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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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ANNUAL REPORT ON 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, 1999
Commission file number 33-40804
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MODERN RECORDS, INC.
(Exact name of registrant as specified in it charter)
<TABLE>
<S> <C>
California 95-3404374
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
468 North Camden Drive, Third Floor, Beverly Hills, CA 90210
Issuer telephone number, including area code: (310) 285-5370
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Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act: None
(Title of Class)
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Check whether the Issuer (1) 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 [_]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will 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
amendment to this Form 10-KSB.
The Issuer's revenues for the most recent fiscal year were $450,971.
The aggregate market value of the Common Stock of the Registrant held by
non-affiliates of the Registrant on October 31, 1999, based on the average
closing bid and asked price of the Common Stock as quoted on the Canadian
Venture Exchange on such date, was approximately C$15,284,924.
The number of shares of the Registrant's Common Stock outstanding as of
February 4, 2000 was 27,369,114 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format (Check One): Yes [_] No [X]
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MODERN RECORDS
ANNUAL REPORT ON FORM 10-KSB
INDEX
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Page
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PART I
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 6
Item 3. Legal Proceedings............................................. 6
Item 4. Submission of Matters to a Vote of Security Holders........... 6
PART II
Market for Registrant's Common Equity and Related Stockholder
Item 5. Matters....................................................... 7
Management's Discussion and Analysis of Financial Condition
Item 6. and Results of Operations..................................... 7
Item 7. Financial Statements.......................................... 9
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 10
PART III
Item 9. Directors and Executive Officers of the Registrant............ 11
Item 10. Executive Compensation........................................ 12
Security Ownership of Certain Beneficial Owners and
Item 11. Management.................................................... 14
Item 12. Certain Relationships and Related Transactions................ 14
Item 13. Exhibits and Reports on Form 8-K.............................. 15
Signatures.............................................................. 17
</TABLE>
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PART I
This Annual Report on Form 10-KSB includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Exchange Act of 1934, as amended. These include, among
others, the statements about Modern Record's plans and strategies under the
headings "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Although Modern Records believes that
its plans, intentions and expectations reflected in or suggested by such
forward looking statements are reasonable, it cannot assure that such plans,
intentions or expectations will be achieved. Actual results may differ
materially from the forward-looking statements made in this Annual Report on
Form 10-KSB.
ITEM 1. BUSINESS
General
Modern Records Inc. ("Modern Records") licenses, acquires, markets and
distributes recorded music in a variety of genres.
Modern Records was incorporated under the laws of the State of California on
November 28, 1978. Modern Records was formed to obtain an exclusive recording
contract with Stevie Nicks as well as recording contracts with other artists.
Ms. Nicks released six solo albums on the Modern Records label from 1981 to
1994 which sold a total of over 12 million copies. Modern records distributes
its products pursuant to distribution agreements with Atlantic Recording
Corporation ("Atlantic") and MCY Music World, Inc. ("MCY").
In May 1997, Stephen Randall Jackson acquired all of the shares of common
stock of Modern Records held by Paul Fishkin, one of Modern Records' founders,
or approximately 47% of the outstanding shares. Of the 6,822,499 shares
acquired, 2,555,000 are still registered in Mr. Fishkin's name and are being
held in escrow until the earlier of such time as Modern Records achieves
certain financial goals or March 31, 2001. If Modern Records does not achieve
the targeted performance goals, the escrowed shares will be canceled.
Our principal executive offices are located at 468 North Camden Drive, Third
Floor, Beverly Hills, CA 90210, and our telephone number is (310) 285-5350.
Our Website address is modernrecords.com.
Our Objective and Strategy
Modern Records is an independent record label focused on creating a dynamic
artist portfolio. Our objective is to establish Modern Records as a leading
force in the recording industry. Our strategy for achieving this includes:
. Signing established artists. Our strategy is to build a portfolio of
established artists that have a history of consistent sales but are no
longer under contract with a major record label. We believe that
Mr. Jackson's connections and relationships in the recording and music
publishing industry will be a significant factor in our ability to
acquire and market such artists.
. New artist development. In addition to building a portfolio of
established artists, we intend to develop new artists to enhance the
long term value of our portfolio. As an independent label, we believe
that we can provide a cultural environment that will maximize artistic
growth by fostering superior performance and creativity.
. Strategic acquisitions. We believe that the acquisition of independently
owned music catalogs, publishing companies and undercapitalized record
labels will assist us in developing a sustainable cash flow. This will
help reduce our business risks and fuel growth by providing an adequate
and diversified base of assets that generate recurring earnings.
. Marketing the music of Modern Records. Increasing awareness of the
Modern Records brand is essential to our growth. We intend to build
brand awareness with trade and consumer audiences by
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providing distributors with innovative, well-coordinated marketing
campaigns in connection with each new release. We will do this through
packaging and promotions that reinforce the dynamic nature of Modern
Records and its artists. We also intend to support distributors' efforts
to gain a greater retail presence and market share for Modern Records.
. Multi-channel distribution. We intend to use our industry relationships
to secure major label distribution for our products. Our strategy is to
develop the use of major distributors and independent distributors that
have access to many of the smaller markets. We also plan to place a
greater emphasis on international distribution.
Artist Relationships
Contract Terms. We contract with our 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 rights are generally obtained on a worldwide basis.
Typically, a contract will provide for an artist to deliver a certain number
of albums with advances against royalties paid when the contract is signed and
upon delivery of each album. Generally, we have the option, exercisable for a
specified period of time, to accept the product that the artist delivers.
Normally, if we do not exercise the option, the artist will have no further
obligation to deliver any additional product. The provisions in our contracts
with established artists do, however, vary considerably. For example, they may
require us to release a specified number of albums or contain an option that
is exercisable for more than one album.
Our advances are generally recovered from the royalties payable to the
artists. In addition, we recover a portion of the marketing and touring costs,
if any, from the royalty payments.
Recording. Recording contracts may provide for the artists to deliver
completed recordings to us or we may undertake to record the artist. If we
advance the recording costs, these costs are also recouped from the royalties
payable to the artist. Our staff is involved in selecting producers, recording
studios, any additional musicians and the tracks to be recorded, as well as
supervising the output of recording sessions. Our involvement may be minimal,
however, for more established artists.
Licensing
Our licensing activity involves the acquisition of rights to certain master
recordings and compositions and the grant of rights to third parties in the
master recordings and compositions that we own. Typically, on the albums we
release, we obtain an ownership or co-ownership interest in newly recorded
compositions written by the artist performing them on that album. The rights
to use the other compositions on the albums we release are obtained from the
publishers of those compositions under agreements that are often issued
through a central agency. The license fees for albums, or mechanical license
fees, are customarily indexed to a statutory rate set by the United States
Copyright Act, which is currently 7.1 cents for a performance of up to five
minutes and more for longer performances. Although fees for audiovisual works,
or synchronization license fees, vary from set fees to a percentage of the
sales price, the fee often corresponds to the statutory rate for mechanical
licenses. We also issue our own mechanical and synchronization licenses to
third parties when they use compositions from our catalog.
We enforce the performance rights in compositions that we own under
agreements we have with the American Society of Composers, Authors and
Publishers, Broadcast Music, Inc. and SESAC, Inc., which licenses commercial
users of music like radio and television broadcasters, restaurants and
retailers. These license fees are based upon the frequency and type of
performances.
Our Portfolio
Jeffrey Osborne. In 1997, we produced and released an album entitled
"Something Warm for Christmas" by Jeffrey Osborne. The album was distributed
through an agreement with Platinum Entertainment, Inc. which has since
expired. We repackaged the CD for a Christmas re-release this year.
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Stevie Nicks. In May 1998, we released a three-CD box set entitled
"Enchanted" by Stevie Nicks through a distribution agreement with Atlantic.
The set acheived Gold status in April 1999. To date, the set has sold over
170,000 copies.
Abel Mason. In June 1998, we entered into an agreement with Abel Mason, a
previously unsigned R&B artist, for a five album commitment. We expect to
release his debut album, which features producer G-One on several tracks,
sometime in 2000.
The Jacksons. In March 1999, we entered into an agreement with The Jacksons
to produce their next album. The terms of the agreement require us to advance
$2 million dollars to the Jacksons with one half payable upon commencement of
recording and the balance payable upon the delivery and acceptance by us of
the master recording. We made the first $1 million payment out of the
proceeeds from a private placement of our securities. The album is expected to
be released in the third quarter of fiscal 2000. Randy Jackson, Chairman and
Chief Executive Officer of Modern Records, and Jackie Jackson, a director of
Modern Records, are members of The Jacksons.
Tiffany. In January 2000, we entered into an agreement with Tiffany to
provide us with four new albums and an additional greatest hits album
featuring her hits from the late 80s. Tiffany has sold an estimated 14 million
records to date.
Distribution Agreements
Atlantic. Although Stevie Nicks is no longer under contract with us, we
continue to derive a significant portion of our revenue from sales of the
three-CD box set distributed by Atlantic. Under the terms of this agreement,
we receive 50% of the revenues received by Atlantic, after expenses.
MCY. In August 1999, we entered into an agreement with MCY under which MCY
acquired the digital distribution rights to our catalogue of current and
future artists. Consumers can download tracks from our catalogue in digital
format directly from MCY's Web site through MCY's proprietary NETrax(TM)
distribution technology. We believe that the NETrax technology prevents piracy
and is more secure than other formats for downloading music from the Internet.
Competition
Our success depends on the skill and creativity of our employees and our
relationship with our artists. We face intense competition for discretionary
consumer spending from numerous other record companies, video companies and
others. We compete directly with other record companies, including the five
major international recorded music companies, as well as other record and
music publishing companies, to sign established and new artists and
songwriters and to acquire music catalogs. Our competitors generally have
significantly greater financial resources, longer operating histories and
larger music catalogs. To compete successfully, we must:
. obtain financing to fund our growth strategy;
. build upon and maintain our reputation for quality music products; and
. introduce music products that are accepted by consumers.
Government Regulation
There is no material government regulation of Modern Record's business.
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Employees
As of February 4, 2000, Modern Records had 7 employees, including 6 full-
time and 1 part-time employee. None of our employees is covered by a
collective bargaining agreement. We believe that our relations with our
employees are good.
ITEM 2. DESCRIPTION OF PROPERTY.
Modern Records maintains its principal executive offices in approximately
1,800 square feet of office space in Beverly Hills leased on a month to month
basis with monthly lease payments of $7,245.
We are currently considering options for new facilities in the Los Angeles
area that would support our growing space requirements. We expect that any new
space we decide to lease or acquire will include studio space to allow for
rehearsals and recording to take place in the same facility that houses our
corporate offices.
Modern Records believes that its existing leased property is adequately
covered by insurance.
ITEM 3. LEGAL PROCEEDINGS.
Modern Records is not a party to any pending material legal proceeding,
other than routine litigation that is incidental to its business or is covered
by insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Modern Records's common stock is traded on the Canadian Venture Exchange
CDNX under the symbol "MZR.V" and on the Over the Counter Bulletin Board under
the symbol "MDNR". The following table sets forth the high and low bid prices
of the common stock for the quarters indicated as quoted on the CDNX. The
amounts set forth below are listed in Canadian Dollars ("C$").
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended
October 31, 1999 October 31, 1998
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High Low High Low
----------------- --------- --------
<S> <C> <C> <C> <C>
First Quarter........................... C$ 2.55 C$ 1.25 C$ .50 C$ .15
Second Quarter.......................... 2.25 1.00 .65 .15
Third Quarter........................... 1.34 .60 .95 .50
Fourth Quarter.......................... 1.09 .58 1.50 .50
</TABLE>
The above quotations represent prices between dealers without adjustments
for retail markups, markdowns or commissions and may not represent actual
transactions.
As of October 31, 1999, there were approximately 57 holders of record of
Modern Records common stock.
Modern Records has never declared or paid any cash dividends on its capital
stock and does not anticipate paying cash dividends on its common stock in the
foreseeable future. Modern Records currently intends to retain future earnings
to finance its operations and fund the growth of its business. Any payment of
future dividends will be at the discretion of the board of directors of Modern
Records and will depend upon, among other things, Modern Records's earnings,
financial condition, capital requirements, level of indebtedness, contractual
restrictions with respect to the payment of dividends and other factors that
Modern Records's board of directors deems relevant.
Recent Sales of Unregistered Securities
In October 1999, we issued 315,750 unites in a private placement. Each unit
consists of one share of common stock and one non-transferable warrant to
purchase an additional share of common stock for two years at C$.60
(approximately US$.41) for the first year, and at C$.75 (approximately US$.52)
for the second year. The issuances were made in reliance on Section 4(2) of
the Securities Act of 1933, as amended, to investors who were accredited or
sophisticated and had access to information regarding Modern Records.
In November 1999, we issued 1,622,500 units in a private placement. Each
unit consists of one share of common stock and one non-transferable warrant to
purchase an additional share of common stock for two years at C$.90
(approximately US$.62) for the first year, and at C$1.25 (approximately
US$.86) for the second year. Of these units, (1) 20,000 units were issued to
Jordac Investments Ltd., (2) 14,000 units were issued to each of Reidar Ostman
and Anders Alsing, and (3) 24,500 units were issued to Yorkton Securities in
consideration of their services in placing the units. The issuances were made
in reliance on Section 4(2) of the Securities Act to investors who were
accredited or sophisticated and had access to information regarding Modern
Records.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Our principal business activities are producing, acquiring, licensing,
marketing and distributing audio recordings.
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To date, our primary source of revenue has been from the sales of the works
of Stevie Nicks, one of the founders of Modern Records. Ms. Nicks is no longer
under contract with us but these sales continue to provide us with a
significant source of revenue. Additional revenues are provided from the sales
of other less successful artists in our catalogue, although we may not
maintain these sources in the future.
In the past we have also licensed our catalog to others. We believe that
this potential source of revenue has been underutilized and we intend to
pursue additional sources of licensing revenue in the future.
Funds from the sales of securities have provided us with the means to
attract additional talent to our label. In fiscal 1998, we signed Abel Mason a
previously unsigned artist, with a commitment for four albums. We expect that
the release of his debut album in fiscal 2000 will provide us with an
additional source of revenue. In addition, we expect to release The Jackson's
new album in the third quarter of fiscal 2000. We also recently signed
recording artist Tiffany to the Modern Records label with a commitment for
four new albums and one greatest hits album. Tiffany has sold 14 million
records to date and we expect this addition to our artist roster will be a
significant source of additional revenue.
A significant recurring funding requirement for us are the expenses
associated with A&R. These include recording costs and advances to the artists
prior to distribution of the final product and before we realize any potential
profits. We make substantial payments each quarter for these expenses to
maintain and enhance our artist roster. To the extent possible, these costs
are recouped from the royalties otherwise payable to the artist from future
albums. When an artists current popularity and past performance provide a
sound basis for estimating the extent to which we will be able to recoup such
costs from royalties, the advances are capitalized as an asset.
Our ability to achieve and maintain profitability in the future will depend
on our ability to attract and maintain the talent that will provide us with a
steady source of revenue, as well as our ability to successfully market such
talent.
Results of Operations
Fiscal Year Ended October 31, 1999 Compared to Fiscal Year Ended October 31,
1998
Revenues. For the fiscal year ended October 31, 1999 ("fiscal 1999") Modern
Records had revenues of $450,971 compared to revenues of $355,246 for the
fiscal year ended October 31, 1998 ("fiscal 1998"), an increase of $95,725 or
approximately 26%. This increase in revenues for fiscal 1999 was due primarily
to an increase in revenues derived from our distribution agreement with
Atlantic from $297,715 in fiscal 1998 to $359,193 in fiscal 1999, an increase
of $61,478 or approximately 21%. This increase reflects continued strong sales
for the three CD box set by Stevie Nicks entitled "Enchanted," which was
released in May 1998 through a distribution agreement with Atlantic. In
addition, other recording revenues increased to $87,985 in fiscal 1999 from $0
in fiscal 1998, due to revenues from the distribution of the Jeffrey Osborne
Christmas CD.
Cost of Revenues. Cost of revenues increased from $96,749 in fiscal 1998 to
$184,930 in fiscal 1999, an increase of $88,181 or approximately 91%. This
increase was primarily due to the artist and repertoire ("A&R") expenses in
connection with production on the Abel Mason CD.
Gross Profits. Gross profit increased from $258,497 in fiscal 1998 to
$266,041 in fiscal 1999, an increase of $7,544 or approximately 3%. This
relatively small increase is due to the increase in revenues received from our
agreement witht Atlantic Records to distribute the Stevie Nicks CD box set,
offset by an increase in cost of revenues to produce new recordings.
Expenses. Total expenses increased from $810,864 in fiscal 1998 to
$1,690,547 in fiscal 1999, an increase of $879,683 or approximately 108%. The
increase is mainly due to our continued commitment to developing a strategic
business plan, attracting appropriate equity and debt financing and
establishing an organizational infrastructure.
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In connection with developing our organizational infrastructure, expenses
for officers' salaries increased from $200,000 in fiscal 1998 to $250,000 in
fiscal 1999, an increase of $50,000 or 25% due to an increase in the salary of
our Chairman and Chief Executive Officer, Mr. Jackson. In addition, expenses
for other salaries increased from $63,402 in fiscal 1998 to $202,105 in fiscal
1999, an increase of $138,703 or approximately 219%. This is increase is
associated with the hiring of additional personnel to implement our growth
strategy.
Balance sheet improvements were registered during the year ended October 31,
1999 with total assets increasing from $343,343 for fiscal 1998 to $971,814
for fiscal 1999, an increase of $628,471 or approximately 183%. This was due
largely to costs that were capitalized in connection with prepaid royalties
that we expect to recoup in connection with the release of The Jacksons new
album. Total current liabilities increased, however, from $664,220 in fiscal
1998 to $1,268,105 in fiscal 1999, an increase of $603,885 or approximately
91% due to an increase in accounts payable and salaries deferred at the
election of our chief executive officer. Total shareholders' deficiency
decreased from $345,877 in fiscal 1998 to $321,291 in fiscal 1999, a decrease
of $24,586 or approximately 7%.
Liquidity and Capital Resources
Our growth strategy is focused on signing new artists to the Modern Records
label, advancing funds for the production of new albums, marketing albums on
the Modern Records label and retaining an experienced and talented management
team. This strategy requires substantial expenditures before any revenue is
realized. Our current revenue stream is derived largely from the sale of
Stevie Nicks' albums for which we realized approximately $296,000 in gross
profits. This revenue is insufficient to fund our growth strategy.
As of October 31, 1999 we had approximately $16,535 in cash and cash
equivalents, compared to $1,656 as of October 31, 1998. We do not have access
to a line of credit. Since Mr. Jackson obtained a controlling interest in
Modern Records in May 1997, our growth strategy has been financed primarily
through the private placement of common stock, no par value, of Modern
Records. In fiscal year 1999, we raised approximately $1,449,092 through the
private placement of common stock and warrants to purchase common stock.
At October 31, 1999 we owed an aggregate of $36,789 in principal plus
accrued and unpaid interest to the father of one of our shareholders pursuant
to a note dated November 7, 1994 and a note dated April 19, 1995. All
principal plus accrued interest thereon is due and payable on demand. In
addition, as of October 31, 1999, we owed an aggregate of $21,205 to two
shareholders pursuant to notes dated September 12, 1995. At October 31, 1999
we also owed an aggregate of $512,500 in accrued compensation to Mr. Jackson
which is due and payable upon demand.
Our ability to successfully implement our growth strategy depends on our
ability to obtain additional financing. If we are unable to raise additional
funds through the private placement of our securities, we may seek additional
financing from affiliated or unaffiliated third parties. We are currently in
discussions with potential lenders regarding the possibility of obtaining long
term financing. Such financing may not be available on acceptable terms, or at
all. If we are unable to obtain financing to meet our working capital needs,
repay indebtedness or advance royalty payments as they become due, we will
have to consider alternative sources of funding to meet our obligations.
Year 2000 Costs
Modern Records did not incur any significant costs in fiscal 1999 in
connection with Year 2000 compliance.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplemental data required by this Item 7
follow the index to financial statements appearing at Item 14 of this Form 10-
KSB.
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 3, 1998, Ellis Foster resigned as our independent public
accountant at our request. We wanted to retain a U.S.--based accounting firm
to audit our financial statements in accordance with U.S. generally accepted
accounting principles on a going forward basis. We retained Hollander, Lumer &
Co. LLP as our independent public accountant, which action was ratified by our
Board of Directors as of December 3, 1998.
The audit reports of Ellis Foster on our 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 our Annual report on Form 10-KSB for the fiscal year
ended October 31, 1998 and is hereby incorporated by reference herein.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Directors and Executive Officers
Set forth in the table below are the names, ages and positions of the
current directors and executive officers of Modern Records. Ages are shown as
of February 7, 2000. Directors hold office until the next annual meeting of
stockholders and until their successors are elected and qualified. Executive
officers are elected by and serve at the discretion of the Modern Records
Board. Except as set forth below with respect to Stephen ("Randy") Jackson and
Sigmund ("Jackie") Jackson, none of the executive officers has any family
relationship to any director or any other executive officer of Modern Records.
<TABLE>
<CAPTION>
Positions Currently Held Director
Name Age With the Company Since
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<C> <C> <S> <C>
Stephen Randall Jackson.......... 38 Chairman of the Board and 1997
Chief Executive Officer
Stig Hans Johan Grandin.......... 37 Director and Secretary 1996
Sigmund Jackie Jackson........... 48 Director 1998
Lawrence W. Gallo................ 35 Director 1998
Harold Rustigian ("Russ Regan").. 66 President
Henley Regisford, Jr............. 32 Vice President, Artist and
Repertoire
Stanley Winslow.................. 47 Vice President, Sales and
Promotion
</TABLE>
Set forth below is a brief description of the business experience for the
previous five years of all current directors and executive officers of Modern
Records.
Randy Jackson has served as a director and Chief Executive Officer of Modern
Records since May 1997. From May 1997 through December 1999, Mr. Jackson
served as President of Modern Records. Mr. Jackson has also served as
President of Rand Jack Music and Jackson Capital Management since 1996.
Mr. Jackson has been involved in the music industry for the past 30 years as a
producer, writer and performer, with extensive experience in the area of
artist and repertoire. Mr. Jackson has been a member of The Jacksons since
their formation and was formerly a member of The Jackson 5. He is the brother
of Jackie Jackson, a director of Modern Records.
Jackie Jackson has served as a director of Modern Records since 1998. Mr.
Jackson also serves as President of Siggy Music, a music publishing company
and Brandy Productions, an independent music recording company that develops
new recording artists. Mr. Jackson is a producer of the television show,
"Tomorrow's Stars Today" and was the executive producer of the television
miniseries, "The Jackson Story: The American Dream." Mr. Jackson has been a
member of The Jacksons since their formation and was formerly a member of The
Jackson 5. He is the brother of Randy Jackson, a director and the Chief
Executive Officer of Modern Records.
Mr. Grandin has served as a director of Modern Records since 1996. Since
1991, Mr. Grandin has served as a financial advisor to international companies
with Martyn Element & Associates in Vancouver, British Columbia. Mr. Grandin
has also served as a financial advisor to Modern Records since 1994.
Mr. Gallo has served as a director of Modern Records since 1998. Mr. Gallo
is the founder of Launch Management which provide financial, business and
creative management services to sports figures and entertainers. Prior to
that, Mr. Gallo served as Senior Vice President of Hoening, Inc. Prior to
that, since 1992, he served as either Senior Vice President of Institutional
Investment Services or as Director for Equity Finance with Lehman Brothers
Inc.
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Mr. Regan has served as President of Modern Records since January 2000.
Prior to that, since 1998, he served as a consultant to Modern Records. Prior
to that, since November 1996, Mr. Regan served as President of Starbound
Records. Mr. Regan served as President of Quality Records from February 1991
to June 1996. [Need chronological info for at least 5 years.]
Mr. Regisford has served as Vice President, Artist and Repertoire of Modern
Records since May 1999. Prior to that, Mr. Regisford served as Vice President,
Artist and Repertoire of A&M Records since 1992 where he worked with such
artists as Salt N' Pepa, Vanessa Williams, Barry White and Ice Cube.
Mr. Winslow has served as Vice President, Sales and Promotion of Modern
Records since June 1999. Prior to that, Mr. Winslow served as President and
Chief Executive Officer of Total Scope Entertainment. Prior to that, since
1996 he served as Senior Vice President of Promotion and Marketing of MCA
Records. Prior to that, since 1991, he served as Vice President of Operations
of Pendulum Records.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our officers
and directors, and persons who beneficially own more than 10% of a registered
class of our equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Officers, directors and
beneficial owners of more than 10% of the common stock are required by SEC
regulations to furnish us with copies of all Section 16(a) forms that they
file. Based solely on review of the copies of such forms furnished to us, or
written representations that no reports on Form 5 were required, we believe
that for the period through October 31, 1999, all officers, directors and
greater-than-10% beneficial owners complied with all Section 16(a) filing
requirements applicable to them.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth all compensation received for services
rendered to Modern Records in all capacities for the three fiscal years ended
October 31, 1999 by Randy Jackson, our President and Chief Executive Officer
during fiscal 1999. We had no other executive officer whose total cash
compensation exceeded $100,000 for fiscal 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual
Compensation Long Term Compensation Awards
-------------- Securities Underlying
Name and Principal Positions Year Salary(1) Options/SARs
- - ---------------------------- ---- --------- -----------------------------
<S> <C> <C> <C>
Randy Jackson(2) ................. 1999 $250,000 -0-
Chairman of the Board, 1998 200,000 265,000
President and Chief Executive
Officer 1997 100,000 729,000
</TABLE>
- - --------
(1) For the fiscal year ended October 31, 1999, includes $229,167 deferred at
the election of Mr. Jackson. For the fiscal year ended October 31, 1998,
includes $183,333 deferred at the election of Mr. Jackson. For the fiscal
year ended October 31, 1997, includes 100,000 deferred at the election of
Mr. Jackson. See "Employment Agreements."
(2) Effective, January 2000, Mr. Jackson resigned as President of Modern
Records.
12
<PAGE>
Option Grants in Last Fiscal Year
The following table provides information concerning grants of stock to the
named executive officers during the twelve months ended October 31, 1999. No
stock appreciation rights were granted to any one during this period.
<TABLE>
<CAPTION>
Individual Grants
Number of Percent Of Total
Securities Options SARs
Underlying Granted To
Option/SARs Employees In Exercise Of Base
Name Granted (#) Fiscal Year Price Expiration Date
---- ----------- ----------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Randy Jackson........... 265,000 100% C$.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, 1999 and the value of unexercised stock options at October 31,
1999.
<TABLE>
<CAPTION>
Number of Value of
Securities Unexercised In-
Underlying the-Money
Unexercised Options/SARs At
Shares Options/SARs At Fiscal Year-
Acquired Value Fiscal Year-End End(1)
Name on Exercise Realized(1) (all exerciseable) (all exerciseable)
---- ----------- ----------- ------------------ ------------------
<S> <C> <C> <C> <C>
Randy
Jackson...... 199,718 C$13,980 65,282 C$4,570
</TABLE>
- - --------
(1) The value per option is calculated by subtracting the exercise price from
the closing price of the common stock on the CDNX on October 31, 1999 of
C$.85 per share.
Director Compensation
Our non-employee directors receive no cash for their services as directors,
but are reimbursed for travel expenses incurred in connection with attending
meetings of the Board of Directors.
Employment Agreements
On May 15, 1997, we entered into an at will employment agreement with Randy
Jackson. The agreement provided for annual compensation of approximately
$200,000 through December 1998, with the annual compensation to be determined
by the Board of Directors, thereafter. Mr. Jackson's current salary has been
set at $250,000. Mr. Jackson is also eligible to receive a discretionary cash
bonus, as determined by the Board of Directors.
On May 17, 1999, we entered into an three year employment agreement with Mr.
Regisford which expires March 13, 2002. The agreement provides for an annual
salary of:
. $125,000 for the first year;
. $140,000 for the second year; and
. $160,000 for the third year.
Mr. Regisford is also eligible to receive a discretionary bonus as
determined by Modern Records. In addition, Mr. Regisford was granted an option
to purchase 25,000 shares of common stock of Modern Records. The options is
immediately exercisable for 5,000 shares with the remainder vesting in two
equal installments on the first and second anniversary of the grant date.
13
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding beneficial
ownership of Modern Record's common stock as of February 7, 2000, (a) by each
person who is known by Modern Records to own beneficially more than 5% of
Modern Record's common stock, (b) by each of the Modern Records Directors and
(c) by all officers and directors of Modern Records as a group:
<TABLE>
<CAPTION>
Percentage
Name and Address Number of Shares Ownership
of Beneficial Owner(1) Beneficially Owned(2)(3) of Class
- - ---------------------- ------------------------ ----------
<S> <C> <C>
Randy Jackson............................. 11,188,208(4) 40%
Jackie Jackson............................ 200,000(5) *
Stig Hans Johan Grandin................... 1,599,005(6) 6%
Lawrence Gallo............................ 400,000(7) 1%
Russ Regan................................ 150,000(8) *
Henley Regisford, Jr...................... -0- N/A
Stanley Winslow........................... -0- N/A
All officers and directors as a group (7
people).................................. 13,537,213 46%
</TABLE>
- - --------
* less than 1%
(1) Each person's address is c/o Modern Records, 468 N. Camden Drive, Third
Floor, Beverly Hills, California 90210, unless otherwise noted.
(2) Unless otherwise indicated, Modern Records believes that all persons named
in the table have sole voting and investment power with respect to the
shares of common stock beneficially owned by them.
(3) A person is deemed to be the beneficial owner of common stock that can be
acquired by such person within 60 days of the date hereof upon the
exercise of warrants or stock options. Except as otherwise specified, each
beneficial owner's percentage ownership is determined by assuming that
warrants and stock options that are held by such person (but not those
held by any other person) and that are exercisable within 60 days from the
date hereof, have been exercised.
(4) Includes 8,208,508 shares owned by Modern Entertainment, of which Randy
Jackson is the principal and for which he may be deemed to be the
beneficial owner. Also includes 663,807 shares of common stock obtainable
upon the exercise of warrants or stock options.
(5) Includes 200,000 shares obtainable upon the exercise of warrants or stock
options.
(6) Includes warrants to purchase 23,000 shares of common stock held by
Grandin Financial Consulting, of which Mr. Grandin is the principal and
461,050 shares of common stock held by Sonja Brocke-Grandin for which Mr.
Grandin may be deemed to be the beneficial owner. Also includes 398,250
shares of common stock obtainable upon the exercise of warrants or stock
options.
(7) Includes 400,000 shares of common stock obtainable upon the exercise of
warrants or stock options.
(8) Includes 300,000 shares of common stock obtainable upon the exercise of
warrants or stock options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Transactions With Randy Jackson. On March 16, 1998, we borrowed $12,500 from
Mr. Jackson under a note that is due and payable on March 16, 2000. The note
bears interest at a rate of 10% per year. Accrued interest at October 31, 1999
was approximately $2,035.
In December 1999, Mr. Jackson advanced certain producer fees to George
Archie (p/k/a G1) in connection Mr. Archie's work on the Abel Mason project.
These fees were offset against certain monies owed by Modern Entertainment for
the purchase of 600,000 units, of which Mr. Jackson may be deemed to be the
beneficial owner.
14
<PAGE>
Other Transactions. Martyn Element & Associates provides us with certain
consulting services for which we currently pay $3,500 per month. Grandin
Financial Consulting Ltd., of which Mr. Grandin, one of our directos, is the
sole owner, receives one half of those fees under a joint venture arrangement
between Element and Grandin Financial.
Substantially all of our current revenues are derived from the sales of
Stevie Nicks albuums through a distribution agreement with Atlantic Recording.
Ms. Nicks currently owns more than 5% of our outstanding common stock.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial Statements.
The audited consolidated financial statements of Modern Records filed as a
part of this Annual Report on Form 10-KSB are listed in the "Index to
Financial Statements" preceding our Financial Statements, which directly
follow this Part IV of this Annual Report on Form 10-KSB, which "Index to
Financial Statements" is hereby incorporated herein by reference.
(b) Exhibits.
See index to exhibits
(c) Reports on Form 8-K.
None.
15
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
3. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 Articles of Incorporation of Modern Records (incorporated by reference
to Exhibit 3.1 of Modern Records's Registration Statement on Form S-1
(File No. 33-40804) (the "S-1").
3.2 Bylaws of Modern Records (incorporated by reference to Exhibit 3.2 of
Modern Record's Annual Report on Form 10-KSB for the fiscal year ended
October 31, 1998 (the "1998 10-KSB")).
3.3 Certificate of Amendment to the Articles of Incorporation of Modern
Records (incorporated by reference to Exhibit 3.3 of the 1998 10-KSB).
10.1 Distribution Agreement dated July 1, 1979 between Modern Records and
Atlantic Recording Corporation as amended (incorporated by reference
to Exhibit 10.1 of the1998 10-KSB).
10.2 Stock Option Agreement dated July 10, 1998 entered into between Modern
Records and Randy Jackson directors (incorporated by reference to
Exhibit 10.16 of the 1998 10-KSB).
10.3 Stock Option Agreement dated July 10, 1998 between Modern Records and
Jackie Jackson (incorporated by reference to Exhibit 10.17 of the 1998
10-KSB).
10.4 Stock Option Agreement dated July 10, 1998 between Modern Records and
Lawrence W. Gallo (incorporated by reference to Exhibit 10.18 of the
1998 10-KSB).
10.5 Stock Option Agreement dated July 10, 1998 between Modern Records and
Johan Grandin (incorporated by reference to Exhbit 10.19 to the 1998
10-KSB).
10.6 Loan Agreement dated March 16, 1998 between Modern Records and Randy
Jackson (incorporated by reference to Exhibit 10.21of the 10-KSB).
10.7 Employment Agreement dated May 15, 1997 between Modern Records and
Randy Jackson (incorporated by reference to Exhibit 10.22 of the 1998
10-KSB).
10.8 Recording Agreement dated March 1, 1999 between United Leisure
Corporation and Modern Records and The Jacksons (incorporated by
reference to Exhibit 10.17 of the 1997 10-KSB).
10.9 Employment Agreement dated May 17, 1999 between Modern Records and
Henley Regisford, Jr. (incorporated by reference to Exhibit 10.16 of
the 1997 10-KSB).
10.10 Financing Agreement dated May 1, 1997 between United Film
Distributors, Inc. and Modern Records (incorporated by reference to
Exhibit 10.12 of Modern Record's Quarterly Report on Form 10-QSB for
the period ended July 31, 1999 (the "July 31, 1999 10-QSB")).
10.11 Letter Agreement dated June 11, 1999 between Modern Records and Roland
Perry (incorporated by reference to Exhibit 10.2 of the July 31, 1999
10-QSB).
10.12 Incentive Stock Option Agreement dated June 11, 1999 between Modern
Records and Roland Perry (incorporated by reference to Exhibit 10.3 of
the July 31, 1999 10-QSB).
10.13 License Agreement dated August 18, 1999 between Modern Records and MCY
Music World, Inc. (incorporated by reference to Exhibit 10.4 the July
31, 1999 10-QSB).
10.14 Incentive Stock Option Agreement dated January 28, 2000 between Modern
Records and Randy Jackson.
10.15 Incentive Stock Option Agreement dated January 28, 2000 between Modern
Records and Harold Rustigian.
27.1 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K.
None.
16
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, on this 14th day of February 2000.
Modern Records, Inc.
By: /s/ Stephen Randall Jackson
___________________________________
Stephen Randall Jackson
Chief Executive Officer and
Director
In accordance with Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Stephen Randall Jackson Chairman of the Board and February 14, 2000
____________________________________ Chief Executive Officer
Stephen Randall Jackson (Principal Financial and
Accounting Officer)
/s/ Sigmund Jackie Jackson Director February 14, 2000
____________________________________
Sigmund Jackie Jackson
/s/ Stig Hans Johan Grandin Director February 14, 2000
____________________________________
Stig Hans Johan Grandin
/s/ Lawrence W. Gallo Director February 14, 2000
____________________________________
Lawrence W. Gallo
</TABLE>
17
<PAGE>
MODERN RECORDS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors............................................ F-2
Balance Sheets as of October 31, 1998 and 1999............................ F-3
Statements of Operations for the years ended October 31, 1998 and 1999.... F-4
Statements of Shareholders' Deficiency for the years ended October 31,
1998 and 1999............................................................ F-5
Statements of Cash Flows for the years ended October 31, 1998 and 1999.... F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Modern Records, Inc.
We have audited the accompanying balance sheets of Modern Records, Inc. as
of October 31, 1998 and 1999 and the related statements of operations,
shareholders' deficiency, and cash flows for 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 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 1999, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's significant operating losses, working
capital deficiency and significant capital requirements raise substantial
doubt about the Company's ability to continue as a going concern. The
statements do not include any adjustments that might result from the outcome
of this uncertainty.
HOLLANDER, LUMER & CO. LLP
Los Angeles, California
January 14, 2000
F-2
<PAGE>
MODERN RECORDS, INC.
BALANCE SHEETS
OCTOBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.......................... $ 1,656 $ 16,535
Accounts receivable................................ 156,140 87,985
----------- -----------
TOTAL CURRENT ASSETS............................. 157,796 104,520
DEFERRED RECORD MASTER COST, NET..................... 184,892 --
PREPAID ROYALTIES.................................... -- 808,808
EQUIPMENT: NET OF ACCUMULATED DEPRECIATION........... -- 42,474
OTHER ASSET.......................................... 655 16,012
----------- -----------
$ 343,343 $ 971,814
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft..................................... $ 3,544 $ --
Accounts payable and accrued expenses.............. 300,815 804,101
Notes payable...................................... 19,705 21,205
Deferred revenue................................... -- 23,599
Recoupable advance................................. 50,000 --
Due to related parties............................. 290,156 419,200
----------- -----------
TOTAL CURRENT LIABILITIES........................ 664,220 1,268,105
LONG-TERM DEBT....................................... 25,000 25,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' 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 25,110,869 shares (1999)............... 2,499,370 3,948,462
Accumulated deficit................................ (2,845,247) (4,269,753)
----------- -----------
TOTAL SHAREHOLDERS' DEFICIENCY................... (345,877) (321,291)
----------- -----------
$ 343,343 $ 971,814
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
MODERN RECORDS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
REVENUE
Modern/Atlantic agreement.......................... $ 297,715 $ 359,193
Modern/Platinum agreement.......................... 57,531 3,331
Other recording revenue............................ -- 87,985
Other.............................................. -- 462
----------- -----------
355,246 450,971
COST OF REVENUE...................................... 96,749 184,930
----------- -----------
GROSS PROFIT......................................... 258,497 266,041
EXPENSES
Officer's salaries................................. 200,000 250,000
Other salaries..................................... 63,402 202,105
Other marketing, general and administrative
expenses.......................................... 547,462 1,238,442
----------- -----------
810,864 1,690,547
----------- -----------
NET LOSS............................................. $ (552,367) $(1,424,506)
=========== ===========
BASIC AND DILUTED LOSS PER SHARE..................... $ (0.03) $ (0.07)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING......................................... 19,360,000 21,004,820
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
MODERN RECORDS, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIENCY
YEARS ENDED OCTOBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
Preferred
Stock Common Stock
------------- --------------------- Accumulated
Shares Amount Shares Amount Deficit Total
------ ------ ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, November 1,
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)
Special warrants
excercised............. 1,013,450 988,612 988,612
Option excercised....... 199,718 104,755 104,755
Private placements...... 600,000 355,725 355,725
Net loss................ (1,424,506) (1,424,506)
--- --- ---------- ---------- ----------- -----------
Balance, October 31,
1999................... -- -- 25,110,864 $3,948,462 $(4,269,753) $ (321,291)
=== === ========== ========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
MODERN RECORDS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................................ $ (552,367) $(1,424,506)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation...................................... -- 6,480
Amortization of deferred record master cost....... 40,586 184,892
Loss on disposal of equipment..................... -- --
Changes in operating assets and liabilities:
Accounts receivable............................. -- 68,155
Receivable from Atlantic Recording Corporation.. (156,140) --
Other assets.................................... (655) (15,357)
Accounts payable and accrued expenses........... (48,209) 503,286
Accrued interest on notes payable............... 4,596 1,500
Due to related party for compensation........... 183,333 229,167
Deferred revenue................................ (141,574) 23,599
---------- -----------
NET CASH USED IN OPERATING ACTIVITIES........... (670,430) (422,784)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Prepaid royalties................................... -- (808,808)
Purchase of equipment............................... -- (48,954)
---------- -----------
NET CASH USED IN INVESTING ACTIVITIES........... -- (857,762)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft...................................... 3,544 (3,544)
Advances from related parties....................... 112,425
Repayments of advances from related parties......... (607,328) (100,123)
Common stock issued................................. 1,148,028 1,449,092
Recoupable advance.................................. (50,000)
---------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES....... 656,669 1,295,425
---------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... (13,761) 14,879
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........ 15,417 1,656
---------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.............. 1,656 16,535
========== ===========
CASH PAID FOR:
Interest............................................ $ -- $ --
Income taxes........................................ $ -- $ --
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
MODERN RECORDS, INC.
NOTES TO FINANCIAL STATEMENTS
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,
licenses, acquires recorded music and distributes it through several
distribution companies such as Atlantic Recording Corporation ("Atlantic") and
Platinum Entertainment, Inc. ("Platinum").
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/Prepaid Royalties. 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
charged to expense during the period in which the loss becomes evident.
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.
Deferred Revenue. The Company records all advances against participation
from distribution companies as deferred revenue until earned. The Company
earns revenue from its participation on "net profits" as defined under the
agreement between the Company and distribution companies. A receivable from
distribution companies is recorded when earned revenue from participation
exceeds advances.
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.
Foreign Currency Transactions. Monetary assets and liabilities recorded in
foreign currencies are translated at the exchange rate on the balance sheet
date. Translation adjustments resulting from this process are charged or
credited to current year operation. Revenue, costs and expenses are translated
at average rate of exchange prevailing during the year.
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.
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.
F- 7
<PAGE>
MODERN RECORDS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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. 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.
Disclosure about Segments. SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information", establishes standards for public business
enterprises to report information about operating segments in annual financial
statements and requires those enterprises to report selected information about
operating segments in interim financial reports issued to stockholders. It
also establishes the standards for related disclosures about products and
services, geographic areas, and major customers. This statement requires a
public business enterprise to report financial and descriptive information
about its reportable operating segments. The financial information is required
to be reported on the basis that is used internally for evaluating segment
performance and deciding how to allocate resources to segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision-maker in deciding how to allocate resources and in assessing
performance. This statement is effective for financial statements for periods
beginning after December 15, 1997. The Company is operating in one operating
segments.
Reclassifications. Certain reclassifications have been made to 1998
financial statements to conform with the 1999 presentation.
2. DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
Going Concern. The Company has experienced significant operating losses. For
the years ended October 31, 1998 and 1999, the Company experienced net losses
of $552,367 and $1,365,034, respectively. At October 31, 1999, the Company has
a working capital deficiency of $1,100,044. The Company is currently arranging
financing to obtain additional funds so that the Company can meet its
obligations and sustain its activities.
The Company's significant operating losses and significant capital
requirements raise substantial doubt about the Company's ability to continue
as a going concern. The accompanying financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and
liabilities in the normal course of business. The financial statements do not
include any adjustments relating to the recoverability of the recorded assets
or the classification of the liabilities that might be necessary should the
Company be unable to continue as a going concern.
- - --------
* Calculation of weighted average number of common shares outstanding does not
include 3,000,000 shares held in escrow (See Note 7).
F-8
<PAGE>
MODERN RECORDS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Dependence Upon Key Personnel. The success of the Company is largely
dependent on the personal efforts of Mr. R. Jackson, Chief Operating Officer
who is also a shareholder. Mr. R. Jackson has entered into an Employment
Agreement with the Company. The loss of the services of Mr. R. Jackson would
have a material adverse effect on the Company's business and prospects (See
Note 6).
Dependence Upon Signing Artists and Album Release. The Company's primary
source of revenue was derived from albums released by Stephanie Nicks.
However, the Company's recording agreement ("Nicks Agreement") with 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.
Currently the Company is in the process of recording albums of The Jacksons,
Abel Mason and other artist. Although the Company has recording contracts with
them, there are no assurances 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.
3. NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Note dated September 12, 1995, $10,000 principal, interest
at 10%, balance including accrued interest, past due....... $13,137 $14,137
Note dated September 12, 1995, $5,000 principal, interest at
10%, balance including accrued interest, past due.......... 6,568 7,068
------- -------
$19,705 $21,205
======= =======
</TABLE>
4. RECOUPABLE ADVANCE
Recoupable advance at October 31, 1998 represents an 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 particular album.
F-9
<PAGE>
MODERN RECORDS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. RELATED PARTY TRANSACTIONS
Long-term debt at October 31, 1999 consisted of notes payable dated March
16, 1998 to Mr. R. Jackson and to another shareholder, 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 and 1999 amounted to $1,570 and $4,069, respectively (See Note 6).
Due to related parties consisted of the following:
<TABLE>
<CAPTION>
1998 1999
-------- ---------
<S> <C> <C>
Advances to/from R. Jackson and Jackson Capital
Management owned by Mr. Jackson, non-interest
bearing, no stated terms of payment................. $(47,171) $(151,294)
Accrued compensation to R. Jackson................... 283,333 512,500
Notes dated November 7, 1994 and April 19, 1995,
$25,000 Principal, payable to the father of a
shareholder, interest at 10%, payable on demand..... 34,289 36,789
Notes dated September 12, 1995 to two shareholders,
$15,000 Principal, interest at 10%, past due........ 19,705 21,205
-------- ---------
$290,156 $ 419,200
======== =========
</TABLE>
During 1998, the Company paid $21,018, in legal fees to a former director of
the Company and $11,250 as finder's fee to the brother of the Company's
President.
During 1998 and 1999, the Company incurred $48,591 and $73,095 in consulting
fees and reimbursement of expenses to Martyn Element & Associated, a business
associate of Mr. Johan Grandin, a director of the Company.
A significant amount of the Company's revenue comes from Ms. Stevie Nicks'
album. Ms. Nicks is one of the Company's shareholders.
6. COMMITMENTS AND CONTINGENCIES
Employment Agreements
On May 15, 1997, the Company and Mr. R. Jackson entered into an Employment
Agreement. The agreement provides that Mr. Jackson will act as the Company's
President and Chief Operating Officer and will be paid a monthly salary of $
16,666.67 commencing on May 15, 1997. Effective November 1, 1998, the
compensation of Mr. R. Jackson was increased to $250,000 per year. Included in
due to related parties is accrued compensation to Mr. Jackson of $283,333 and
$512,500 at October 31, 1998 and 1999, respectively. Since January 2000, Mr.
Jackson was replaced by Mr. Russ Regan as the President of the Company.
On May 17, 1999, the Company and Henley Regisford entered into three years
Employment Agreement. The Agreement provides that Mr. Regisford will act as
Vice President, Artist and Repertoire for annual compensation of $125,000 for
the first year, $140,000 for the second year and $160,000 for the third year
of the term. Mr. Regisford also is granted non-qualified stock options to
purchase 25,000 shares of common stock of the Company at an exercise price of
100% of fair market value at the date of grant. Such options shall vest at the
rate of 5,000 shares immediately, 10,000 shares upon the first anniversary of
the grant date and 10,000 shares on the second anniversary of the grant date.
The Company also entered into two years Employment Agreement with Roland
Perry. Mr. Perry is the President of Perry & Company, an Internet business
firm and the editor of the Internet Stock Review. Under
F-10
<PAGE>
MODERN RECORDS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
agreement dated June 11, 1999, Mr. Perry will assist the Company in setting up
a corporate news dissemination program and develop an Internet strategy
intended to strengthen the Company's brand identification with both trade and
consumer audiences and to assist in identifying acquisition candidates and
joint ventures partners within the Internet-based music industry. In return
for his services, Mr. Perry was granted option to purchase 200,000 shares of
the Company's common stock at $0.82 Cdn. per share which vested immediately
after the options were granted, subject to the Vancouver Stock Exchange rules
and policies. The option will expire in five years from the grant of the
option. In addition, Mr. Perry subscribed for 100,000 units in the private
placement on June 11, 1999. (See Note 7).
Consulting Agreement
The Company and Wayne Smith were parties in a consulting agreement. The
Company paid $8,000 per month and increase to $13,333 per month in April 1999.
In July 1999 both parties agreed to terminate this agreement.
The Company entered into consulting agreement with Martyn Element &
Associates. Under the agreement, the Company pays $3,500 per month and
reimbursement of all expenses. Through a joint venture arrangement with Martyn
Element & Associated, Grandin Financial Consulting Ltd. owed by Mr. Johan
Grandin, a director of the Company, is entitled to 50% of fees.
Distribution Agreement
Effective August 8, 1999, the Company entered into an open agreement with
MCY.com for the distribution of the Company's catalogue in digital form
directly from the MCY.com website.
Recording Agreement
In June 1998, the Company entered into a recording agreement with Mr. Abel
Mason to record up to five album.
In March 1999, the Company entered into an agreement with Mr. R. Jackson and
his brothers Jackie, Jermaine, Tito, and Marlon ("The Jacksons") to produce
the Jackson's album. The agreement requires the Company to make certain
advances to The Jacksons upon commencement of recording and completion of the
album, which advances are recoupable against The Jackson share of royalties.
Jackie Jackson is a director of the Company and R. Jackson is an officer,
director and the controlling stockholder of the Company.
In January 2000, the Company entered into an agreement with Tiffany R.
Darwisch to provide the Company with four new albums and an additional
greatest hits album featuring her hits from the late 80s.
7. SHAREHOLDERS' DEFICIENCY
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 one common share
and one 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.).
F-11
<PAGE>
MODERN RECORDS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 one common share
and one 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 one common share
and one 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.
Loan warrant exercise on August 6, 1998--47,525 shares at $0.15 Cdn., for
total proceeds of $7,128.75Cdn.
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.).
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 one common share
and one non-transferable share purchase warrant exercisable at $1.25 Cdn. per
share during the first year and $1.50 Cdn. during the second year
During the fiscal year 1999, the Company completed the following
transactions:
On December 17, 1998, the Company granted incentive stock options to
purchase common shares to Mr. Johan Grandin (125,000 options), Mr. Kendrik
Packer (125,000 options) and Mr. Wayne Smith (75,000 options). The options are
exercisable for a period of 5 years, commencing on December 17, 1998 at $2.30
Cdn. per share. Mr. Grandin is a director of the Company, Mr. Smith was a
consultant to the Company, and Mr. Packer was a director of the Company.
Private placements on January 28, 1999--969,100 special warrants at $1.52
Cdn., and 44,350 special warrants to finders with total proceeds of $988,612
($1,473,032 Cdn.). Each special warrant will permit the holder, without
additional payment, to acquire one common stock and one non-transferable share
purchase warrant on or before the earlier of the day which is four months from
the closing date, if the Company becomes eligible to rely on the British
Columbia Securities Commission's Blanket Order and Ruling #98/7 to issue the
underlying securities subject to a four month hold period in British Columbia,
or 330 days from the closing date. If the Company becomes eligible to rely on
Ruling #98/7, the special warrants will be deemed to be exercised on the day
which is four months from the closing. Each share purchase warrant will be
exercisable into one additional common stock of the Company for a period of
two years, at a price of $2.25 Cdn. per share. The special warrants will not
be registered in the United States and will be subject to applicable
restrictions on
F-12
<PAGE>
MODERN RECORDS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
transfer under United States Securities laws. Completion of this private
placement is subject to regulatory approval and the Company finalizing an
agreement for recording an album with the Jacksons. Affiliates of Mr. Johan
Grandin, a director of the Company, and Mr. Kendrick E. Packer, formerly a
director of the Company, purchased 23,000 special warrants and 90,000 special
warrants, respectively. As of October 31, 1999, the Company has completed this
private placement and issued the shares.
On February 23, 1999, Mr. R. Jackson exercised his options to acquire
199,718 shares of common stock at a total purchase price of $104,755 ($155,780
Cdn.).
Private placement on June 11, 1999--600,000 Units at $0.60 Cdn. per unit
with total proceeds of $232,170 ($360,000 Cdn.). Each unit comprised of one
share of common stock and one non-transferable share purchase warrant. Each
share purchase warrant will entitle the holder to purchase an additional share
of common stock for two years at $0.60 Cdn. per share for the first year and
at $0.75 per share for the second year. The units will not be registered in
the United States. As of October 31, 1999, all of these units have been
approved by the regulatory authority and have been issued.
On June 15, 1999, the Company granted option to purchase 200,000 shares of
common stock at $0.82 Cdn. to Mr. Roland Perry. This option vested immediately
subject to the Vancouver Stock Exchange rules and policies. The option will
expire in five years from the grant of the option.
Private placement on September 24, 1999--315,750 Units at $ 0.60 Cdn. per
unit with total proceeds of $123,555 ($189,450 Cdn.). Each unit comprised of
one share of common stock and one non-transferable share purchase warrant.
Each share purchase warrant will entitle the holder to purchase an additional
share of common stock for two years at $0.60 Cdn. per share for the first year
and at $0.75 Cdn. per share for the second year. The units will not be
registered in the United States. Mrs. Sonja Brooke-Grandin, the wife of Mr.
Johan Grandin, a director of the Company purchased 230,750 units. This private
placement was completed on November 24, 1999.
Pursuant to SFAS No. 123, Accounting for Stock-Based Compensation, 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, 1999
would be increased as follows:
<TABLE>
<S> <C>
Net loss....................................................... $(1,424,506)
Pro forma net loss............................................. $(1,528,506)
Basic and diluted loss per share............................... $ (0.07)
Pro forma basic and diluted loss per share..................... $ (0.07)
</TABLE>
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.
At October 31, 1999, there are 3,000,000 shares of the Company common stock
held in escrow. These shares may not be released from escrow without the
consent of regulatory authorities, which consent is dependent on the Company's
financial performance. Any escrowed shares that have not been released by
March 28, 2001 will be cancelled.
F-13
<PAGE>
MODERN RECORDS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
8. INCOME TAXES
There was no income tax expense for the years ended December 31, 1998 and
1999 due to the Company has federal and state net operating loss
carryforwards. As of October 31, 1999, the Company has federal and state net
operating loss carryforwards of $3,400,000 and $1,145,000 that expire through
2019 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 net operating loss carryforwards will be
subject to annual limitations due to change of ownership. No benefit for these
operating loss and deferred assets has been recognized in the financial
statements due to the uncertainty as to the future ability to realize these
deferred assets in future periods. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income.
9. SUBSEQUENT EVENTS
On November 8, 1999 and November 18, 1999 the Company offered 200,000 Units
and 1,350,000 Units respectively, at $0.75 Cdn. per unit to private parties.
Each unit comprised of one share of common stock and one non-transferable
share purchase warrant. Each share purchase warrant will entitle the holder to
purchase an additional share of common stock for two years at $0.90 Cdn. per
share for the first year and at $1.25 per share for the second year. Modern
Entertainment, a company owned by Mr. R. Jackson, purchased 600,000 units.
Payment for this purchase was offset against certain monies advances by Mr. R.
Jackson. The Company paid 72,500 shares as finder's fee. Both private
placements were completed on January 6, 2000.
F-14
<PAGE>
Exhibit 10.14
INCENTIVE STOCK OPTION AGREEMENT
THIS AGREEMENT is made as of the 28th day of January, 2000.
BETWEEN: MODERN RECORDS, INC., a company duly incorporated under the laws of the
--------------------
State of California, having a business office at 468 N. Camden Drive,
3rd Floor, Beverly Hills, California, USA, 90210
hereinafter call the "Company") OF THE FIRST PART
AND: S. RANDALL JACKSON, c/o 468 N. Camden Drive, 3rd Floor, Beverly Hills,
------------------
California, USA, 90210
(hereinafter call the "Optionee") OF THE SECOND PART
WHEREAS the Optionee is a Director of 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 "Tier 2" company by the
Canadian Venture 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. Subject to paragraphs 6 and 7, from the date hereof, the Optionee shall
have and be entitled to and the Company hereby grants to the Optionee an option
to purchase up to SIX HUNDRED THOUSAND (600,000) fully paid and non-assessable
shares of the Company from the treasury on or before JANUARY 28, 2004 at the
price of $1.04 per share (the "Exercise Price").
<PAGE>
- 2 -
2. The right to purchase shares under the Option will vest in the holder in
increments over the term of the Option as follows:
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------
Date Cumulative Number of Shares which may be Purchased
- - ----------------------------------------------------------------------------
<S> <C>
January 28, 2000 300,000
January 28, 2001 100,000
January 28, 2002 100,000
January 28, 2003 100,000
- - ----------------------------------------------------------------------------
</TABLE>
This Option may be exercised in accordance with its terms at any time and from
time to time from and including the Option Date through to and including up to
5:00 local time in Vancouver, British Columbia on the Expiry Date, by delivery
to the Company of an Exercise Notice and a certified cheque or bank draft
payable to Modern Records, Inc. in an amount equal to the aggregate of the
Exercise Price of the Shares in respect of which this Option is being exercised.
3. This 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 favor of the Company for the full amount of the Exercise 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.
4. 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.
5. The option herein granted shall be non-transferable, non-assignable or
negotiable 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.
6. 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.
7. 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 for any reason other than death.
<PAGE>
- 3 -
8. The provisions of the agreement and the exercise of the rights
hereinbefore granted to the Optionee are subject to the approvals of the
applicable regulatory authorities and the shareholders 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 shareholders 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.
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 Canadian Venture Exchange and the shareholders 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 advise with respect to this agreement and understands and is
aware that the securities of the Company have not been registered under the
Securities Act of 1933, as amended, and
<PAGE>
- 4 -
that the granting of this option is conditional upon its 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 all 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
- - --------------------------- )
)
SIGNED, SEALED AND DELIVERED )
by S. RANDALL JACKSON in the )
presence of: )
)
)
- - ---------------------------- ) ------------------------------
Witness ) S. Randall Jackson
This is page 4 to that certain Incentive Stock Option Agreement between MODERN
RECORDS, INC. and S. RANDALL JACKSON dated as of the 28th day of January 2000.
<PAGE>
Exhibit 10.15
INCENTIVE STOCK OPTION AGREEMENT
--------------------------------
THIS AGREEMENT is made as of the 28th day of January, 2000.
BETWEEN: MODERN RECORDS, INC., a company duly incorporated under the laws of
--------------------
the State of California, having a business office at 468 N. Camden
Drive, 3rd Floor, Beverly Hills, California, USA, 90210
(hereinafter call the "Company") OF THE FIRST PART
AND: HAROLD RUSTIGAN, c/o 468 N. Camden Drive, 3rd Floor, Beverly Hills,
---------------
California, USA, 90210
(Hereinafter call the "Optionee") OF THE SECOND PART
WHEREAS the Optionee is an Officer of 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 "Tier 2" company by the
Canadian Venture 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. Subject to paragraph 6 and 7, from the date hereof, the Optionee shall have
and be entitled to and the Company hereby grants to the Optionee an option to
purchase up to THREE HUNDRED THOUSAND (300,000) fully paid and non-assessable
shares of the Company from the treasury on or before JANUARY 28, 2004 at the
price of $1.04 per share (the "Exercise Price").
<PAGE>
- 2 -
2. The right to purchase shares under the Option will vest in the holder in
increments over the term of the Option a follows:
-------------------------------------------------------------------------
Date Cumulative Number of Shares which may be Purchased
-------------------------------------------------------------------------
January 28, 2000 150,000
January 28, 2001 50,000
January 28, 2002 50,000
January 28, 2003 50,000
-------------------------------------------------------------------------
This Option may be exercised in accordance with its terms at any time and from
time to time from and including the Option Date through to and including up to
5:00 local time in Vancouver, British Columbia on the Expiry Date, by delivery
to the Company of an Exercise Notice and a certified cheque or bank draft
payable to Modern Records, Inc. in an amount equal to the aggregate of the
Exercise Price of the Shares in respect of which this Option is being exercised.
3. 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 Exercise 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.
4. 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.
5. The option herein granted shall be non-transferable, non-assignable or
negotiable 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.
6. If the Optionee should die while he is an Officer of the Company, the
option herein granted may then be exercised by his legal heirs of personal
representatives to the same extent as if the Optionee were alive and an Officer
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.
7. 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 an Officer of the Company for any reason other than death.
<PAGE>
- 3 -
8. The provisions of the agreement and the exercise of the rights hereinbefore
granted to the Optionee are subject to the approvals of the applicable
regulatory authorities and the shareholders 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 shareholders 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.
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 Canadian Venture Exchange and the shareholders 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 advise with respect to this agreement and understands and is
aware that the securities of the Company have not been registered under the
Securities Act of 1933, as amended and
<PAGE>
- 4 -
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 all applicable laws.
IN WITNESS WHEREOF the parties have hereunto caused these presents to be
executed as of day and year first above written.
The COMMON SEAL of )
MODERN RECORDS, INC in the )
presence of: )
) c/s
- - ---------------------------- )
)
SIGNED, SEALED AND DELIVERED )
by HAROLD RUSTIGIAN in the )
presence of: )
)
- - ---------------------------- ) -------------------------------
Witness ) Harold Rustigian
This is page 4 to that certain Incentive Stock Option Agreement between MODERN
RECORDS, INC. and HAROLD RUSTIGIAN dated as of the 28th day of January 2000.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED OCTOBER 31, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-1-1998
<PERIOD-END> OCT-31-1999
<CASH> 16,535
<SECURITIES> 0
<RECEIVABLES> 87,985
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 104,520
<PP&E> 48,954
<DEPRECIATION> 6,480
<TOTAL-ASSETS> 971,814
<CURRENT-LIABILITIES> 1,268,105
<BONDS> 0
0
0
<COMMON> 3,948,462
<OTHER-SE> (4,269,753)
<TOTAL-LIABILITY-AND-EQUITY> 971,814
<SALES> 450,509
<TOTAL-REVENUES> 450,971
<CGS> 184,930
<TOTAL-COSTS> 184,930
<OTHER-EXPENSES> 1,690,547
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,424,506)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,424,506)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,424,506)
<EPS-BASIC> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
