be
unreasonably withheld) of the selections to be recorded, the places of
recording, the individual producers and the Authorized Budget. Producer shall
request such approvals at least thirty (30) days prior to the proposed first
date of recording. If Company disapproves any of the foregoing, Producer shall
promptly submit alternative proposals, but in all instances allowing Company a
reasonable period of review prior to the proposed first date of recording; for
the purpose of this paragraph 4(a)(i), a thirty (30) day period of review shall
be deemed to be reasonable.
(b) Producer shall engage artists, producers, musicians, recording
studios and other personnel and facilities for the recording sessions for
Masters to be recorded hereunder, but only after having submitted a detailed
written estimate of all recording costs to be incurred in connection therewith
in the form attached hereto as Exhibit C (as Company may update such form from
time to time) and having obtained a written authorization therefor signed by one
of Company's officers. Such estimate shall provide for payment to Artist of only
minimum union scale for Artist's services, including any services performed by
Artist for arrangements or orchestrations supplied by Artist. Notwithstanding
the foregoing, it is expressly understood and agreed that the advance or Sales
Advance, as applicable, payable to Producer in respect of a particular album
hereunder shall in part be deemed a prepayment by Company of Artist's applicable
union scale for Artist's services in connection with such album, and Producer
shall deliver, and shall cause Artist to deliver, all documents, if any,
required by the applicable union to implement this sentence. The aforesaid
written authorization to conduct such session or sessions shall indicate the
maximum amount which Producer may expend for such recording costs (the
"Authorized Budget"). The granting of authorizations and the approval of
Authorized Budgets shall be entirely within Company's discretion; provided, that
Company agrees to approve an Authorized Budget for any particular album which
does not exceed Seven Hundred Fifty Thousand Dollars ($750,000) for such album
as long as the budget submitted contains a
5
<PAGE> 6
reasonable allocation of estimated recording costs and is otherwise in
conformity with the requirements hereof (the "Available Fund"). Company shall
have the right to have a representative attend all recording sessions conducted
pursuant to this agreement; such attendance shall be at Company's non-recoupable
expense unless such representative fulfills a function at such recording
sessions (e.g., producer or engineer) as to which the expenses would constitute
recording costs hereunder if such function were fulfilled by a person who was
not an employee of Company, or unless such representative's attendance is
necessary because of the culpable acts or omissions of Producer or Artist. If it
reasonably appears to Company that recording costs for any album will exceed the
Available Fund therefor, then, without limiting Company's other rights and
remedies, Company shall have the right to require Producer to discontinue
recording unless Producer can establish to Company's reasonable satisfaction
that Producer can and will pay or reimburse Company for any recording costs in
excess of the Available Fund.
(c) Company shall advance recording costs for each Commitment
Album for which Company is to pay recording costs pursuant to paragraph 3(c)
above in an amount not in excess of the Available Fund therefor. Producer shall
deliver to Company copies of all substantiating invoices, receipts, AFM Form
B's, required AFTRA forms (if applicable), vouchers and similar reasonably
satisfactory documentary evidence of such recording costs, and, if Producer
fails to do so, Company's obligation to pay further recording costs shall be
suspended until delivery thereof. Producer agrees to deliver, or cause the
individual producer of the applicable Masters to deliver, AFM Form B's, W-4's,
INS Form I-9's (or any substitute form therefor which is approved or required by
the United States Immigration and Naturalization Service ["INS"] and which
Company requests Producer to deliver) and required AFTRA forms (if applicable)
to Company within seventy-two (72) hours after each recording session hereunder
(together with a written recitation of the citizenship of each person whose
performance is embodied on said Masters) so that Company may timely make all
required union payments, and Producer agrees to deliver all other invoices,
receipts, vouchers and documents within one (1) week after Producer's receipt
thereof; further, prior to the commencement of the applicable sessions, Producer
agrees to deliver, or cause the applicable individual producer (or remix
producer, if applicable) to deliver a Certificate of Employment in the form
attached hereto as the applicable of Exhibits F or G signed by such producer
and, if applicable, the entity contracting on such producer's behalf. If Company
incurs late-payment penalties by reason of Producer's failure to make timely
delivery of any such materials, then Producer shall reimburse Company for same
upon demand and, without limiting Company's other rights and remedies, Company
may deduct an amount equal to all such penalties from any and all monies
otherwise payable pursuant to this agreement. Company shall be responsible for
late-payment penalties caused solely by Company's acts or omissions. If Company,
in its sole discretion, shall pay any recording costs for any Masters hereunder
in excess of the Available Fund therefor, then, unless such excess costs were
caused solely by Company's culpable acts or omissions, Producer shall repay any
such excess upon demand and, without limiting Company's other rights and
remedies, Company may deduct same from any and all advances, royalties,
mechanical copyright royalties with respect to Controlled Compositions and/or
other monies payable pursuant to this agreement. Producer shall not engage or
permit the engagement of any person to perform services with respect to any
Master or other recording unless and until Producer has caused such person to
properly execute an INS Form I-9, and Producer shall deliver said form (or a
substitute therefor, if approved or required by the INS) to Company with respect
to each such person within seventy-
6
<PAGE> 7
two (72) hours after the applicable person first renders services with
respect to a Master hereunder; provided, that in lieu of the foregoing
procedure, Producer shall adhere to any reasonable alternative procedure
specified by Company.
(d) (i) Prior to Company's authorization of pre-mastering (e.g.,
equalization and the making of reference dubs or the equivalent thereof in the
applicable configurations) for a particular set of Masters (including commercial
and promotional remixes of existing Masters), Producer shall deliver the
following to Company's A&R representative responsible for the applicable set of
Masters and, where applicable, for all other recordings recorded at the
applicable recording sessions:
(A) One (1) fully mixed (but not mastered) DAT
copy of the applicable Masters;
(B) A complete and accurate list of any and all
samples (whether musical or spoken-word) embodied in each Master and other
recording (a sample form for which is attached hereto as Exhibit D);
(C) A written clearance or license for the
perpetual, non-restrictive use in any and all media throughout the Territory of
each such sample from the copyright holder(s) of the master recording and the
musical composition sampled as well as accurate and complete information
regarding all so-called "writer shares" and respective publishing affiliates for
the composition embodying such sample(s); attached hereto as Exhibit E is a list
of several clearing houses, one (1) or more of which Producer may wish to retain
for this purpose.
(D) Any and all necessary information pertaining
to credit copy required by the copyright holder(s) of each such sample.
(ii) Upon Producer's submission to Company of all of the
materials referred to in subclause (i) above, Company will listen to and analyze
the DAT copy of the Master(s) to confirm the accuracy of the information
provided. In the event that Company's review of the tape identifies samples in
addition to the samples identified by Producer, Company will promptly inform
Producer of such discrepancy. Producer acknowledges and agrees that (A) until
Company identifies all samples and receives written clearances for those samples
identified as requiring clearances (or until Producer removes such samples from
the applicable Masters), Company will not authorize pre-mastering of any
particular set of Masters and will not issue funds or purchase orders with
respect to the pre-mastering thereof, and (B) no Masters will be scheduled for
release, exploited by Company or deemed to be delivered to Company hereunder for
any purpose until such written sample clearances (including credit copy, if any)
have been obtained and approved (in Company's good faith judgment) by Company's
legal department or until Producer has removed the applicable samples from the
applicable Masters.
(iii) If any sample clearance referred to in this
paragraph 4(d) provides for a royalty payment on net sales of the applicable
Master and if Producer's record royalty account hereunder is in an unrecouped
position at the time such royalties are due, then, notwithstanding anything to
the contrary contained herein, Producer shall be solely responsible
7
<PAGE> 8
for making, and shall make, such royalty payment to the applicable third party
promptly upon receipt from Company of such third party's accounting statement
therefor; provided, that if any such third-party royalty relates to a sampled
musical composition, Company shall, solely as an accommodation to Producer,
accept a letter of direction from Producer, in a form reasonably approved by
Company, which authorizes and directs Company to make such royalty payments and
deduct same from Controlled Composition mechanical copyright royalties payable
hereunder, but Company shall only be obligated to make such royalty payments at
a particular time to the extent of Controlled Composition mechanical copyright
royalties which are actually payable at such time.
(e) For each Master, Producer shall deliver to Company a
two-track stereo tape, all multi-track master tapes (including, without
limitation, all 24-track and 48-track master tapes) and, upon Company's request
(and at Company's sole cost and expense), a monaural tape. The two-track stereo
tapes for the Masters constituting each album to be delivered hereunder shall be
assembled on one (1) [or, if necessary, on two (2)] master tape reels. Producer
shall not own or control, directly or indirectly, any additional copies of
Masters; provided, that Producer shall have the right to retain safety copies of
Masters. All original session tapes and any derivatives or reproductions thereof
shall also be delivered to Company or maintained at a recording studio or other
location designated or approved by Company, in Company's name and subject to
Company's control.
(f) All recording costs shall be recoupable from all royalties
otherwise payable hereunder and shall also be deemed a pre-payment of the
advance for the Masters for which such recording costs were paid.
5. Mechanical Copyright Royalties.
(a) (i) Company shall be responsible for payment of mechanical
copyright royalties for the United States directly to the copyright proprietors
of the selections embodied in Masters and Company's Canadian licensee (as herein
defined) shall be similarly responsible for the payment of such mechanical
copyright royalties for Canada. Producer shall assist Company in obtaining from
the copyright proprietors mechanical licenses issued to Company and Company's
Canadian licensee for the United States and Canada for all selections embodied
in Masters delivered hereunder which are not Controlled Compositions; provided,
that Producer shall cause the copyright proprietors to issue to Company and
Company's Foreign Affiliate in Canada (referred to in this paragraph 5 as
Company's "Canadian licensee") mechanical licenses for the United States and
Canada for all selections embodied in Masters delivered hereunder which are not
subject to the compulsory license provisions of the United States Copyright Act
and the corresponding provisions of the Canadian copyright law (but Company's
personnel and the personnel of Company's Canadian licensee shall handle the
actual paperwork required in connection therewith). Such mechanical licenses as
Producer is required to cause to be issued to Company and Company's Canadian
licensee shall be at a rate no greater than the rate applicable to compulsory
licenses in the United States or Canada, as applicable, and upon terms no less
favorable to Company and Company's Canadian licensee than those contained in the
then-current standard mechanical license issued by The Harry Fox Agency, Inc.
Such licenses shall name Company or Company's Canadian licensee, as applicable,
as licensees, and copies thereof shall be delivered to Company concurrently with
the delivery to Company of
8
<PAGE> 9
the corresponding Masters.
(ii) Producer hereby agrees that all Controlled
Compositions shall be available for licensing by Company's Foreign Affiliates
for the reproduction and distribution of phonograph records in each country of
the Territory outside of the United States and Canada through the author's
society or other licensing and collecting body generally responsible for such
activities in the country concerned. If and when a particular record is released
in any such country, Producer shall cause the issuance of effective licenses,
under copyright and otherwise, for the applicable of Company's Foreign
Affiliates to reproduce in such country each Controlled Composition embodied
thereon and to distribute each such phonograph record in such country on terms
not less favorable to the applicable of Company's Foreign Affiliates than the
terms prevailing on a general basis in the country concerned with respect to the
use of compositions on comparable phonograph records.
(b) (i) As used herein, the term "Controlled Composition" means
a selection embodied in a Master or other recording hereunder, which selection
is (A) written or composed, in whole or in part, by Artist, or (B) owned or
controlled, in whole or in part, directly or indirectly, by Producer and/or
Artist, or by any person owned or controlled by Producer and/or Artist, or by
any person that owns or controls or is under common control with Producer and/or
Artist or in which Producer and/or Artist has a direct or indirect income
interest. As of the date hereof, all Controlled Compositions are published by
_______________and are administered by _________________________. Any selection
which is not a Controlled Composition is herein referred to as a "Non-Controlled
Composition". Each Controlled Composition is hereby licensed to Company and
Company's Canadian licensee for the United States and Canada at a rate per
selection equal to seventy-five percent (75%) of the Controlled Rate (as herein
defined) in the applicable country [but in no event less than Four Cents ($.04)
Canadian with respect to Canada], and such mechanical copyright royalty shall be
payable with respect to net sales (as well as all other sales made directly by
Company or Company's Canadian licensee, rather than by their respective
third-party licensees) of records hereunder in the applicable country, except
that no mechanical copyright royalties shall be payable with respect to any
records as to which no royalties are payable pursuant to Exhibit A hereto or
with respect to any Controlled Composition which is one (1) minute or less in
duration; provided, that mechanical copyright royalties shall be payable with
respect to fifty percent (50%) of Album Free Goods (as herein defined).
Notwithstanding anything to the contrary contained herein, (AA) neither Company
nor Company's Canadian licensee shall be obligated to pay more than one (1)
mechanical copyright royalty with respect to the use of any particular
Controlled Composition on a particular record hereunder (including, without
limitation, on a record in the DVD configuration embodying the reproduction of
the same recordings in two [2] or more different technical formats and bearing
the same SRLP as a DVD record that reproduces the applicable recordings in only
one [1] technical format), and (BB) solely with respect to net sales of
mid-priced records, budget records and records sold through record clubs by
Company, Company's Canadian licensee and/or their respective third-party
licensees, each Controlled Composition is hereby licensed to the applicable of
the foregoing parties for the United States and Canada at a rate per selection
equal to three-fourths (3/4) of seventy-five percent (75%) of the Controlled
Rate in the applicable country. Notwithstanding anything to the contrary
contained in Exhibit A hereto, statements as to mechanical copyright royalties
payable by Company with respect to Controlled Compositions hereunder, together
with payment of mechanical copyright royalties reflected thereon, less
9
<PAGE> 10
reasonable reserves, shall be sent no later than forty-five (45) days after the
close of each calendar quarter.
(ii) As used herein, the term "Controlled Rate" with
respect to a particular selection shall mean:
(A) With respect to the United States, the
minimum statutory mechanical copyright rate (i.e., without regard to any
so-called "long song" formula) in effect as of the date of initial release of
the first Master embodying such selection; provided that if the United States
Copyright Law ceases to contain a minimum statutory mechanical copyright rate
formula, then effective thereafter the Controlled Rate shall be deemed to be
either (1) the minimum mechanical license rate (i.e., without regard to any
so-called "long song" formula) agreed upon by the majority of the major record
companies (including Company) and the majority of the major music publishers in
the United States which is in effect as of the date of delivery of the first
Master embodying such selection or, if no such rate has been agreed upon as
aforesaid, (2) an amount computed by applying the minimum statutory copyright
rate formula that would have been in effect as of the date of delivery of the
first Master embodying such selection had the last version of the United States
Copyright Law containing such provisions remained in effect in perpetuity (e.g.,
if the United States Copyright Law ceases to contain a minimum statutory
copyright rate formula as of January 1, 1995 and if said Law had as of December
31, 1994 provided for a minimum statutory copyright rate of seven cents [$.07]
and if said Law had also been providing for an annual increase commencing on
January 1 of each year of one-quarter of one cent (.0025), then the Controlled
Rate for an applicable Master delivered on June 5, 1997 would be seven and
three-quarters cents [$.0775]); and
(B) With respect to Canada, the minimum
mechanical license rate (i.e., without regard to any so-called "long song"
formula) agreed upon by the majority of the major record companies (including
Company's Canadian licensee) and the majority of the major music publishers in
Canada which is in effect as of the date of initial commercial release of the
first Master embodying such selection; provided, that in no event shall the
number of pennies (Canadian) payable in respect of a particular selection under
this paragraph 5(b)(ii)(B) exceed the number of pennies (U.S.) that would be
payable in respect of such selection on the record concerned under paragraph
5(b)(ii)(A) above if the applicable record were manufactured for distribution in
the United States [e.g., if the applicable rate under paragraph 5(b)(ii)(A) is
6.6 cents (U.S.), then the applicable rate under paragraph 5(b)(ii)(B) shall not
exceed 6.6 cents (Canadian)].
(C) Intentionally omitted.
(iii) As used herein, the term "Non-Controlled Rate" in
a particular country (i.e., the United States or Canada) means the minimum
statutory mechanical copyright royalty rate [or the equivalent thereof in the
United States and/or Canada, as described in the foregoing subclause (ii)] in
effect in such country as of the date of manufacture of the record copy in
question.
(c) Notwithstanding anything to the contrary contained in
paragraphs 5(a) and 5(b) above, with respect to net sales of records in the
United States and Canada, (A) the
10
<PAGE> 11
maximum aggregate mechanical copyright royalty rate payable by Company or its
Canadian licensee, as applicable, in respect of any particular copy of any album
hereunder that is not a multiple album (the "Maximum Aggregate Album Rate"),
regardless of the number of selections embodied therein or the playing time
thereof, shall be the sum of eleven (11) times seventy-five percent (75%) of the
Controlled Rate, (B) the maximum aggregate mechanical copyright royalty rate
payable by Company or its Canadian licensee, as applicable, in respect of any
single record hereunder embodying two (2) or fewer selections, regardless of the
playing time thereof, shall be two (2) times the Controlled Rate, (C) the
maximum aggregate mechanical copyright royalty rate payable by Company or its
Canadian licensee, as applicable, in respect of any single record hereunder
embodying three (3) selections, regardless of the playing time thereof, shall be
three (3) times the Controlled Rate, and (D) the maximum aggregate mechanical
copyright royalty rate payable by Company or its Canadian licensee, as
applicable, in respect of any Mini-LP hereunder, regardless of the number of
selections embodied thereon or the playing time thereof, shall be five (5) times
the Controlled Rate. With respect to any album that is a multiple album in a
particular configuration, the maximum aggregate copyright royalty rate payable
by Company or its Canadian licensee, as applicable, with respect to such album
in such configuration, regardless of the number of selections embodied therein
or the playing time thereof, shall be the Maximum Aggregate Multiple Album Rate.
As used herein, the term "Maximum Aggregate Multiple Album Rate" for a
particular multiple album in a particular configuration means the Maximum
Aggregate Album Rate which would be applicable to an album which was delivered
on the date such multiple album was manufactured multiplied by a fraction, the
numerator of which is the SRLP of such multiple album in the applicable
configuration in the United States and the denominator of which is Company's
then-prevailing SRLP for Company's newly-released top-price albums (i.e., such
albums which are not Multiple Albums) in such configuration in the United
States.
(d) Notwithstanding anything to the contrary contained
in this paragraph 5, if the actual aggregate mechanical copyright royalties
which Company or its Canadian licensee, as applicable, is required to pay in
respect of any album, multiple album, Mini-LP or single record hereunder shall
exceed the applicable maximum therefor as specified in paragraph 5(c) above,
then, to the extent Company or its Canadian licensee, as applicable, is unable
to recover all of such excess from mechanical copyright royalties payable with
respect to Controlled Compositions embodied therein (which Company and its
Canadian licensee shall have the right to do) (a) Company's Canadian licensee
shall have the right to deduct an amount equal to the additional payments to be
made by it as a result thereof from any and all mechanical copyright royalties
otherwise payable by it with respect to Controlled Compositions embodied in
other records hereunder, and (b) Company shall have the right to deduct an
amount equal to the additional payments to be made by it as a result thereof
from any and all royalties, mechanical copyright royalties with respect to
Controlled Compositions on other records hereunder and other sums payable under
this agreement.
(e) No mechanical copyright royalties shall be payable
in respect of any Controlled Composition which is an arrangement of a selection
in the public domain. Notwithstanding the foregoing, if any such arrangement is
credited by ASCAP or BMI, then Producer hereby licenses such arrangement to
Company at a mechanical copyright royalty rate equal to seventy-five percent
(75%) of the Controlled Rate in effect as of the date of initial commercial
release of the First Master embodying such arrangement of a public domain
11
<PAGE> 12
selection multiplied by the percentage used by the applicable performing rights
society or organization (i.e., ASCAP or BMI) in determining the credits to be
given to the publisher of such arrangement for public performances thereof;
provided, that, unless and until Producer furnishes to Company a copy of the
letter from the performing rights society or organization setting forth the
percentage of the otherwise-applicable credit which the publisher will receive
for such public performances, Company shall not be obligated to pay any
mechanical copyright royalty with respect to such arrangement (but, after
Company's receipt of such letter from Producer, Company shall calculate such
mechanical copyright royalty retroactive to the first record sold and shall pay
same in accordance with the terms of this agreement).
(f) Producer hereby grants the following on a gratis basis (on
behalf of Producer, Artist and any music publishing company that now or
hereafter owns or controls any Controlled Composition recorded by Artist
hereunder) to Company (on behalf of itself and Company's Licensees) with respect
to all Controlled Compositions embodied on Masters hereunder: (i) perpetual
licenses for both the public performance thereof in the United States and the
mechanical reproduction (or the equivalent term applicable to on-line
transmission and the like) thereof in the Territory solely for "advertising and
promotional purposes" [as defined in paragraph 19(a)(vi) below] on on-line
"websites" (or similar tools or mechanisms established by Company or Company's
Licensees or under Company's or Company's Licensees' authority for "on-line" or
similar dissemination of information or data ["Sites"]), and (ii) a perpetual
license to reprint the lyrics thereof on the album packaging and on the Sites.
(g) Any assignment made of the ownership or copyright in, or the
right to license or administer the use of, any Controlled Composition shall be
subject to the terms and provisions hereof.
6. Grant of Rights.
(a) Producer acknowledges and agrees that Company is and shall
be the exclusive owner in perpetuity throughout the universe (the "Territory")
of all right, title and interest in and to all Video Songs, Masters and other
recordings and all records and reproductions made therefrom, and all artwork
created for use in connection therewith ("Artwork"), during and from the
inception of their creation, including, without limitation, the Territory-wide
copyrights therein and thereto [but excluding the copyrights in the musical
compositions embodied in Masters and other recordings and any trademark and/or
service mark rights in and to Producer's and Artist's names and the applicable
corporate and/or professional names thereof (except as otherwise expressly set
forth herein)] and the exclusive right to copyright such Masters and other
recordings as "sound recordings" in the name of Company, to renew and extend
such copyrights and to exercise throughout the Territory all rights of the
copyright proprietor thereof; in connection with the foregoing, Producer hereby
acknowledges and agrees that the Artwork created by Producer in connection with
each phonograph record and Home A/V Device hereunder and each Video Song, Master
and other recording is a work made for hire in that (i) it is prepared within
the scope of Company's employment of Producer and Artist hereunder and under the
Inducement Letter attached hereto and/or (ii) it constitutes a work specifically
ordered by Company for use as a contribution to a collective work. Producer
hereby irrevocably and unconditionally waives any and all moral and like rights
that Producer has in the Masters and in the performances embodied therein and
hereby agrees not to make any claim against Company or
12
<PAGE> 13
any party authorized by Company to exploit the Masters based on such moral or
like rights. To the extent, if any, that Producer and/or Artist may be deemed an
"author" of such "sound recordings", Producer further grants to Company a power
of attorney, irrevocable and coupled with an interest, for Producer and/or
Artist and in Producer's and/or Artist's names, to apply for and obtain, and on
obtaining same, to assign to Company, all such copyrights and renewals and
extensions thereof, which power of attorney is limited to the purposes set forth
in this sentence and may only be exercised if Producer or Artist fails to
execute and deliver to Company any document which Company may reasonably submit
to Producer for execution by Producer and/or Artist. Producer further agrees to
perform such acts and to execute and deliver to Company, and to cause each
person rendering services in connection with Masters and other recordings to
perform such acts and to execute and deliver to Company (A) written assignments
to Company (in a form reasonably satisfactory to Company) of all sound recording
copyright rights (including renewal and extension rights) such person may have,
and/or (B) such other instruments as Company reasonably deems necessary to
effectuate and/or record ownership of rights hereunder with the U.S. Copyright
Office or elsewhere. Producer hereby irrevocably appoints Company as Producer's
agent and attorney-in-fact solely to execute the aforementioned instruments in
the name of Producer and/or such persons rendering services in connection with
Masters and other recordings and to dispose of such instruments; Producer
acknowledges that Company's agency and power are coupled with an interest.
Without limiting the foregoing, but subject to the terms and conditions
contained in this agreement, Company shall have the exclusive and perpetual
right throughout the Territory to control all Artwork, Video Songs, Masters and
other recordings, and except as specifically provided to the contrary elsewhere
herein, may sell, lease, license and otherwise exploit such Artwork, Video
Songs, Masters and other recordings, or refrain therefrom, throughout the
Territory upon such terms and conditions, in such records, and in such forms and
versions as it may in its sole discretion determine. Producer acknowledges that
records embodying Masters may be released under any trademark, trade name or
label designated by Company; provided, that the initial commercial release in
the United States of each album delivered hereunder shall be on one of Company's
then-current top-line "pop" labels (i.e., currently the "Modern Records, Inc."
labels).
(b) Producer hereby grants to Company the right to use and
publish, and to permit others to use and publish, Producer's name and the name
and likeness of and biographical material concerning Artist and Producer, all
individual producers and all other persons rendering services in connection with
Masters and other recordings for advertising and purposes of trade in connection
with the promotion and sale of records and Video Songs hereunder, Company's
record business and products, and Artist's career, or Company may refrain from
any or all of the foregoing; as used herein, the name of a group or person
includes, without limitation, all past, present and future professional names
used by the applicable group and all past, present and future legal and
professional names used by the applicable person. Except in connection with
records which have been recorded for third parties prior to the commencement of
the term hereof and which third parties own and have the right to exploit as of
the date hereof without the consent of Producer or Artist, (i) the foregoing
rights with respect to Artist shall be exclusive to Company for the Territory
during the term hereof and (except as expressly set forth herein) non-exclusive
thereafter, and the foregoing rights with respect to Producer shall be
non-exclusive at all times, and (ii) during the term hereof, neither Producer
nor Artist shall directly or indirectly authorize the use of Artist's name,
likeness or other identification, voice or other sound effects, or performance,
for or in connection with the production, sale, advertising or exploitation of
13
<PAGE> 14
phonograph records in the Territory by or for any person other than Company.
During the term hereof, Company may bill, advertise, and describe Artist for the
Territory as, and Producer agrees to use Producer's reasonable efforts with
respect to other aspects of Artist's career to cause Artist to be billed,
advertised and described as, an "Exclusive `Company'/'Producer' Artist", or by a
similar designation. Producer will deliver to Company any photographs and other
likenesses of and biographical material concerning Artist, label data and any
other material, any or all of which Producer or Artist may own or control and
which Company reasonably may require to exploit and promote records hereunder.
Company agrees that, notwithstanding anything to the contrary contained herein,
all likenesses of and biographical material concerning Artist used hereunder
shall be subject to Producer's approval; provided, that such approval shall be
deemed given with respect to any material submitted by Producer; provided,
further, that such approval shall be deemed given with respect to any such
material which Producer does not disapprove in writing within seven (7) business
days after Producer has been provided with a copy of such material at Producer's
notice address hereunder. If Producer objects to any previously approved
likeness (other than any likeness embodied in any Video Song or on the packaging
for any record hereunder) or biographical material and provides Company with
replacements therefor which are approved by Company, then after such
replacements have been so provided, Company shall not make any new use of those
likenesses and biographical material to which Producer has objected. Company's
inadvertent failure to comply with the foregoing requirements with respect to
likenesses and biographical material shall not be deemed a breach hereof;
provided, that, after Company's receipt of notice from Producer of any such
failure, Company shall use reasonable efforts to prospectively comply with the
foregoing provisions with respect to likenesses and biographical material.
(c) Producer agrees that during the term hereof:
(i) Neither Producer nor Artist shall enter into any
agreement or make any commitment which would interfere with Producer's or
Artist's performance of any of the terms or provisions hereof.
(ii) Except as permitted pursuant to paragraph 24 below,
Artist shall not perform, and Producer shall not authorize or allow Artist to
perform, for the purpose of making phonograph records for distribution or sale
in the Territory by or for any person other than Company.
(iii) Notwithstanding anything to the contrary contained
herein, neither Producer nor Artist shall, without Company's prior written
consent, promote, advertise, endorse or otherwise use Artist's name, likeness or
logo (whether presently or hereafter used by Artist) in connection with the
sale, distribution, advertisement or other exploitation of any blank tapes or
other medium capable of recording sound, including, without limitation,
reel-to-reel tapes, cartridges, cassette tapes and recordable compact discs,
whether for financial remuneration, promotional consideration or otherwise.
(iv) If Artist makes any sound recording for motion
pictures, television, radio or any other medium, or if Artist performs as a
member of the cast in making sound recordings for a live theatrical
presentation, then Artist will do so only pursuant to a written contract
prohibiting the use of such recordings, directly or indirectly, for phonograph
record
14
<PAGE> 15
purposes by any person other than Company. Upon Company's request, Producer
shall promptly deliver (or cause Artist to deliver) to Company a true and
correct copy of the pertinent provisions of each such contract.
(d) Company may take such action as it deems necessary, in
Producer's and/or Artist's name and/or in its own name, to enforce and protect
its rights under this agreement, including, without limitation, taking action
against any person who uses the performance, name, photograph or other likeness,
other identification, voice and/or sound effects of Artist in violation of
Company's rights hereunder; such action shall be at Company's sole cost and
expense except with respect to matters which involve breaches of Producer's
warranties, representations or agreements hereunder or as to which Producer is
obligated to indemnify Company hereunder. Producer may, at Producer's sole cost
and expense, participate in Company's efforts to enforce its rights hereunder,
but the final control and disposition of any and all such efforts shall remain
with Company.
(e) Producer and Artist recognize and acknowledge that Company
has not made, and does not hereby make, any representation or warranty with
respect to the quantity (if any) of sales of records embodying Masters. Producer
and Artist recognize and acknowledge that the sale of phonograph records is
speculative and agree that the judgment of Company (and its subsidiary and
affiliated companies and Company's Licensees) in regard to any matter affecting
the sale, distribution and exploitation of said records shall be binding and
conclusive upon Producer and Artist. Producer warrants, represents and agrees
that neither Producer nor Artist shall make any claim, nor shall any liability
be imposed upon Company or Company's Licensees based upon any claim, that more
sales could have been made or better business could have been done than was
actually made or done by Company or Company's Licensees.
7. Release Commitment.
(a) Provided that neither Producer nor Artist is then in
material breach hereunder, Company shall release each Commitment Album in the
United States not later than the later of (i) one hundred twenty (120) days
after delivery of such album, or (ii) nine (9) months after release by Company
in the United States of the immediately preceding Commitment Album hereunder;
provided, that if the last day on which Company would be obligated pursuant to
the foregoing to release any album hereunder falls between October 1 and
December 31 of any year, then Company shall not be obligated to release such
album in the United States prior to the fourth week of January of the next
succeeding year; provided, further, that if U.S. Net Sales of the immediately
preceding Commitment Album exceed two hundred fifty thousand (250,000) as of the
date on which a particular Commitment Album is delivered hereunder, then the
foregoing extension shall only apply if pursuant to the provisions hereof
Company is obligated to release such album between November 1 and December 31 of
any year. If Company fails to release any album as aforesaid, Producer's sole
remedy shall be the right for thirty (30) days after the expiration of such one
hundred twenty (120) day or nine (9) month period (as such period may be
extended as set forth above) to give Company notice of such failure. If Company
fails to release the applicable album in the United States within sixty (60)
days after such notice, Producer shall have the right (as Producer's sole
remedy) for forty-five (45) days after the expiration of such sixty (60) day
period to terminate the term hereof by notice to Company; provided, that if
Company releases the applicable album in the United States in
15
<PAGE> 16
accordance with the terms of this agreement prior to Company's receipt of such
notice, then Producer's such notice shall be of no force or effect. Producer's
failure to give Company notice within any of the time periods set forth herein
shall be a waiver of Producer's right to terminate the term hereof as aforesaid.
Notwithstanding anything to the contrary contained in paragraph 1 hereof, if
Company's obligation to release in the United States the last Commitment Album
of any period of the term is extended until January of a particular year
pursuant to this paragraph 7(a), then the then-current period of the term shall
expire on the later of April 30 of such year or the date such period would
otherwise expire pursuant to paragraph 1 hereof.
(b) If Producer has the right to terminate the term of this
agreement as a result of Company's failure to release any Commitment Album
hereunder and Producer properly exercises such right in accordance with
paragraph 7(a) above, then Producer shall have the option, exercisable by notice
to Company no later than one hundred twenty (120) days after such termination,
to purchase such unreleased album from Company; provided, that if prior to
Company's receipt of Producer's such notice, Company commences the manufacture
of copies of such album with the intention of releasing such album [and if
Company, in fact, thereafter commercially releases such album within ninety (90)
days after receipt of such notice], then such election to purchase shall be of
no force and effect and Company shall have no obligation to sell such album to
Producer. The purchase price for any such unreleased album shall be an amount
equal to all sums actually paid by Company pursuant to paragraphs 3 and 4 hereof
with respect to such unreleased album less the amount of any excess recording
costs for such album which were incurred solely as the result of Company's
culpable acts or omissions (such amount being hereinafter referred to as the
"Purchase Price"), and the Purchase Price shall be paid to Company concurrently
with the transfer of all rights in the album to Producer. Further, as a
condition of the right of purchase and the transfer of such rights, Producer
shall execute Company's then-current standard form master purchase agreement.
(c) (i) As used herein, the term "Qualified Commitment Album"
means a Commitment Album which achieves a position in the top 20 positions in
the Billboard magazine "The Billboard 200" album chart (or such a position in
the equivalent album chart in any successor leading United States music industry
trade publication). Provided that neither Producer nor Artist is then in
material breach hereunder, Company shall cause the release of each Qualifying
Commitment Album in Canada, Australia and Japan (each of the foregoing
territories being herein referred to as a "Release Territory") not later than
one hundred twenty (120) days after the applicable album becomes a Qualified
Commitment Album.
(ii) Upon Company's failure to cause the release of any
Qualified Commitment Album in any particular Release Territory, as aforesaid,
Producer's sole remedy shall be the right for thirty (30) days following the
expiration of such one hundred twenty (120) day period (as such period may be
suspended and extended as set forth herein) to notify Company of such failure,
and if Company fails to cause the release of such album in the applicable
Release Territory within sixty (60) days (the "Cure Period") after such notice,
Producer shall have the right, exercisable by notice to Company within thirty
(30) days after the expiration of the Cure Period, to exercise an option (the
"Single Album Third Party Licensee Option") with respect to the applicable
Release Territory. In the event that Producer exercises the Single Album Third
Party Licensee Option with respect to a particular Release Territory, then the
following shall be applicable:
16
<PAGE> 17
(A) Company and Producer shall jointly have the
right to license to any one or more third parties (whether or not owned by or
affiliated with Company) the right to manufacture, distribute and sell records
embodying such unreleased album (the "Licensed Masters") for the applicable
Release Territory, such license to be limited to the right to sell copies of
such album as a whole and to release single records derived solely therefrom,
with all other rights in and to the Licensed Masters being reserved to Company.
Any such third party licensee is referred to in this paragraph 7(c)(ii) as a
"Third Party Foreign Licensee". Producer's choice of Third Party Foreign
Licensees shall be subject to Company's approval; Company agrees not to
unreasonably withhold Company's approval of Artist's choice of any particular
company as a Third Party Foreign Licensee.
(B) The license issued by Company and Producer
to each Third Party Foreign Licensee shall require such Third Party Foreign
Licensee to agree for Company's express benefit to account to Company one
hundred percent (100%) of all advances and royalties payable by such Third Party
Foreign Licensee with respect to the exploitation of the Licensed Masters by
such Third Party Foreign Licensee pursuant to the applicable license agreement.
Company shall account to and pay royalties to Artist in respect of such
exploitation by Third Party Foreign Licensee in accordance with applicable
provisions of paragraph 3(a) hereof and Exhibit A hereto; provided, that Company
shall not be obligated to credit Producer's royalty account with more than fifty
percent (50%) of the royalties credited to Company's royalty account by the
applicable Third Party Foreign Licensee.
(C) The license issued by Company and Producer
to each Third Party Foreign Licensee shall require such Third Party Foreign
Licensee to be solely responsible for and make any and all payments required to
be made in connection with the manufacture, distribution and sale or other
exploitation of records embodying Licensed Masters in the applicable Release
Territory, including, without limitation, mechanical or copyright fees or
royalties, contributions which may become due to the AFM Music Performance Trust
Fund, the AFM Special Payments Fund, or any other union trust fund, and shall
require each Third Party Foreign Licensee to hold Company free and harmless from
any and all claims in connection therewith; provided, that Company shall pay
royalties to Producer in accordance with the foregoing subparagraph (B).
(D) The license issued by Company and Producer
to each Third Party Foreign Licensee shall require such Third Party Foreign
Licensee to indemnify and hold Company and Company's licensees harmless from any
damages, liabilities, cost and expenses, including legal expenses and reasonable
attorneys' fees, arising out of any and all uses of the Licensed Masters by such
Third Party Foreign Licensee or its successors, assigns or licensees.
(iii) In the event that Company fails to cause the
release in a Release Territory, as herein required, any two (2) consecutive
Qualifying Commitment Albums, Producer's sole remedy shall be to provide Company
with notice of such failure within thirty (30) days after expiration of the
ninety (90) day period specified above with respect to the second of such
albums. Provided that Producer shall have given Company notice of such failure
as aforesaid, and provided that the Company fails to cause the release in such
Release Territory of either of such albums within the Cure Period with respect
to the second of such albums, Producer shall have the right, exercisable by
notice to Company within thirty (30) days after the expiration
17
<PAGE> 18
of the Cure Period with respect to the second of such albums, to exercise the
General Third Party Licensee Option for such Release Territory, and, if Producer
does so, then the provisions of paragraphs 7(c)(ii)(A), 7(c)(ii)(B), 7(c)(ii)(C)
and 7(c)(ii)(D) above shall be applicable in all respects to such albums and to
all subsequently-delivered Commitment Albums.
(iv) Producer shall not deliver any particular Masters
or Album Artwork relating thereto (as the term "Album Artwork" is defined in
paragraph 25 below) to any Third Party Foreign License prior to the delivery of
such Masters and Album Artwork to Company. In addition, no license issued by
Company and Producer shall authorize the exploitation of any particular Masters
prior to the earlier of (A) the last date on which Company can timely release
such Masters in the United States pursuant to paragraph 7(a) above, or (B) the
date on which Company initially releases such Masters in the United States.
(v) Notwithstanding anything to the contrary contained
herein, if Company fails to cause the release of any Qualifying Commitment Album
in any particular Release Territory because, in the good-faith judgment of
Company or Company's licensee for such Release Territory, such release would
either be illegal or would contravene the moral or ethical standards prevailing
in such Release Territory because of the lyric content of such album or the
Album Artwork therefor, then Company shall not be obligated to cause the release
of such album in such Release Territory as set forth in paragraph 7(c)(i) above
and, accordingly, Producer shall not have the right to exercise the Third Party
Licensee Option because of such non-release; provided, that if Producer revises
the applicable Qualifying Commitment Album or Album Artwork in a way that
obviates the reason for non-release in the good faith judgment of Company or
Company's applicable licensee, then Company's obligation to cause the release of
such album in the applicable Release Territory shall be reinstated as to such
revised album but, for the purpose of such release obligation in such Release
Territory, such album shall be deemed to have become a Qualifying Commitment
Album no earlier than the date upon which Producer delivers to Company such
revised album and/or Album Artwork, as applicable.
8. Re-recording Restrictions.
(a) Producer, on Producer's and Artist's behalf, agrees that
Artist shall not perform in any manner any selection (or portion thereof)
recorded hereunder, whether or not released by Company, for the purpose of
making records for distribution or sale in the Territory by or for any person
other than Company, at any time prior to the later of the following dates (such
later date, with respect to any such selection, is herein sometimes referred to
as the "Restriction Date"): (i) five (5) years after the date of delivery to
Company of the last Master embodying such selection, or (ii) two (2) years after
the expiration or termination of the term of this agreement or any subsequent
agreement between Company and Producer (or Artist or any person furnishing
Artist's recording services or the results and proceeds thereof) with respect to
Artist's recording services.
(b) Except as permitted pursuant to paragraph 24 below, neither
Producer nor Artist shall at any time manufacture, distribute or sell, or
directly or indirectly authorize the manufacture, distribution or sale in the
Territory by any person other than Company of phonograph records embodying (i)
any performance rendered in any manner by Artist during the term of this
agreement, or (ii) any performance rendered in any manner by Artist after the
18
<PAGE> 19
expiration or termination of the term of this agreement of a selection recorded
hereunder, whether or not released by Company, if such performance is rendered
prior to the Restriction Date applicable thereto. Furthermore, Artist shall not
record, nor shall Producer or Artist directly or indirectly authorize to be
recorded for any purpose, any such performance without in each case taking all
reasonable measures necessary to prevent the manufacture, distribution or sale
in the Territory at any time by any person other than Company of phonograph
records embodying such performance. Specifically, but without limiting the
generality of the foregoing, if, after the expiration or termination of the term
of this agreement, Artist performs for any purpose any selection recorded
hereunder prior to the Restriction Date applicable thereto, then Artist will do
so only pursuant to a written contract containing an express provision that
neither such performance nor any recording thereof will be used directly or
indirectly for the purpose of making phonograph records for distribution or sale
in the Territory. Upon Company's request, Producer shall promptly deliver (or
cause Artist to deliver) to Company a true and correct copy of the pertinent
provisions of each such contract.
9. Warranties and Representations.
Producer warrants, represents and agrees that:
(a) Producer and Artist are free to enter into and perform this
agreement, and neither Producer nor Artist is under any restriction or
obligation which will impair their full performance of their respective
obligations hereunder or impair Company's full enjoyment of Company's rights
hereunder. Without limiting the foregoing, Producer specifically warrants and
represents that no selection recorded or to be recorded by Artist hereunder is
or will be subject to any re-recording or reproducing restriction under any
previous recording or production contract to which Producer or Artist may have
been a party, and that neither Producer nor Artist nor any other person
rendering services in connection with Masters or other recordings is or will be
a party to any contract which would in any way impair the rights granted to
Company hereunder.
(b) All Masters and other recordings shall be free of all liens
and encumbrances, and there will be no claims, demands or actions pending or
threatened with respect thereto other than any such liens, encumbrances, claims,
demands or actions arising from Company's acts or omissions.
(c) Neither any name(s) used by Artist, the Masters, any other
recordings, any of the selections embodied therein, any other matters or
materials supplied by Producer or Artist hereunder, nor any exploitation or use
of any of the foregoing, will violate or infringe upon any civil, personal or
proprietary right of any person, including, without limitation, trademarks,
trade names, copyrights and rights of privacy and publicity, and all label copy
and liner-note information provided by Producer and/or Artist hereunder upon
delivery of each Master shall be accurate and complete.
(d) Neither Producer nor Artist shall, at any time prior to the
date occurring nine (9) months after the delivery of the last Commitment Album
delivered prior to the expiration or termination of the term hereof [or twelve
(12) months after such delivery if Company suspends its obligation to release
such album until January of any particular year pursuant to paragraph 7(a)
above] sell, license or otherwise exploit in any manner whatsoever, or
19
<PAGE> 20
authorize any third party to sell, license or otherwise exploit, any recording
embodying the performances of Artist which is now or hereafter owned or
controlled by Producer or Artist [whether recorded during or prior to such nine
(9) month or twelve (12) month period, as applicable], and any selections
embodied in such recordings are and shall be subject to paragraph 8(a) above.
(e) The selections embodied in Masters and other recordings
shall be available for mechanical licensing to Company in accordance with
paragraph 5 above, and as of the date hereof no Controlled Compositions are
owned or controlled by a third party.
(f) Other than as specifically set forth in this agreement,
Company shall be subject to no costs, fees, advances, charges or royalties for
or in connection with the recording, sale, use or exploitation of the Masters
and other recordings.
(g) Artist is, and shall remain, a member in good standing of
any appropriate union(s) with which Company may at the time of recording or
delivery of any Master or other recording hereunder have an agreement lawfully
requiring such union membership.
(h) All Masters and other recordings shall be produced under and
in conformity with all union agreements to which the Masters and other
recordings may at any time be or become subject. The foregoing warranties and
representations are included for the benefit of the AFM, AFTRA, all other
appropriate unions, their respective members whose performances are embodied in
Masters or other recordings, and Company, and may be enforced by such unions,
their respective designees or by Company.
(i) (i) During the term of this agreement, Producer shall have
the sole and exclusive right to Artist's recording services under a valid and
binding contract with Artist, which contract shall grant to Producer all rights
necessary or desirable for Producer's full performance hereunder. Producer shall
supply a true copy of such contract to Company upon demand. Such contract does
not and will not require the payment to Artist (or to a person on Artist's
behalf) of a royalty, advance or other monies in excess of monies payable to
Producer hereunder. During the term hereof and prior to the Restriction Date
with respect to any Master or other recording hereunder, Producer shall not in a
manner which may in any way adversely affect Company's rights hereunder (A)
release Artist from any term or provision of such contract; (B) agree to any
termination or modification thereof; (C) fail to exercise any renewal,
suspension or extension option with respect thereto; or (D) breach said contract
in any manner.
(ii) Concurrently with Producer's execution hereof,
Producer shall procure and deliver to Company an inducement letter in the form
of Exhibit B hereto (the "Inducement Letter") signed by Artist and Producer.
Producer shall cause Artist to comply with such Inducement Letter, and Producer
shall be bound by the terms and conditions thereof. If Company elects to
directly receive Artist's services under paragraph 4 of the Inducement Letter
pursuant to a claim by or through Artist that Producer is no longer entitled to
Artist's services, then Company's obligations under this agreement shall be
automatically suspended until it is determined, through final, non-appealable
award (judgment or arbitration) or written settlement agreement, whether or not
Producer is entitled to Artist's recording services as required by this
agreement. Further, Company shall have access to Producer's books and records so
that
20
<PAGE> 21
Company may, at its election, account and make payments directly to Artist,
which payments shall fully satisfy Company's obligations to make payments to
Producer hereunder during such suspension. If and when Producer is so determined
to have been entitled to Artist's services as required herein, then (A) such
suspension shall thereupon be terminated, (B) Company shall pay Producer any
amounts withheld during the suspension, less any amounts actually paid by
Company to Artist, to any producer of Masters or other recordings and to any
other persons who may be entitled to receive royalties or other sums in respect
of Masters or other recordings, any and all of which shall be deemed to have
been paid hereunder, and (C) any Masters and other recordings recorded by Artist
during such suspension shall be deemed to be Masters or other recordings, as
applicable, recorded hereunder. If and when Producer is so determined not to
have been entitled to Artist's services as required hereunder, then the term of
this agreement shall be deemed to have terminated as of the date the suspension
commenced, recordings made directly for Company under the terms of the
Inducement Letter shall be and remain Company's sole and exclusive property, not
subject to this agreement insofar as Producer is concerned, and Company shall
have no obligation whatsoever to pay any monies to Producer with respect to such
recordings, whether earned before or after the date of such termination.
(iii) Provided that Artist fully performs all of
Artist's material obligations to Company under the terms of the Inducement
Letter (including, without limitation, the timely delivery of Masters in
satisfaction of the Recording Commitment) and provided further, that Company has
not terminated the term of this agreement, the term of this agreement shall
continue without interruption notwithstanding a suspension under paragraph
9(i)(ii) above. However, any extension of the term of the agreement between
Company and Artist shall likewise extend the then-current period of the term
hereof and any applicable subsequent period of the term hereof. The exercise by
Company of any option under the agreement between Company and Artist shall be
deemed an exercise of the corresponding option under paragraph 1 above. The
provisions of this paragraph 9(i)(iii) are subject to the last sentence of
paragraph 9(i)(ii) above.
(iv) Company shall have, and Producer hereby grants to
Company, all rights acquired and to be acquired by Producer under Producer's
contract with Artist which are necessary or desirable to enable Company to enjoy
its rights under this agreement. Producer shall, for the express benefit of
Company, require the performance by Artist of said contractual obligations so as
to enable Company to enjoy the rights granted to Company by Producer. Company
may participate in Producer's efforts to enforce such contract, and Producer
hereby grants to Company the power and authority to enforce the performance of
all such contractual obligations directly against Artist in the name of Producer
and/or Company, as Company may elect, including the seeking of injunctive or
other equitable relief, as well as seeking the recovery of damages at law.
(j) Company's acceptance and/or use of Masters, other recordings
or other matters or materials hereunder shall not constitute a waiver of any of
Producer's and/or Artist's warranties, representations or agreements in respect
thereof.
(k) Producer and Artist agree to use their good-faith efforts to
record and produce commercially acceptable Masters hereunder. Without limiting
the foregoing, with respect to each Commitment Album after the First Album: (i)
Producer and Artist agree to use
21
<PAGE> 22
their good faith efforts to produce and record Masters hereunder which are
(unless otherwise requested in writing by Company) reasonably consistent in
style, content and caliber with the First Album; and (ii) Producer and Artist
agree not to produce and record Masters that appeal to a so-called "limited
market" (e.g., seasonal recordings and children's recordings) unless otherwise
requested in writing by Company.
(l) Producer does not have, and during the term hereof shall not
acquire, the right to require Artist to make any recordings other than the
Masters of the Recording Commitment and any other recordings which are delivered
to Company hereunder.
(m) If Producer is a corporation, Producer is and at all times
during the term hereof shall be a corporation in good standing in the
jurisdiction of its incorporation.
(n) Artist (and each member of Artist, if Artist is a group) is
a United States citizen and is at least eighteen (18) years of age.
10. Indemnification.
(a) Producer agrees to indemnify and hold Company and its
parent, affiliates, divisions, successors and assigns and the officers,
directors, and employees of the foregoing harmless from and against any
liability, damage, cost or expense (including reasonable costs and reasonable
attorneys' fees) occasioned by or arising out of any third-party claim, demand
or action which is reduced to final non-appealable judgment or settled with
Producer's written consent and (i) which arises as a result of the acts or
omissions of Producer, Artist and/or their respective agents, or (ii) which is
inconsistent with any warranty, representation, agreement or grant of rights
made or assumed by Producer or Artist hereunder. Company agrees to give Producer
notice of any claim, demand or action to which the foregoing indemnity applies,
and Producer may participate in the defense of same at Producer's expense,
through counsel of Producer's choice; provided, that the final control and
disposition of same (by settlement, compromise or otherwise) shall remain with
Company after good-faith consultation with Producer and Producer's counsel.
Producer agrees to pay Company on demand any amount for which Producer may be
responsible under the foregoing indemnity and, without limiting any of Company's
other rights or remedies, upon the making or filing of any claim, demand or
action subject hereto, Company shall be entitled to withhold sums payable under
this agreement in an amount reasonably related to the potential liability, plus
reasonable costs and reasonable attorneys' fees; provided, that Company shall
not so withhold monies if Producer posts a bond which has been reasonably
approved in all aspects (form, amount, duration, surety, etc.) by Company.
Further, at such time, if ever, as such withheld monies become payable to
Producer, Company shall pay Producer interest on such withheld and payable funds
at the rate prevailing at Bank of America in Los Angeles, California for regular
passbook savings accounts from time to time during the period for which such
monies were so withheld. With respect to any claim or demand, Company shall not
withhold monies hereunder for more than one (1) year after Company has received
notice of such claim or demand unless legal action with respect to such claim or
demand is filed and served within such one (1) year period; provided, that if
any such legal action is filed and served within such one (1) year period and is
thereafter withdrawn or dismissed and not refiled within three (3) months after
withdrawal or dismissal, then Company shall remit such withheld monies (less
actual costs incurred by Company) to Producer promptly
22
<PAGE> 23
after the expiration of such three (3) month period. Producer shall, at
Company's request, cooperate fully and cause Artist to cooperate fully with
Company in any controversy which may arise with third parties or litigation
which may be brought by third parties concerning this agreement or any of
Company's rights hereunder. If Producer fails to consent to a proposed
settlement, Company shall nonetheless have the right to enter into such proposed
settlement but, in such event, Producer shall not be liable for the amount of
the settlement, but shall be liable for all reasonable expenses (including
reasonable costs and reasonable attorneys' fees) which Company incurred up to
and including the date as of which the claim is settled. Alternatively, if
Producer fails to consent to a proposed settlement and Company elects not to
enter into such settlement agreement in accordance with the immediately
preceding sentence, Producer shall, if Company so elects and at Company's
written request, thereafter directly bear all costs of defense and shall
promptly reimburse Company for all reasonable expenses incurred by Company
(including reasonable costs and reasonable attorneys' fees) up to and including
the date as of which Producer failed to consent to such proposed settlement and,
if Producer fails to promptly undertake such future costs and reimburse Company
for such accumulated expenses, then Company may settle such claim in its sole
discretion and Producer's indemnification shall apply to such settlement.
(b) Company agrees to indemnify and hold Producer and its
parent, affiliates, divisions, successors and assigns and the officers,
directors and employees of the foregoing harmless against any liability, damage,
cost or expense (including reasonable costs and reasonable attorneys' fees)
occasioned by or arising out of any third-party claim, demand or action
inconsistent with any warranty, representation or agreement made or assumed by
Company hereunder which is reduced to final non-appealable judgment or settled
with Company's written consent. In all relevant respects, the provisions of
paragraph 10(a) hereof shall be applicable to the scope of such indemnification.
11. Force Majeure; Defaults and Remedies.
Notwithstanding anything to the contrary contained in this agreement:
(a) If Company's performance hereunder is delayed or becomes
impossible or commercially impracticable by reason of any force majeure event,
including, without limitation, any act of God, fire, earthquake, strike, civil
commotion, act of government or any order, regulation, ruling or action of any
labor union or association of artists affecting Company and/or the phonograph
record industry, Company, upon notice to Producer, may suspend its obligations
hereunder for the duration of such delay, impossibility or impracticability, as
the case may be. In the event any force majeure suspension exceeds six (6)
consecutive months, Producer may terminate the term of this agreement upon ten
(10) days notice to Company; provided, that any such termination by Producer
shall be effective only if the force majeure event does not affect a substantial
portion of the United States recording industry, in no way involves Producer's
or Artist's acts or omissions, and Company fails to terminate the suspension
within ten (10) days after its receipt of Producer's notice. Company shall not
withhold payment of any royalties (including, without limitation, foreign
royalties and mechanical copyright royalties) during any such suspension unless
the force majeure event materially impairs Company's ability to calculate and/or
pay royalties.
23
<PAGE> 24
(b) Each of the following shall constitute an event of default
hereunder:
(i) Artist's voice and/or playing ability becomes
materially impaired as determined by a physician reasonably designated by
Company and Producer [provided, that Producer shall not thwart Company's rights
under this paragraph 11(b) by failing to designate a physician], Artist ceases
to seriously pursue Artist's career as a musical performing artist, Producer
attempts to assign this agreement other than as permitted under paragraph 14
hereof, or Producer and/or Artist fails, refuses or neglects to fulfill any of
their respective material obligations hereunder.
(ii) Producer or Artist commences a voluntary case under
any applicable bankruptcy, insolvency or other similar law now or hereafter in
effect or consents to the entry of an order for relief in any involuntary case
under such law or consents to the appointment of or taking possession by a
receiver, liquidator, assignee, trustee or sequestrator (or similar appointee)
of Producer or Artist or any substantial part of Producer's or Artist's property
or Producer or Artist makes an assignment for the benefit of creditors or takes
any action (whether corporate or otherwise) in furtherance of any of the
foregoing which substantially affects Company's material rights hereunder.
(iii) A court having jurisdiction over the affairs or
property of Producer or Artist enters a decree or order for relief in respect of
Producer or Artist or any of Producer's or Artist's property in an involuntary
case under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect or appoints a receiver, liquidator, assignee, custodian,
trustee or sequestrator (or similar appointee) of Producer or Artist or for any
substantial part of Producer's or Artist's property or orders the winding up or
liquidation of Producer's or Artist's affairs and such decree or order remains
unstayed and in effect for a period of fifteen (15) consecutive days.
(c) On the occurrence of any event of default set forth in
paragraph 11(b) above, Company, without limiting its other rights or remedies,
may, by notice to Producer, elect to (i) suspend its obligations to Producer
hereunder for the duration of such event (except that Company shall not suspend
its obligation to pay royalties otherwise payable hereunder if Producer's
failure to perform Producer's obligations is caused by reasons beyond the
reasonable control of Producer and Artist), (ii) terminate the term of this
agreement by notice to Producer given at any time (whether or not during a
period of suspension based on such event or based upon any other event), and
thereby be relieved of all liability other than any obligations hereunder to pay
royalties in respect of Masters delivered prior to termination, and/or (iii)
require Artist to render Artist's exclusive services directly to Company in
accordance with the Inducement Letter.
(d) Producer acknowledges that its performance and the services
of Artist hereunder, and the rights granted to Company herein, are of a special,
unique, extraordinary and intellectual character which gives them peculiar
value, the loss of which cannot be reasonably or adequately compensated in
damages in an action at law, that a breach by Producer or Artist of this
agreement will cause Company irreparable injury and that, subject to paragraph
14 hereof, Company is not obligated to accept the performance of Producer or
Artist hereunder from, or to render performances due to Producer hereunder to,
any person other than Producer, including,
24
<PAGE> 25
without limitation, any successor in interest to Producer. Company shall be
entitled to seek injunctive and/or other equitable relief to prevent a breach of
this agreement by Producer and/or Artist, which relief shall be in addition to
any other rights or remedies which Company may have, whether for damages or
otherwise.
12. Promotional activities of Artist.
From time to time, at Company's reasonable request and whenever same
will not unreasonably interfere with other professional activities of Artist,
Producer shall cause Artist to: appear at photographic sessions in connection
with the creation of artwork, poster and cover art to be used for the
advertising, marketing and promotion of records hereunder; appear for interviews
with representatives of the press and Company's publicity personnel; and advise
and consult with Company regarding Artist's performances hereunder. At Company's
request and subject to Artist's reasonable availability, Producer shall also
cause Artist to make personal appearances on radio and television and elsewhere
and to record taped interviews, spot announcements, trailers and electrical
transcriptions, all for the purpose of advertising, exploiting and/or promoting
records hereunder. Neither Producer nor Artist shall be entitled to any
compensation for such services, except as may be required by applicable union
agreements; provided, that Company shall, on a non-recoupable basis, pay
directly or reimburse Producer for the reasonable travel and living expenses
incurred by Artist pursuant to a budget approved by Company in advance in
connection with the rendition by Artist of services rendered at Company's
direction pursuant to this paragraph 12. Notwithstanding the foregoing
provisions of this paragraph 12, Producer's failure to comply with the
requirements of this paragraph 12 in any instance shall not constitute a breach
of this agreement unless Producer consistently refuses or fails to comply with
such requirements and/or unless Producer refuses or fails to cause Artist to
perform a reasonable amount of such requirements with respect to any Commitment
Album.
13. Insurance.
Company shall have the right at any time during the term hereof to
obtain term insurance on the life of Artist and/or disability insurance on
Artist [or such member(s) of Artist as Company may designate if Artist is a
group] at Company's sole cost and expense, with Company being the sole
beneficiary thereof. Producer agrees to cause Artist to fully cooperate with
Company's reasonable requests, at Company's sole cost and expense, in connection
with the obtaining of any such policy, including, without limitation, Artist's
submission to a physical examination and all laboratory tests required in
connection therewith and the completion of any and all documents necessary or
desirable in respect thereof. Neither Producer, Artist nor Artist's estate shall
have any right to claim the benefit of any such policy obtained by Company. The
uninsurability of Artist shall not be deemed a breach of this agreement by
Producer or Artist.
14. Miscellaneous.
(a) Company may assign this agreement to (i) any parent,
subsidiary, sister corporation or other affiliate of Company, (ii) a person
acquiring all or substantially all of the phonograph record assets of Company,
or (iii) an entity merged into or consolidated with Company; provided, that in
the event of any such assignment Company shall remain secondarily liable
hereunder and, accordingly, Producer shall be obligated to exhaust Producer's
remedies
25
<PAGE> 26
against the applicable assignee before proceeding against Company hereunder
unless Producer brings an action against both such assignee and Company and does
not cause, authorize or permit the dismissal of such action with respect to such
assignee or other removal or withdrawal of such assignee prior to Company's
dismissal, removal or withdrawal therefrom. The foregoing shall not prohibit or
in any way restrict Company from assigning or licensing any of its rights
hereunder in the ordinary course of business. This agreement is personal to
Producer, and this agreement and any and all rights and obligations hereunder
may only be assigned by Producer to a corporation or other entity which is, and
during the term hereof shall be, wholly owned and controlled by Artist and/or
the current principals of Producer; provided, that such restriction shall be
binding on each successive assignee, and Producer or Artist, as applicable,
shall in any event remain primarily liable hereunder. This agreement is entire,
and all negotiations and understandings are merged herein. No approvals or
consents by either party hereunder shall be unreasonably withheld unless
otherwise specifically provided herein. After the term hereof, Company shall not
be obligated to secure Producer's consent to any matter as to which Producer's
consent is otherwise required hereunder if LL is no longer alive; after the term
hereof, Producer's failure to withhold in writing any consent requested by
Company shall be deemed to constitute the granting of the requested consent.
This agreement cannot be modified except by an instrument in writing, executed
by both Company and Producer. A waiver of a breach by either party in any one
instance shall not constitute a waiver of any subsequent breach, whether or not
similar. Nothing contained herein shall constitute a partnership between or
joint venture by the parties hereto or constitute either party the agent or
employee of the other [except as set forth in paragraph 6(a) hereof] or impose
any fiduciary relationship upon Company. This agreement is not intended for the
benefit of any third party, except as set forth in paragraph 9(h) hereof.
Company shall not be deemed in default or breach of this agreement unless
Company is given notice thereof and same is not cured within thirty (30) days
after such notice. Producer shall not be deemed to be in default or breach of
this agreement unless Producer is given notice thereof and same is not cured
within thirty (30) days after such notice; provided, that the foregoing shall
not be applicable to any breach which cannot be cured [e.g., the breach of a
re-recording restriction or of a provision of paragraph 11(b)(ii) above];
provided, further, that nothing contained herein shall prevent Company from
seeking immediate injunctive relief. Nothing contained in this agreement shall
be construed to require the commission of any act contrary to law or the
omission of any act required by law, and wherever there is any conflict between
any provision of this agreement and any present or future statute, law,
ordinance or regulation, the latter shall prevail, but in such event the
provision of this agreement so affected shall be curtailed and limited only to
the extent necessary to bring it within legal requirements, and such curtailment
shall not affect the enforceability of this agreement. The headings of the
paragraphs hereof are for convenience only and shall not be deemed to limit or
in any way affect the scope, meaning or intent of this agreement or any portion
hereof. Unless referring to a specifically-identified individual, all references
herein to someone of the masculine gender shall also apply to all, if any,
applicable individuals of the feminine gender and all references herein to
someone of the feminine gender shall also apply to all, if any, applicable
individuals of the masculine gender.
(b) This agreement shall in all respects be interpreted,
enforced and governed by the internal laws of the State of New York applicable
to contracts negotiated and executed in said state by domiciliaries of said
state, which are to be performed entirely in said state and otherwise create
legal relationships existing solely within said state. Any claim, dispute or
26
<PAGE> 27
disagreement arising out of, connected with or in respect of this agreement may
be brought only in the courts of the State of New York or the federal courts
within the State of New York, which courts shall have exclusive jurisdiction
thereof, and each party hereby waives any claim that such courts do not have
jurisdiction or are an inconvenient forum. The parties hereto expressly waive
their right to trial by jury in connection with any claim, demand or action
arising out of this agreement. Any process in any action or proceeding may,
among other methods, be served upon Producer, Artist or Company, as applicable,
by delivering or mailing the same, via registered or certified mail, return
receipt requested, addressed to Producer, Artist or Company, as applicable, at
the address set forth in paragraph 16 hereof or such other address as Producer,
Artist or Company, as applicable, may designate pursuant to paragraph 16 hereof.
Any such delivery or mail service shall be deemed to have the same force and
effect as personal service within the State of New York.
15. Definitions.
As used herein: (a) "person" means a natural person or a partnership,
corporation, association or other entity of any kind; (b) "Master" means a fully
mixed, edited, equalized and leadered fifteen (15) i.p.s. one-quarter inch or
thirty (30) i.p.s. one-half inch tape recording or a fully mixed, edited and
equalized digital tape recording, theretofore unreleased, which (i) has been
accepted by Company as technically and commercially satisfactory for the
production and sale of records, (ii) in Company's reasonable, good-faith opinion
does not constitute an invasion of third-party rights, including, without
limitation, copyright infringement, libel or slander, and does not violate
Company's standards of decency or constitute an obscenity; (iii) embodies a
performance featuring all members of Artist [together with any other featured
artist(s) who have been approved by Company and Producer and as to whom Producer
has obtained all necessary licenses and consents for their performances to be
included on the applicable master recording], of a selection not previously
recorded by Artist [it being understood that multiple versions (e.g., different
mixes or edits) of the same recording shall be deemed to be the same Master],
(iv) has been recorded by Artist in its entirety during the term hereof in a
first-class recording studio (or other recording studio approved by Company);
(v) has a playing time of not less than two (2) minutes, and (vi) unless Artist
is solely an instrumentalist, does not embody solely an instrumental
performance; (c) "other recordings" means all recordings of any kind which are
not Masters (including, without limitation, so-called "outtakes") and which are
recorded by Artist, in whole or in part, during the term hereof, whether or not
delivered hereunder; (d) "delivery," or words of like connotation, means, with
respect to each particular Master or set of Masters, the delivery by Producer to
Company of all necessary approvals, permissions, complete and accurate label
copy and liner-note information, licenses (including, without limitation, those
relating to all samples, if any, interpolated in the Master[s]), consents and
other documents and materials [including, without limitation, Album Artwork (as
herein defined) therefor and a complete and accurate declaration in the form
attached hereto as Exhibit D regarding all samples embodied in said Master(s)
and other recordings] required by Company to commercially release a particular
record embodying such Master(s), the physical tender by Producer of such
Master(s) to Company's engineering department and Company's acceptance of such
Master(s) as complying with paragraph 15(b) above and this paragraph 15(d); (e)
"selection" or "composition" means a single musical composition, including a
medley, and all components and/or versions thereof (musical or otherwise); (f)
"phonograph record" or "record" means all forms of reproduction now or hereafter
known (including reproductions of sound alone and audio-visual reproductions)
27
<PAGE> 28
which are manufactured or distributed primarily for home use, institutional
(e.g., library or school) use, jukebox use or use in means of transportation
(including, without limitation, any computer-assisted media [e.g., a CD-ROM,
CD-I and similar disc systems, interactive cable and/or telephony]); (g) a
"Video Song" means a film, videotape or other device used for the reproduction
of a combination of Artist's audio performance of one (1) selection and a visual
rendition of Artist's performance (and/or other visual accompaniment), including
a dramatization of the applicable selection; (h) a "Home A/V Device" means an
audio-visual record intended primarily for home consumer or institutional (e.g.,
library or school) use, jukebox use or use in means of transportation,
including, without limitation, videocassettes, videodiscs, DVDs or other media
or devices [sometimes individually referred to herein as "New Video Media"] that
allow the consumer to control the viewing of or to interact with the Home A/V
Device, including without limitation, transmission directly into the home that
enables the consumer to view the Home A/V Device at any time; (i) "recording
costs" means all direct costs incurred in the production of Masters and other
recordings through the end of the mastering process in each configuration,
including, without limitation, all sums paid to individual producers, musicians,
vocalists, conductors, arrangers, orchestrators, copyists and engineers; all
costs and expenses of obtaining rights to all samples of master recordings,
selections and other materials embodied in Masters and other recordings
(including, without limitation, all advances, license fees, attorneys' fees and
clearinghouse fees); transportation costs, hotel and living expenses,
immigration clearances and per diems incurred in connection with the attendance
of artists (including Artist), individual producers, musicians and other
essential personnel at recording sessions and the preparation therefor; payments
to a union or guild trustee or fund based on services rendered at recording
sessions (and not based on sales of records hereunder); payments for studio and
rehearsal hall rental; payments for instrument and equipment rental and/or
purchase; payments for tape, editing, mastering, mixing, remixing and other
similar functions; reference dubs; equalizing time; and all other costs and
expenses incurred hereunder which are now or hereafter generally recognized as
recording and mastering costs in the phonograph record industry; (j) an "album"
delivered hereunder means a phonograph record embodying no fewer than ten (10)
Masters having an aggregate playing time of no less than forty-two (42) minutes;
a "multiple album" means an album which is released in any particular
configuration on two (2) or more records which are sold as a unit; "disc" means
a record in any vinyl disc configuration, "tape" means a record in any analog
tape configuration, "CD" or "compact disc" means a record in any compact disc
configuration and "NM" or "New Medium" means a record in any software medium
(including, without limitation, DAT, DCC, Mini-Disc, DVD audio and transmission
directly into the home via any of the following: transmission over wire or
fiber-optic cable or through the air and on-line sales) in which recorded music
is not in general commercial distribution in the United States as of October 1,
1992; (k) "SRLP" means the suggested retail list price of a particular record in
a particular configuration in effect at the time of its sale or return, as
applicable; provided, that in no event shall any return in the United States be
debited to Producer's account hereunder at an SRLP greater than the SRLP at
which the applicable third-party customer's account is credited therefor by
Company's distributor; the "Consumer Price" means the price paid by the consumer
for an NM record sold via direct transmission into the home; (l) "Mini-LP" means
a set of no fewer than four (4) and no more than seven (7) Masters which bears a
SRLP in any particular configuration in the applicable country of the Territory
which is (i) with respect to the United States and Canada, at least Two Dollars
($2.00) less (in the applicable currency) than the SRLP of Company's or
Company's Foreign Affiliate's, as
28
<PAGE> 29
applicable, then-current newly-released top-price albums in such configuration
in the applicable country, and (ii) with respect to any particular country in
the Territory other than the United States and Canada, eighty percent (80%) or
less of the SRLP of the then-current newly-released top-price albums in such
configuration of Company's Foreign Affiliate in such country; (m) "single" or
"single record" means a set of three (3) or fewer Masters; (n) "mid-priced
record" means a record which is released under any label designation, including,
without limitation, the "Modern Records, Inc." label, and bears a SRLP in any
particular configuration in the applicable country of the Territory of at least
sixty-five percent (65%) of the SRLP of the majority of Company's or Company's
Foreign Affiliate's, as applicable, then-current, newly-released top-price
records in such configuration but not more than the greater of (i) eighty
percent (80%) of the SRLP of Company's or Company's Foreign Affiliate's, as
applicable, then-current newly-released top-price records in such configuration,
or (ii) Two Dollars ($2.00) (or the local currency equivalent thereof) less than
the SRLP of the majority of Company's or Company's Foreign Affiliate's, as
applicable, then-current newly-released records in such configuration; (o)
"budget record" means a record which is released under any label designation,
including, without limitation, the "Modern Records, Inc." label, and bears a
SRLP in any particular configuration in the applicable country of the Territory
of the greater of (i) less than sixty-five percent (65%) of the SRLP of the
majority of Company's or Company's Foreign Affiliate's, as applicable,
then-current newly-released top-price records in such configuration or (ii) Two
Dollars ($2.00) (or the local currency equivalent thereof) less than the SRLP of
the majority of Company's or Company's Foreign Affiliate's, as applicable,
then-current mid-price records in such configuration; (p) "sampler record" means
a record embodying Masters together with master recordings by artists other than
Artist which is intended for sale at a price in a particular configuration in
the applicable country which is fifty percent (50%) or less of the SRLP of
Company's or Company's Foreign Affiliates', as applicable, then-current
newly-released top-price records in such configuration; (q) "normal retail
channels" means sales by Company's distributor in the United States (currently
the WEA Corporation) or by Company's Foreign Affiliates outside the United
States to their retail accounts; (r) "Company's Foreign Affiliates" means
Company's affiliates, or the licensees of Company or of Company's affiliates,
which distribute Company's newly-released albums through normal retail channels
in the Territory but outside the United States and "Company's Licensees" means
all entities (whether or not affiliated with Company and including, without
limitation, Company's Foreign Affiliates) to which Company has directly or
indirectly licensed the right of sale, distribution or exploitation of Masters
and other recordings anywhere in the Territory; (s) "net sales" means the
cumulative number of records sold by Company through Company's distributor in
the United States or through Company's Foreign Affiliates, as applicable, to
independent third parties, for which Company has been paid or credited, less
records returned for credit at any time for any reason, including at Company's
request, and less all credits, cancellations, exchanges or other adjustments,
and "U.S. Net Sales" means net sales of records which are not mid-price or
budget records and which are distributed through normal retail channels in the
United States in disc, tape and CD configurations; (t) "net receipts" means (i)
gross advances or flat fees paid to Company by Company's Licensees which are
specifically paid solely in respect of Masters hereunder, and (ii) gross
royalties received by Company from Company's Licensees [in excess of the gross
advances described in the preceding clause (i), if applicable] in respect of
uses of Masters by Company's Licensees for which Company has been paid or has
otherwise received a credit to Company's account, less Company's expenses in
respect of same, including, without limitation,
29
<PAGE> 30
costs of collection, shipping, taxes, payments to any unions or guilds (or their
trust funds) and mechanical copyright royalties; (u) "configuration" means each
particular format in which phonograph records are now or may in the future be
manufactured or distributed, including, without limitation, 7-inch disc singles,
12-inch disc singles, analog cassette tape albums, digital audio tape albums,
digital compact cassette albums, each format of direct transmission, disc albums
and CD albums; (v) "term" means the initial period and any option period for
which Company has exercised an option under paragraph 1 hereof, and "period of
the term" means the initial period or any particular option period hereunder;
and (w) "sample" means any pre-existing sound recording or other audio component
or composition interpolated in a Master hereunder.
16. Notices.
(a) All notices given to Company hereunder shall be sent to
Company at the applicable address set forth for Company in paragraph 16(b) below
(or such other address as Company may designate by notice to Producer). All
royalties, royalty statements and/or payments, and any and all notices to
Producer and/or Artist hereunder shall be sent to the address set forth for
Producer and Artist in paragraph 16(b) below (or such other address as either
Producer or Artist respectively may designate by notice to Company). All notices
sent under this agreement shall be in writing (whether or not so specified
elsewhere in this agreement). In the case of notices given pursuant to
paragraphs 1 and 7 hereof as well as notices concerning an alleged breach by
Producer, Company or Artist hereunder, each such notice must be sent via
certified or registered mail through the United States mail system (postage
prepaid, return receipt requested) or via telex (with an electronic confirmation
of transmittal) or via overnight Federal Express service (or any similar type of
first class overnight courier service that gives proof of delivery) and shall be
deemed given on the date of the mailing or transmittal thereof. All other
notices hereunder must be given by certified or registered mail through the
United States mail system (postage prepaid, return receipt requested), personal
delivery (with a receipt signed by Artist or a principal or officer of Producer
or Company, as applicable), telegraph (toll prepaid) or telex (with an
electronic confirmation of the transmittal). In the case of accounting
statements sent by Company to Producer hereunder, such statements may also be
sent via regular mail (postage prepaid) and shall be deemed sent on the date the
applicable statement is mailed. Notwithstanding the foregoing, if a force
majeure event materially impairs the effective deposit or delivery of certified
and registered mail by the United States mail system, then those notices
described in the fourth sentence of this paragraph 16(a) may be sent by any of
the alternative delivery methods described in the fifth sentence of this
paragraph 16(a) for the duration of the force majeure event concerned.
(b) Addresses for notices shall be as follows:
TO PRODUCER AND/OR ARTIST: (as set forth above)
TO COMPANY: (as set forth above)
or such other address as either party may designate by notice given as
aforesaid; provided, that the effective date of any notice hereunder regarding
an address change shall be the date such notice is received by the addressee.
Company's failure to serve a courtesy copy of any notice hereunder shall not
constitute a breach of this agreement nor shall any such failure affect the
30
<PAGE> 31
effectiveness of any particular notice which is otherwise given to Producer in
accordance with this agreement.
17. Intentionally omitted.
18. Single Record Selections.
(a) During the term hereof, Producer shall have the right to
approve Company's selection of Masters to be embodied in the "B" side of each
single record released hereunder in the United States; provided, that if
Producer fails to object to a Master selected by Company to be embodied in the
"B" side of any particular such single record within three (3) business days
after Company's request that Producer approve such a selection, then Producer
shall be deemed to have approved Company's such selection. If Producer
disapproves two (2) consecutive selections for the "B" side of any particular
single record as aforesaid, and if at least seven (7) days have elapsed since
Company first requested Producer to approve a selection for the "B" side of such
single record, then Company may thereafter designate the Master [other than the
two (2) selections so disapproved by Producer] to be embodied in such "B" side.
(b) During the term hereof, Company shall consult with Producer
with respect to the selection of Masters to be embodied in the "A" side of each
single record released hereunder in the United States; provided, that in the
event of a dispute with respect to any such designation, Company's decision
shall control; provided, further, that Company's inadvertent failure to so
consult with Producer shall not constitute a breach of this agreement.
19. Video.
(a) The following shall be applicable to any Video Song which
Company and Producer may mutually decide to produce embodying a Master
hereunder, provided that Company hereby agrees, subject to the terms of this
Paragraph 19 and any other applicable terms of this agreement, to produce up to
two (2) Video Songs in connection with each of the first and second albums:
(i) The selection(s) to be embodied in each Video Song
shall be mutually determined by Company and Producer.
(ii) Each Video Song shall be shot on a date or dates
and at a location or locations to be mutually designated by Company and
Producer.
(iii) (A) The producer, director and concept or script
(and any applicable storyboards) for each Video Song shall be mutually
determined by Company and Producer. After consultation with Producer with
respect to the items set forth in the immediately preceding sentence, Company
shall engage the producer, director and other production personnel for each
Video Song and shall be responsible for, and shall pay, the production costs (as
herein defined) of each Video Song in an amount not in excess of a budget to be
established in advance by Company after good-faith consultation with Producer
(the "Production Budget"), provided that Company hereby agrees to a Production
Budget of up to Two Hundred Fifty Thousand Dollars ($250,000) per each committed
Video Song produced pursuant to subparagraph 19(a) hereinabove. Producer shall
be responsible for, and shall pay, the production costs for each
31
<PAGE> 32
Video Song which are in excess of the Production Budget therefor if such excess
is incurred as a result of Producer's or Artist's acts or omissions. If the
production of any Video Song is canceled as the result of Producer's or Artist's
acts or omissions, Producer shall be responsible for, and shall pay, the
production costs incurred in connection therewith, and Company shall have no
obligation to resume production of the Video Song concerned. In the event that
Company pays any production costs for which Producer is responsible pursuant to
the foregoing (which Company is under no obligation whatsoever to do), Producer
shall promptly reimburse Company for such excess upon demand and, without
limiting Company's other rights and remedies, Company may deduct an amount equal
to such excess from any and all monies otherwise payable by Company hereunder.
If any excess production costs are incurred solely as a result of causes other
than Producer's and Artist's acts or omissions, Producer shall not be obligated
to pay such excess costs but, to the extent Company pays such excess costs,
Company shall have the right to recoup such production costs as set forth in
this paragraph 19(a)(iii)(A). Except as set forth above, fifty percent (50%) of
the production costs paid or incurred by Company shall be recoupable only from
royalties payable to Producer with respect to audio-only records under this
agreement, and one hundred percent (100%) thereof shall be recoupable from
royalties payable to Producer with respect to Video Songs pursuant to Exhibit A
hereof, but with respect to any particular Video Song Company shall not so
recoup in the aggregate more than one hundred percent (100%) of the production
costs thereof.
(B) As used herein: (1) "distribution
expenses" of Video Songs means all actual costs paid or incurred by Company in
connection with the distribution of Video Songs other than Company's general
overhead expenses, including, without limitation, the costs of tape stock,
duplication of Video Songs and shipping, and (2) "production costs" of Video
Songs means all direct costs incurred in the production of Video Songs through
the final 1-inch master tape or film, including, without limitation, all sums
paid to or for production companies (including, without limitation, payments to
or for producers, directors, writers and associate producers); payments to or
for technical crews (including, without limitation, payments to or for
cameramen, videomen, maintenance engineers, audio crew members and equipment);
payments to or for lighting crews (including, without limitation, payments for
or to lighting directors, gaffers, electricians, best boys, grips and
equipment); payments to or for set construction crews and materials; payments
for or to production crews (including, without limitation, payments for or to
production managers and assistants, secretaries, floor managers, art directors,
prop masters, make-up and wardrobe personnel and materials, go-fers and script
supervisors); location and police permits and fees (including, without
limitation, hall and studio rental); cartage; equipment rental; transportation
costs, hotel expenses, living expenses and per diems incurred in connection with
location scouting and the attendance of artists and all production personnel at
pre-production, production and post-production sessions for Video Songs and the
preparation therefor; insurance premiums paid in connection with the production
of Video Songs; taxes and contingencies (including fees or mark-ups payable to
any production company or any other person in connection with Video Songs);
payments for tape, film or other stock; payments for on-line and off-line
editing, mixing, Quantel or other special effects, color correction, audio track
transfer or dubbing, title cards and similar functions; creation of one (1)
3/4-inch videocassette with SMPTE code from the 1-inch master videotape;
payments to all extras, sidemen and other persons appearing in Video Songs in
respect of the production and use thereof; payments to any union or guild or
union or guild trustee or fund in respect of Video Songs; and all other costs
and expenses incurred with respect to Video Songs which are now or hereafter
generally recognized
32
<PAGE> 33
in the United States record industry as production costs of audio-visual
programs.
(iv) Producer shall fully cooperate, and shall cause
Artist to fully cooperate, with the reasonable requests of the producer,
director and all other production personnel in the production of each Video Song
and, to the extent required by the script, Producer shall cause Artist to render
Artist's services as a visual performer in connection with each Video Song.
(v) Producer hereby grants (on behalf of Producer,
Artist and any music publishing company that now or hereafter owns or controls
any Controlled Composition recorded by Artist hereunder) (1) Territory-wide,
perpetual licenses to Company for the inclusion and exploitation of all
Controlled Compositions in Video Songs, and (2) perpetual licenses to Company
for public performance in the United States (to the extent that ASCAP and BMI
are unable to grant same) of all Controlled Compositions in Video Songs, each
such license to be issued at no cost and to be effective as of the commencement
of production of the applicable Video Song; moreover, Producer shall obtain such
licenses, on Company's behalf and at no cost to Company, with respect to each
selection recorded hereunder which is written, owned or controlled, in whole or
in part, directly or indirectly, by the individual producer of the Master
embodying such selection, or by any person which is owned or controlled,
directly or indirectly, in whole or in part, by such individual producer. In the
event that, for any reason whatsoever, Company becomes obligated to pay any fee
in connection with such usage, Company shall have the right to deduct the amount
of such license fee from any and all monies otherwise payable by Company
hereunder.
(vi) Company shall have the right to use, and to allow
others to use, each Video Song and any portion(s) thereof for any purpose and in
any manner or medium whatsoever, it being expressly understood and agreed that
no payment shall be due to Producer with respect to any use made of any Video
Song for "advertising and promotional purposes." As used herein, "advertising
and promotional purposes" means all uses which, in its good faith business
judgment, Company deems to be desirable and valuable for the purpose of
advertising and promoting any particular phonograph record in order to induce
the commercial sale of such phonograph record.
(vii) Notwithstanding the provisions of paragraph
19(a)(vi) above, in the event Company receives monetary consideration with
respect to any use of a Video Song (whether such use is for advertising and
promotional purposes or otherwise) which is in excess of a reasonable amount as
reimbursement for the actual costs incurred by Company for tape stock,
duplication of the Video Song and shipping, then Company shall account to
Producer with respect thereto in accordance with paragraph 4 of Exhibit A
hereto. All uses described in this paragraph 19(a)(vii) for which Company
derives such monetary consideration are collectively hereinafter referred to as
"Income-Producing Exploitation."
(viii) In the event that, at any time after the date
when Company and Producer schedule the commencement of production of a
particular Video Song but prior to the completion of Artist's services with
respect to such Video Song, Artist is prevented from commencing or continuing
such services as set forth herein by reason of injury, illness or other
incapacity, Producer shall (A) immediately notify Company of such circumstances,
(B)
33
<PAGE> 34
immediately procure the attention of a duly-qualified physician for Artist, (C)
obtain and provide to Company such physician's certificate detailing fully the
nature of Artist's such incapacity and the circumstances in which such
incapacity arose, (D) cause Artist [or the applicable member(s) of Artist] to
submit to all examinations reasonably required by Company or required by
Company's insurance carrier with respect to such incapacity, and (E) cooperate
with, and cause Artist to cooperate with, Company and Company's insurance
carrier with respect to any insurance claim in connection with such incapacity;
provided, that Company shall not require Artist to fulfill any obligations under
this paragraph 19(a)(viii) in excess of those required by Company's insurance
carrier. Notwithstanding the provisions of paragraph 19(a)(iii) above, if and to
the extent that Company recovers from Company's insurance carrier any production
costs for a particular Video Song which are in excess of the Production Budget
therefor and for which Producer is responsible pursuant to paragraph 19(a)(iii)
above and which have been previously charged against Producer's account
hereunder or for which Producer has theretofore reimbursed Company, Company
shall, upon such recovery, re-credit Producer's account or reimburse Producer,
as applicable, in the amount of such recovery.
(b) In the event that during the term hereof Producer and/or
Artist desires to produce, finance or cause a third party to produce and/or
finance an audio-visual presentation of any duration consisting primarily of
Artist's audio performances of any one or more selections, together with a
visual rendition of Artist's performance or any other visual accompaniment,
including a dramatization of said selection(s) (an "A/V Production"), for
exploitation in any or all media, including, without limitation, television
(cable, satellite or broadcast), Home A/V Devices and theatrical release,
Producer shall give Company notice thereof, which notice shall set forth in as
much detail as possible the Production Budget, the creative concept for the A/V
Production, the selections to be performed, the names of the intended production
personnel (e.g., director, producer, choreographer, director of photography) and
any other relevant information known to Producer concerning the A/V Production.
Company shall have the option, exercisable by notice to Producer within sixty
(60) days after Producer's such notice to Company to elect to finance the
production of the A/V Production for an amount equal to the actual out-of-pocket
costs of production, which costs shall include no fees or other payments to
Producer or Artist. If Company exercises such option, then Company shall have
such rights in such A/V Production as apply to Video Songs in accordance with
paragraph 19(a) hereof, the monies payable by Company to Producer with respect
to the commercial exploitation of such A/V Production shall be computed in
accordance with paragraph 4 of Exhibit A hereto and one hundred percent (100%)
of the production costs of such A/V Production shall be recoupable only from
royalties payable to Producer with respect to such A/V Production. If Company
finances an A/V Production (other than an A/V Production which also satisfies
the definition of a Video Song), then Artist shall not have the right to appear
in another A/V Production for a period of twelve (12) months after delivery of
such A/V Production to Company. If Company does not elect to finance a
particular A/V Production of which Producer has given Company notice in
accordance with this paragraph 19(b), then Producer [subject to the proviso to
paragraph 19(c) below concerning home video rights] shall have the right to
enter into an agreement at any time within one hundred twenty (120) days after
the expiration of the aforementioned sixty (60) day period (or after such
earlier date on which Company notifies Producer that Company elects not to
finance the A/V Production) with any third party(s) for the finance and/or
exploitation of such A/V Production, but only if the Production Budget for such
A/V Production is no less than the Production Budget set forth in Producer's
notice to Company and all of the other elements
34
<PAGE> 35
(including, without limitation, the creative concept, director, producer,
payments to Producer and/or Artist, and the recoupment of production costs) of
the A/V Production are materially (or more favorable to Producer and/or Artist,
as applicable) the same as were set forth in such notice to Company.
(c) Subject to Company's rights in accordance with paragraphs
19(a) and 19(b) above but otherwise notwithstanding anything to the contrary
contained herein, neither Company nor Producer shall authorize the distribution
of Home A/V Devices embodying any performance by Artist which is rendered during
the term hereof without the prior written consent of the other party hereto
(which consent Company may withhold in Company's sole discretion, but which
consent Producer shall not unreasonably withhold); provided, that Company may
license the right to embody a particular Master in Home A/V Devices in
connection with Company's issuance pursuant to the provisions hereof of a
license for the inclusion of such Master in a feature film or other audio-visual
program.
20. Intentionally omitted.
21. Merchandising.
Producer warrants that neither Producer nor Artist is currently subject
to any contract that grants to any person the right to manufacture and sell
products that embody Artist's name and/or likeness (such rights being herein
referred to as "Merchandising Rights"). If, during the term of this agreement,
Artist desires to grant Merchandising Rights to a third party and if at such
time Producer controls or has any income interest or other interest in such
Merchandising Rights and Company (or one of Company's affiliates) is actively
involved in the merchandising business, then prior to commencing negotiations
with any such third party with respect to any such Merchandising Rights,
Producer shall notify Company thereof and Company and Producer shall promptly
begin good faith negotiations regarding the material terms and conditions of an
agreement relating to such Merchandising Rights (a "Merchandising Agreement").
If, after such good faith negotiations, Company and Producer are unable to agree
on the material terms of such Merchandising Agreement, then neither Producer nor
Artist shall have the right to enter into a Merchandising Agreement with any
person with respect to such Merchandising Rights unless Producer first (i)
notifies Company of the basic terms of the proposed agreement between Producer
or Artist and the applicable third party regarding Artist's Merchandising Rights
(the "Outside Proposal"), and (ii) offers to enter into an agreement with
Company (or Company's merchandising affiliate, as applicable) on the same terms
as the Outside Proposal. If Company does not agree to enter into an agreement
with Producer or Artist, as applicable, on the same terms as the Outside
Proposal (i.e., to "match" the Outside Proposal) within thirty (30) days of
Company's receipt of Producer's notice of such proposal, then Producer or Artist
may enter into an agreement with the third party concerned on the terms set
forth in such Outside Proposal (or on terms more favorable to Producer or Artist
than the terms set forth in such Outside Proposal).
35
<PAGE> 36
22. Intentionally omitted.
23. Intentionally omitted.
24. Sideman Performances.
Notwithstanding anything to the contrary contained herein, during the
term hereof Artist shall have the right to perform as a background vocalist or
background instrumentalist for the purpose of making audio-only phonograph
record master recordings which feature artists other than Artist and are
released by record companies other than Company, but only on the following terms
and conditions:
(a) Artist's such performance shall be only in a background
capacity and under no circumstances shall Artist perform as a featured artist,
including, without limitation, in a duet performance or a so-called "step-out"
performance;
(b) No such performance shall interrupt, delay or interfere with
Artist's rendition of services hereunder or with any professional engagement to
which Artist is committed which is intended to aid in the promotion of
phonograph records embodying Masters hereunder;
(c) No such performance shall be rendered in connection with the
recording of any musical composition embodied in a Master theretofore or
thereafter delivered by Producer hereunder;
(d) No such performance shall be rendered on any recording of
which Artist is an individual producer;
(e) Artist's name and likeness, and biographical material
concerning Artist, shall not be used in any manner in connection with the
manufacture, sale or other exploitation of any such phonograph records embodying
Artist's performance(s) or in connection with the advertising thereof, except
that Artist's name (but, if Artist is a group, not Artist's group name) may
appear on the applicable artwork of each configuration where such credits
normally appear in accordance with U.S. record industry custom in type the size
and prominence of which is also in accordance with then-current U.S. record
industry custom but in no event larger or more prominent than that used for any
other sideman whose performances are embodied therein. If Artist is credited as
aforesaid, Producer shall cause each record company distributing records
embodying the applicable recording to give Company courtesy credit in Company's
then-current standard form for courtesy credits.
(f) If Artist is a group, the performance of no more than one
(1) member of Artist shall be embodied in any such recording.
25. Artwork.
(a) Subject to the second to last sentence of this paragraph 25(a),
Producer shall prepare or cause the preparation of all Album Artwork (as herein
defined) and shall deliver camera-ready copies thereof to Company not later than
concurrently with the delivery of the
36
<PAGE> 37
Masters for the applicable album. Company shall reimburse Producer for
Producer's actual cost of preparing Album Artwork for each such album, per paid
invoices (or, at Producer's written request, Company shall issue purchase orders
and pay such costs directly), in an amount not in excess of Ten Thousand Two
Hundred Fifty Dollars ($10,250.00) (the "Artwork Budget") per album as a
non-returnable, non-recoupable payment for the creation of such Album Artwork
and of camera-ready mechanicals therefor in disc, tape and CD configurations
(collectively "Preparation Costs"), excluding costs of fabrication, stripping
and four-color separation but including all costs, if any, paid directly by
Company; if any album hereunder is not to be released in all of the disc, tape
and CD configurations, then the Artwork Budget shall be reduced to reflect same
and Company shall notify Producer of the revised amount thereof. If Company pays
any Preparation Costs for the Album Artwork for any such album which are in
excess of the applicable Artwork Budget (which Company is in no way obligated to
do), then Producer shall reimburse Company for such excess upon demand and,
without limiting its other rights and remedies, Company may deduct an amount
equal to such excess from any and all monies payable hereunder. Notwithstanding
the foregoing, Producer shall not commence the production of any Album Artwork
until Company has approved the concept for such Album Artwork and the
individuals (e.g., photographers, designers and illustrators) whom Producer
intends to engage to produce such Album Artwork, such approvals not to be
unreasonably withheld. At Producer's election, Producer's preparation of Album
Artwork may take the form of supervising Company's art department in the
preparation thereof, in which event all of the provisions of this paragraph 25
(including, but not limited to, the provisions regarding the Artwork Budget)
shall nevertheless apply with respect thereto. As used herein, the term "Album
Artwork" means all artwork, photography and related materials for the packaging
of each Commitment Album released in the United States during the term hereof.
(b) The manufacturing costs in any particular configuration for
the packaging for any album hereunder for which Producer prepares the Album
Artwork shall not exceed Company's then-current standard costs for album
packaging in such configuration [e.g., with respect to analog cassettes,
manufacturing costs shall not exceed Company's then-current standard costs for a
single-cassette styrene box with a Norelco outer case and a 4-color over
black-and-white J-card with eight (8) flaps].
(c) All Album Artwork shall contain all such materials,
information, logos and other items [including, without limitation, a "parental
guidance" or similar legend (if applicable) in a form and location specified by
Company] as Company then-currently customarily includes on its album packaging
for other albums, shall not contain any readily-identifiable third-party product
or logo, and shall be, in all respects, in conformity with all applicable
governmental rules and regulations. All Album Artwork shall be subject to
Company's reasonable approval. Company shall advise, consult with and assist
Producer with respect to the foregoing requirements for the legal and
manufacturing elements of Album Artwork and advise Producer of any changes from
time to time in the current requirements with respect thereto. Upon Producer's
timely request with respect to any particular album hereunder, Company shall
provide Producer with a summary of Company's then-current standard costs for
album packaging in each applicable configuration prior to Producer's preparation
of Album Artwork for the applicable album; provided, that Company's inadvertent
failure to provide any such cost summary shall not be deemed a breach hereof,
nor shall any such failure limit any of Company's rights or remedies hereunder.
37
<PAGE> 38
(d) Upon Producer's delivery of Album Artwork for a particular
album, Company shall determine the cost for the manufacture of packaging
therefrom. If Company determines that the manufacturing costs for any
configuration will exceed Company's then-current standard manufacturing costs
for such configuration as set forth in paragraph 25(b) above, Company shall
notify Producer prior to manufacturing packaging from such Album Artwork and
give Producer the opportunity to redesign such Album Artwork so that the
manufacturing costs do not exceed such standard costs in any configuration. If
Producer does not redesign the applicable Album Artwork to come within Company's
standard costs in all configurations within fourteen (14) days after Company's
such notice, Company shall have the right, at its election, to (i) create
different Album Artwork for such album if it is not reasonably possible for
Company to re-design such Album Artwork to come within Company's standard costs
in all configurations (in which event Producer shall promptly repay to Company
all amounts paid or incurred by Company in connection with the Album Artwork
prepared by Producer and, if Producer fails to do so, Company may, in addition
to its other rights and remedies, recoup such amounts from any and all advances,
royalties, mechanical royalties with respect to Controlled Compositions and
other monies payable hereunder), (ii) redesign the Album Artwork prepared by
Producer to come within such standard costs in all configurations, or (iii) use
the Album Artwork as provided by Producer. If Company uses the Album Artwork as
provided by Producer even though the manufacturing costs therefor exceed
Company's standard costs in one or more configurations (which Company is under
no obligation to do), then Producer shall pay such excess to Company upon demand
and, in addition to all of its other rights and remedies, Company shall have the
right to withhold a reserve from any and all monies otherwise payable hereunder
in an amount reasonably related to the estimated amount of such excess and to
recoup such excess from any and all monies payable hereunder.
(e) In the event that Producer does not deliver Album Artwork
for any album prior to or concurrently with the delivery of the Masters for such
album, Company shall have the right to prepare such Album Artwork; provided,
that if Company exercises such right to prepare Album Artwork (i) Producer shall
reimburse Company for any amounts theretofore paid or incurred by Company
pursuant to paragraph 25(a) above with respect to any such undelivered Album
Artwork upon demand by Company and, without limiting its other rights and
remedies, Company may deduct an amount equal thereto from any and all monies
payable hereunder, and (ii) no Preparation Costs paid or incurred by Company
with respect to preparation of such Album Artwork after Company exercises such
right shall be recoupable from monies payable hereunder unless Producer
otherwise agrees in writing. Company shall use reasonable efforts to consult
with Producer regarding the concept for such Album Artwork prior to preparing
same. Notwithstanding the foregoing, Producer shall have the right, exercisable,
if at all, within five (5) days after such Album Artwork has been made available
to Producer for review at Company's offices in New York, New York, to disapprove
such Album Artwork prepared by Company pursuant to this paragraph 25(e), but
such disapproval may only be made on the basis that such Album Artwork, in
Producer's reasonable opinion, is salacious, obscene, violates reasonable
standards of good taste, is demeaning to Artist, or otherwise detracts from
Artist's stature as a recording artist.
(f) Notwithstanding anything to the contrary contained herein,
Company hereby grants Producer the perpetual, exclusive right to utilize Artwork
prepared hereunder for all merchandising purposes other than in connection with
the sale or other exploitation of
38
<PAGE> 39
phonograph records (subject to Company's right to use such Artwork in connection
with advertising, distribution and promotion of records hereunder) upon the
payment to Company of (i) the cost of preparing duplicates of such Artwork for
Producer, and (ii) one-half (1/2) of the cost of the production of such Artwork,
including costs of fabrication, stripping and four-color separations; provided,
that (A) such grant of rights shall be subject to any restrictions upon such
uses which may have been imposed by the creators of such Artwork (e.g.,
photographers, illustrators, designers), and (B) Company shall remain the
worldwide owner of all rights, title and interest in and to such Artwork, and,
accordingly, Producer shall direct its licensees to place the appropriate
copyright notice on all copies of any product embodying all or any part of such
Artwork.
26. Group Provisions.
(a) As used herein, the term "Artist" includes all members of
the group presently professionally known as "The JACKSONS", whether presently or
hereafter bound by the terms and provisions of this agreement; Producer warrants
and represents that, as of the date hereof, Artist is constituted of those
individuals whose names are set forth on the first page of this agreement. The
obligations, liabilities, prohibitions and restrictions imposed upon Artist
hereunder shall be deemed to apply individually and collectively to each of the
members of Artist, whether performing alone, with others, or as a member of
Artist, regardless of the name by which Artist or any of its members may then be
identified. A failure by any member of Artist to satisfy the obligations of
Artist shall, at Company's election, be deemed a breach of this agreement by
Producer. In the event of any such breach, Company may, by notice to Producer,
and without limiting Company's other rights or remedies hereunder, terminate the
term of this agreement or, alternatively, may terminate the term of this
agreement only as to the member or members of Artist who have failed to satisfy
the obligations of Artist hereunder.
(b) Producer hereby represents and warrants that (i) Artist is
and shall be the sole owner of the name "The JACKSONS" (the "Group Name") and
will be the sole owner of any other professional name which Artist may use
during the term hereof, (ii) Producer has and shall have the right and power to
grant Company the right to use the Group Name and any other professional name
which Artist may use during the term hereof, (iii) Producer will not permit
Artist to use any professional name other than the Group Name during the term
hereof without Company's prior written consent, which may be withheld for any
reason, and (iv) during the term hereof Producer will not use, or authorize
Artist or any other person other than Company to use, the Group Name (or any
other professional name used by Artist) in connection with the recording,
production, manufacture, sale or advertising of phonograph records in the
Territory, nor will Producer use, or authorize Artist or any other person to
use, the Group Name in connection with personal appearances (or any advertising
related thereto) by any person other than Artist; Producer acknowledges that
Company may, in its sole discretion, elect to have a trademark search performed
to confirm Artist's right in and to the Group Name, and Producer hereby agrees
that the cost thereof shall be recoupable from all royalties payable hereunder
in accordance with paragraph 3 hereof and Exhibit A hereto. If Company
reasonably believes that the Group Name is not available for use by Company
hereunder in any portion of the Territory or that its availability in any
portion of the Territory is in question, then Producer shall, at Company's
request, designate another professional name to be used by Artist, such other
professional name to be subject to Company's approval; upon Company's such
approval, such
39
<PAGE> 40
name shall be deemed to be the Group Name for the purpose of this paragraph
26(b). Notwithstanding anything to the contrary contained in this paragraph
26(b), Company's failure to object to Artist's use of a professional name,
including the Group Name, or Company's approval of Artist's use of any such
name, shall not constitute a waiver by Company of any of Producer's or Artist's
warranties and representations hereunder. If any member of Artist becomes a
Leaving Member (as herein defined), or if Company terminates the term of this
agreement as to some but not all members of Artist, then (1) the Leaving Member
or the member(s) of Artist as to whom the term of this agreement is terminated
shall not thereafter use, or authorize or permit any other person to use, in any
manner or for any purpose whatsoever (including, without limitation, in the
phrase "formerly a member of `The JACKSONS'"), the Group Name (or any other name
which Artist may then be using) or any name similar thereto (provided, that the
foregoing shall not prevent any Leaving Member from using his or her full legal
name as his or her full professional name), and (2) the Group Name and any other
name which Artist may then be using shall be and remain the property for all
purposes of those members of Artist as to whom the term of this agreement has
not been terminated. Producer and Artist agree that, during the term hereof,
Artist will not abandon or change the Group Name (or any other name which Artist
may then be using) without Company's prior written consent, which may be
withheld for any reason. As used herein, a "Leaving Member" means (A) any member
of Artist who, during the term hereof, ceases to be an actively performing
member of Artist for any reason whatsoever including, without limitation, as a
result of the death or physical or mental disability of such member, and (B) in
the event that Artist disbands or that Company decides to terminate this
agreement because of there being a Leaving Member, each member of Artist.
(c) No additional member may be added to Artist without
Company's prior written consent. If Company terminates the term hereof with
respect to fewer than all members of Artist as set forth above, or if there
shall be a Leaving Member, then Producer shall, if requested by Company, replace
the terminated member(s) or the Leaving Member(s) and such replacement member(s)
shall be mutually approved by Company and Producer. If Company disapproves any
new member of Artist, then any recording embodying the performance of such
disapproved person shall not constitute a Master unless Company otherwise agrees
in writing. Producer shall cause any new member at any time recording with
Artist to be subject to all of the terms and conditions of this agreement, and
Producer shall, at Company's request, cause any such new member to execute and
deliver to Company any and all documents which in Company's judgment may be
necessary or desirable ("New Member Documents"), such documents to be effective
for the then-remaining term hereof. If Producer fails to cause any new member to
execute and deliver to Company any New Member Document within sixty (60) days
after Company's request that Producer do so, then (i) any recording embodying
such person's performance shall not constitute a Master unless Company otherwise
agrees in writing, and (ii) such failure shall, at Company's election,
constitute an event of default hereunder. Company's rights shall not be
diminished or otherwise affected by Company's failure to request, or any
approved new member's failure to execute and deliver to Company, any New Member
Document, and Company's failure to request execution and delivery of any New
Member Document shall not constitute a waiver of Company's right to require
execution and delivery of any New Member Document at any time.
(d) If any member of Artist becomes a Leaving Member, then
Producer shall promptly give Company notice thereof. Company shall have the
right to rely upon Producer's
40
<PAGE> 41
notice that a member of Artist has become a Leaving Member notwithstanding such
member's claim that he or she has not become a Leaving Member; alternatively,
Company shall have the right, at its election, to rely on any notice regarding
such putative Leaving Member which is signed by at least fifty percent (50%) of
the members of Artist even if such notice is contrary to the aforesaid notice
given to Company by Producer. Accordingly, upon receipt of any such notice on
which Company relies stating that a member of Artist has become a Leaving Member
(the "Leaving Member Notice"), Company, at Company's election, shall not have
any further obligations to such Leaving Member unless Company elects to exercise
its rights to the recording services of such Leaving Member in accordance with
this paragraph 26(d) or paragraph 8 of Exhibit B hereto and, further, if Company
elects not to terminate the term of this agreement with respect to the remaining
members of Artist, then, notwithstanding the provisions of paragraph 3(b)(ii)
hereof, the Sales Advance applicable to the first Commitment Album delivered
hereunder after the date of the Leaving Member Notice shall not exceed the
Minimum Advance therefor. If a particular member of Artist becomes a Leaving
Member then, unless such member of Artist is deceased, Company shall have the
irrevocable option (the "Leaving Member Option") to require Producer to record
and deliver to Company master recordings featuring the performances of such
Leaving Member in accordance with the terms set forth below. For the purpose of
determining whether Company desires to exercise the Leaving Member Option,
Company shall have the right, exercisable by notice to Producer within thirty
(30) days after receipt of the Leaving Member Notice, to require Producer to
produce and deliver within thirty (30) days thereafter up to three (3) [as
designated by Company] demonstration recordings (the "Leaving Member Demos")
featuring the recorded performances of such Leaving Member, the recording costs
of which [not to exceed Five Thousand Dollars ($5,000.00) in the aggregate]
shall be paid by Company pursuant to an Authorized Budget to be furnished by
Company; if Company thereafter elects to exercise the applicable Leaving Member
Option, Company shall have the right to recoup all such recording costs from any
and all monies otherwise payable pursuant to the applicable Production Agreement
(as herein defined). Company shall own all right, title and interest in and to
the Leaving Member Demos to the same extent that Company owns all right, title
and interest in and to the Masters hereunder. Company may exercise the Leaving
Member Option by notice to Producer no later than the later of ninety (90) days
after the date upon which Company receives the Leaving Member Notice or thirty
(30) days after Producer's delivery to Company of all Leaving Member Demos
requested by Company in connection with the applicable Leaving Member. If
Company exercises the applicable Leaving Member Option, then Producer and
Company shall be deemed to have entered into an exclusive production agreement
(a "Production Agreement") pursuant to which Producer agrees to record and
deliver to Company master recordings featuring the performances of such Leaving
Member (and the applicable Leaving Member shall be deemed to have entered into
an Inducement Letter thereto in the form of Exhibit B hereto, with all
references to this agreement being deemed to be references to such Production
Agreement), which Production Agreement shall be identical to this agreement
(with such Leaving Member substituted for "Artist" therein) except as provided
to the contrary below:
(i) The initial period of such Production Agreement
shall commence as of the date of Company's notice to Producer pursuant to this
paragraph 26(d), and shall expire, subject to the provisions of paragraph 7(a)
of such Production Agreement, nine (9) months after the date on which Producer
delivers to Company the Masters constituting the Recording Commitment for the
initial period thereof in accordance with the terms and provisions of such
41
<PAGE> 42
Production Agreement. Company shall have such number of separate, consecutive
and irrevocable options to renew the term of such Production Agreement as equal
one (1) less than the number of Commitment Albums remaining to be delivered
(including any Commitment Albums for option periods as to which Company has not
yet exercised its option) in satisfaction of the Recording Commitment hereunder
as of the date such individual becomes a Leaving Member, but in no event shall
there be fewer than two (2) such options. Each such option shall give Company
the right to renew the term of such Production Agreement upon the same terms and
conditions applicable to the initial period thereof, except as specifically set
forth herein. Each such option period shall commence upon the expiration of the
immediately preceding period of the term of such Production Agreement and shall
expire, subject to paragraph 7(a) of such Production Agreement, nine (9) months
after the date on which Producer delivers to Company the Masters constituting
the Recording Commitment for such option period. Each such option may be
exercised by Company giving Producer notice at any time prior to the expiration
of the then-current period of the term of such Production Agreement.
(ii) During the initial period and each option period of
such Production Agreement, Producer's Recording Commitment shall be one (1)
album.
(iii) With respect to the Commitment Album for the
initial period of such Production Agreement, Company shall pay to Producer an
advance (inclusive of all recording costs) of Two Hundred Fifty Thousand Dollars
($250,000), payable in accordance with paragraph 3(c) of such Production
Agreement as if such sum were the Sales Advance for such album and the
Qualifying Date for the Previous Album had occurred prior to the commencement of
recording. With respect to each Commitment Album for the first and each
subsequent option period, if any, of such Production Agreement, Company shall
pay to Producer a Sales Advance which is calculated in the same manner and
subject to the same Minimum Advance and Maximum Advance as the Sales Advance set
forth in paragraph 3(b) of this agreement for the corresponding Commitment Album
hereunder but based on royalties accrued to Producer's royalty account with
respect to the Previous Album under such Production Agreement (e.g., the Sales
Advance for the Commitment Album to be delivered in the third option period of
such Production Agreement shall be based on royalties accrued to Producer's
royalty account with respect to the Commitment Album delivered in the second
option period thereof and shall be calculated in the same manner and subject to
the same Minimum Advance and Maximum Advance as the Sales Advance for the Fourth
Album under this agreement). Each such advance (other than the advance for the
album to be delivered in the initial period of such Production Agreement) shall
be payable in the manner set forth in paragraphs 3 and 4 of this agreement.
(iv) Royalties payable to Producer with respect to
Masters embodied in the Commitment Album for the initial period of such
Production Agreement shall be computed as set forth in Exhibit A hereto for the
First Album hereunder, and the royalties payable with respect to Masters
embodied in the next successive albums, if any, of the Recording Commitment
under such Production Agreement shall be computed at the royalty rates
applicable to the corresponding successive albums of the Recording Commitment
hereunder after the First Album.
(vi) Intentionally deleted.
42
<PAGE> 43
(vii) The unrecouped balance in Producer's royalty
account under this agreement as of the date when Company exercises its option
pursuant to this paragraph 26(d) to enter into a particular Production Agreement
(the "Unrecouped Group Advance") shall constitute an advance against royalties
payable by Company pursuant to such Production Agreement; provided, that Company
shall nevertheless have the right to recoup the entire Unrecouped Group Advance
from royalties payable under this agreement; provided, further, that the
Unrecouped Group Advance shall at all times be deemed to be the last monies
recouped from royalties payable under such Production Agreement and under this
agreement. If Company recoups any of the Unrecouped Group Advance from royalties
payable with respect to the applicable Leaving Member's recordings and shall
thereafter recoup all or any portion thereof from royalties payable with respect
to recordings embodying the performances of Artist, then Company shall thereupon
re-credit Producer's royalty account with respect to such Leaving Member.
Moreover, solely with respect to Masters recorded by Artist hereunder prior to
the commencement of the term of the applicable Production Agreement, Company
shall have the right to apply the Prorated Royalty (as herein defined) earned by
Producer therefrom to the recoupment of any unrecouped balances in Producer's
account under the Leaving Member's Production Agreement. At Company's request,
Producer and such Leaving Member shall execute and deliver to Company any and
all documents which Company may deem necessary or expedient to evidence the
foregoing, including, without limitation, the above-described Production
Agreement with Company, but Company's rights hereunder shall not be diminished
by the failure or refusal of Producer or such Leaving Member to execute and
deliver to Company the Production Agreement or any other such document. As used
herein, the term "Prorated Royalty" means the royalty payable to Producer
hereunder with respect to the Masters in question multiplied by a fraction, the
numerator of which is the number of Leaving Members who are subject to the
applicable Production Agreement and the denominator of which is the total number
of members of Artist (including all Leaving Members) who participate in such
royalty.
(viii) If Producer does not have the right to the
exclusive recording services of the applicable Leaving Member, then Producer
shall give Company notice thereof in the notice which Producer is required to
give to Company pursuant to this paragraph 26(d) and, in such event, Company
shall have the irrevocable option, exercisable in accordance with paragraph 8 of
the Inducement Letter, to engage directly the exclusive recording services of
such Leaving Member. If Company exercises such option with respect to such
Leaving Member, then Producer shall thereafter have no interest whatsoever in
and to the recording services of such Leaving Member or to the product thereof.
Furthermore, Producer shall thereupon deliver to Company a true and correct copy
of Producer's recording contract with Artist to enable Company to satisfy
Company's obligations to such Leaving Member which arise as a result of
Company's exercise of such option. If Company exercises its option pursuant to
this paragraph 26(d) to enter into a Production Agreement with Producer with
respect to a particular Leaving Member, and if such Leaving Member asserts that
Producer does not have the right to furnish the services of such Leaving Member
to Company as required herein, then such dispute shall be handled as set forth
in paragraph 4 of the Inducement Letter to such Production Agreement.
(e) If there shall be more than one (1) Leaving Member for whom
Company has exercised its option as provided in paragraph 26(d) above and two
(2) or more of such Leaving Members shall, with Company's consent, elect to
perform together as a duo or group, then Company shall have the right to treat
such Leaving Members collectively as if they were
43
<PAGE> 44
one (1) Leaving Member for the purpose of the royalty rates, advances and other
monies payable in respect of their joint recordings pursuant to paragraph 26(d)
above.
(f) (i) Notwithstanding anything to the contrary contained in
this agreement, if there shall be a Leaving Member, or if Artist completely
disbands, Company shall have the right, at its election and without limiting its
other rights and remedies, to terminate the term of this agreement by notice to
Producer no later than ninety (90) days after Company's receipt of Producer's
notice to Company that there has been a Leaving Member or that Artist has
completely disbanded. If Company terminates the term hereof in accordance with
the immediately foregoing sentence of this paragraph 26(f), then Company shall
thereby be relieved of any and all obligations hereunder except its obligations
with respect to Masters recorded hereunder prior to such termination. In the
event Company elects to so terminate the term of this agreement, paragraph 26(d)
hereof shall be deemed applicable to each member of Artist as if each member
were a Leaving Member.
(ii) Notwithstanding anything to the contrary contained
in this paragraph 26, if (A) Artist shall completely disband and as a result
thereof Company terminates this agreement as permitted herein and (B) thereafter
all or the majority of the members of Artist desire to recommence performing
together for the purpose of making phonograph records or one (1) or more of such
members desire to perform under the Group Name, then Producer shall give Company
prompt notice thereof and Company shall have the right, exercisable by notice to
Producer within thirty (30) days after receipt of Producer's said notice, to
require Producer to produce and deliver within thirty (30) days thereafter up to
three (3) [as designated by Company] demonstration recordings featuring the
recorded performances of the applicable member(s) of Artist, which shall in all
respects (e.g., financing, ownership) be treated the same as the Leaving Member
Demos as specified in paragraph 26(d) above; Company shall thereafter have the
right to reinstate this agreement with respect to the applicable member(s) by
notice to Producer no later than the later of ninety (90) days after the date
upon which Company receives Producer's aforesaid notice or thirty (30) days
after Producer's delivery to Company of all the aforesaid demos requested by
Company in connection with the applicable member(s). If this agreement is
reinstated as aforesaid, Company hereby nevertheless acknowledges and agrees
that its subsequent Leaving Member rights with respect to each member of Artist
whose services Company had theretofore terminated will be subject to any
agreement then-currently in force relating to such Leaving Member's solo
recording services which was executed by such Leaving Member during the period
in which his or her services hereunder had been terminated.
27. Intentionally omitted.
28. Intentionally omitted.
29. Independent Promotion.
Fifty percent (50%) of any amounts paid by Company to third parties for
so-called "independent promotion" of Masters or other recordings by Artist shall
be recoupable from royalties (other than mechanical copyright royalties) payable
hereunder and the other fifty percent (50%) thereof shall be non-recoupable.
Company shall use reasonable efforts to consult in good faith with Producer
regarding the possible engagement of, and the amount to be spent in
44
<PAGE> 45
connection
with, independent promotion of records hereunder (including, without limitation,
independent "street" promotion and radio promotion campaigns) but no inadvertent
failure to so consult with Producer shall constitute a breach hereof or limit
Company's right to recoup a portion of the amounts spent by Company therefor as
aforesaid.
45
<PAGE> 46
30. Acknowledgment.
Producer acknowledges (and Artist, by Artist's execution of Exhibit B
hereto, acknowledges) that this agreement for Artist's services covered by the
AFTRA Phonograph Code may include provisions which relate to the following:
Music Publishing, Audio-Visual Production, Merchandising and Mechanical
Royalties.
MODERN RECORDS, INC.
By /s/ Randy Jackson
---------------------------------
(an authorized signatory)
ACCEPTED AND AGREED TO:
/s/ Jermaine Jackson /s/ Marlon Jackson
- ---------------------------------- --------------------------------------
Jermaine Jackson Marlon Jackson
SS# SS#
/s/ Tito Jackson /s/ Jackie Jackson
- ---------------------------------- --------------------------------------
Tito Jackson Jackie Jackson
SS# SS#
/s/ Randy Jackson
- ----------------------------------
Randy Jackson
SS#
46
<PAGE> 47
EXHIBIT A
ROYALTY PROVISIONS
The following provisions constitute an integral and material part of the
exclusive recording agreement between Modern Records, Inc. ("Company") and Tito
Jackson, Marlon Jackson, Jackie Jackson and Jermaine Jackson, collectively p/k/a
"The JACKSONS" (individually and collectively, "Producer", "Artist" and/or
"you"), dated as of December 28, 1998 and are incorporated therein by this
reference.
1. Company agrees to pay to Producer a royalty at the rates set forth
below based on one hundred percent (100%) of net sales through normal retail
channels of phonograph records embodying Masters, computed on the SRLP of such
records (except as otherwise provided herein), as follows:
(a) (i) With respect to U.S. Net Sales of the First and Second
Albums, twenty percent (20%), provided that such royalty shall increase (but
only on a prospective basis and only with respect to sales of the album that has
achieved the following sales thresholds) as follows: (A) for U.S. Net Sales in
excess of five hundred thousand (500,000) units, one percent (1%) to twenty-one
percent (21%); (B) for U.S. Net Sales in excess of 1,000,000 units, one percent
(1%) to twenty-two percent (22%); (C) for U.S. Net Sales in excess of one
million five hundred units (1,500,000), one percent (1%) to twenty-three percent
(23%); (D) for U.S. Net Sales in excess of two million units (2,000,000), one
percent (1%) to twenty-four percent (24%); and (E) for U.S. Net Sales in excess
of two million five hundred thousand units (2,500,000), one percent to
twenty-five percent (25%).
(ii) As used herein, the "Base U.S. Album Royalty Rate"
for a particular Commitment Album (and each Master embodied therein) shall mean
a royalty rate equal to the royalty rate for the first net sale of such album
through normal retail channels in the United States on a
configuration-by-configuration basis.
(b) Intentionally omitted.
(c) With respect to U.S. Net Sales of single records, twelve
percent (12%). As used herein, the "Base U.S. Single Royalty Rate" shall mean
twelve percent (12%).
(d) (i) With respect to net sales of each Commitment Album
through normal retail channels in Canada and with respect to each Master
initially embodied therein as embodied in other albums in Canada (including
records sold for export to licensees in Canada), eighty-five percent (85%) of
the Base U.S. Album Royalty Rate.
(ii) With respect to net sales of single records through
normal retail channels in Canada (including records sold for export to licensees
in Canada), eighty-five percent (85%) of the Base U.S. Single Royalty Rate.
(e) (i) With respect to net sales of each Commitment Album
through normal retail channels in the United Kingdom, the European Economic
Community (the "EEC")
47
<PAGE> 48
and Japan and with respect to each Master initially embodied therein as embodied
in other albums in said countries (including records sold for export to
licensees in said countries), seventy-five percent (75%) of the Base U.S. Album
Royalty Rate.
(ii) With respect to net sales of single records through
normal retail channels in the United Kingdom, the EEC and Japan (including
records sold for export to licensees in said countries), seventy-five percent
(75%) of the Base U.S. Single Royalty Rate.
(f) (i) With respect to net sales of each Commitment Album
through normal retail channels throughout the rest of the world (including
records sold for export to licensees in any of such other countries), sixty-five
percent (65%) of the Base U.S. Album Royalty Rate.
(ii) With respect to net sales of single records through
normal retail channels throughout the rest of the world (including records sold
for export to licensees in any of such other countries), the royalty rate shall
be sixty-five percent (65%) of the Base U.S. Single Royalty Rate.
(g) Intentionally omitted.
(h) Notwithstanding anything to the contrary contained in this
agreement, the royalty rate for each country of the Territory in respect of net
sales through normal retail channels of copies of any record in CD configuration
shall be eighty percent (80%) of the royalty rate applicable to net sales of
such record through normal retail channels in the applicable country pursuant to
this Exhibit A based upon the actual or imputed SRLP of such CD record;
provided, that (i) if the SRLP of a particular album hereunder in CD
configuration shall be less than the SRLP of Company's (or the applicable one of
Company's Foreign Affiliates) top-priced albums in CD configuration in the
applicable country as of January 1, 1998 (e.g., $15.98 in the United States),
then the royalty rate for net sales of such album hereunder in CD configuration
in the applicable country shall be multiplied by a fraction, the numerator of
which shall be the SRLP of such album hereunder in CD configuration in the
applicable country and the denominator of which shall be the SRLP of Company's
(or the applicable of Company's Foreign Affiliates') top-priced albums in CD
configuration in such country as of January 1, 1998, and (ii) [intentionally
deleted]. Except as provided to the contrary in this paragraph 1(h), the royalty
payable hereunder in respect of net sales of any record in compact disc
configuration shall be prorated, reduced, computed and paid in accordance with
the provisions of this agreement.
(i) Notwithstanding anything to the contrary contained in this
agreement, the royalty rate for each country of the Territory in respect of net
sales through normal retail channels of copies of any record in any New Medium
shall be eighty percent (80%) of the royalty rate applicable to the first net
sale of such record through normal retail channels in the applicable country
pursuant to this Exhibit A based upon the actual or imputed SRLP of such record
in the applicable configuration. Except as provided to the contrary in this
paragraph 1(i), the royalty payable hereunder in respect of net sales of any
record in any New Medium shall be prorated, reduced, computed and paid in
accordance with the provisions of this agreement.
48
<PAGE> 49
2. Notwithstanding anything to the contrary contained herein, Company
agrees to pay to Producer a royalty at the rates set forth below with respect to
the following types of net sales of phonograph records embodying Masters and on
certain other types of exploitation of Masters under this agreement, computed on
the SRLP of such records (except as otherwise provided herein), as follows:
(a) With respect to net sales of records sold via direct mail or
through mail order operations (including, without limitation, record club plans)
by licensees of Company, Producer's royalty shall be one-half (1/2) of Company's
net receipts in connection with such sales.
(b) With respect to the following types of records, the royalty
rate shall be one-half (l/2) of the otherwise-applicable royalty rate, based on
the SRLP of the record involved unless otherwise indicated: (i) records sold as
premiums in connection with other products or services, and the SRLP for
premiums shall be deemed the net amount received by Company (or for which
Company receives a final credit in the United States) from an actual sale of
such record; and (ii) records sold to governmental agencies or institutions
(including, without limitation, their agencies and departments, but excluding
Armed Forces Post Exchanges and similar retail-type facilities).
(c) If Company sells records directly (and not through
licensees) via television and/or radio advertisements or through mail or phone
order in the United States, then such sales for purposes of paragraph l(a)
hereof shall be deemed U.S. Net Sales and, accordingly, Producer shall be paid
royalties with respect thereto in accordance with paragraph l(a) hereof, but
only with respect to eighty-five percent (85%) of such net sales.
(d) With respect to records sold through Armed Forces Post
Exchanges, ship's stores and other military facilities ("PX Records"), the
royalty rate shall be the otherwise-applicable royalty rate, based on the SRLP
of the record involved in the Armed Forces Post Exchanges, ship's stores and
other military facilities, as applicable; provided, that with respect to PX
Records sold in the Territory but outside the United States, the royalty rate
shall be three-fourths (3/4) of the otherwise-applicable royalty rate on a
configuration-by-configuration basis, based on the SRLP of the record involved
in the Armed Forces Post Exchanges, ship's stores and other military facilities,
as applicable.
(e) With respect to net sales of budget records by Company or
Company's Foreign Affiliates through normal retail channels, the royalty rate
shall be one-half (l/2) of the otherwise-applicable royalty rate on a
configuration-by-configuration basis.
(f) With respect to net sales of mid-priced records by Company
or Company's Foreign Affiliates through normal retail channels, the royalty rate
shall be three-fourths (3/4) of the otherwise-applicable royalty rate on a
configuration-by-configuration basis with respect to sales in the United States
and two-thirds (2/3) of the otherwise-applicable royalty rate on a
configuration-by-configuration basis with respect to sales outside of the United
States.
(g) With respect to net sales of Mini-LPs by Company or
Company's Foreign Affiliates through normal retail channels, the royalty rate
shall be three-fourths (3/4) of the
49
<PAGE> 50
royalty rate which would be applicable (on a configuration-by-configuration
basis) to the first net sale of a Commitment Album delivered on the date when
the Masters constituting the applicable Mini-LP were delivered.
(h) (i) If Company or Company's Foreign Affiliates sell Consumer
Compilations or other records via telephone, satellite, cable or other direct
transmission to consumers over wire or through the air, then such sales shall be
deemed sales of such "records" through normal retail channels for all purposes
and, accordingly, Producer shall be paid royalties with respect thereto on a
configuration-by-configuration basis at the otherwise- applicable rates herein
and in the manner set forth in paragraph l of this Exhibit A, but with respect
to any such sales in the United States, royalties shall only be payable with
respect to eighty-five percent (85%) of such sales. For purposes of calculating
royalties payable in connection with such sales, the SRLP of such "records"
shall be deemed to be the then-current SRLP of tape copies of such records, and
the same packaging deduction shall be made for such sales in accordance with
paragraph 3(c)(ii) of this Exhibit A as is applicable to tape copies of such
records.
(ii) If Company or any of Company's Foreign Affiliates
license third parties to sell Consumer Compilations or other records in the
manner described in paragraph 2(h)(i) above then, notwithstanding the provisions
of paragraph 2(i) below, Producer shall be paid royalties with respect thereto
in accordance with paragraph 2(h)(i) above; provided, that in no event shall
such royalties exceed one-half (1/2) of Company's net receipts in connection
with such sales.
(iii) With respect to Masters embodied on Consumer
Compilations sold in-store (as opposed to via the methods described in paragraph
2(h)(ii) above), Producer shall be paid, on a Master-by-Master basis, the same
royalty (in pennies or other applicable currency) that Producer was paid for the
first net sale in cassette tape form in the country concerned of the Commitment
Album in which the applicable Master was initially embodied multiplied by a
fraction (the "Fraction"), the numerator of which is one (1) and the denominator
of which is the total number of royalty-bearing masters (including any Masters)
that are embodied on such Consumer Compilation; provided, that:
(A) If Company is not furnished with information
regarding the total number of masters embodied on a particular Consumer
Compilation, the denominator of the Fraction shall be deemed to be ten (10) for
the purpose of the foregoing calculation;
(B) With respect to such sales in the United
States, royalties shall only be paid on eighty-five percent (85%) of such net
sales; and
(C) In no event shall Producer's royalty under
this paragraph 2(h)(iii) exceed fifty percent (50%) of Company's net receipts in
respect of the exploitation of the applicable Master on the particular Consumer
Compilation concerned.
(i) With respect to Masters licensed to third parties by
Company or Company's Foreign Affiliates on a flat fee, royalty rate or cent rate
basis for any type of use not specifically covered elsewhere in this paragraph
2, Company shall credit Producer's royalty account with one-half (1/2) of
Company's net receipts in respect thereof.
50
<PAGE> 51
(j) Company shall credit Producer's royalty account with
one-half (1/2) of Company's net receipts, if any, which are specifically
referable (in reports to Company) to United States public performances of
Masters less any portion thereof which is payable by Company to individual
producers with respect to such public performances; provided, that if Producer
receives payment in respect thereof from a third party, then Company shall
credit Producer's royalty account with such amount as shall provide Producer
with a total (including the share received by Producer from third parties) equal
to one-half (1/2) of the aggregate amount paid to Company, Producer (on behalf
of itself and Artist) and any individual producers.
(k) (i) Notwithstanding the provisions of paragraph 1(h) above
or paragraph 4 below, if Company manufactures and distributes CDV Devices in the
United States embodying one (1) or more Masters and one (1) or more audio-visual
reproductions of Artist's recorded performances, then Company shall pay to
Producer a royalty based upon Company's CDV Royalty Base Price (as herein
defined) with respect to such CDV Devices, subject to the proration provisions
of paragraph 2(k)(iv) below, equal to (A) with respect to CDV-5 Devices, ten
percent (10%); (B) with respect to CDV-8 Devices, the rate that would otherwise
be applicable pursuant to paragraph 2(g) hereof to a Mini-LP initially released
at the time of the initial release of the respective CDV-8 Device [but in no
event less than ten percent (10%)]; and (C) with respect to CDV-12 Devices, the
rate that was applicable to the first U.S. Net Sale of the Commitment Album
released by Company immediately prior to the initial release of the applicable
CDV-12 Device; As used herein, the term "CDV Royalty Base Price" for a
particular CDV Device means a royalty base price for such CDV Device which is
calculated in the same manner as the "Video Royalty Base Price" is calculated
with respect to Home A/V Devices pursuant to paragraph 4(b)(i) below.
(ii) If Company's Foreign Affiliates manufacture and
distribute CDV Devices in the Territory but outside the United States, then
Company shall pay to Producer a percentage of Company's Foreign Affiliates'
Accountable Foreign CDV Receipts (as herein defined) with respect to such CDV
Devices equal to the otherwise- applicable percentage rate referred to in
paragraphs 2(k)(i)(A) through (C) above, reduced in the same proportion on a
country-by-country basis as the royalty rate hereunder with respect to U.S. Net
Sales of a particular Commitment Album is reduced with respect to net sales of
such album in the applicable country. As used herein, the term "Accountable
Foreign CDV Receipts" shall have the same definition and shall be calculated in
the same manner with respect to CDV Devices as the term Accountable Foreign Home
A/V Receipts is defined and calculated with respect to Home A/V Devices pursuant
to paragraph 4(b)(ii) below.
(iii) In clarification of this paragraph 2(k), it is
understood that (A) the royalty payable in respect of CDV Devices pursuant to
this paragraph 2(k) shall be exclusive of royalties that may be payable to
publishers of both Controlled Compositions and Non-Controlled Compositions
embodied on Masters and audio-visual reproductions of Artist's recorded
performances embodied thereon, and (B) all royalties earned by Producer with
respect to CDV Devices shall be credited to Producer's royalty account hereunder
with respect to audio-only records, and all costs incurred by Company with
respect thereto [including, without limitation, editing costs, mastering costs
and other costs of compiling CDV Devices] shall be recoupable solely from
royalties payable hereunder with respect to audio-only records.
51
<PAGE> 52
(iv) If Company couples audio-visual reproductions of
Artist's recorded performances and Masters on any particular CDV Device with
audio-visual reproductions and master recordings by other recording artists,
then the amounts otherwise payable to Producer hereunder with respect to such
CDV Device shall be multiplied by a fraction, the numerator of which is the
number of audio-visual reproductions of Artist's recorded performances and
Masters involved and the denominator of which is the aggregate number of
royalty-bearing audio-visual reproductions (including those embodying Artist's
recorded performances) and master recordings (including Masters) involved, and
each selection embodied in each audio-visual reproduction involved shall count
as one (1) audio-visual reproduction for such purposes.
3. Notwithstanding anything to the contrary contained herein:
(a) If Company couples Masters with recordings which are not
Masters, then the amounts otherwise payable to Producer hereunder shall be
multiplied by a fraction, the numerator of which is the number of Masters which
are embodied in the record involved and the denominator of which is the
aggregate number of royalty-bearing recordings (including Masters) embodied in
such record. If Company couples together on a particular record Masters to which
different royalty rates are applicable hereunder, then on a Master-by-Master
basis, the royalty rate therefor shall be divided by the aggregate number of
Masters (and other royalty-bearing master recordings, if applicable) embodied in
such record.
(b) No royalties shall be payable in respect of:
(i) Records furnished on a no-charge basis or sold by
Company or Company's Licensees for less than fifty percent (50%) [or, with
respect to such sales in the Burbank Studio Store, the Warner Corner Store or
other comparable "company stores", sixty-five percent (65%) or less] of
Company's or Company's Licensees' posted wholesale list price to disc jockeys,
publishers, employees of Company or Company's Licensees, motion picture
companies, radio and television stations and other customary recipients of free,
discounted or promotional records; records sold by Company or Company's
Licensees at close-out, overstock or cut-out prices or for scrap or at less than
Company's or Company's Licensees' inventory cost; and sampler records; and
(ii) Records (or fractions thereof) given away or
distributed on a so-called "no-charge" or "freebie" basis or sold for fifty
percent (50%) or less of Company's or Company's Licensees' posted wholesale list
price to distributors, subdistributors, dealers and others which are intended
for re-sale to third parties; if Company or Company's Licensees sell records
which are intended for re-sale to third parties at a discount from Company's or
Company's Licensees', as applicable, posted wholesale list price [but for more
than fifty percent (50%) of such price], the number of such records (or
fractions thereof) which are deemed to have been given away shall be determined
by applying such discount to the total number of such records distributed. For
convenience, those records referred to in this paragraph 3(b)(ii) are
collectively sometimes referred to herein as "Free Goods". References in this
agreement to "records for which no royalties are payable hereunder", or words of
similar connotation, shall include, without limitation, all Free Goods. Free
Goods embodying albums or Mini-LPs hereunder are sometimes referred to herein as
"Album Free Goods", and Free Goods embodying
52
<PAGE> 53
single records hereunder are sometimes referred to herein as "Single Free
Goods". Company and Producer acknowledge and agree that fifteen percent (15%) of
the aggregate units of all albums and Mini-LPs distributed by Company hereunder
shall be Album Free Goods ("Standard Album Free Goods"). Company and Producer
acknowledge and agree that twenty-three percent (23%) of the aggregate units of
all such single records distributed by Company hereunder shall be Single Free
Goods ("Standard Single Free Goods"). Standard Album Free Goods and Standard
Single Free Goods are sometimes herein collectively referred to as "Standard
Free Goods". In addition to the distribution of Standard Free Goods, from time
to time Company may conduct special programs with respect to the marketing and
merchandising of recordings of various artists which may include Artist or
special "impact" programs concerning the marketing and merchandising of
recordings hereunder, and all of said special programs may involve the
distribution of Free Goods which are in addition to Standard Free Goods. All
such additional Free Goods distributed pursuant to any such special program are
herein referred to as "Special Free Goods", all additional Album Free Goods
distributed pursuant to any such special program are herein referred to as
"Special Album Free Goods" and all additional Single Free Goods shipped pursuant
to any such special program are herein referred to as "Special Single Free
Goods". Company shall have the right to ship Special Album Free Goods, but not
in excess of ten percent (10%) of the aggregate units of all albums and Mini-LPs
distributed by Company hereunder. Further, Company shall have the right to ship
Special Single Free Goods, but not in excess of ten percent (10%) of the
aggregate units of all single records distributed by Company hereunder. If
Company distributes Standard Free Goods and/or Special Free Goods in excess of
the limits set forth above, then Company shall not be deemed in breach hereof,
and Company's only obligation to Producer in such event shall be to pay Producer
royalties as provided herein in respect of such excess Standard Free Goods or
Special Free Goods, as applicable.
(c) Notwithstanding anything to the contrary contained herein,
the following shall be excluded from the base prices against which the
applicable royalty rates are to be applied:
(i) All sales, use, excise, transactional, V.A.T. and
other similar taxes included in the retail or other applicable price of records,
whether such taxes are collected by the taxing authority from the retailer, the
distributor or the manufacturer; and
(ii) As a container charge, an amount equal to (A) ten
percent (10%) of the SRLP for all disc albums, Mini-LPs and 12-inch singles
packaged in Company's then-current standard container therefor and for disc
7-inch and 12-inch single records packaged in special sleeves; (B) fifteen
percent (15%) of the SRLP for all disc records packaged in multi-fold containers
or containers with cardboard inner sleeves or special inserts or attachments;
(C) twenty percent (20%) of the SRLP for tapes; (D) twenty-five percent (25%) of
the SRLP for CD records (other than CDV Devices) and NM records; and (E)
twenty-five percent (25%) of the CDV Royalty Base Price or of Company's Foreign
Affiliates' Accountable Foreign CDV Receipts, as applicable, for CDV Devices.
(d) (i) For the purpose of sales outside the United States, the
SRLP shall be the SRLP from time to time of such records in the country of
manufacture or the country of sale, as Company is paid. If there are no SRLPs of
records in any particular country, then for the purpose of computing royalties
hereunder, the prices of records in such country which are
53
<PAGE> 54
generally regarded as the equivalent thereof shall be deemed the SRLPs of such
records. Royalties on foreign sales shall be computed in the national currency
of the country involved and shall be deemed earned only when monies from sales
on which such royalties are based are received by Company in the United States
(or credited against an advance theretofore so received) at the dollar
equivalent of the rate of exchange at which Company is paid, net of Producer's
proportionate share of any and all foreign taxes. If Company does not receive
payments in United States dollars in the United States as a result of
governmental restrictions and elects to accept payment in a foreign currency,
then Company may deposit Producer's royalties in such foreign currency to
Producer's account (and at Producer's expense) in a depository selected by
Producer. Deposit as aforesaid of payments representing royalties applicable
hereto shall satisfy Company's obligations hereunder for the sales to which such
royalty payments are applicable.
(ii) Notwithstanding anything to the contrary contained
herein, with respect to records sold in any country of the Territory in which
governmental or other authorities place limits on the royalty rates permissible
for remittances to the United States in respect of records sold therein, the
royalty rate payable to Producer hereunder in respect of sales of records in
each such country shall equal the lesser of: (A) the otherwise-applicable
royalty rate payable in respect of records sold therein; or (B) the effective
royalty rate permitted by such governmental or other authority for remittances
to the United States, less the sum of (1) a royalty equivalent to two percent
(2%) of the applicable royalty base price, and (2) such monies as Company and
its licensees shall be required to pay to all applicable union funds in respect
of said sales.
(e) Company may at any time elect to use a different method of
computing royalties from that specified in this agreement so long as such method
or methods are applicable to substantially all persons similarly engaged by
Company; provided, that no such method reduces the net monies due Producer. If
Company shall no longer designate a SRLP for records hereunder in any particular
configuration and price category (e.g. full-price, mid-price and budget records)
in the United States, then for the purpose of computing royalties hereunder with
respect to sales of records in such configuration and price category through
normal retail channels in the United States, the following method of computation
shall be deemed to satisfy the requirements of the foregoing sentence: the SRLP
of such records in such configuration and price category shall be deemed to be a
dollar amount computed by multiplying Company's price to subdistributors (before
consideration of any discount resulting from the distribution of Free Goods) for
such records in such configuration and price category by a fraction, the
numerator of which is the SRLP for the majority of Company's records in such
configuration and price category as of the date when Company ceases to designate
a SRLP for records in such configuration and price category and the denominator
of which is Company's price to subdistributors for the majority of Company's
records in such configuration and price category as of the date when Company
ceases to designate a SRLP for records in such configuration and price category
(before consideration of any discount resulting from the distribution of Free
Goods).
4. Company shall pay to Producer a royalty with respect to the
Income-Producing Exploitation of Video Songs as follows:
54
<PAGE> 55
(a) (i) With respect to all Income-Producing Exploitation uses of Video
Songs by licensees of Company other than the uses specified in paragraph 4(b)
below, a royalty equal to one-half (1/2) of the Adjusted Gross Video Receipts
(as herein defined).
(ii) As used herein, the term "Adjusted Gross Video Receipts" means
one hundred percent (100%) of monies actually received by Company (or credited
to Company's account) in the United States which are specifically allocated to
Territory-wide Income-Producing Exploitation of Video Songs hereunder, less the
following deductions in the following order:
(A) An amount equal to fifteen percent (15%) thereof, which
Company shall be entitled to retain for its own account as an administration
fee;
(B) All distribution expenses of Video Songs hereunder;
(C) All payments required to be made to third parties,
including, without limitation, to unions or guilds or their funds (but excluding
contributions to union or guild funds which are based on number of sales of
records) to publishers of Non-Controlled Compositions (but expressly excluding
any Royalty Participant, as herein defined) in connection with the production
and/or exploitation of Video Songs; and
(D) All sales, gross receipts, turnover, foreign withholding,
excise, use, value added and personal property or similar taxes levied upon,
payable with respect to, or arising in connection with the exploitation, use,
production, distribution, revenues, or materials of such Video Songs, but
specifically excluding any corporate franchise or excess profits tax.
(iii) If Company enters into an agreement with a third party
pursuant to which Company receives payment for the right to telecast certain
video songs which are initially distributed by Company during a particular year
(or other applicable period of time), and such payment is not specifically
allocated among the video songs involved, then with respect to each Video Song
which is initially distributed by Company during such year (or other applicable
period of time) and to which such third party obtains rights under the
applicable agreement, Company shall be deemed to have received as a license fee
an amount equal to such payment multiplied by a fraction, the numerator of which
is one (1) and the denominator of which is the total number of video songs
(including Video Songs) in which such third party obtains rights under the
applicable agreement in the applicable time period, regardless of the extent, if
any, to which such third party actually exercises such rights in any particular
video song or Video Song. It is specifically agreed that this paragraph
4(a)(iii) applies to any agreement which Company may enter into regarding "MTV:
Music Television".
(iv) Producer shall be solely responsible for and shall pay any and
all monies payable to the producers of the master recordings embodied in Video
Songs (the "Video Masters"), the producers and directors of the visual portion
of Video Songs and to any other persons (except the publishers of Non-Controlled
Compositions which are embodied in Video Songs and any unions or guilds or their
funds) who are entitled to a royalty or any other payment in respect of the
exploitation of Video Masters (each such person being herein referred to as a
55
<PAGE> 56
"Royalty Participant") if the applicable Royalty Participant is entitled to any
monies in connection with the applicable Video Song. Notwithstanding the
foregoing, if Company shall pay or be required to pay any such monies directly
to any Royalty Participant, then Company shall have the right to deduct same
from any and all royalties payable to Producer hereunder.
(b) (i) If Company manufactures and distributes Home A/V Devices
in the United States embodying one or more Video Songs, then Company shall pay
to Producer a royalty with respect to net sales of such Home A/V Devices by
Company in the United States, subject to paragraphs 4(c) and 4(d) below, equal
to (A) ten percent (10%) of Company's Video Royalty Base Price (as herein
defined) with respect to Home A/V Devices with a SRLP of Seventeen Dollars
($17.00) or less, (B) fifteen percent (15%) with respect to Home A/V Devices
with a SRLP in excess of Seventeen Dollars ($17.00) but not in excess of Twenty
Dollars ($20), and (c) twenty percent (20%) with respect to Home A/V Devices
with an SRLP in excess of Twenty Dollars ($20). Such royalties shall at all
times be subject to retroactive adjustment for returns, refunds, credits,
settlements, allowances, rebates, discounts and other similar adjustments. As
used herein, the term "Video Royalty Base Price" means (1) with respect to Home
A/V Devices sold by Company through normal retail channels, the wholesale
receipts from subdistributors of such Home A/V Devices less an amount equal to
ten percent (10%) thereof, and (2) with respect to Home A/V Devices sold by
Company (as opposed to Company's licensees) through mail order and other
direct-to-consumer operations (aa) if sold directly by Company and not through a
distributor, a price equal to the average Video Royalty Base Price applicable to
sales by Company through normal retail channels of the applicable Home A/V
Device during the accounting period during which such mail order or other
direct-to-consumer sales occurred, and (bb) if sold through a distributor, an
amount equal to the price at which Company sells such Home A/V Devices to such
distributor less ten percent (10%) thereof.
(ii) If Company's Foreign Affiliates manufacture and
distribute in the Territory but outside the United States Home A/V Devices
embodying one (1) or more Video Songs, then Company shall pay to Producer a
royalty with respect to net sales of such Home A/V Devices by Company's Foreign
Affiliates outside the United States, subject to paragraphs 4(c) and 4(d) below,
equal to (A) ten percent (10%) of Company's Foreign Affiliates' Accountable
Foreign Home A/V Receipts (as herein defined) with respect to Home A/V Devices
with an SRLP in the United States which is not in excess of Twenty Dollars
($20), and (B) fifteen percent (15%) with respect to Home A/V Devices with an
SRLP in the United States which is in excess of Twenty Dollars ($20).
(A) As used herein, the term "Accountable Foreign Home
A/V Receipts" means Gross Foreign Home A/V Receipts (as herein defined) less
Deductible Amounts (as herein defined).
(B) As used herein, the term "Gross Foreign Home A/V
Receipts" means one hundred percent (100%) of monies actually received by
Company's Foreign Affiliates from the exploitation of Home A/V Devices in the
Territory but outside the United States. Monies actually received by Company or
Company's Foreign Affiliates are at all times subject to retroactive adjustment,
such as for returns, refunds, credits, settlements, allowances, rebates,
discounts and other similar adjustments.
56
<PAGE> 57
(C) As used herein, the term "Deductible
Amounts" means the sum of all sales, gross receipts, turnover, foreign
withholding, excise, use, value added, and personal property or similar taxes
levied upon, payable with respect to, or arising in connection with the
exploitation, use, distribution, revenues or materials of such Home A/V Devices
in the Territory but outside the United States, but specifically excluding any
corporate franchise or excess profits tax.
(iii) The royalties payable in accordance with this
paragraph 4(b) shall be inclusive of all royalties that may be payable to all
third parties (other than unions or guilds and their funds), including, without
limitation, producers of Video Masters, producers and directors of the visual
portion of Video Songs, and publishers of both Controlled Compositions and
Non-Controlled Compositions. If Company makes any payments to third parties with
respect to any such Home A/V Devices, then Company shall have the right to
deduct such payments from royalties otherwise payable to Producer with respect
to Home A/V Devices.
(iv) The provisions of paragraph 3(b) above shall be
applicable to the sale of Home A/V Devices by Company and Company's Foreign
Affiliates; provided, that Company shall not distribute Standard Free Goods with
respect to Home A/V Devices but shall have the right to distribute Special Free
Goods with respect to Home A/V Devices.
(c) If Company couples Video Songs with video songs which are not
Video Songs hereunder, then the amounts otherwise payable to Producer hereunder
with respect to such coupled Video Songs shall be multiplied by a fraction, the
numerator of which is the number of Video Songs involved and the denominator of
which is the aggregate number of royalty-bearing video songs (including Video
Songs) involved, and each selection embodied in each Video Song and video song
involved shall count as one (1) Video Song or video song for such purposes.
(d) The provisions of paragraph 5 below shall apply with respect to
Company's obligations to render accountings to Producer and to pay Producer
royalties with respect to Video Songs and to Producer's rights to object to such
statements and to audit Company's books and records with respect thereto.
Producer's royalty account with respect to Video Songs shall be a single account
which is separate from Producer's royalty account with respect to audio-only
records except to the extent otherwise provided in this agreement.
5. (a) No royalties shall be payable to Producer unless and until
Company is in a "recouped position" (i.e., unless and until Company has recouped
from royalties otherwise payable hereunder, in accordance with this agreement,
all recoupable recording costs, advances, expenses and other charges incurred or
borne by Company hereunder which are recoupable in accordance with the terms and
conditions hereof). If, at Producer's request, Company makes a payment to
Producer or to a third party designee of Producer of amounts not provided for in
this agreement (which Company is in no way obligated to do), then such payments
shall also be recoupable from any and all monies payable under this agreement
unless Company agrees otherwise in writing. Prior to final determination
thereof, Company may withhold a reasonable reserve against returns, exchanges,
refunds, credits and the like, such reserve to be established by Company in its
sound discretion, based on, among other factors, Artist's sales experience.
Company shall not retain a reserve with respect to any particular accounting
period which is in excess of thirty-five percent (35%) of royalties accrued in
respect of such accounting period.
57
<PAGE> 58
Each such reserve shall be fully liquidated no later than with the rendition of
the third accounting statement rendered following the statement with respect to
which such reserve was originally maintained. Company agrees that, in the United
States, records which are returned shall be debited to Producer's account at an
SRLP equal to the SRLP at which the applicable third-party customer's account is
credited therefor.
(b) Within ninety (90) days after June 30 and December 31 of
each year during which applicable phonograph records are sold, Company shall
render a statement of accrued royalties earned under this agreement during the
preceding calendar half-year, less all amounts chargeable thereagainst under
this agreement (including, to the extent lawful or as permitted hereunder, all
or any portion of any indebtedness then owing by Producer to Company).
Notwithstanding the foregoing, Company shall not have the right to recoup from
royalties payable hereunder with respect to a given semi-annual accounting
period advances or other recoupable payments paid by Company hereunder to
Producer or to third parties on Producer's behalf after the close of such
semi-annual accounting period unless Producer has requested that a payment
scheduled to be made prior to the close of such semi-annual accounting period be
delayed until after the close of such semi-annual accounting period.
Simultaneously with the rendering of its statement, Company shall pay Producer
the net amount, if any, shown to be due thereon, less any deductions or
withholdings required by law or any union or guild rules or regulations.
Producer shall be deemed to have consented to each statement, and such statement
shall become final and binding upon Producer, two (2) years after the rendition
thereof unless Producer renders specific written objection thereto Company
within such period. If Company gives Producer notice that it denies the validity
of the objection, such statement shall become final and binding upon Producer
unless suit is instituted within one (1) year of the date Company gives such
notice.
(c) (i) Producer may designate a certified public accountant who
may audit the books and records of Company concerning the distribution and sale
of records embodying Masters. Said examination (A) shall be at Producer's sole
cost and expense, (B) must be conducted during normal business hours and only
upon reasonable notice, and (C) may not be conducted more than once annually.
The books and records for a particular accounting period may only be audited as
aforesaid during the two (2) years following rendition of the statement for such
period. Further, such examination shall be conditioned upon the accountant's
written agreement to Company that (AA) the accountant will not voluntarily
disclose any findings to any person other than Producer or Producer's attorney
or other advisers, (BB) the accountant is not being compensated on a contingent
fee basis, and (CC) the accountant shall review all tentative findings with a
designated employee of Company prior to rendering an audit report to Producer in
order to remedy any factual errors and to clarify any issues which have resulted
from a misunderstanding or misstatement of fact.
(ii) With respect to any claim by Producer that additional
monies are payable by Company to Producer pursuant to this agreement based upon
an audit by Producer of Company's books and records, Company shall not be deemed
in breach of this agreement unless, within sixty (60) days after Company's
receipt of Producer's written claim to be sent by certified or registered mail,
return receipt requested that additional monies are due and payable together
with a copy of the audit report prepared in connection with such audit, Company
neither (A) pays such additional monies so claimed by Producer, nor (B) contests
such claim, in whole or in part,
58
<PAGE> 59
by notice to Producer. If Company, in Company's good-faith reasonable business
judgment, so contests any such claim, Company shall not be deemed in breach of
this agreement unless such claim is reduced to a final, non-appealable judgment
and Company fails to pay Producer the amount of such judgment within thirty (30)
days after Company receives notice of the entry of such judgment.
(iii) If (A) Company agrees to pay royalties directly to
any third party to whom Producer is otherwise obligated to pay such royalties
pursuant to paragraph 3(a) of the Agreement (which it shall be under no
obligation whatsoever to do), and (B) Producer thereafter conducts an audit
hereunder with respect to the Masters for which Company has agreed to pay such
third party, and (C) as a result of such audit additional monies become payable
with respect to such Masters, then Company shall not be obligated to pay to
Producer such portion of such additional monies as would have become payable to
such third party if such third party had conducted such audit unless Producer
furnishes Company with satisfactory authorization from such third party
directing Company to pay same to Producer rather than to such third party.
59
<PAGE> 60
MODERN RECORDS, INC.
468 N. CAMDEN DR., 3RD FLOOR
BEVERLY HILLS, CA 90210
Jackie Jackson
5520 Lindey Avenue #9
Encino, CA 91316
Marlon Jackson
578 Armour Circle
Atlanta, GA 30324
Jermaine Jackson
4641 Havenhurst
LA, CA 91316
Tito Jackson
c/o Jermaine Jackson
4641 Havenhurst
LA, CA 91316
Randy Jackson
c/o Modern Records, Inc.
468 N. Camden Dr., 3rd Floor
Beverly Hills, CA 90210
Gentlemen:
Reference is made to the agreement between Modern Records, Inc. and
Jermaine Jackson, Tito Jackson, Marlon Jackson, Jackie Jackson and Randy
Jackson, collectively p/k/a "The JACKSONS" dated as of March 1, 1999 (the
"Agreement"). All terms used but not otherwise defined herein shall have the
same meaning given to them in the Agreement.
It is the understanding of all parties to the Agreement that the
Agreement pertains solely to the recording services of Artist as a group, and
the Agreement shall not prevent any member of Artist from rendering his services
as a solo Artist. In order to clarify this understanding, the Agreement shall be
modified as follows:
1. All references to Artist shall refer solely to Artist as a group and not
to any member of Artist individually.
2. Subparagraph 6(b) shall be modified by including the following:
Notwithstanding the foregoing, each individual member of the group shall
have the right to use and publish,
60
<PAGE> 61
and permit others to use and publish, such individual's name, likeness
and biographical material in connection with such individual's solo
career.
3. Subparagraph 6(c)(ii) shall be modified to read as follows: "Except as
permitted pursuant to paragraph 24 below, Artist shall not perform as a
group, and Producer shall not authorize or allow Artist to perform as a
group, for the purpose of making phonograph records for distribution or
sale in the Territory by or for any person other than Company.
4. Subparagraph 8(a) shall be modified to read as follows:
Producer, on Producer's and Artist's behalf, agrees that neither Artist
nor any individual member of Artist shall perform in any manner any
selection (or portion thereof) recorded hereunder, whether or not
released by Company, for the purpose of making records for distribution
or sale in the Territory by or for any person other than Company, at any
time prior to the later of the following dates (such later date, with
respect to any such selection, is herein sometimes referred to as the
"Restriction Date"): (i) five (5) years after the date of delivery to
Company of the last Master embodying such selection, or (ii) two (2)
years after the expiration or termination of the term of this agreement
or any subsequent agreement between Company and Producer (or Artist or
any person furnishing Artist's recording services or the results and
proceeds thereof) with respect to Artist's recording services.
5. Paragraph 21 shall be modified by including the following: "The parties
hereby acknowledge that the Merchandising Rights apply solely to the
group as a whole and not to any individual member of Artist."
6. Paragraph 24 shall be modified by deleting subparagraph (f) and
including the following in its place: "The terms and conditions
contained herein shall refer solely to Artist's rights to perform as
background vocalists or background instrumentalists as a group. Nothing
contained herein shall restrict the rights of any individual member of
Artist."
7. Paragraph 26 shall be deleted in its entirety and the following included
in its place:
Notwithstanding anything to the contrary contained in this agreement, if
Artist completely disbands, Company shall have the right, at its
election and without limiting its other rights and remedies, to
terminate the term of this agreement by notice to Producer no later than
ninety (90) days after Company's receipt of Producer's notice to Company
that Artist has disbanded. If Company terminates the term hereof in
accordance with this paragraph 26, then Company shall thereby be
relieved of any and all obligations hereunder except its obligations
with respect to Masters recorded hereunder prior to such termination.
Notwithstanding the foregoing, if (A) Artist shall completely disband
and as a result thereof Company terminates this agreement as permitted
herein and (B) thereafter all of the members of Artist desire to
recommence performing together for the purpose of making phonograph
records, then Producer shall give Company prompt notice thereof and
Company shall have the right, exercisable by notice to Producer within
thirty (30) days after receipt of Producer's said notice, Company shall
thereafter have the right to
61
<PAGE> 62
reinstate this agreement by notice to Producer no later than the later
of ninety (90) days after the date upon which Company receives
Producer's aforesaid notice.
If the foregoing accurately reflects your understanding of the matters
contained herein, kindly so indicate by signing below.
Sincerely,
MODERN RECORDS, INC.
BY: /s/ Randy Jackson
---------------------------------
Randy Jackson, President
ACCEPTED AND AGREED TO:
/s/ Jermaine Jackson /s/ Tito Jackson
- ---------------------------------- --------------------------------------
Jermaine Jackson Tito Jackson
/s/ Marlon Jackson /s/ Jackie Jackson
- ---------------------------------- --------------------------------------
Marlon Jackson Jackie Jackson
/s/ Randy Jackson
- ----------------------------------
Randy Jackson
62
<PAGE> 1
EXHIBIT 16.1
Ellis Foster
Chartered Accountants
1650 West 1st Avenue Reply Attention: Neal G. Clarance
Vancouver, BC V6J 1G1
- --------------------------------------------------------------------------------
April 16, 1999
United States Securities & Exchange Commission
Washington, DC 20549
Dear Sirs/Mesdames:
We have read Item 8 of the Form 10-KSB of Modern Records, Inc. for the year
ended October 31, 1998, and agree with the statements made therein.
Yours truly,
/s/ ELLIS FOSTER
- ---------------------
Chartered Accountants
Vancouver, Canada
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR ENDED OCTOBER 31, 1998, 1997, 1996
AND 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR YEAR
<FISCAL-YEAR-END> OCT-31-1998 OCT-31-1997 OCT-31-1996 OCT-31-1995
<PERIOD-START> NOV-01-1997 NOV-01-1996 NOV-01-1995 NOV-01-1994
<PERIOD-END> OCT-31-1998 OCT-31-1997 OCT-31-1996 OCT-31-1995
<CASH> 1,656 15,417 0 0
<SECURITIES> 0 0 0 0
<RECEIVABLES> 156,140 0 35,214 9,090
<ALLOWANCES> 0 0 0 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 157,796 15,417 35,214 133,336
<PP&E> 0 0 34,711 34,711
<DEPRECIATION> 0 0 34,310 33,562
<TOTAL-ASSETS> 343,343 240,895 35,615 134,485
<CURRENT-LIABILITIES> 662,650 1,182,433 428,260 299,151
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 2,499,370 1,351,342 1,343,497 1,308,388
<OTHER-SE> (2,845,247) (2,292,880) (2,075,534) (1,835,963)
<TOTAL-LIABILITY-AND-EQUITY> 343,343 240,895 35,615 134,485
<SALES> 0 0 0 0
<TOTAL-REVENUES> 355,246 208,196 184,521 196,299
<CGS> 0 0 0 0
<TOTAL-COSTS> 907,613 425,542 424,092 644,417
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 0 0 0 0
<INCOME-PRETAX> (552,367) (217,346) (239,571) (448,118)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (552,367) (217,346) (239,571) (448,118)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (552,367) (217,346) (239,571) (448,118)
<EPS-PRIMARY> (0.03) (0.02) (0.02) (0.03)
<EPS-DILUTED> (0.03) (0.02) (0.02) (0.03)
</TABLE>
